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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT TO 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _______
Commission File Number 0-20212
ARROW INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-1969991
(STATE 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)
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 under the Exchange Act) YES X NO
--- ---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of November 1, 2003 was approximately $627,898,132.
The number of shares of Registrant's Common Stock outstanding on November
1, 2003 was 43,391,394.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on January 21, 2004, which will be filed with the
Securities and Exchange Commission within 120 days after August 31, 2003, are
incorporated by reference in Part II, Item 10, and 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 ITEM 1. BUSINESS - CERTAIN RISKS
RELATING TO ARROW, AS WELL AS OTHER INFORMATION CONTAINED IN ARROW
INTERNATIONAL, INC.'S PERIODIC REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, OR THE SEC.
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 in the administration of fluids, drugs, and blood products, patient
monitoring and diagnostic purposes. 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, the first of which were originally
introduced in 1977, accounted for approximately 85.0%, 83.0% and 83.0% of net
sales in fiscal 2003, 2002 and 2001, 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, or lumens, 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, 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 custom tubing
sets used to connect central venous catheters to blood pressure monitoring
devices and drug infusion systems, and the HemoSonic(TM) 100, a hemodynamic
monitoring device that continuously measures descending aortic blood flow using
a non-invasive esophageal ultrasound probe.
In November 2002, the Company expanded its critical care product line
with the acquisition of Diatek, Inc., a company that develops, manufactures, and
markets chronic hemodialysis catheters. When acquired, Diatek was marketing in
select U.S. markets the Cannon Catheter(TM), an implanted hemodialysis catheter
for long-term access that is used to facilitate dialysis treatment. Previously,
the Company sold acute, or short-term, catheters for hemodialysis treatment. The
catheters acquired in connection with its purchase of Diatek complement and
broaden the Company's product line in this field (see Item 8. Notes to
Consolidated Financial Statements - Note 3). On November 7, 2003, the Company
received authorization to CE-mark the Cannon Catheter(TM), enabling it to market
this product line within the European Economic Area.
In March 2003, the Company further expanded its critical care product
line with the acquisition of Klein-Baker Medical, Inc., a company that develops,
manufactures, and markets the NeoCare(R) product line of specialty catheters and
related procedure kits for use by neonatal intensive care units. The NeoCare(R)
product line was marketed in select areas of the U.S. and the Company intends to
expand the sale of these products
(2)
ITEM 1. BUSINESS (CONTINUED)
into additional U.S. and international markets and to develop additions to the
basic product line. This acquisition may also serve as the base for possible
further expansion of the Company's pediatric product line (see Item 8. Notes to
Consolidated Financial Statements - Note 3).
Arrow's cardiac care products accounted for approximately 15.0%, 17.0%
and 17.0% of net sales in fiscal 2003, 2002 and 2001, respectively. These
products include cardiac assist products, such as intra-aortic balloon, or IAB,
pumps and catheters, which are used primarily to augment temporarily the pumping
capability of the heart following cardiac surgery, serious heart attack or
balloon angioplasty. The Company's IAB products include the AutoCAT(TM), its
automatic IAB pump 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. The Company also recently introduced the
Ultraflex 7.5 Fr. IAB catheters, which is the smallest IAB in the market and
employs the Company's proprietary wire reinforced technology.
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 is used for pediatric cardiac
angiographic procedures and the Super Arrow-Flex(TM) sheath 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
new cardiac care products, including the Arrow LionHeart(TM), a fully
implantable Left Ventricular Assist System, or LVAS, capable of taking over the
entire work load of the left ventricle, CorAide(TM), a non-pulsatile centrifugal
flow ventricular assist device designed to be used for the treatment of
congestive heart failure, and the AutoCat(TM)2 WAVE IAB pump and associated
LightWAVE(TM) catheter system, which utilizes fiber optic pressure-sensing
catheter instrumentation and provides total automation of the pumping process
for all patients, including those with severely arrhythmic heartbeats.
SALES AND MARKETING
Arrow markets its products to physicians and hospitals through a
combination of direct selling, independent distributors and a group purchasing
organization. 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 2003, 2002 and 2001, 65.7%, 65.5% and 65.9%, respectively, of
the Company's net sales were to U.S. customers. In this market, approximately
88.0% of the Company's fiscal 2003 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. On September 3, 2002, the Company
purchased the net assets of its former New York City distributor, Stepic
Medical, from Horizon Medical Products (See Item 8. Notes to Consolidated
Financial Statements - Note 3.). On July 1, 2003, the Company purchased certain
assets of its Florida-based distributor, IMA, Inc. (See Item 8. Notes to
Consolidated Financial Statements - Note 3.) With these acquisitions,
approximately 90% of the Company's net sales in the U.S. will be generated by
its direct sales representatives.
Internationally, the Company sells its products through 12 direct sales
subsidiaries serving markets in Japan, Germany, the Netherlands, France, Spain,
Greece, Africa, Canada, Mexico, the Czech Republic, Slovakia and Italy. As of
November 1, 2003, independent distributors in 91 additional countries sell the
Company's products in the remainder of the world.
(3)
ITEM 1. BUSINESS (CONTINUED)
SALES AND MARKETING (CONTINUED)
To support growth in international sales, the Company operates a 40,000
square foot manufacturing facility in Chihuahua, Mexico and has leased 22,500
square feet of additional manufacturing space in Mexico since fiscal 2001. The
Company also operates an 88,000 square foot manufacturing and product
development facility in the Czech Republic, which was recently expanded in
fiscal 2002.
Revenues, profitability and long-lived assets attributable to
significant geographic areas are presented in Note 13 to the Company's
Consolidated Financial Statements included in Item 8.
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 more than 10% of
the Company's sales. Purchase 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 share, and protecting that market share has affected the
Company's pricing in some instances. The Company also continues to face pricing
pressures in certain product lines in both European and Japanese 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. There can be no assurance 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.
(4)
ITEM 1. BUSINESS (CONTINUED)
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
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
divisions of Boston Scientific and C.R. Bard, Inc. The Company's acquisition of
Sometec, S.A. enabled it to introduce to the market its innovative ultrasound
hemodynamic monitoring device. During fiscal 2003, the Company continued its
development of an improved version of this product, which it believes is more
user-friendly and better able to meet the needs of a broader range of
physicians. The Company is currently in the final stages of this development and
expects to begin market testing of the new model in the second half of fiscal
2004. In fiscal 2003, the Company acquired Diatek, Inc., allowing it to market
Diatek's Cannon Catheter(TM) hemodialysis catheter product, and also acquired
the NeoCare(R) product line, enabling it to market specialty catheters and
related procedure kits to neonatal intensive care units.
Research and development expenses totaled $28.2 million (7.4% of net
sales), $26.2 million (7.7% of net sales) and $25.2 million (7.5% of net sales)
in fiscal 2003, 2002 and 2001, 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. 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. The
Arrow LionHeart(TM), the LVAS currently under development by the Company, is
designed to serve as a long-term cardiac assist device for certain patients. The
Arrow LionHeart(TM) has been in development by the Company for over 10 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.
The first human implant of the Arrow LionHeart(TM) took place in October
1999 at The Herzzentrum NRW (The Heart Center) in Bad Oeynhausen, Germany as
part of the 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. To date, five patients have lived on
the device for more than two years, with the longest surviving patient exceeding
three years on the device. Other centers participating in the European clinical
trials include Deutsches Herzzentrum Berlin; Policlinico San Matteo (San Matteo
Polyclinic), Pavia, Italy; Hospital La Pitie, Paris; University of Vienna
Hospital; CHUV Hospital Vaudois, Lausanne, Switzerland; and Freidrich-Schieller
Universitat, Jena, Germany.
On November 7, 2003, the Company received authorization from its
European Notified Body, TUV Product Services of Munich, Germany, to CE-mark the
Arrow LionHeart(TM), based on the results of the European trials. The CE mark
provides authorization to market the device within the European Economic Area
for permanent implantation or "destination therapy". The Company believes that
the Arrow LionHeart(TM) is the first LVAS to receive CE-marking authorization
specifically for the destination therapy indication.
(5)
ITEM 1. BUSINESS (CONTINUED)
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
Authorization to CE-mark the Arrow LionHeart(TM) will allow the Company
to continue the clinical learning program and begin the commercial development
of the destination therapy market in Europe while continuing patient trials of
system enhancements. The second generation smaller and lighter external
electronics have been provided to the European LionHeart(TM) patients.
Although there are several other LVAS devices approved in Europe, they
are generally used in shorter term "bridge to transplant" applications. The
Company believes that the use of these other available LVAS devices for
destination therapy is currently minimal. No meaningful market for destination
therapy exists today. The Company believes that, due to the prevalence of
end-stage heart disease, a market for destination therapy will develop as
devices such as the LionHeart(TM) are increasingly commercialized. As a related
matter, it is currently unclear as to the extent to which health care systems,
both public and private, will reimburse patients for the cost of destination
therapy. Furthermore, continued implantation of these devices in a greater
number of patients is necessary to provide additional learning as to the ability
of typically older patients to successfully undergo the rigors of LVAS
implantation surgery.
In February 2001, the Company received U.S. Food and Drug
Administration, or the FDA, approval under an Investigational Device Exemption,
or 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. In February 2001, the Company announced the first U.S. human
implant of the LionHeart(TM) under the IDE. By August 2001, the Company had
enrolled all seven U.S. patients in the Phase I U.S. feasibility trial
authorized in February under the IDE.
In December 2001, the FDA approved the Company's request to expand this
Phase I clinical trial for an additional seven patients to be implanted with the
LionHeart(TM) in the U.S. The first of these seven additional implants was
performed in July 2002. In May and October 2003, the second and third of these
additional implants were performed, bringing the total number of patients who
have received the LionHeart(TM) in the U.S. to ten. A total of eight U.S. sites
have been approved to perform the remaining four implants under the Phase I
trial and these institutions are presently screening for appropriate patients.
In April 2001, the Company entered into an agreement with The Cleveland
Clinic Foundation, or the CCF, for the exclusive license of the 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 the CCF and the National Institutes 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.
The first human implant of a CorAide(TM) continuous flow ventricular
assist system took place in Germany in May 2003 as part of a clinical trial with
patients needing ventricular support prior to receiving a donor heart in order
to provide a better understanding of human tolerance for non-pulsatile flow
devices. The patient experienced unexpected elevated levels of plasma-free
hemoglobin, and the device was replaced with another bridge device pending the
availability of a donor heart. Subsequent analysis and testing of the
CorAide(TM) device, together with small modifications to it, have provided
insight into the probable causes of the elevated level of hemolysis (plasma-free
hemoglobin). The Company is continuing its analysis and testing of small
modifications to the CorAide(TM) device to resolve the causes for elevated
levels of hemolysis experienced in the first implant of the device. The Company
believes at this time that significant design
(6)
ITEM 1. BUSINESS (CONTINUED)
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
changes will not be required, and that minor modifications will reduce
hemolysis. While there can be no assurance that the Company has resolved the
problem, the Company believes that clinical trials of the CorAide(TM) device
will resume later this fiscal year.
The Company considers the CorAide(TM) development program to be
complementary to its ongoing program to develop and market the Arrow
LionHeart(TM) LVAS. The first version of the CoreAide(TM) device is not fully
implantable and is intended to provide support for patients waiting for heart
transplantation or considered candidates for bridging to natural recovery of
ventricular function. The Company continues to believe that successful
development of the CorAide(TM) device would provide a lower cost, less invasive
and broader application approach to ventricular assist than pulsatile devices
that are currently available or under development.
The Company believes that its Percutaneous Thrombolytic Device, or PTD,
has significant opportunity for growth in its primary area of use, which is
cleaning hemodialysis grafts. The Company is also investigating a secondary
usage of this device for the treatment of deep vein thrombosis. The Company is
continuing its European clinical trials to determine the safety and feasibility
of the PTD for the treatment of iliofemoral deep vein thrombosis and, as of
November 1, 2003, there have been nine patients enrolled in this study. Due to
slower than anticipated trial enrollment, however, the Company decided to
discontinue its U.S. study of this device for this application.
In fiscal 2002, the Company began development of the Magnaflow(R), a new
technology for magnetically guiding and facilitating the placement of enteral
nutrition catheters in patients in intensive care units. During fiscal 2003, the
Company decided to discontinue its support for this development project as
clinical testing indicated a limited market potential for this device.
During fiscal 2003, the Company's Cardiac Assist Division announced a
limited release of new technology for balloon pumping, which includes the
AutoCat(TM) 2 WAVE(TM) and LightWave(TM) catheter system. The Company's
AutoCat(TM) 2 WAVE(TM) IAB pump and associated LightWave(TM) catheter system
utilizes fiber optic pressure-sensing catheter instrumentation and provides
total automation of the pumping process for all patients, including those with
severely arrhythmic heartbeats. The Company anticipates that this technology
will provide it with the opportunity to expand its share of the worldwide
balloon pumping market.
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.
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.
(7)
ITEM 1. BUSINESS (CONTINUED)
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. and
foreign patents and patent applications that 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 owned by or licensed to 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. Various patents relating to aspects of the technology
underlying some of the Company's critical care and cardiac assist products
expired in fiscal 2003 or will expire in fiscal 2004, none of which has had or
is expected to have a significant impact on the Company's business, financial
condition or results of operations. All other existing patents owned by or
licensed to the Company relating to any of its major products expire after
fiscal 2004.
From time to time, the Company is subject to legal actions involving
patent and other intellectual property claims. In October 2003, the Company
reached a settlement in principle for $8.0 million, or $0.12 diluted earnings
per share, in two related lawsuits in which the plaintiffs had alleged that
certain of the Company's hemodialysis catheter products infringed patents owned
by or licensed to the plaintiffs. However, the final terms of this proposed
settlement are still under negotiation. In the fourth quarter of fiscal 2003,
the Company established a reserve in anticipation of its settlement of these two
related lawsuits. The Company had been obligated to pay royalties to the
plaintiffs based on the sales levels for these products. Upon the final
settlement of these actions, the Company will no longer owe royalties to the
plaintiff for any sales occurring after August 28, 2004.
The Company is also currently a defendant in a lawsuit in which the
plaintiff alleges that the Company's Cannon-Cath(TM) split-tip hemodialysis
catheters, which were acquired as part of the Company's acquisition in November
2002 of specified assets of Diatek, Inc., infringe a patent owned by or licensed
to the plaintiff. In November 2003, this lawsuit was stayed pending the U.S.
Patent and Trademark Office's ruling on its re-examination of the patent at
issue, which is not expected to occur until after fiscal 2004. The Company has
reserved $2.0 million for estimated legal fees related to this lawsuit. The
reserve amount represents the Company's responsibility to pay one-half of these
legal fees while the former owners of Diatek, Inc. are responsible for payment
of the other half. Based on information presently available to the Company, the
Company believes that its products do not infringe any valid claim of the
plaintiff's patent and that, consequently, it has meritorious legal defenses
with respect to this action and is vigorously contesting it. Although the
ultimate outcome of this action is not expected to have a material adverse
effect on the Company's business or financial condition, whether an adverse
outcome in this action would materially adversely affect the Company's reported
results of operations in any future period cannot be predicted with certainty.
Arrow owns a number of registered trademarks in the United States and,
in addition, has obtained registration in many of its major foreign markets for
the trademark ARROW(R) and certain other trademarks.
(8)
ITEM 1. BUSINESS (CONTINUED)
GOVERNMENT REGULATION
As a developer, manufacturer and marketer of medical devices, the
Company is subject to extensive regulation by, among other governmental
entities, the FDA and the corresponding state, local and foreign regulatory
agencies in jurisdictions in which the Company sells its products. These
regulations govern the introduction of new medical devices, the observance of
certain standards with respect to the manufacture, testing and labeling of such
devices, the maintenance of certain records, the tracking of such devices and
other matters. Failure to comply with applicable federal, state, local or
foreign laws or regulations could subject the Company to enforcement action,
including product seizures, recalls, withdrawal of 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. There can
be no assurance that such changes or FDA enforcement program will not have a
material adverse effect on the Company.
In October 2002, The Medical Device User Fee and Modernization Act of
2002 was enacted, which amended the FDA's regulations to provide, among other
things, the ability for the FDA to impose user fees for medical device reviews.
The Company's activities require that it make many filings with the FDA that are
now subject to this new fee structure. The precise amount of fees that the
Company will incur each year will be dependent upon the specific quantity and
nature of its filings.
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 they would not have such an effect in the
future.
In the early to mid 1990s, the review time by the FDA to approve 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, ranging from
small start-up enterprises to companies that are larger than Arrow with greater
financial and other resources. In addition, in response to 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 are competing
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.
(9)
ITEM 1. BUSINESS (CONTINUED)
ENVIRONMENTAL COMPLIANCE
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. In the course of its
business, the Company is involved in the handling, storing and disposal of
materials which are classified as hazardous. In 1989, the Company was notified
that it was among the potentially responsible parties under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 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 Environmental Protection Agency to enter into a proposed
global consent decree for DE MINIMIS parties with the United States District
Court for the District of Maryland, which was approved in November 2002. As a
result, the Company paid $11,276 during fiscal 2003 in accordance with the
payment provisions of the consent decree, which resolved in its entirety the
Company's liability with respect to the facility on a DE MINIMIS basis.
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 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 is 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. The
Company's primary global product liability insurance policy is on a claims made
basis. For fiscal 2003, the Company's deductibles for its primary global product
liability insurance policy were increased to $750,000 per occurrence from
$250,000 in fiscal 2002 for domestic product liability claims, with the
Company's annual exposure for such deductibles in any one policy year being
increased to $1.5 million in fiscal 2003 from $500,000 in fiscal year 2002.
Effective for fiscal 2004, the Company's deductibles for its primary global
product liability insurance policy were increased to $2.5 million per occurrence
for domestic product liability claims, with the Company's annual exposure for
such deductibles being limited to $5.0 million for any one policy year. The
policy year runs from September 1 to August 31 and has a $10.0 million aggregate
limit. The Company also has additional layers of coverage insuring up to $35.0
million in annual aggregate losses arising from claims that exceed the primary
product liability insurance policy limits. 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.
A product liability lawsuit against the Company tried before a jury in
Arkansas state court resulted in a judgment against the Company in May 2001 for
$175,000 in compensatory and $4.0 million in punitive damages. In February 2003,
the Company's appeal from this judgment to the Arkansas state court of appeals
was unsuccessful. In April 2003, the Company's petition to the Arkansas Supreme
Court to hear the appeal of the state court of appeals' decision was denied. In
February 2003, the Company was successful in defending an action brought by its
insurer seeking a judicial declaration that it would not be obligated to
indemnify the Company for the punitive damages portion of the judgment. As a
result, all compensatory and punitive damages resulting from this product
liability lawsuit were covered by the Company's primary and excess product
liability insurance policies, other than deductibles of $250,000 then in effect
under such insurance policies.
(10)
ITEM 1. BUSINESS (CONTINUED)
EMPLOYEES
As of November 1, 2003, Arrow had 3,193 full-time employees, of which
278 were hourly-paid manufacturing employees at the Company's Reading and
Wyomissing, Pennsylvania facilities. These hourly-paid employees 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 August 2006. The Company has never experienced an organized work
stoppage or strike and considers its relations with its employees to be good.
AVAILABLE INFORMATION
Arrow's internet address is: HTTP://WWW.ARROWINTL.COM. The Company makes
available, free of charge, on its internet website its annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other
information filed or furnished pursuant to the Securities Exchange Act of 1934
as soon as reasonably practicable after these filings have been made
electronically with the SEC. The Company's Code of Conduct, which applies to all
of its directors, officers and other employees, is also posted on its website.
Information contained on the Company's website is not incorporated by reference
in this report.
CERTAIN RISKS RELATING TO ARROW
FROM TIME TO TIME, IN BOTH WRITTEN REPORTS AND IN ORAL STATEMENTS BY THE
COMPANY'S SENIOR MANAGEMENT, EXPECTATIONS AND OTHER STATEMENTS ARE EXPRESSED
REGARDING THE COMPANY'S FUTURE PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE
INHERENTLY UNCERTAIN AND INVESTORS MUST RECOGNIZE THAT EVENTS COULD TURN OUT TO
BE DIFFERENT THAN SUCH EXPECTATIONS AND STATEMENTS. KEY FACTORS IMPACTING THE
COMPANY'S CURRENT AND FUTURE PERFORMANCE ARE DISCUSSED ELSEWHERE IN THIS REPORT
AND IN THE COMPANY'S OTHER FILINGS WITH THE SEC. IN ADDITION TO SUCH
INFORMATION, INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING
THE COMPANY AND ITS BUSINESS, AS WELL AS IN REVIEWING FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS REPORT AND IN THE COMPANY'S OTHER PERIODIC REPORTS FILED WITH
THE SEC AND IN ORAL STATEMENTS MADE BY ITS SENIOR MANAGEMENT. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS DUE
TO MATERIAL RISKS, UNCERTAINTIES AND CONTINGENCIES, INCLUDING, WITHOUT
LIMITATION, THOSE DISCUSSED BELOW.
Stringent Government Regulation
The Company's products are subject to extensive regulation by the FDA
and, in some jurisdictions, by state, local and foreign governmental
authorities. In particular, the Company must obtain specific clearance or
approval from the FDA before it can market new products or certain modified
products in the United States. In the United States, permission to distribute a
new device generally can be met either through a 510(k) premarket notification
or a premarket approval, or PMA, application.
Under the FDA's requirements, if a manufacturer can establish that a
newly developed device is "substantially equivalent" to a legally marketed
predicate device, the manufacturer may seek marketing clearance from the FDA to
market the device by filing a 510(k) premarket notification with the FDA. With
the exception of one product, the Company has, to date, obtained FDA marketing
clearance for its products only through the 510(k) premarket notification
process. The 510(k) premarket notification must be supported by data
establishing the claim of substantial equivalence to the satisfaction of the
FDA. The process of obtaining a 510(k) clearance typically can take several
months to a year or longer. If substantial equivalence cannot be established or
if the FDA determines that the device requires a more rigorous review, the FDA
will require that the manufacturer submit a PMA application that must be
approved by the FDA prior to marketing the device in the United States.
The PMA application must be supported by extensive data, including
preclinical and human clinical data, to prove the safety and efficacy of the
device with respect to the modifications disclosed in the supplement.
(11)
ITEM 1. BUSINESS (CONTINUED)
CERTAIN RISKS RELATING TO ARROW (CONTINUED)
Certain of the Company's products under development, including the Arrow
LionHeart(TM) LVAS, the CoreAide(TM) ventricular assist device and other future
applications require approval through the more rigorous PMA application process.
By regulation, the FDA has 180 days to review a PMA application and during that
time an advisory committee may evaluate the application and provide
recommendations to the FDA. While the FDA has approved PMA applications within
the allotted time period, review more often occurs over a significantly
protracted period, usually 18 to 36 months, and a number of devices have never
been cleared for marketing.
The process of obtaining 510(k) clearances or PMAs can be time consuming
and expensive. There can be no assurance that the FDA will grant all such
clearances or approvals sought by the Company or that FDA review will not
involve delays adversely affecting the marketing and sale of its products. Both
a 510(k) premarket notification and a PMA application, if approved, may also
include significant limitations on the indicated uses for which a product may be
marketed. FDA enforcement policy prohibits the promotion of approved medical
devices for unapproved uses. In addition, product approvals can be withdrawn for
failure to comply with regulatory requirements or the occurrence of unforeseen
problems following initial marketing.
The Company is also required to adhere to applicable regulations setting
forth current Good Manufacturing Practices, which require that the Company
manufacture its products and maintain its records in a prescribed manner with
respect to manufacturing, testing and control activities. In addition, the
Company is required to comply with FDA requirements for labeling and promotion
of its products.
Medical device laws are also in effect in many of the countries outside
the U.S. in which the Company does business. These laws range from comprehensive
device approval and quality system requirements for some or all of the Company's
products to simpler requests for product data, certifications or compliance with
packaging or labeling requirements. Many of the regulations applicable to the
Company's products in foreign countries are similar to those of the FDA and the
number and scope of these requirements are increasing, which is expected to add
to the delays and uncertainties associated with new product releases, as well as
the clinical and regulatory costs of supporting such releases. In addition, the
Company is required to notify the FDA if it exports to certain countries medical
devices manufactured in the U.S. that have not been approved by the FDA for
distribution in the U.S.
Failure to comply with applicable federal, state, local or foreign laws
or regulations could subject the Company to enforcement action, including
product seizures, recalls, withdrawal of clearances or approvals, and civil and
criminal penalties, any one or more of which could have a material adverse
effect on its business, financial condition and results of operations. Federal,
state, local and foreign laws and regulations regarding the development,
manufacture and sale of medical devices are subject to future changes. There can
be no assurance that such changes will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Significant Competition and Continual Technological Change
The markets for medical devices are highly competitive. The Company
currently competes with many companies in the development and marketing of
catheters and related medical devices. Some of the Company's competitors have
access to greater financial and other resources than it does.
Furthermore, the markets for medical devices are characterized by rapid
product development and technological change. Technological advances by one or
more of the Company's current or future competitors could render its present or
future products obsolete or uneconomical. The Company's future success will
(12)
ITEM 1. BUSINESS (CONTINUED)
Significant Competition and Continual Technological Change (Continued)
depend upon its ability to develop new products and technology to remain
competitive with other developers of catheters and related medical devices. The
Company's business strategy emphasizes the continued development and
commercialization of new products and the enhancement of existing products for
the critical care and cardiac care markets. There can be no assurance that the
Company will be able to continue to successfully develop new products and to
enhance existing products, to manufacture these products in a commercially
viable manner, to obtain required regulatory approvals or to gain satisfactory
market acceptance for its products.
Health Care Cost Containment and Third Party Reimbursement
The Company's products are purchased principally by hospitals, hospital
networks and hospital buying groups. Although its products are used primarily
for non-optional medical procedures, the Company believes that the overall
escalating cost of medical products and services has led and will continue to
lead to increased pressures upon the health care industry to reduce the cost or
usage of certain products and services. In the United States, these cost
pressures have led to increased emphasis on the price and cost-effectiveness of
any treatment regimen and medical device. Third party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, which are billed by hospitals for such health care services,
are increasingly negotiating the prices charged for medical products and
services and may deny reimbursement if they determine that a device was not used
in accordance with cost-effective treatment methods as determined by the payor,
was experimental, unnecessary or used for an unapproved indication. In
international markets, reimbursement systems vary significantly by country. Many
international markets have government managed health care systems that control
reimbursement for certain medical devices and procedures and, in most such
markets, there also are private insurance systems which impose similar cost
restraints. There can be no assurance that hospital purchasing decisions or
government or private third party reimbursement policies in the United States or
in international markets will not adversely affect the profitability of the
Company's products.
In keeping with the increased emphasis on cost-effectiveness in health
care delivery, the current trend among hospitals and other customers of medical
device manufacturers is to consolidate into larger purchasing groups to enhance
purchasing power. The medical device industry has also experienced some
consolidation, partly in order to offer a broader range of products to large
purchasers. As a result, transactions with customers tend to be larger, more
complex and involve more long-term contracts than in the past. The enhanced
purchasing power of these larger customers may also increase the pressure on
product pricing, although the Company is unable to estimate the potential impact
on it at this time. Several comprehensive health care reform proposals have
been, and continue to be, considered by the U.S. Congress. While none of these
proposals have to date been adopted, the intent of these proposals was,
generally, to expand health care coverage for the uninsured and reduce the rate
of growth of total health care expenditures. In addition, certain states have
made significant changes to their Medicaid programs and have adopted various
measures to expand coverage and limit costs. Several foreign countries in which
the Company does business are also considering, and in some countries have
already adopted, similar reforms to limit the growth of health care costs,
including price regulation. Implementation of government health care reform and
other efforts to control costs may limit the price of, or the level at which
reimbursement is provided for, the Company's products. The 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. There
can be no assurance that any such reforms will not have a material adverse
effect on the Company's business, financial condition or results of operations.
(13)
ITEM 1. BUSINESS (CONTINUED)
Dependence on Patents and Proprietary Rights
The Company owns numerous U.S. and foreign patents and has several U.S.
and foreign patent applications pending. The Company also has exclusive license
rights to certain patents held by third parties. These patents relate to aspects
of the technology used in certain of the Company's products. From time to time,
the Company is subject to legal actions involving patent and other intellectual
property claims. Successful litigation against the Company regarding its patents
or infringement of the patent rights of others could have a material adverse
effect on its business, financial condition and results of operations. In
addition, there can be no assurance that pending patent applications will result
in issued patents or that patents issued to or licensed-in by the Company will
not be challenged or circumvented by competitors or found to be valid or
sufficiently broad to protect its technology or to provide it with any
competitive advantage. The Company also relies on trade secrets and proprietary
technology that it seeks to protect, in part, through confidentiality agreements
with employees, consultants and other parties. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, that others will not independently develop
substantially equivalent proprietary information or that third parties will not
otherwise gain access to its trade secrets.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. Historically,
litigation has been necessary to enforce and defend certain patent and trademark
rights held by the Company. Future litigation may be necessary to enforce patent
and other intellectual property rights belonging to the Company, to protect its
trade secrets or other know-how owned by it, or to defend itself against claimed
infringement of the rights of others and to determine the scope and validity of
its and others' proprietary rights. Any such litigation could result in
substantial cost to and diversion of effort by the Company. Adverse
determinations in any such litigation could subject the Company to significant
liabilities to third parties, require it to seek licenses from third parties and
prevent it from manufacturing, selling or using certain of its products, any one
or more of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks Associated with International Operations
Because the Company generates significant sales outside of the United
States and many of its manufacturing facilities and suppliers are located
outside of the U.S., it is subject to risks generally associated with
international operations, such as: unexpected changes in regulatory
requirements; tariffs, customs, duties and other trade barriers; difficulties in
staffing and managing foreign operations; differing labor regulations; longer
payment cycles and problems in collecting accounts receivable; risks arising
from a specific country's or region's political or economic conditions;
fluctuations in currency exchange rates; foreign exchange controls which
restrict or prohibit repatriation of funds; export and import restrictions or
prohibitions; delays from customs brokers or government agencies; differing
protection of intellectual property; and potentially adverse tax consequences
resulting from operating in multiple jurisdictions with different tax laws. Any
one or more of these risks could materially adversely impact the success of the
Company's international operations. As the Company's revenues from international
operations increase, an increasing portion of its revenues and expenses will be
denominated in currencies other than U.S. dollars and, consequently, changes in
exchange rates could have a greater effect on its future operations. There can
be no assurance that such factors will not have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
there can be no assurance that laws or administrative practices relating to
regulation of medical devices, labor, taxation, foreign exchange or other
matters of countries within which the Company operates will not change. Any such
change could also have a material adverse effect on the Company's business,
financial condition and results of operations.
(14)
ITEM 1. BUSINESS (CONTINUED)
Potential Product Liability
The Company's business exposes it to potential product liability risks
which are inherent in the design, manufacture and marketing of catheters and
related medical devices. The Company's products are often used in surgical and
intensive care settings with seriously ill patients. In addition, many of the
medical devices manufactured and sold by the Company are designed to be
implanted in the human body for long periods of time and component failures,
manufacturing flaws, design defects or inadequate disclosure of product-related
risks with respect to these or other products manufactured or sold by the
Company could result in an unsafe condition or injury to, or death of, the
patient. The occurrence of such a problem could result in product liability
claims and/or a recall of, or safety alert relating to, one or more of the
Company's products. There can be no assurance that the product liability
insurance maintained by the Company will be available or sufficient to satisfy
all claims made against it or that it will be able to obtain insurance in the
future at satisfactory rates or in adequate amounts. Product liability claims,
safety alerts or product recalls in the future, regardless of their ultimate
outcome, could result in costly litigation and could have a material adverse
effect on the Company's business, reputation, its ability to attract and retain
customers for its products and its results of operations. In recent years,
physicians, hospitals and other medical service providers who are users of the
Company's products have become subject to an increasing number of lawsuits
alleging medical malpractice. Medical malpractice suits often involve large
claims and substantial defense costs.
Risks Associated with Derivative Financial Instruments
As a partial hedge against adverse fluctuations in exchange rates, the
Company periodically enters into foreign currency exchange contracts with
certain major financial institutions. By their nature, all such contracts
involve risk, including the risk of nonperformance by counterparties.
Accordingly, losses relating to these contracts could have a material adverse
effect upon the Company's business, financial condition and results of
operations. The Company's Foreign Currency Management Policy prohibits the use
of derivative instruments for speculative purposes.
Dependence on Key Management
The Company's success depends upon the continued contributions of key
members of its senior management team. Accordingly, loss of the services of one
or more of these key members of management could have a material adverse effect
on the Company's business. None of these individuals has an employment agreement
with the Company.
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 24,325 square foot
manufacturing facility in San Antonio, Texas acquired in connection with the
Company's acquisition of the NeoCare(R) product line in March 2003; a 49,000
square foot manufacturing and warehouse facility in Mount Holly, New Jersey; and
an 88,000 square foot manufacturing and research facility in the Czech Republic.
In addition, the Company leases a 55,000 square foot manufacturing
facility in Everett, Massachusetts, a 7,700 square foot sales office and
distribution center in Woburn, Massachusetts, a 21,000 square foot sales office
and distribution center in Hicksville, New York, 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, Italy and Greece, sales office space in Mexico and
(15)
ITEM 2. PROPERTIES (CONTINUED)
Belgium, and warehouse space in California. The Company also leases a 19,323
square foot manufacturing facility in Winston Salem, North Carolina acquired in
connection with its acquisition of Diatek in November 2002.
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.
The Company believes that it will be able to renew all leases on commercially
reasonable terms as they become due, or, if it is unable to renew them, that
suitable replacement space would be available on commercially reasonable terms.
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. The Company
is also subject to legal actions involving patent and other intellectual
property claims. 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.
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 2003 through the solicitations of proxies or otherwise.
(16)
EXECUTIVE OFFICERS
The executive officers of the Company and their ages and positions as of
November 1, 2003 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
---- --- ----------------
Carl G. Anderson, Jr. 58 Chairman and Chief Executive Officer
Philip B. Fleck 59 President and Chief Operating Officer
Paul L. Frankhouser 58 Executive Vice President - Global
Business Development
Frederick J. Hirt 55 Vice President-Finance and Chief
Financial Officer
Carl W. Staples 52 Vice President-Human Resources
John C. Long 38 Vice President and Treasurer
T. Jerome Holleran 67 Secretary
Carl N. Botterbusch 40 Vice President and General Manager,
Cardiac Assist Division
Thomas D. Nickel 64 Vice President-Regulatory Affairs
and Quality Assurance
Mr. Anderson was elected to the position of Chairman and Chief Executive
Officer effective September 1, 2003. Mr. Anderson succeeded Marlin Miller, Jr.,
who retired from the Company on August 31, 2003 after serving as its Chairman of
the Board and Chief Executive Officer since it was founded in 1975. From January
2002 to August 31, 2003, Mr. Anderson served as Vice Chairman of the Board and
General Manager of the Company's Critical Care Division with responsibility for
worldwide sales, marketing, research and development of the Company's critical
care products. Mr. Anderson has served as a director of Arrow since January 1998
and, prior to his employment by the Company, served as President and Chief
Executive Officer of ABC School Supply, Inc., a producer of materials and
equipment for public and private schools, from May 1997 to December 2001. Mr.
Anderson served as Principal with the New England Consulting Group, a general
management and marketing consulting company, from May 1996 to May 1997, as Vice
President, General Manager, Retail Consumer Products of James River Corporation,
a multinational company engaged in the development, manufacture and marketing of
paper-based consumer products ("James River"), from August 1994 to March 1996,
and as Vice President, Marketing, Consumer Brands of James River from May 1992
to August 1994, and in various capacities with Nestle Foods Corporation, the
latest as Vice President, Division General Manager, Confections, from 1984 to
May 1992. Prior thereto, Mr. Anderson served in several marketing and management
capacities with Procter & Gamble from 1972 to 1984. Mr. Anderson also serves as
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.
(17)
EXECUTIVE OFFICERS (CONTINUED)
Mr. Frankhouser has served as Executive Vice President - Global Business
Development of the Company since January 2002, with responsibility for worldwide
evaluation and acquisition of new business opportunities. From January 1999 to
January 2002, Mr. Frankhouser served as Executive Vice President of the Company,
with responsibility for worldwide sales and marketing. 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 and Chief Financial
Officer of the Company since August 1998. From August 1998 until January 2003,
he also served as Treasurer of the Company. Prior to joining the Company, from
1980 to 1998, Mr. Hirt served in various capacities with Pharmacia & Upjohn,
Inc., the latest as Vice President, Accounting and Reporting.
Mr. Staples has served as Vice President, Human Resources of the Company
since September 2002. Prior to joining the Company, Mr. Staples served as Vice
President Human Resources and in various other human resources capacities with
CIBA Specialty Chemicals from 1989 through August 2002. From 1974 to 1989, Mr.
Staples served in various human resources-related positions with Sara Lee
Corporation, Bausch & Lomb Incorporated, Rockwell International, and Union
Carbide Corporation.
Mr. Long has served as Vice President and Treasurer of the Company since
January 2003, and as Assistant Treasurer from 1995 to January 2003. Prior to
joining the Company, Mr. Long served as Controller for the Jaindl Companies, a
group of privately held companies involved in agribusiness and real estate
development, from 1989 to 1995. From 1986 to 1989, Mr. Long was employed in the
Allentown office of Concannon, Gallagher, Miller & Co., CPA's. Mr. Long also
serves as a director of American Bank Incorporated, a regional commercial bank.
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. ("PMP"), a former subsidiary of Arrow Precision
Products, Inc. ("Precision"), a corporation controlled by principal shareholders
of the Company until its dissolution in May 2002, which manufactures and markets
certain non-catheter medical products and was sold in August 1997 to certain
employees of Precision, including Mr. Holleran. He is now the Chairman of PMP.
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 March 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.
(18)
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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. On August 15, 2003, the Company effected
a two-for-one split of its common stock while retaining the rate of its
quarterly cash dividends, which resulted in the doubling of its quarterly
dividend. All historical share and per share amounts in the table below have
been adjusted to reflect these actions.
Price per Share
=======================================
Quarter Ended High Low Dividends per Share
===================== ======================================= =======================
August 31, 2003 $ 25.8000 $ 21.4100 $ 0.0800
May 31, 2003 22.3100 20.2350 0.0400
February 28, 2003 21.8750 18.6450 0.0400
November 30, 2002 19.3750 15.7500 0.0350
August 31, 2002 $ 22.7850 $ 16.9250 $ 0.0350
May 31, 2002 24.2000 21.7100 0.0350
February 28, 2002 23.1100 18.5050 0.0350
November 30, 2001 19.3800 17.9500 0.0325
As of November 1, 2003, there were approximately 541 registered
shareholders of the Company's common stock.
(19)
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the years ended
August 31, 2003, 2002, 2001, 2000 and 1999 have been derived from the Company's
audited consolidated financial statements. The consolidated financial statements
of the Company as of August 31, 2003 and 2002 and for each of the three years in
the period ended August 31, 2003, together with the notes thereto and the
related report of PricewaterhouseCoopers LLP, independent auditors, are included
in Item 8 of this report. 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 in Items 7 and 8 of this report.
2003 2002 2001 2000 1999
---------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales $ 380,376 $ 340,759 $ 334,042 $ 325,714 $ 300,318
Cost of goods sold 190,246 169,625 158,573 156,107 143,953
Gross profit 190,130 171,134 175,469 169,607 156,365
Operating expenses
Research, development and engineering 28,170 26,165 25,209 19,771 20,335
Selling, general, and administrative 89,354 78,406 78,499 74,921 71,091
Special charges* 8,000 8,005 - 3,320 12,819
Total operating expenses 125,524 112,576 103,708 98,012 104,245
Operating income 64,606 58,558 71,761 71,595 52,120
Other expenses (income), net (2,312) 781 2,291 2,145 (3,221)
Income before income taxes 66,918 57,777 69,470 69,450 55,341
Provision for income taxes 21,248 18,777 22,925 23,266 19,646
------------ ----------- ------------ ------------ ------------
Net income $ 45,670 $ 39,000 $ 46,545 $ 46,184 $ 35,695
============ =========== ============ ============ ============
Basic earnings per common share $ 1.05 $ 0.89 $ 1.06 $ 1.03 $ 0.77
============ =========== ============ ============ ============
Diluted earnings per common share $ 1.04 $ 0.88 $ 1.05 $ 1.03 $ 0.77
============ =========== ============ ============ ============
Cash dividends per common share $ 0.195 $ 0.1375 $ 0.1275 $ 0.1175 $ 0.1075
Weighted average shares used in computing
basic earnings per common share 43,399 43,826 43,991 44,901 46,390
Weighted average shares used in computing
diluted earnings per common share 43,773 44,211 44,241 45,038 46,390
All historical share and per share amounts have been adjusted to reflect the
two-for-one split of the Company's common stock and the doubling of its
quarterly dividend effected on August 15, 2003.
(20)
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
2003 2002 2001 2000 1999
---------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Working capital $ 163,914 $ 157,162 $ 110,227 $ 78,132 $ 100,246
Total assets 493,897 426,776 418,209 385,814 357,484
Notes payable and current maturities of 28,731 16,432 50,722 60,481 33,272
long-term debt
Long-term debt, excluding current maturities 3,735 300 600 900 11,105
Shareholders' equity 390,646 360,356 326,089 285,204 278,167
Certain prior period amounts in the table above have been reclassified to
conform to the fiscal 2003 presentation (see Item 8. Notes to Consolidated
Financial Statements - Note 1).
* See Item 8. Notes to Consolidated Financial Statements - Note 2 for a
description of the special charges recorded in fiscal 2003 and 2002. 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 $0.05 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. In accordance with Financial
Accounting Standard (FAS) No. 2 "Accounting for Research and Development
Costs" and Financial Accounting Standard Board (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 date of consummation of the acquisition. 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 $0.06 per basic and diluted common
share) related to the purchase of in-process IAB pump research and
development as part of the Company's acquisition of the assets of the
cardiac assist division of C.R. Bard, Inc. In accordance with FAS No. 2
"Accounting for Research and Development Costs" and 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. 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 of $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 $0.12 per basic and diluted
common share.
(21)
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 ITEM 1. BUSINESS - CERTAIN
RISKS RELATING TO ARROW AND THE COMPANY'S OTHER REPORTS FILED WITH THE SEC.
RESULTS OF OPERATIONS
The following table presents for the three years ended August 31, 2003
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
---------------------------------- ---------------------------------
2003 2002 2001
Year ended August 31,
---------------------------------- vs vs vs
2003 2002 2001 2002 2001 2000
-------- -------- -------- -------- -------- --------
Net sales 100.0 % 100.0 % 100.0 % 11.6 % 2.0 % 2.6 %
Gross profit 50.0 50.2 52.5 11.1 (2.5) 3.5
Operating expenses:
Research, development and
engineering 7.4 7.7 7.5 7.6 4.0 27.5
Selling, general and
administrative 23.5 23.0 23.5 14.0 0.1 4.8
Special charges** 2.1 2.3 - 0.0 * (100.0)
-------- -------- -------- -------- -------- --------
Operating income 17.0 17.2 21.5 10.2 (18.4) 0.2
Other expenses (income), net (0.6) 0.2 0.7 396.0 (65.9) 6.9
Income before income taxes 17.6 17.0 20.8 15.7 (16.8) -
Provision for income taxes 5.6 5.6 6.9 13.2 (18.1) (1.5)
-------- -------- -------- -------- -------- --------
Net income 12.0 % 11.4 % 13.9 % 17.2 % (16.1) % 0.8 %
*Not a meaningful comparison
**See Item 6. Selected Financial Data for a description of special charges
(22)
FISCAL 2003 COMPARED TO FISCAL 2002
Net sales increased by $39.6 million, or 11.6%, to $380.4 million in fiscal 2003
from $340.8 million in fiscal 2002 due primarily to an increase in critical care
product sales, including sales of products distributed by the Company's new
Stepic subsidiary formed in fiscal 2003 following the Company's acquisition of
the net assets of its former New York City distributor, and a favorable foreign
exchange impact during fiscal 2003 as a result of the weakness of the U.S.
dollar relative to currencies of countries in which the Company operates direct
sales subsidiaries, as further discussed below. Net sales represent gross sales
invoiced to customers, less certain related charges, discounts, returns, and
other allowances. Revenue from sales is recognized at the time products are
shipped and title is passed to the customer. The following is a summary of the
Company's sales by product platform:
Sales by Product Platform For the years ended
(in millions)
August 31, 2003 August 31, 2002
--------------- ---------------
Central venous catheters* $186.4 $164.1
Specialty catheters 124.1 115.0
Stepic distributed products 13.0 -
------ ------
Subtotal 323.5 279.1
Drug infusion pumps - 4.9
------ ------
Subtotal critical care 323.5 284.0
Cardiac care 56.9 56.8
------ ------
TOTAL $380.4 $340.8
====== ======
*Includes Diatek and NeoCare(R) product sales of $6.4 million in fiscal
2003.
Sales of critical care products increased 13.9% to $323.5 million from $284.0
million in fiscal 2002, due primarily to increased sales of central venous and
specialty catheters offset by decreased sales of drug infusion products as a
result of the Company's divestiture of its implantable drug infusion pump
business in fiscal 2002, as discussed below. Sales of central venous catheters
increased in fiscal 2003 due primarily to an increase in the number of hospitals
that began purchasing the Company's recently introduced procedure kits featuring
its safety devices as well as increased sales of renal access and neonatal
products resulting from the Company's acquisitions of Diatek and the NeoCare(R)
product line, respectively, as discussed in Item 8. Notes to the Consolidated
Financial Statements - Note 3. Sales of specialty catheters increased in fiscal
2003 due to improved sales of epidural products, intravenous and extension sets,
percutaneous thrombolytic devices, and rapid infusion catheters. Sales of
cardiac care products increased to $56.9 million from $56.8 million in fiscal
2002, due primarily to increased sales of IAB pump and diagnostic products
offset by decreased sales to another medical device manufacturer. International
sales increased by 11.1% to $130.5 million from $117.5 million in the prior year
and represented 34.3% of net sales in fiscal 2003, compared to 34.5% in the
prior year. As a result of the weakness of the U.S. dollar relative to
currencies of countries in which the Company operates direct sales subsidiaries,
net sales for fiscal 2003 increased $8.1 million.
In April 2002, the Company completed the sale of substantially all of the assets
of its implantable drug infusion pump business pursuant to an asset purchase
agreement dated as of March 1, 2002. As a result of this divestiture, the
Company reported no sales of implantable drug infusion pump products in fiscal
2003 compared to $4.9 million of such sales in fiscal 2002.
Gross profit increased 11.1% to $190.1 million in fiscal 2003 from $171.1
million in fiscal 2002. As a percentage of net sales, gross profit decreased to
50.0% in fiscal 2003 compared to 50.2% in fiscal 2002. The decline in gross
margin was due primarily to (1) lower margins realized on the sale of
inventories of products purchased as part of the Company's acquisition of the
net assets of Stepic Medical, its former New York City distributor, in September
2002, and (2) the ongoing distribution by the Company's Stepic subsidiary of
lower margin products of other medical device manufacturers, offset in part by
(3) a $1.8 million charge against sales in fiscal 2002 related to the Company's
acquisition of Stepic Medical to reflect an increase in the
(23)
FISCAL 2003 COMPARED TO FISCAL 2002 (CONTINUED)
reserve for dealer rebates as a result of obtaining additional information
regarding Stepic's rebates, (4) higher than average margins realized on the sale
of renal access products associated with the Company's acquisition of Diatek in
November 2002, and (5) higher than average margins realized on the sale of
NeoCare(R) products associated with the acquisition of this business in March
2003.
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 also continues
to face pricing pressures in certain product lines in both European and Japanese
markets as governments strive to curtail increases in health care costs. The
Company intends to continue its efforts to mitigate the effect of these pricing
pressures through continued emphasis on cost reduction.
Research, development and engineering expenses in fiscal 2003 increased by 7.6%
to $28.2 million from $26.2 million in fiscal 2002. As a percentage of net
sales, these expenses decreased to 7.4% in fiscal 2003, compared to 7.7% in
fiscal 2002. The increase in research, development and engineering expenses was
primarily due to a write off of $3.6 million, or $0.05 diluted earnings per
share, related to development costs for the second generation of external
batteries used in the Arrow LionHeart(TM), the Company's LVAS, and increased
research and development spending on the CorAide(TM) continuous flow ventricular
assist system, the Company's joint research and development program with The
Cleveland Clinic Foundation. Offsetting these increases was lower research and
development spending relating to other aspects of the Arrow LionHeart(TM)
program and lower development expenditures for the Company's implantable drug
infusion pump product line as a result of the Company's divestiture of this
business in April 2002.
Selling, general and administrative expenses increased by 14.0% to $89.4 million
from $78.4 million in the previous year, and were 23.5% of net sales in fiscal
2003 compared to 23.0% in fiscal 2002. These increases were due primarily to
several factors: (1) increased legal costs of $1.9 million associated with the
Company's defense of patent litigation relating to certain of its hemodialysis
catheter products (see Notes to Consolidated Financial Statements - Note 16);
(2) increased expenses of $0.8 million relating to the strengthening of the
Company's international marketing; (3) selling, general and administrative
expenses of $6.5 million incurred in connection with the Company's acquisitions
of Stepic Medical, Diatek, the NeoCare(R) product line and IMA, as further
discussed below under "Liquidity and Capital Resources"; and (4) an increase in
selling, general and administrative expenses of $2.5 million as a result of the
weakness of the U.S. dollar relative to currencies of countries in which the
Company operates direct sales subsidiaries. These increases were offset in part
by a decrease in expenses of $3.5 million resulting from the divestiture of the
Company's implantable drug infusion pump business in April 2002. The Company
expects to incur additional legal costs in the first quarter of fiscal 2004 in
connection with the patent litigation relating to its hemodialysis catheter
products.
Net periodic pension cost is recorded in operating expenses in amounts
determined by the Company's actuaries and is based on management's estimates of
expected interest rates, expected rates of return on plan assets and expected
compensation increases. These estimates reflect management's best judgments in
the current circumstances. Actual results may differ from the estimates.
Interest rate assumptions are based on market rates at the beginning of the
Company's fiscal year. Expected rates of return on plan assets are based in part
on the Company's historical asset portfolio performance over the prior ten year
period and also the estimated rate of return on plan assets in the future. The
Company's rate of compensation increase assumption is based on its historical
compensation percentage increases as well as its expected rate increases in
future periods.
The Company incurred a special charge in its fourth quarter of fiscal year 2003
totaling $8.0 million ($5.4 million after tax, or $0.12 diluted earnings per
share.) This special charge was recorded to establish a reserve for a proposed
settlement in two related patent infringement lawsuits, which, as discussed
above relate to certain of the Company's hemodialysis catheter products.
(24)
FISCAL 2003 COMPARED TO FISCAL 2002 (CONTINUED)
Principally due to the above factors, operating income increased 10.2% to $64.6
million in fiscal 2003 from $58.6 million in fiscal 2002.
Other expenses (income), net, increased to $2.3 million of income in fiscal 2003
from $0.8 million of expense in fiscal 2002, principally due to the two factors
discussed below. Other expenses (income) net, consists principally of interest
expense and foreign exchange gains and losses associated with the Company's
direct sales subsidiaries. The Company had foreign currency transaction gains
resulting from the translation of intercompany receivables denominated in the
functional currencies of its international sales subsidiaries. In the third
quarter of fiscal 2003, the Company recapitalized its subsidiary in the Czech
Republic. This refinancing resulted in a temporarily unhedged foreign currency
position leading to a foreign currency transaction gain of $1.0 million. This
foreign currency position was subsequently hedged in the third fiscal quarter.
In addition, the Company realized interest income accruing on refunds related to
amended federal tax returns, which claimed additional research and development
credits and depreciation of equipment. Aggregate foreign exchange losses were
$0.1 million and $0.2 million in fiscal 2003 and 2002, respectively. Gains
relating to foreign currency contracts were $0.7 million in fiscal 2003 and $0.1
million in fiscal 2002.
As a result of the factors discussed above, income before income taxes increased
in fiscal 2003 by 15.7% to $66.9 million from $57.8 million in fiscal 2002. The
Company's effective income tax rate decreased to 31.8% from 32.5% in fiscal
2002, primarily due to a favorable tax settlement with the IRS in the fourth
quarter of fiscal 2003 related to the Company's research and development tax
credits.
In addition, the Company currently anticipates a tax payment in fiscal 2004 of
an amount ranging between $2.8 million and $10.2 million related to an ongoing
Japanese transfer price audit. The Company intends to utilize competent
authority proceedings in the U.S. to recover a majority of the required tax
payment amount. The Company believes that any amount not recovered through these
proceedings has been fully reserved as of August 31, 2003 and, therefore will
not adversely affect its future results of operations. Payment of this amount,
however, is expected to adversely affect the Company's operating cash flow in
fiscal 2004.
In fiscal 2003, the World Trade Organization determined that the
Extraterritorial Income Regime, or ETI, as provided for in the U.S. Internal
Revenue Code, is an illegal export subsidy. Accordingly, the Company anticipates
that the United States will repeal the ETI during fiscal 2004. Various proposals
before the U.S. Congress may replace the ETI, but even if adopted, would likely
not result in the same level of income tax benefit to the Company as the ETI.
Therefore, it is possible that the Company's worldwide tax rate will increase in
fiscal 2004 and beyond, pending the outcome of these potential changes in the
law. During fiscal 2003, the ETI benefit decreased the Company's worldwide tax
rate by 4.2 percentage points. The Company is presently unable to determine the
effect of the potential tax law changes and there can be no assurance that such
changes will not adversely affect its results of operations in future periods.
Net income in fiscal 2003 increased 17.2% to $45.7 million from $39.0 million in
fiscal 2002. As a percentage of net sales, net income represented 12.0% in
fiscal 2003 compared to 11.4% in fiscal 2002.
During the fourth quarter of fiscal 2003, the Company approved the issuance,
effective on August 15, 2003, of an additional share of common stock for each
share issued and outstanding on the record date of August 1, 2003 while
retaining the rate of its quarterly dividend, which resulted in the doubling of
its quarterly dividend to $0.08 per share. All historical share and per share
information has been adjusted to reflect these actions.
Basic earnings per common share were $1.05 in fiscal 2003, up 18.0%, or $0.16
per share, from $0.89 in fiscal 2002. Diluted earnings per common share were
$1.04 in fiscal 2003, up 18.2%, or $0.16 per share, from $0.88 in fiscal 2002.
Weighted average shares of common stock outstanding used in computing basic
earnings per common share decreased to 43,399,363 in fiscal 2003 from 43,825,856
in fiscal 2002. Weighted average shares of common stock outstanding used in
computing diluted earnings per common share decreased to 43,773,253 in fiscal
2003 from 44,211,082 in fiscal 2002. These decreases were primarily a result of
the Company's share repurchase program, which remains in effect.
(25)
FISCAL 2002 COMPARED TO FISCAL 2001
Net sales increased by $6.8 million, or 2.0%, to $340.8 million in fiscal 2002
from $334.0 million in fiscal 2001. Sales of critical care products increased
2.9% to $284.0 million from $276.1 million in fiscal 2001, due primarily to
increased sales of central venous and special catheters. Sales were adversely
impacted by a $1.8 million charge for increased rebate reserves related to the
Company's acquisition of the net assets of its former New York City distributor,
Stepic Medical, on September 3, 2002, as further described above in Item 1.
Business - Sales and Marketing. Sales of cardiac care products decreased 1.9% to
$56.8 million from $57.9 million in fiscal 2001, due primarily to decreased
sales of IAB pump and diagnostic products. International sales increased by $3.5
million, and represented 34.5% of net sales in fiscal 2002, compared to 34.1% in
the prior year, despite the negative impact of the strength of the U.S. dollar
relative to currencies in countries where the Company operates direct sales
subsidiaries, which reduced sales by $2.1 million for fiscal 2002 when compared
to the prior fiscal year.
In April 2002, the Company completed the sale of substantially all of the assets
of its implantable drug infusion pump business pursuant to an asset purchase
agreement dated as of March 1, 2002. As a result of this divestiture, the
Company reported no sales of implantable drug infusion pump products from April
1, 2002 through August 31, 2002, compared to $3.2 million of such sales in the
same five month period of fiscal 2001.
Gross profit decreased 2.5% to $171.1 million in fiscal 2002 from $175.5 million
in fiscal 2001. As a percentage of net sales, gross profit decreased to 50.2% in
fiscal 2002 compared to 52.5% in fiscal 2001. These decreases were primarily the
result of increased manufacturing variances caused by manufacturing of products
at a rate below the actual sales rate in order to bring inventories more in line
with requirements following manufacturing shifts to expanded international
plants, a less profitable product sales mix and pricing pressures. Gross profit
also decreased, as discussed above, due to a $1.8 million charge against sales
related to the Company's acquisition of its former New York City distributor to
reflect an increase in the reserve for dealer rebates as a result of obtaining
additional information regarding the distributor's rebates (see Item 8. Notes to
Consolidated Financial Statements - Notes 2 and 3).
The Japanese Ministry of Health and Welfare adopted new reimbursement pricing
for central venous catheters effective as of April 1, 2002. The impact of this
reduced pricing on the Company's earnings for fiscal 2002 was not material.
In addition, effective as of March 1, 2002, the Company entered into an
agreement with a group purchasing organization resulting in reduced pricing to
the hospitals participating in this organization. The impact of the reduced
pricing under this arrangement on the Company's earnings in fiscal 2002 was not
material.
Research, development and engineering expenses in fiscal 2002 increased by 4.0%
to $26.2 million from $25.2 million in fiscal 2001. As a percentage of net
sales, these expenses increased to 7.7% in fiscal 2002, compared to 7.5% in
fiscal 2001. This increase was primarily a result of increased research and
development spending on the Arrow LionHeart(TM), the Company's LVAS, and
CorAide(TM), the Company's joint research and development program with The
Cleveland Clinic Foundation, which was offset in part by less research and
development spending on the Company's implantable drug infusion pump business
due to its divestiture of this business on April 1, 2002.
Selling, general and administrative expenses were $78.4 million during fiscal
2002 compared to $78.5 million in the previous year, and were 23.0% of net sales
in fiscal 2002 compared to 23.5% in fiscal 2001. This decrease was due primarily
to several factors, including: decreased legal expenses relating to patent
litigation matters although, as discussed above, the Company continued to incur
legal costs in connection with a patent dispute relating to certain of its
hemodialysis catheter products; and reduced goodwill amortization expense of
$3.0 million related to the Company's adoption in the first quarter of fiscal
2002 of SFAS 142, less selling, general and administrative expenses related to
the Company's implantable drug infusion pump business, which was sold in April
2002, partially offset by increased expenses related to the Company's defined
benefit
(26)
FISCAL 2002 COMPARED TO FISCAL 2001 (CONTINUED)
pension plans. In addition, during fiscal 2002, the Company recorded a $2.1
million charge for additional product liability insurance to maintain
deductibles at existing levels for five years for claims incurred but not
reported occurring prior to September 1, 2002 and for additional reserves for
product liability claims and workers' compensation exposures.
As discussed in Note 20 of Notes to Consolidated Financial Statements in Item 8
of this report, during fiscal 2002, the Company recorded an estimated loss of
$1.2 million ($0.8 million after tax, or $0.02 per basic and diluted common
share) on the sale of its implantable drug infusion pump business. As discussed
in Note 18 of Notes to Consolidated Financial Statements in Item 8 of this
report, the Company also recorded a gain of $1.7 million on the sale of
securities available for sale. The net impact of these transactions was not
material to the Company's results of operations for fiscal 2002.
The Company recorded special charges in the fourth quarter of fiscal 2002
amounting to a total of $8.0 million ($5.4 million after tax, or $0.12 per basic
and diluted common share) relating to the matters described below. Intangible
assets in the aggregate amount of $4.7 million ($3.2 million after tax, or $0.07
per basic and diluted common share) were written off relating to purchased
technologies the Company has decided not to support for (1) Pullback Atherectomy
Catheterization, or PAC ($2.6 million, $1.8 million after tax, or $0.04 per
basic and diluted common share), (2) IAB pumping software ($1.5 million, $1.0
million after tax, or $0.02 per basic and diluted common share), and (3)
microwave ablation technology ($0.6 million, $0.4 million after tax, or $0.01
per basic and diluted common share). The Company's special charge relating to
the PAC resulted from its discontinuation of support for this development
project due to changes in the market outlook for this device. The special charge
relating to the IAB pumping software resulted from the Company's decision to
evaluate a new pump which will not utilize this software. The special charge
relating to microwave ablation resulted from the Company's decision to
discontinue its efforts to further develop this technology for treating liver
ablation. Also included in the special charge is the write-off of an investment
of $2.0 million ($1.3 million after tax, or $0.03 per basic and diluted common
share) in a developer and manufacturer of systems to measure certain cardiac
functions due to the developer's uncertain access to future financing and
unfavorable financial condition. Finally, due to delay in CE-mark approval for
the Arrow LionHeart(TM), the Company's LVAS, in Europe, the Company incurred
$1.3 million ($0.9 million after tax, or $0.02 per basic and diluted common
share) of manufacturing variances related to systems being produced for market
introduction.
Principally due to the above factors, operating income decreased 18.4% to $58.6
million in fiscal 2002 from $71.8 million in fiscal 2001.
Other expenses (income), net, decreased to $0.8 million of expense in fiscal
2002 from $2.3 million in fiscal 2001, principally due to lower interest expense
on the Company's revolving credit facility. Aggregate foreign exchange losses
were $0.2 million and $0.4 million in fiscal 2002 and 2001, respectively. Gains
relating to foreign currency contracts were $0.1 million in fiscal 2002 and $0.4
million in fiscal 2001.
As a result of the factors discussed above, income before income taxes decreased
in fiscal 2002 by 16.8% to $57.8 million from $69.5 million in fiscal 2001. The
Company's effective income tax rate decreased to 32.5% from 33.0% in fiscal
2001, principally as a result of the Company's adoption of SFAS 142 and the
elimination of nondeductible goodwill in the first quarter of fiscal 2002 and
anticipated research and development tax credits.
Net income in fiscal 2002 decreased 16.1% to $39.0 million from $46.5 million in
fiscal 2001. As a percentage of net sales, net income represented 11.4% in
fiscal 2002 compared to 13.9% in fiscal 2001. As a result of the Company's
adoption of SFAS 142 and the discontinuation of amortization of goodwill, net
income in fiscal 2002 increased by $2.1 million after tax from fiscal 2001
($0.05 per basic and diluted common share).
(27)
FISCAL 2002 COMPARED TO FISCAL 2001 (CONTINUED)
Basic earnings per common share were $0.89 in fiscal 2002, down 16.0%, or $0.17
per share, from $1.06 in fiscal 2001. Diluted earnings per common share were
$0.88 in fiscal 2002, down 16.2%, or $0.17 per share, from $1.05 in fiscal 2001.
Weighted average shares of common stock outstanding used in computing basic
earnings per common share decreased to 43,825,856 in fiscal 2002 from 43,990,788
in fiscal 2001. Weighted average shares of common stock outstanding used in
computing diluted earnings per common share decreased to 44,211,082 in fiscal
2002 from 44,240,734 in fiscal 2001. These decreases were primarily a result of
the Company's share repurchase program, which, as discussed below, remains in
effect, partially offset by the Company's issuance during fiscal 2002 of 20,000
shares from treasury to CCF as an additional royalty for CCF's completion of
certain research and development milestones under the Company's license
agreement with CCF.
LIQUIDITY AND CAPITAL RESOURCES
Arrow's primary source of funds continues to be cash generated from operations,
as shown in the Company's Consolidated Statement of Cash Flows included in Item
8 of this report. For fiscal 2003, net cash provided by operations was $78.8
million, an increase of $1.0 million, or 1.3% from the prior year, due primarily
to a decrease in the net deferred tax asset and an increase in accrued
compensation offset in part by an increase in prepaid pension costs, accounts
receivable and prepaid expenses, and a decrease in accrued liabilities. The net
deferred income tax asset decreased $10.7 million in fiscal 2003 compared to a
$3.7 million increase in fiscal 2002 due primarily to the timing of book-tax
differences resulting from more favorable than expected tax deductions for
fiscal 2002 relating to depreciation, pension expenses and certain special
charges. Accrued compensation increased $3.9 million in fiscal 2003 compared to
a $0.1 million increase in fiscal 2002 due primarily to the achievement in
fiscal 2003 of certain senior management bonuses in addition to increased
compensation accruals incurred in connection with the Company's business
acquisitions completed in fiscal 2003, as discussed below.
Prepaid pension costs increased $13.7 million in fiscal 2003 compared to a $2.2
million increase in fiscal 2002 due to increased payments used to fund certain
of the Company's pension plans during fiscal 2003. Accounts receivable increased
$7.5 million in fiscal 2003 compared to a $4.2 million decrease in fiscal 2002.
The fiscal 2003 increase was due primarily to an increase in accounts receivable
attributable to the Company's fiscal 2003 acquisition of Stepic Medical. The
fiscal 2002 decrease primarily resulted from increased collections efforts by
the Company. Accounts receivable, measured in days sales outstanding during the
period, decreased to 79 days at August 31, 2003 from 80 days at August 31, 2002.
Prepaid expenses and other increased $6.8 million in fiscal 2003 compared to a
$0.8 million decrease in fiscal 2002 due primarily to recording a receivable in
fiscal 2003 for a favorable U.S. tax settlement related to the Company's
research and development tax credits, the payment of which is expected to be
received in fiscal 2004. Accrued liabilities increased $9.5 million in fiscal
2003 compared to a $3.9 million increase in fiscal 2002 due primarily to the
establishment of a reserve in fiscal 2003 of $8.0 million for a proposed
settlement in two related patent infringement lawsuits relating to certain of
the Company's hemodialysis catheter products.
Net cash used in the Company's investing activities increased to $56.0 million
in fiscal 2003 from $5.5 million in fiscal 2002 due primarily to the Company's
business acquisitions completed in fiscal 2003, as discussed below, and the
proceeds received by the Company from the sale of its implantable drug infusion
pump business in fiscal 2002. Capital expenditures decreased to $16.4 million in
fiscal 2003 from $21.0 million in fiscal 2002 primarily as a result of the
completion of the Company's expansion of its Czech Republic manufacturing
facility in addition to lower expenditures for certain computer software and
hardware.
(28)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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, $3.5 million in fiscal 2001, and $1.0 million in fiscal
2002 for achievement of milestones during those periods. During fiscal 2003, the
Company paid $0.5 million to Belmont for achievement of the final two
milestones, representing the seventh and eighth quarterly installments of
$250,000 payable by the Company (which payments commenced in April 2001). With
these two payments, the Company has completed its payment obligations to Belmont
pursuant to the asset purchase agreement and, as of August 31, 2003, no longer
owes any amounts to Belmont. 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 was approximately $7.1 million.
The results of operations of this business are included in the Company's
consolidated financial statements from the date of acquisition.
On September 3, 2002, the Company purchased the net assets of its former New
York City distributor, Stepic Medical, from Horizon Medical Products for $12.6
million, which includes the relief from $5.5 million of accounts receivable that
had been due from this distributor. As of August 31, 2003, pursuant to the asset
purchase agreement, the Company had paid in cash the entire $12.6 million
purchase price for this acquisition. Stepic Medical had been the Company's
distributor in the greater New York City area, eastern New York State, and parts
of Connecticut and New Jersey since 1977.
This 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 was approximately $0.1 million. Intangible assets acquired of $3.5
million are being amortized over a period of five years. The results of
operations of this business are included in the Company's consolidated financial
statements from the date of acquisition. The purchase price for this acquisition
was allocated as follows:
(in millions)
Accounts receivable $10.1
Inventories 6.8
Other current assets -
Property, plant and equipment 0.1
Goodwill and intangible assets 3.5
Current liabilities (7.9)
----------
Total purchase price $12.6
==========
On November 25, 2002, the Company purchased specified assets and assumed
specified liabilities of Diatek, Inc., a company in the business of the
development, manufacture and marketing of chronic hemodialysis catheters, for
approximately $10.9 million, subject to post-closing adjustments. As of August
31, 2003, pursuant to the asset purchase agreement, the Company had paid $8.9
million in cash and recorded a liability classified as long-term debt of an
additional $2.0 million for potential purchase price adjustments. The products
acquired in the transaction are expected to complement the Company's existing
hemodialysis product line. This acquisition has been accounted for using the
purchase method of accounting. The purchase price for this acquisition did not
exceed the estimated fair value of the net assets acquired and, therefore, no
goodwill has been recorded by the Company in connection therewith. Intangible
assets acquired of $12.2 million, consisting primarily of intellectual property
rights, are being amortized over a period of 20 years based on the legal life of
the underlying acquired technology. An independent valuation firm was used to
determine a preliminary fair market value of the intangible assets acquired.
Pursuant to the asset purchase agreement relating to this transaction, the
Company may be required to make royalty payments to Diatek's former owners based
on the achievement of specified annual sales levels of certain hemodialysis
product lines. Any such payments would begin in fiscal 2004 based on fiscal 2003
sales levels and are being expensed as incurred.
(29)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The results of operations of this business are included in the Company's
consolidated financial statements from the date of acquisition. This business
acquisition is expected to benefit the Company's fiscal year 2004 results. The
purchase price for this acquisition was allocated as follows:
(in millions)
Accounts receivable $ 0.2
Inventories 0.4
Property, plant and equipment 0.2
Intangible assets 12.2
Current liabilities (2.1)
----------
Total purchase price $10.9
==========
On March 18, 2003, the Company purchased substantially all of the assets of
Klein Baker Medical, Inc., a company doing business as NeoCare(R) in San
Antonio, Texas, for approximately $16.5 million, subject to post-closing
adjustments. NeoCare(R) develops, manufactures and markets specialty catheters
and related procedure kits to neonatal intensive care units. The Company
believes that this acquisition will further enhance its broad line of critical
care related products and may serve as the base for possible further expansion
of the Company's pediatric product line. As of August 31, 2003, pursuant to the
asset purchase agreement, the Company had paid $14.5 million in cash and
recorded a liability classified as long-term debt of an additional $2.0 million
for potential purchase price adjustments. This 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 $3.8 million was
recorded as goodwill and will be evaluated for impairment on a periodic basis in
accordance with SFAS No. 142. Intangible assets acquired were $8.5 million, with
$7.2 million being amortized over a period of 25 years based on the anticipated
period in which cash flows are expected. The other intangible asset portion of
$1.3 million has an indefinite life, which the Company is testing for impairment
on an annual basis in accordance with the provisions of SFAS No. 142. An
independent valuation firm was used to determine a fair market value of the
inventory and intangible assets acquired. The results of operations of this
business are included in the Company's consolidated financial statements from
the date of acquisition. This business acquisition is expected to benefit the
Company's fiscal 2004 results. The purchase price for this acquisition was
allocated as follows:
(in millions)
Accounts receivable $ 0.6
Inventories 2.0
Property, plant and equipment 1.7
Goodwill and intangible assets 12.3
Current liabilities (0.1)
-----------
Total purchase price $ 16.5
===========
On July 1, 2003, the Company purchased certain assets of its former
Florida-based distributor, IMA, Inc., for $2.3 million, which includes the
relief from $0.6 million of accounts receivable that had been due from this
distributor, subject to post-closing adjustments. As of August 31, 2003,
pursuant to the asset purchase agreement, the Company had paid in cash $2.2
million for this acquisition. As a result of this transaction, the Company is
conducting direct sales activity in the territory formerly covered by IMA, Inc.
(30)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
This acquisition has been accounted for using the purchase method of accounting.
The purchase price for this acquisition did not exceed the estimated fair value
of the net assets acquired and, therefore, no goodwill has been recorded by the
Company in connection therewith. Intangible assets acquired of $1.8 million are
being amortized over a period of five years. The results of operations of this
business are included in the Company's consolidated financial statements from
the date of acquisition. The purchase price for this acquisition was allocated
as follows:
(in millions)
Accounts receivable $0.3
Inventories 0.8
Intangible assets 1.8
Current liabilities (0.6)
-----------
Total purchase price $2.3
==========
In fiscal 2001, the Company's Board of Directors approved spending of up to
$10.0 million for the construction of additional manufacturing capacity,
including related equipment, at its existing manufacturing and research facility
in the Czech Republic. Construction of the additional space at this facility was
completed in December 2001. As of August 31, 2003, the Company had completed
this construction, including the purchase of related equipment, and had spent
all of the authorized amount.
Financing activities used $9.4 million of net cash in fiscal 2003, compared to
$42.6 million in fiscal 2002, primarily as a result of a decrease in the
Company's need for borrowings under its U.S. revolving credit facility offset in
part by an increase in the Company's use of cash to purchase shares of its
common stock in the open market in connection with its share repurchase program.
The Company's Board of Directors has authorized the repurchase of up to a
maximum of 4,000,000 shares under the share repurchase program. During fiscal
2003, the Company purchased 766,000 shares of its common stock under this
program for $13.8 million. As of August 31, 2003, the Company had repurchased a
total of 3,603,600 shares under this program for approximately $57.5 million
since the program's inception in March 1999.
To provide additional liquidity and flexibility in funding its operations, the
Company from time to time also borrows amounts under credit facilities and other
external sources of financing. At both August 31, 2003 and 2002, the Company had
a revolving credit facility providing a total of $65.0 million in available
revolving credit for general business purposes. At August 31, 2003 and 2002, the
Company had $18.9 million and $6.2 million outstanding under this credit
facility, respectively, all of which was owed by its foreign subsidiaries. Under
this credit facility, the Company is required to comply with the following
financial covenants: 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 the Company's and its subsidiaries' incurrence of
liens; and a requirement that the lender approve the incurrence of additional
indebtedness unrelated to the revolving credit facility when the aggregate
principal amount of such new additional indebtedness exceeds $75.0 million. This
credit facility was amended in fiscal 2003 to increase the approval limit from
$50.0 million to $75.0 million for the requirement that the lender approve the
incurrence of additional indebtedness related to the revolving credit facility.
At August 31, 2003 and 2002, the Company was in compliance with all such
covenants. Failure to remain in compliance with these covenants could trigger an
acceleration of the Company's obligation to repay all outstanding borrowings
under this credit facility.
Certain subsidiaries of the Company had revolving credit facilities totaling the
U.S. dollar equivalent of $18.0 and $20.7 million, of which $9.4 and $9.9
million were outstanding as of August 31, 2003 and 2002, respectively. In
addition, during fiscal 2003 the Company entered into a short-term note payable
with IMA, Inc. for $0.1 million related to a non-compete arrangement pursuant to
the Company's acquisition of this business on July 1, 2003.
(31)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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,
2003, the weighted average interest rate on short-term borrowings was 2.2% per
annum. Combined borrowings under these facilities increased $12.3 million during
fiscal year 2003 due primarily to the Company's refinancing associated with its
Czech Republic subsidiary.
A summary of all of the Company's contractual obligations and commercial
commitments as of August 31, 2003 were as follows:
PAYMENTS DUE
OR
COMMITMENT EXPIRATION
BY PERIOD
-------------------------------------------------------------
LESS MORE
CONTRACTUAL OBLIGATIONS AND THAN 1 - 3 3 - 5 THAN 5
COMMERCIAL COMMITMENTS TOTAL 1 YEAR YEARS YEARS YEARS
- ---------------------------------------- --------- ---------- --------- --------- ---------
($ IN MILLIONS)
Long-term debt $ 4.0 $0.3 $3.7 $ - $ -
Operating leases 11.5 4.4 5.0 1.1 1.0
Other long-term obligations 0.4 - 0.1 0.1 0.2
Lines of credit* 28.4 28.4 - - -
Standby letters of credit 1.6 1.6 - - -
- ---------------------------------------- --------- ---------- --------- --------- ---------
Total cash contractual obligations
and commercial commitments $45.9 $34.7 $8.8 $1.2 $1.2
========= ========== ========= ========= =========
*Includes short-term indebtedness of the Company and its subsidiaries under
various revolving credit facilities, as discussed above in this Item 7.
Based upon its present plans, the Company believes that cash generated from its
operations and available credit resources, including its ability to extend
maturities of borrowings outstanding under its lines of credit in the ordinary
course consistent with past practice, will be adequate to repay current portions
of long-term debt, to finance currently planned capital expenditures and
repurchases of the Company's stock in the open market, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has disclosed in Note 1 to its consolidated financial statements
included in Item 8 of this report those accounting policies that it considers to
be significant in determining its results of operations and financial position.
In all material respects, the accounting principles utilized by the Company in
preparing its consolidated financial statements are in conformity with generally
accepted accounting principles in the United States of America.
(32)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
The preparation of these consolidated financial statements requires the
Company's management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as the disclosure
of contingent assets and liabilities at the date of its financial statements.
The Company bases its estimates on historical experience, actuarial valuations
and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Some of those judgments can be subjective and complex and,
consequently, actual results may differ from these estimates under different
assumptions or conditions. While for any given estimate or assumption made by
the Company's management there may be other estimates or assumptions that are
reasonable, the Company believes that, given the current facts and
circumstances, it is unlikely that applying any such other reasonable estimate
or assumption would materially impact the financial statements.
The Company's management believes the following critical accounting policies
affect its more significant estimates and judgments used in the preparation of
the Company's consolidated financial statements.
Revenue Recognition:
Revenue is recognized by the Company at the time its products are shipped and
title has passed to its customer. The Company's net sales represent gross sales
invoiced to customers, less certain related charges, including discounts,
returns, rebates and other allowances. Such charges are recognized against
revenue on an accrual basis, at the point in which these costs are incurred.
Product returns are permitted. The accrual for product returns is based on the
Company's history of actual product returns. To date, product returns have not
been material. The Company grants sales rebates to certain distributors upon
achievement of agreed upon pricing for sales of the Company's products to
hospitals. Incurred but unpaid rebates are accrued by the Company in the period
in which they are incurred. The Company's rebate accrual is based on its history
of actual rebates paid. The Company's reserves for rebates are reviewed at each
reporting period and adjusted to reflect data available at that time. To the
extent these estimates prove inaccurate, the Company will adjust the reserves,
which will impact the amount of net product sales revenue recognized by the
Company in the period of the adjustments.
Inventory:
The Company values its inventories at the lower of cost or market. Cost is
determined by the "first-in, first-out" (FIFO) method. The Company uses a
materials management program for identifying, redeploying and/or destroying
slow-moving, inactive or potentially obsolete inventory. An adjustment to fair
market value is recorded for all inventory specifically identified as
slow-moving, inactive or potentially obsolete. For certain new products, the
Company manufactures inventory in anticipation of product launch. As of August
31, 2003, the Company had $6.0 million of inventory related to its HemoSonic(TM)
100 hemodynamic monitoring device, which is significantly greater than the net
sales of this product in fiscal 2003. The Company is currently developing
changes to this product which it believes should enhance the demand for this
product in the marketplace. The Company's inventory is evaluated on an ongoing
basis and is adjusted as necessary to accurately reflect current conditions.
Impairment of Goodwill:
Goodwill represents the excess of the cost over the fair value of net assets
acquired in business combinations. Currently, the Company operates as a single
reporting unit. Goodwill and other "indefinite-lived" assets are not amortized
and are subject to the impairment rules of Statement of Financial Accounting
Standards No. 142 (SFAS 142), which the Company adopted effective as of
September 1, 2001. Goodwill is tested for impairment on an annual basis or upon
the occurrence of certain circumstances or events. The Company determines the
fair market value of its reporting unit using quoted market rates and cash flow
techniques. The fair market value of the reporting unit is compared to its
carrying value to determine if an impairment loss
(33)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
should be calculated. If the book value of the reporting unit exceeds its fair
value, an impairment loss is indicated. The loss is calculated by comparing the
fair value of the goodwill to the book value of the goodwill. Fair value of
goodwill is determined by subtracting the fair value of the identifiable assets
of the reporting unit from the fair value of the reporting unit. If the book
value of the goodwill exceeds the fair value of goodwill, an impairment loss is
recorded.
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. The costs of materials (whether
from the Company's normal inventory or acquired specially for research and
development activities) and equipment or facilities that are acquired or
constructed for research and development activities and that have alternative
future uses (in research and development projects or otherwise) are capitalized
as tangible assets when acquired or constructed. The cost of such materials
consumed in research and development activities and the depreciation of such
equipment or facilities used in those activities are recorded as research and
development costs.
Product Liability:
Costs for attorney's fees and indemnification associated with injuries resulting
from the use of the Company's products are provided for in setting reserves. The
Company provides reserves for product liability by utilizing loss estimates
prepared by the primary product liability insurance carrier with adjustments, as
appropriate, based upon management's perspective on the ultimate projected
claim, giving consideration to the perspective of outside counsel and other
relevant factors. The Company records a reserve regarding a particular claim
when a loss is known or considered probable and the amount can be reasonably
estimated. If a loss is not probable or a probable loss cannot be reasonably
estimated, a reserve is not recorded. The Company's primary global product
liability insurance policy is on a claims made basis. For fiscal 2003, the
Company's deductibles for its primary global product liability insurance policy
were increased to $750,000 per occurrence from $250,000 in fiscal 2002 for
domestic product liability claims, with the Company's annual exposure for such
deductibles in any one policy year being increased to $1.5 million in fiscal
2003 from $500,000 in fiscal year 2002. Effective for fiscal 2004, the Company's
deductibles for its primary global product liability insurance policy were
increased to $2.5 million per occurrence for domestic product liability claims,
with the Company's annual exposure for such deductibles being limited to $5.0
million for any one policy year. The policy year runs from September 1 to August
31 and has a $10.0 million aggregate limit. The Company also has additional
layers of coverage insuring up to $35.0 million in annual aggregate losses
arising from claims that exceed the primary product liability insurance policy
limits. Because deductibles were due to increase when the Company renewed its
product liability insurance policy in September 2002, the Company elected to
exercise a provision in its current policy that maintains deductibles and limits
for unreported claims occurring prior to September 1, 2002 at existing levels
for five years.
Employee Benefit Plans:
The Company sponsors pension, post-retirement, medical and life insurance plans
covering substantially all of its employees who meet the applicable eligibility
requirements. The Company uses several actuarial and other statistical factors
which attempt to anticipate future events in calculating its expense and
liability related to these plans. These factors include assumptions about
discount rate, expected return on plan assets and rate of future compensation
increases, as determined by the Company within specified guidelines. In
addition, the Company's actuarial consultants also utilize subjective
assumptions, such as withdrawal and mortality rates, to estimate these factors.
The actuarial assumptions used by the Company may differ materially from actual
results due to changing market and economic conditions, higher or lower
withdrawal rates, or longer or shorter life spans of participants. These
differences, depending on their magnitude, could have a significant impact on
the amount of pension expense recorded by the Company in any particular period.
(34)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
Income Taxes:
The Company's effective tax rate differs from the statutory rate primarily as a
result of research and development tax credits, the foreign sales corporation
deduction and the extraterritorial income tax regime. Because the Company
operates in a number of domestic and foreign tax jurisdictions, the statutory
rates within these various jurisdictions are considered in determining the
Company's overall effective tax rate. Management judgment is required to
determine the Company's consolidated provision for income tax expense, deferred
income tax balances and any valuation allowances associated with deferred tax
assets. The Company's management also considers open statutory periods, current
and anticipated audits, and the impact that any adverse adjustments would have
on the Company's current and prospective overall effective tax rate.
Deferred tax assets and liabilities are recorded when differences exist between
the financial statement carrying amounts and the tax bases of assets or
liabilities. The Company regularly reviews its deferred tax assets for
recoverability and to date has not established valuation allowances. The Company
deems all undistributed earnings of foreign subsidiaries permanently invested
and, accordingly, has not established a tax provision for any repatriation of
retained earnings in these entities. Undistributed earnings of the Company's
foreign subsidiaries amounted to $25.9 million and $20.2 million at August 31,
2003 and 2002, respectively.
NEW ACCOUNTING STANDARDS
Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", was issued in December 2002. This
statement provides companies with two additional alternative transition methods
for recognizing a company's voluntary decision to change its method of
accounting for stock-based employee compensation to the fair-value method. It
also amends the existing disclosure requirements of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation". The transition
guidance and provisions of this statement for annual disclosures are effective
for fiscal years ending after December 15, 2002. The provisions for
interim-period disclosures are effective for financial reports that contain
financial statements for interim periods beginning after December 15, 2002. As
of August 31, 2003, the Company has adopted the interim period and annual
disclosure requirements of this statement.
Financial Accounting Standard No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued in April 2003. This statement
amends and clarifies accounting and reporting for derivative instruments
embedded in other contracts and for hedging activities under Financial
Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The provisions of this statement are effective for all contracts
entered into or modified after June 30, 2003.
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.
(35)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
MARKET RISK (CONTINUED)
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 exposures exist and not to enter into
foreign currency transactions for speculative purposes.
The fair value of all the Company's foreign currency forward contracts
outstanding at August 31, 2003 was less than $0.1 million. The following
analysis estimates the sensitivity of the fair value of all foreign currency
forward contracts to hypothetical 10% favorable and unfavorable changes in spot
exchange rates at August 31, 2003 and 2002:
Fair Value of Foreign Currency
Forward Contracts
-----------------
(in millions)
August 31, 2003 August 31, 2002
--------------- ---------------
10% adverse rate movement $ (0.4) $ (0.2)
At August 31st rates - -
10% favorable rate movement 0.6 0.3
The Company had no foreign currency option contracts outstanding at
August 31, 2003. The following analysis estimates the sensitivity of the fair
value of all foreign currency option contracts to hypothetical 10% favorable and
unfavorable changes in spot exchange rates at August 31, 2003 and 2002:
Fair Value of Foreign Currency
Option Contracts
----------------
(in millions)
August 31, 2003 August 31, 2002
--------------- ---------------
10% adverse rate movement $ - $ -
At August 31st rates - -
10% favorable rate movement - 0.1
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.
During fiscal 2003, 2002 and 2001, the percentage of the Company's sales
invoiced in currencies other than U.S. dollars was 22.7%, 21.9% and 22.2%,
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 and foreign currency option 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 and to hedge anticipated sales in foreign currencies to foreign
subsidiaries. Such transactions occur throughout the year and are probable, but
not firmly committed. Foreign currency 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 currency denominated assets, liabilities
and
(36)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
MARKET RISK (CONTINUED)
transactions being hedged. The premiums paid on the foreign currency option
contracts are recorded as assets and amortized over the life of the option.
Other than the risk associated with the financial condition of the
counterparties, 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 pursuant to 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. Both time value and 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 foreign currency 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, 2003,
outstanding foreign currency forward contracts totaling the U.S. dollar
equivalent of $8.8 million mature at various dates through December 2003. As of
November 1, 2003, the Company had no foreign currency option contracts
outstanding. The Company expects to continue to utilize foreign currency forward
contracts 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. The
Company believes that its risk associated with this concentration is limited due
to the Company's ongoing credit review procedures.
Additional Quantitative and Qualitative disclosures about market risk
(e.g., interest rate and foreign currency exchange risk) are set forth in Note
15 of the Notes to Consolidated Financial Statements included in Item 8 of this
report.
(37)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors 39
Consolidated Balance Sheets at
August 31, 2003 and 2002 40-41
Consolidated Statements of Income
for the years ended August 31, 2003,
2002 and 2001 42
Consolidated Statements of Comprehensive
Income for the years ended August 31, 2003,
2002 and 2001 43
Consolidated Statements of Cash Flows
for the years ended August 31, 2003,
2002 and 2001 44-45
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
August 31, 2003, 2002, and 2001 46-48
Notes to Consolidated Financial Statements 49-78
Schedule II - Valuation and Qualifying Accounts 79
(38)
Report of Independent Auditors
To the Board of Directors and
Shareholders of Arrow International, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index appearing under Item 8 on page 38 present fairly, in all material
respects, the financial position of Arrow International, Inc. and its
subsidiaries (the "Company") at August 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 2003 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedules listed in the accompanying index appearing under
Item 8 on page 38 present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules 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, PA
October 3, 2003
(39)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
August 31,
----------------------------
2003 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 46,975 $ 33,103
Accounts receivable, less allowance for doubtful accounts
of $990 and $956 in 2003 and 2002, respectively 82,467 74,983
Inventories, net 90,449 85,946
Prepaid expenses and other 14,978 8,246
Deferred income taxes 7,011 5,377
----------- -----------
Total current assets 241,880 207,655
----------- -----------
Property, plant and equipment:
Land and improvements 5,748 5,658
Buildings and improvements 88,767 86,094
Machinery and equipment 163,479 154,727
Construction-in-progress 18,300 15,001
----------- -----------
276,294 261,480
Less accumulated depreciation (147,861) (131,157)
----------- -----------
128,433 130,323
Goodwill 42,732 38,591
Intangible and other assets, net of accumulated amortization of
$19,453 and $15,064 in 2003 and 2002, respectively 48,836 27,738
Prepaid pension costs 32,016 18,314
Deferred income taxes - 4,155
----------- -----------
Total assets $ 493,897 $ 426,776
=========== ===========
See notes to consolidated financial statements
(40)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share amounts)
August 31,
----------------------------
2003 2002
----------- -----------
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 300 $ 300
Notes payable 28,431 16,132
Accounts payable 11,727 9,736
Cash overdrafts 1,506 2,697
Accrued liabilities 21,600 12,086
Accrued compensation 10,684 6,755
Accrued income taxes 3,718 2,787
----------- -----------
Total current liabilities 77,966 50,493
Long-term debt 3,735 300
Accrued postretirement and pension benefit obligations 13,409 15,627
Deferred income taxes 8,141 -
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
5,000,000 shares authorized;
none issued - -
Common stock, no par value;
100,000,000 shares authorized;
issued 52,957,626 shares in 2003 and 2002 45,661 45,661
Additional paid-in capital 5,840 4,054
Retained earnings 403,004 365,778
Less treasury stock at cost:
9,672,124 and 9,015,988 shares
in 2003 and 2002, respectively (63,472) (50,328)
Accumulated other comprehensive (expense) (387) (4,809)
----------- -----------
Total shareholders' equity 390,646 360,356
----------- -----------
Total liabilities and shareholders' equity $ 493,897 $ 426,776
=========== ===========
See notes to consolidated financial statements
(41)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
for the years ended August 31,
---------------------------------------------------------------------
2003 2002 2001
-------------------- --------------------- ---------------------
Net sales $ 380,376 $ 340,759 $ 334,042
Cost of goods sold 190,246 169,625 158,573
-------------------- --------------------- ---------------------
Gross profit 190,130 171,134 175,469
-------------------- --------------------- ---------------------
Operating expenses:
Research, development and engineering 28,170 26,165 25,209
Selling, general and administrative 89,354 78,406 78,499
Special charges 8,000 8,005 -
-------------------- --------------------- ---------------------
125,524 112,576 103,708
-------------------- --------------------- ---------------------
Operating income 64,606 58,558 71,761
-------------------- --------------------- ---------------------
Other expenses (income):
Interest expense, net of amount capitalized 618 627 2,084
Interest income (1,821) (235) (187)
Other, net (1,109) 389 394
-------------------- --------------------- ---------------------
(2,312) 781 2,291
-------------------- --------------------- ---------------------
Income before income taxes 66,918 57,777 69,470
Provision for income taxes 21,248 18,777 22,925
-------------------- --------------------- ---------------------
Net income $ 45,670 $ 39,000 $ 46,545
==================== ===================== =====================
Basic earnings per common share $ 1.05 $ 0.89 $ 1.06
==================== ===================== =====================
Diluted earnings per common share $ 1.04 $ 0.88 $ 1.05
==================== ===================== =====================
Cash dividends per common share $ 0.1950 $ 0.1375 $ 0.1275
==================== ===================== =====================
Weighted average shares used in computing
basic earnings per common share 43,399,363 43,825,856 43,990,788
==================== ===================== =====================
Weighted average shares used in computing
diluted earnings per common share 43,773,253 44,211,082 44,240,734
==================== ===================== =====================
All historical share and per share amounts have been adjusted to reflect the two-for-one split of the Company's common stock and the
doubling of its quarterly dividend effected on August 15, 2003.
See notes to consolidated financial statements
(42)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
for the years ended August 31,
----------------------------------------------------------
2003 2002 2001
---------------- ----------------- -----------------
Net income $ 45,670 $ 39,000 $ 46,545
Other comprehensive income (expense):
Foreign currency translation adjustments 3,309 5,470 (182)
Unrealized holding (loss) gain on foreign currency
option contracts 286 (400) 114
Unrealized holding (loss) gain on securities, net of tax
($0, $399 and $(108), respectively) - (642) 173
Reclassification adjustment for (gains) on securities
included in net income, net of tax ($0, $653 and
$76, respectively) - (1,050) (123)
Minimum pension liability adjustment, net of tax ($(515),
$557 and $0, respectively) 827 (874) (22)
---------------- ----------------- -----------------
Other comprehensive income (expense) 4,422 2,504 (40)
---------------- ----------------- -----------------
Total comprehensive income $ 50,092 $ 41,504 $ 46,505
================ ================= =================
See notes to consolidated financial statements
(43)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
for the years ended August 31,
---------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
Cash flows from operating activities:
Net income $ 45,670 $ 39,000 $ 46,545
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 18,850 18,581 16,576
Special charges 8,000 8,005 -
Amortization 4,376 3,112 6,120
LionHeart(TM)second generation external batteries write-off 3,569 - -
401(K) plan stock contribution 713 739 106
Non-qualified stock option tax benefit 565 - -
Gain on sale of securities - (1,703) (199)
Deferred income taxes 10,145 (3,233) 1,892
Unrealized holding gain (loss) on foreign currency options 286 (400) 114
Realized holding gain (loss) on securities - 1,052 (31)
Loss on sale of implantable drug infusion pump business - 1,226 -
Increase (decrease) in provision for postretirement benefit
obligation 887 (607) (207)
(Increase) in prepaid pension costs (13,702) (2,193) (3,859)
Other - (176) (201)
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable, net (302) 6,822 (6,532)
Inventories 5,710 4,174 (11,676)
Prepaid expenses and other (6,593) 1,123 (4,925)
Accounts payable and accrued liabilities (3,816) 2,141 (536)
Accrued compensation 3,746 59 (1,428)
Accrued income taxes 682 117 89
------------------- ------------------- -------------------
Total adjustments 33,116 38,839 (4,697)
------------------- ------------------- -------------------
Net cash provided by operating activities 78,786 77,839 41,848
------------------- ------------------- -------------------
Cash flows from investing activities:
Capital expenditures (16,446) (21,047) (20,880)
(Increase) in intangible and other assets (1,272) (6) (3,549)
Cash paid for businesses acquired, net (38,317) (3,601)
Proceeds from sale of business - 13,000 -
Proceeds from sale of securities - 2,540 639
------------------- ------------------- -------------------
Net cash used in investing activities (56,035) (5,513) (27,391)
------------------- ------------------- -------------------
Cash flows from financing activities:
Increase (decrease) in notes payable 11,554 (34,698) (958)
Principal payments of long-term debt, including current
maturities (565) (300) (8,631)
(Decrease) increase in book overdrafts (1,191) 733 769
Dividends paid (6,522) (5,920) (5,499)
Proceeds from stock options exercised 1,210 3,346 298
Purchase of treasury stock (13,846) (5,758) (1,294)
------------------- ------------------- -------------------
Net cash used in financing activities (9,360) (42,597) (15,315)
------------------- ------------------- -------------------
Effects of exchange rate changes on cash and cash equivalents 481 406 (133)
Net change in cash and cash equivalents 13,872 30,135 (991)
Cash and cash equivalents at beginning of year 33,103 2,968 3,959
------------------- ------------------- -------------------
Cash and cash equivalents at end of year $ 46,975 $ 33,103 $ 2,968
=================== ================== ===================
See notes to consolidated financial statements
(44)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
For the years ended August 31,
--------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 547 $ 635 $ 2,680
Income taxes $ 13,759 $ 19,969 $ 24,070
Supplemental schedule of noncash investing and financing activities:
The Company assumed liabilities in conjunction with the purchase of
certain assets as follows:
Estimated fair value of assets acquired $ 53,278 $ - $ 4,952
Liabilities assumed 14,961 - 1,351
---------------- ---------------- ----------------
Cash paid for assets, net of cash acquired,
of $0, $0 and $386, respectively $ 38,317 $ - $ 3,601
================ ================ ================
Cash paid for businesses acquired:
Working capital $ 10,323 $ - $ -
Property, plant and equipment 1,960 - 180
Goodwill, intangible assets and in-process
research and development 30,034 3,421
Long-term debt (4,000) - -
---------------- ---------------- ----------------
$ 38,317 $ - $ 3,601
================ ================ ================
Treasury Stock issued for 401(k) Plan contribution $ 713 $ 739 $ 106
================ ================ ================
Intangible assets acquired by issuing treasury stock $ - $ 464 $ 878
================ ================ ================
Non-qualified stock option tax benefit $ 565 $ - $ -
================ ================ ================
Dividends declared but not paid $ 3,462 $ 1,538 $ 1,430
================ ================ ================
See notes to consolidated financial statements
(45)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended August 31, 2003, 2002 and 2001
(In thousands, except share and per share amounts)
Common Stock Treasury Stock
--------------------- ---------------------
Addition
Retained Paid-in
Shares Amount Earnings Shares Amount Capital
---------- -------- --------- --------- --------- -------
Balance, August 31, 2002 52,957,626 $ 45,661 $ 365,778 9,015,988 $(50,328) $ 4,054
Cash dividends on common
stock, $0.195 per share (8,444)
Purchase of treasury stock 766,000 (13,846)
Exercise of stock options (73,930) 477 733
Treasury stock issued to
purchase intangible
assets
Treasury stock issued as
contribution to the
Company's 401(k) Plan (35,934) 225 488
Reclassification adjustment,
stock option tax benefit
(non-qualified stock option) 565
Unrealized holding gain on
foreign currency option
contracts
Foreign currency translation
adjustments
Minimum pension liability
adjustment
Net income 45,670
---------- -------- --------- --------- --------- -------
Balance, August 31, 2003 52,957,626 $ 45,661 $ 403,004 9,672,124 $(63,472) $ 5,840
========== ======== ========= ========= ========= =======
Accumulated Other Comprehensive Income (Expense)
-----------------------------------------------
Minimum Reclass-
Pension ification Unrealized
Liability Adjustment gain on Foreign
Adjust- for Marketable Currency
ment Gains Securities Effects
------- --------- ---------- --------
Balance, August 31, 2002 $ (896) $ (1,173) $ 1,173 $(3,913)
Cash dividends on common
stock, $0.195 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,
stock option tax benefit
(non-qualified stock option)
Unrealized holding gain on
foreign currency option
contracts 286
Foreign currency translation
adjustments 3,309
Minimum pension liability
adjustment 827
Net income
------- --------- ---------- --------
Balance, August 31, 2003 $ (69) $ (1,173) $ 1,173 $ (318)
======= ========= ========== ========
All historical share and per share amounts have been adjusted to reflect the
two-for-one split of the Company's common stock and the doubling of its
quarterly dividend effected on August 15, 2003.
See notes to consolidated financial statements
(46)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended August 31, 2003, 2002 and 2001
(In thousands, except share and per share amounts)
Common Stock Treasury Stock
--------------------- ---------------------
Addition
Retained Paid-in
Shares Amount Earnings Shares Amount Capital
---------- -------- --------- --------- --------- -------
Balance, August 31, 2001 52,957,626 $ 45,661 $332,806 8,954,826 $(45,995) $ 930
Cash dividends on common (6,028)
stock, $0.1375 per share
Purchase of treasury stock 317,000 (5,758)
Exercise of stock options (200,200) 1,116 2,230
Treasury stock issued to
purchase intangible assets (20,000) 112 352
Treasury stock issued as
contribution to the
Company's 401(k) Plan (35,638) 197 542
Reclassification adjustment
for gains included in net
income, net of tax of $653
Unrealized gain on marketable
securities, net of tax of $399
Unrealized holding gain on
foreign currency option
contracts
Foreign currency translation
adjustments
Minimum pension liability
adjustment
Net income 39,000
---------- -------- --------- --------- --------- -------
Balance, August 31, 2002 52,957,626 $ 45,661 $ 365,778 9,015,988 $(50,328) $ 4,054
========== ======== ========= ========= ========= =======
Accumulated Other Comprehensive Income (Expense)
------------------------------------------------
Minimum Reclass-
Pension ification Unrrealized
Liability Adjustment gain on Foreign
Adjust- for Marketable Currency
ment Gains Securities Effects
------- --------- ---------- --------
Balance, August 31, 2001 $ (22) $ (123) $ 1,815 $(8,983)
Cash dividends on common
stock, $0.1375 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 tax of $653 (1,050)
Unrealized gain on marketable
securities, net of tax of $399 (642)
Unrealized holding gain on
foreign currency option
contracts (400)
Foreign currency translation
adjustments 5,470
Minimum pension liability
adjustment (874)
Net income
------- --------- ---------- --------
Balance, August 31, 2002 $ (896) $ (1,173) $ 1,173 $(3,913)
======= ========= ========== ========
All historical share and per share amounts have been adjusted to reflect the
two-for-one split of the Company's common stock and the doubling of its
quarterly dividend effected on August 15, 2003.
See notes to consolidated financial statements
(47)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended August 31, 2003, 2002 and 2001
(In thousands, except share and per share amounts)
Common Stock Treasury Stock
--------------------- ---------------------
Addition
Retained Paid-in
Shares Amount Earnings Shares Amount Capital
---------- -------- --------- --------- --------- -------
Balance, August 31, 2000 52,957,626 $ 45,661 $ 291,870 8,955,820 $(45,092) $ 38
Cash dividends on common
stock, $0.1275 per share (5,609)
Purchase of treasury stock 73,800 (1,294)
Exercise of stock options (19,140) 106 192
Treasury stock issued to
purchase intangible assets (50,000) 256 622
Treasury stock issued as
contribution to the
Company's 401(k) Plan (5,654) 29 78
Reclassification adjustment
for gains included in net
income, net of tax of $76
Unrealized gain on marketable
securities, net of tax of
$(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 52,957,626 $ 45,661 $ 332,806 8,954,826 $(45,995) $ 930
========== ======== ========= ========= ========= =======
Accumulated Other Comprehensive Income (Expense)
------------------------------------------------
Minimum Reclass-
Pension ification Unrrealized
Liability Adjustment gain on Foreign
Adjust- for Marketable Currency
ment Gains Securities Effects
------- --------- ---------- --------
$ - $ - $ 1,642 $(8,915)
Balance, August 31, 2000
Cash dividends on common
stock, $0.1275 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 (123)
for gains included in net
income, net of tax of $76
Unrealized gain on marketable 173
securities, net of tax of
$(108)
Unrealized holding gain on 114
foreign currency option
contracts (182)
Foreign currency translation
adjustments (22)
Minimum pension liability
adjustment ------- --------- ---------- --------
Net income $ (22) $ (123) $ 1,815 $(8,983)
======= ========= ========== ========
Balance, August 31, 2001
All historical share and per share amounts have been adjusted to reflect the
two-for-one split of the Company's common stock and the doubling of its
quarterly dividend effected on August 15, 2003.
See notes to consolidated financial statements
(48)
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 for
comparative purposes.
Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with a
maturity of 90 days or less to be cash equivalents. The carrying amount of cash
and cash equivalents approximate fair value.
Use of Estimates:
The preparation of these consolidated financial statements requires the
Company's management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as the disclosure
of contingent assets and liabilities at the date of its financial statements.
The Company bases its estimates on historical experience, actuarial valuations
and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Some of those judgments can be subjective and complex and,
consequently, actual results may differ from these estimates under different
assumptions or conditions. While for any given estimate or assumption made by
the Company's management there may be other estimates or assumptions that are
reasonable, the Company believes that, given the current facts and
circumstances, it is unlikely that applying any such other reasonable estimate
or assumption would materially impact the financial statements.
Inventory:
The Company values its inventories at the lower of cost or market. Cost is
determined by the "first-in, first-out" (FIFO) method. The Company uses a
materials management program for identifying, redeploying and/or destroying
slow-moving, inactive or potentially obsolete inventory. An adjustment to fair
market value is recorded for all inventory specifically identified as
slow-moving, inactive or potentially obsolete. For certain new products, the
Company manufactures inventory in anticipation of product launch. As of August
31, 2003, the Company had recorded $6,035 of inventory related to its
HemoSonic(TM) 100 hemodynamic monitoring device, which is significantly greater
than the net sales of this product in fiscal 2003. The Company is currently
developing changes to this product which it believes should enhance the demand
for this product in the marketplace. The Company's inventory is evaluated on an
ongoing basis and is adjusted as necessary to accurately reflect current
conditions.
Continued
(49)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
Goodwill, Intangible and Other Assets:
Goodwill represents the excess of the cost over the fair value of net assets
acquired in business combinations. Currently, the Company operates as a single
reporting unit. Goodwill and other "indefinite-lived" assets are not amortized
and are subject to the impairment rules of Statement of Financial Accounting
Standards No. 142 (SFAS 142) which the Company adopted effective as of September
1, 2001. Goodwill is tested for impairment on an annual basis or upon the
occurrence of certain circumstances or events. The Company determines the fair
market value of its reporting unit using quoted market rates and cash flow
techniques. The fair market value of the reporting unit is compared to the
carrying value of the reporting unit to determine if an impairment loss should
be calculated. If the book value of the reporting unit exceeds the fair value of
the reporting unit, an impairment loss is indicated. The loss is calculated by
comparing the fair value of the goodwill to the book value of the goodwill. If
the book value of the goodwill exceeds the fair value of goodwill, an impairment
loss is recorded. Fair value of goodwill is determined by subtracting the fair
value of the identifiable assets of a reporting unit from the fair value of the
reporting unit.
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 5-25 years. The Company's
management reviews the carrying amount of 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 SFAS 144
"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.
Amortization expense of intangibles for fiscal 2003 was $4,376. Estimated
intangible amortization expense for each of the next five succeeding fiscal
years is as follows:
Fiscal year ending August 31 Amount
---------------------------- ------
2004 $ 4,244
2005 4,018
2006 3,995
2007 3,671
2008 2,704
Continued
(50)
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.
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. As stated in Note 19
below, during fiscal 2002, the Company sold its remaining marketable equity
securities.
Financial Instruments:
The Company complies with the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 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/ (expense)), depending on whether the derivative is
being used to hedge changes in fair value, cash flows or foreign currency.
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. The Company classifies a portion of certain intercompany receivables
as long-term investments. The foreign exchange translation effect related to the
investment is reported as accumulated other comprehensive income (expense)
within shareholders' equity. Such transactions occur throughout the year and are
probable, but not firmly committed.
Foreign currency forward contracts are marked to market each accounting period,
and the resulting gains or losses on these contracts are recorded in other
income / (expense) in 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 Company does not use financial instruments for trading or
speculative purposes. From time to time, the Company also purchases 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. Other than the risk associated with the
financial condition of the counterparties, 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
Continued
(51)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
$1,000 pursuant to 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. Both
time value and intrinsic value gains and losses are recorded in shareholders'
equity (as a component of comprehensive income/ (expense)) 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 by the Company at the time its products are shipped and
title has passed to its customer. The Company's net sales represent gross sales
invoiced to customers, less certain related charges, including discounts,
returns, rebates and other allowances. Such charges are recognized against
revenue on an accrual basis. Product returns are permitted. The accrual for
product returns is based on the Company's history of actual product returns. To
date, product returns have not been material. The Company grants sales rebates
to certain distributors upon achievement of agreed upon pricing for sales of the
Company's products to hospitals. Incurred but unpaid rebates are accrued by the
Company in the period in which they are incurred. The Company's rebate accrual
is based on its history of actual rebates paid. The Company's reserves for
rebates are reviewed at each reporting period and adjusted to reflect data
available at that time. If necessary, the Company will adjust these estimated
reserves, which will impact the amount of net product sales revenue recognized
by the Company in the period of the adjustments.
Income Taxes:
The Company's effective tax rate differs from the statutory rate primarily as a
result of research and development tax credits, the foreign sales corporation
deduction and the extraterritorial income tax regime. Because the Company
operates in a number of domestic and foreign tax jurisdictions, the statutory
rates within these various jurisdictions are considered in determining the
Company's overall effective tax rate. Management judgment is required to
determine the Company's consolidated provision for income tax expense, deferred
income tax balances and any valuation allowances associated with deferred tax
assets. The Company's management also considers open statutory periods, current
and anticipated audits, and the impact that any adverse adjustments would have
on the Company's current and prospective overall effective tax rate.
Deferred tax assets and liabilities are recorded when differences exist between
the financial statement carrying amounts and the tax bases of assets or
liabilities. The Company regularly reviews its deferred tax assets for
recoverability and to date has not established valuation allowances. The Company
deems all undistributed earnings of foreign subsidiaries permanently invested
and, accordingly, has not established a tax provision for any repatriation of
retained earnings in these entities. Undistributed earnings of the Company's
foreign subsidiaries amounted to $25,920 and $20,239 at August 31, 2003 and
2002, respectively.
Foreign Currency Translation:
During fiscal 2003, 2002 and 2001, 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
accumulated other comprehensive income / (expense) within
Continued
(52)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
shareholders' equity. 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. Foreign currency
transaction gains and losses resulting from intercompany receivables denominated
in the local currencies are included in other income/(expense) in the
consolidated statement of income, and were $99, $156 and $360 for the fiscal
years ended August 31, 2003, 2002 and 2001, respectively.
Employee Benefit Plans:
The Company sponsors pension, post-retirement, medical and life insurance plans
covering substantially all of its employees who meet the applicable eligibility
requirements. The Company uses several actuarial and other statistical factors
which attempt to anticipate future events in calculating its expense and
liability related to these plans. These factors include assumptions about
discount rate, expected return on plan assets and rate of future compensation
increases, as determined by the Company within specified guidelines. In
addition, the Company's actuarial consultants also utilize subjective
assumptions, such as withdrawal and mortality rates, to estimate these factors.
The actuarial assumptions used by the Company may differ materially from actual
results due to changing market and economic conditions, higher or lower
withdrawal rates, or longer or shorter life spans of participants. These
differences, depending on their magnitude, could have a significant impact on
the amount of pension expense recorded by the Company in any particular period.
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
potentially dilutive 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 are to
be capitalized and amortized over the useful life of the asset. Total cost
capitalized under this policy, net of amortization, were $9,544 and $8,227 as of
August 31, 2003 and 2002, 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. The costs of materials (whether
from the Company's normal inventory or acquired specially for research and
development activities) and equipment or facilities that are acquired or
constructed for research and development activities and that have alternative
future uses (in research and development projects or otherwise) are capitalized
as tangible assets when acquired or constructed. The cost of such materials
consumed in research and
Continued
(53)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
development activities and the depreciation of such equipment or facilities used
in those activities are recorded as research and development costs. As of August
31, 2003, the Company had $8,560 of capitalized costs related to the Arrow
LionHeart(TM), the Company's LVAS, of which $4,962 represents inventory of
systems intended for commercial use. In the fourth quarter of fiscal 2003, the
Company wrote off $3,569 ($2,409 after tax, or $0.05 diluted earnings per share)
related to development costs for the second generation of external batteries
used in the Arrow LionHeart(TM). The Company also had $630 of capitalized costs
related to the CorAide(TM) as of August 31, 2003.
Product Liability:
Costs for attorney's fees and indemnification associated with injuries resulting
from the use of the Company's products are provided for in setting reserves. The
Company provides reserves for product liability by utilizing loss estimates
prepared by the primary product liability insurance carrier with adjustments, as
appropriate, based upon management's perspective on the ultimate projected
claim, giving consideration to the perspective of outside counsel and other
relevant factors. The Company records a reserve regarding a particular claim
when a loss is known or considered probable and the amount can be reasonably
estimated. If a loss is not probable or a probable loss cannot be reasonably
estimated, a reserve is not recorded. The Company's primary global product
liability insurance policy is on a claims made basis. For fiscal 2003, the
Company's deductibles for its primary global product liability insurance policy
were increased to $750 per occurrence from $250 in fiscal 2002 for domestic
product liability claims, with the Company's annual exposure for such
deductibles in any one policy year being increased to $1,500 in fiscal 2003 from
$500 in fiscal year 2002. Effective for fiscal 2004, the Company's deductibles
for its primary global product liability insurance policy were increased to
$2,500 per occurrence for domestic product liability claims, with the Company's
annual exposure for such deductibles being limited to $5,000 for any one policy
year. The policy year runs from September 1 to August 31 and has a $10,000
aggregate limit. The Company also has additional layers of coverage insuring up
to $35,000 in annual aggregate losses arising from claims that exceed the
primary product liability insurance policy limits. Because deductibles were due
to increase when the Company renewed its product liability insurance policy in
September 2002, the Company elected to exercise a provision in its current
policy that maintains deductibles and limits for unreported claims occurring
prior to September 1, 2002 at existing levels for five years.
As a result of the Company's adoption as of May 31, 2003 of the provisions of
Statement of Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosures," the Company is required to disclose
its policy related to its accounting for its stock option plans. This policy is
described below:
The Company previously adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted under SFAS 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.
Continued
(54)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
Had compensation expense for stock options granted in fiscal 2003 and 2002 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 related income tax
effects, for the periods ended August 31, 2003, 2002, and 2001 would have been
reduced to the pro forma amounts indicated in the table below:
2003 2002 2001
----------------- ----------------- ----------------
Net income applicable to common shareholders
As reported $ 45,670 $ 39,000 $ 46,545
Deduct: Total stock based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects $ (1,329) $ (1,553) $ (1,332)
Pro forma $ 44,341 $ 37,447 $ 45,213
Basic earnings per common share
As reported $ 1.05 $ 0.89 $ 1.06
Pro forma $ 1.02 $ 0.86 $ 1.03
Diluted earnings per common share
As reported $ 1.04 $ 0.88 $ 1.05
Pro forma $ 1.01 $ 0.85 $ 1.02
The pro forma effects are not representative of the effects on reported net
income for future years, as most of the stock option awards granted by the
Company vest in cumulative increments over a period of five years.
(55)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
2. Special Charges:
The Company incurred a special charge in its fourth quarter of fiscal year 2003
totaling $8,000 ($5,400 after tax, or $0.12 diluted earnings per share.) This
special charge was recorded to establish a reserve for a proposed settlement in
two related patent infringement lawsuits, which, as previously disclosed,
related to certain of the Company's hemodialysis catheter products. In October
2003, the Company reached a settlement in principle for the reserved amount
related to these two related patent infringement lawsuits. However, the final
terms of this proposed settlement are still under negotiation.
The Company recorded special charges in the fourth quarter of fiscal 2002
amounting to a total of $8,005 ($5,403 after tax, or $0.12 per basic and diluted
common share) relating to the matters described below. Intangible assets in the
aggregate amount of $4,715 ($3,183 after tax, or $0.07 per basic and diluted
common share) were written off relating to purchased technologies the Company
has decided not to support for (1) Pullback Atherectomy Catheterization (PAC)
($2,579, $1,741 after tax, or $0.04 per basic and diluted common share), (2) IAB
pumping software ($1,532, $1,034 after tax, or $0.02 per basic and diluted
common share), and (3) microwave ablation technology ($604, $408 after tax, or
$0.01 per basic and diluted common share). The Company's special charge relating
to the PAC resulted from its discontinuation of support for this development
project due to changes in the market outlook for this device. The special charge
related to the IAB pumping software resulted from the Company's decision to
evaluate a new pump which will not utilize this software. The special charge
relating to this microwave ablation resulted from the Company's decision to
discontinue its efforts to further develop this technology for treating liver
ablation. Also included in the special charge is the write-off of an investment
of $2,000 ($1,349 after tax, or $0.03 per basic and diluted common share) in a
developer and manufacturer of systems to measure certain cardiac functions due
to the developer's uncertain access to future financing and unfavorable
financial condition. Finally, due to delay in CE mark approval to sell the Arrow
LionHeart(TM), the Company's fully implantable LVAS, in Europe, the Company
incurred $1,290 ($871 after tax, or $0.02 per basic and diluted common share) of
manufacturing variances related to systems being produced for market
introduction.
3. Business Acquisitions:
On September 3, 2002, the Company purchased the net assets of its former New
York City distributor, Stepic Medical, from Horizon Medical Products for
$12,636, which includes the relief from $5,539 of accounts receivable that had
been due from this distributor. As of August 31, 2003, pursuant to the asset
purchase agreement, the Company had paid in cash the entire $12,636 purchase
price for this acquisition. Stepic Medical had been the Company's distributor in
the greater New York City area, eastern New York State, and parts of Connecticut
and New Jersey since 1977.
Continued
(56)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
3. Business Acquisitions: (Continued)
This 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 was approximately $102. Intangible assets acquired of $3,452 are being
amortized over a period of five years. The results of operations of this
business are included in the Company's consolidated financial statements from
the date of acquisition. The purchase price for this acquisition was allocated
as follows:
Accounts receivable $10,090
Inventories 6,830
Other current assets 25
Property, plant and equipment 116
Goodwill and intangible assets 3,554
Current liabilities (7,979)
--------------
Total purchase price $12,636
==============
On November 25, 2002, the Company purchased specified assets and assumed
specified liabilities of Diatek, Inc., a company in the business of the
development, manufacture and marketing of chronic hemodialysis catheters, for
approximately $10,935, subject to post-closing adjustments. As of August 31,
2003, pursuant to the asset purchase agreement, the Company had paid $8,935 in
cash and recorded a liability classified as long-term debt of an additional
$2,000 for potential purchase price adjustments. The products acquired in the
transaction are expected to complement the Company's existing hemodialysis
product line. This acquisition has been accounted for using the purchase method
of accounting. The purchase price for this acquisition did not exceed the
estimated fair value of the net assets acquired and, therefore, no goodwill has
been recorded by the Company in connection therewith. Intangible assets acquired
of $12,235, consisting primarily of intellectual property rights, are being
amortized over a period of 20 years based on the legal life of the underlying
acquired technology. An independent valuation firm was used to determine a fair
market value of the intangible assets acquired. Pursuant to the asset purchase
agreement relating to this transaction, the Company may be required to make
royalty payments to Diatek's former owners based on the achievement of specified
annual sales levels of certain hemodialysis product lines. Any such payments
would begin in fiscal 2004 based on fiscal 2003 sales levels and are being
expensed as incurred. The results of operations of this business are included in
the Company's consolidated financial statements from the date of acquisition.
The purchase price for this acquisition was allocated as follows:
Accounts receivable $ 176
Inventories 423
Property, plant and equipment 179
Intangible assets 12,235
Current liabilities (2,078)
--------------
Total purchase price $10,935
==============
On March 18, 2003, the Company purchased substantially all of the assets of
Klein-Baker Medical, Inc., a company doing business as NeoCare(R) in San
Antonio, Texas, for approximately $16,540, subject to post-closing adjustments.
NeoCare(R) develops, manufactures and markets specialty
Continued
(57)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
3. Business Acquisitions: (Continued)
catheters and related procedure kits to neonatal intensive care units. The
Company believes that this acquisition will further enhance its broad line of
critical care related products and may serve as the base for possible further
expansion of the Company's pediatric product line. As of August 31, 2003,
pursuant to the asset purchase agreement, the Company had paid $14,540 in cash
and recorded a liability classified as long-term debt of an additional $2,000
for potential purchase price adjustments. This 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 $3,793 was recorded
as goodwill and will be evaluated for impairment on a periodic basis in
accordance with SFAS No. 142. Intangible assets acquired were $8,539 with $7,192
being amortized over a period of 25 years based on the anticipated period in
which cash flows are expected. The other intangible asset portion of $1,347 has
an indefinite life, which the Company is testing for impairment on an annual
basis in accordance with the provisions of SFAS No. 142. An independent
valuation firm was used to determine a fair market value of the inventory and
intangible assets acquired. The results of operations of this business are
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price for this acquisition was allocated as follows:
Accounts receivable $ 640
Inventories 2,009
Property, plant and equipment 1,666
Goodwill and intangible assets 12,332
Current liabilities (107)
-------------
Total purchase price $ 16,540
=============
On July 1, 2003, the Company purchased certain assets of its former
Florida-based distributor, IMA, Inc., for $2,276, which includes the relief from
$621 of accounts receivable that had been due from this distributor, subject to
post-closing adjustments. As of August 31, 2003, pursuant to the asset purchase
agreement, the Company had paid in cash $2,150 for this acquisition. As a result
of this transaction, the Company is conducting direct sales activity in the
territory formerly covered by IMA, Inc.
This acquisition has been accounted for using the purchase method of accounting.
The purchase price for this acquisition did not exceed the estimated fair value
of the net assets acquired and, therefore, no goodwill has been recorded by the
Company in connection therewith. Intangible assets acquired of $1,843 are being
amortized over a period of five years. The results of operations of this
business are included in the Company's consolidated financial statements from
the date of acquisition. The purchase price for this acquisition was allocated
as follows:
Accounts receivable $ 310
Inventories 744
Intangible assets 1,843
Current liabilities (621)
-------------
Total purchase price $ 2,276
=============
Continued
(58)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
3. Business Acquisitions: (Continued)
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, $3,545 in fiscal 2001, and $1,000 in fiscal 2002 for achievement of
milestones during these periods. During fiscal 2003, the Company paid $500,000
to Belmont for achievement of the final two milestones representing the seventh
and eighth quarterly installments of $250 payable by the Company (which payments
commenced in April 2001). With these two payments, the Company has completed its
payment obligations to Belmont pursuant to the asset purchase agreement and, as
of August 31, 2003, no longer owes any amounts to Belmont.
Pro forma amounts are not presented as the acquisitions described above did not
have 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
300,000 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 of Directors 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 10,000
shares of common stock upon each eligible director's initial election to the
Board of Directors and the grant of an additional option to purchase 3,000
shares of common stock on the date each year when directors are elected to the
Board of Directors. 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 2003, 2002 and 2001 fiscal years.
In fiscal 2003 and 2002, options to purchase 16,000 and 1,108,830 shares,
respectively, of the Company's common stock were granted to key employees of the
Company pursuant to the 1999 Plan. The option price per share ranged from $17.78
to $20.53 in fiscal 2003 and ranged from $18.37 to $21.47 in fiscal 2002. 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
(59)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
4. Stock Option Plans (Continued):
On January 15, 2003, January 16, 2002 and January 17, 2001, options to purchase
24,000, 24,000 and 27,000 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 2003, 2002 and 2001 awards was $20.53, $20.62 and
$18.25, respectively, equal to 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, 2003, 2002 and 2001 is
summarized below:
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
FY 2003 Price FY 2002 Price FY 2001 Price
------------ ------------ ------------ ------------- ------------ ---------------
Outstanding at 2,414,510 $16.75 1,581,720 $15.33 1,605,420 $15.20
September 1
Granted 40,000 $20.11 1,132,830 $18.73 67,000 $18.55
Exercised (76,130) $16.43 (200,200) $16.79 (19,140) $15.12
Terminated (60,120) $17.24 (99,840) $16.52 (71,560) $15.03
------------ ------------ ------------
Outstanding at
August 31 2,318,260 $16.81 2,414,510 $16.76 1,581,720 $15.33
Exercisable at
August 31 1,293,686 $15.84 930,360 $15.45 826,232 $15.95
Stock options outstanding at August 31, 2003 are summarized below:
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- -------------------------- --------------- -------------------- ------------- -------------- ---------------
$12.56 - $17.50 999,890 5.32 $14.15 852,316 $14.25
$17.51 - $21.47 1,318,370 7.34 $18.82 441,370 $18.91
--------------- --------------
2,318,260 1,293,686
The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation". As permitted under SFAS 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.
Continued
(60)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
4. Stock Option Plans (Continued):
The per share weighted average value of stock options granted in fiscal 2003,
2002 and 2001 was $8.30, $9.08 and $9.35, respectively. The fair value was
estimated as of the grant date using the Black-Scholes option pricing model with
the following average assumption:
2003 2002 2001
---------------- ---------------- ----------------
Risk-free interest rate 2.68% 2.98% 4.70%
Dividend yield 1.72% 0.74% 0.71%
Volatility factor 44.55% 22.07% 24.34%
Expected lives 5 years 4 years 4 years
Had compensation expense for stock options granted in fiscal 2003, 2002 and 2001
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, 2003, 2002 and 2001 would have been reduced to
the pro forma amounts indicated below:
2003 2002 2001
---------------- ---------------- ----------------
Net income applicable to common shareholders
As reported $ 45,670 $ 39,000 $ 46,545
Deduct: Total stock based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects $ (1,329) $ (1,553) $ (1,332)
Pro forma $ 44,341 $ 37,447 $ 45,213
Basic earnings per common share
As reported $ 1.05 $ 0.89 $ 1.06
Pro forma $ 1.02 $ 0.86 $ 1.03
Diluted earnings per common share
As reported $ 1.04 $ 0.88 $ 1.05
Pro forma $ 1.01 $ 0.85 $ 1.02
The pro forma effects are not representative of the effects on reported net
income for future years, as most of the stock option awards granted by the
Company vest in cumulative increments over a period of five years.
Continued
(61)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
5. Related Party Transactions:
During fiscal 2003 and 2002, the Company made purchases amounting to $121 and
$89, 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 as Secretary and a Director of the
Company. Precision was related to the Company through common ownership until it
was dissolved on May 1, 2002.
In September 2001, Stepic Medical, the Company's New York City distributor,
hired as its president the Company's former Vice-President of Domestic Sales
(who had resigned from the Company in February 1999) and who is also the spouse
of the Company's current Vice-President and General Manager of NeoCare(R). At
such time, the Company changed management responsibility for this distributor so
that the Company's manager of its Critical Care Business directly oversees all
transactions between the Company and this distributor. Transactions between the
Company and this distributor were on terms and at prices that the Company
believes were customary in the marketplace. During fiscal 2002, the Company
recorded $10,372 of net sales to Stepic Medical, which included a $1,765 charge
against net sales related to the increase in the dealer rebate reserve. On
September 3, 2002, the Company purchased the net assets of this distributor, as
discussed in Note 3 of these Notes to Consolidated Financial Statements. The
President of Stepic Medical was not hired by the Company. The acquisition was
consummated in terms customary in the market place and were at arms-length.
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 $5,344, $4,467 and $4,328 for fiscal
years ended August 31, 2003, 2002 and 2001, respectively. Following is a
schedule by year showing future minimum rentals under operating leases.
Year Ending August 31, Total
---------------------------- ------------
2004 $ 4,449
2005 3,362
2006 1,589
2007 654
2008 422
Thereafter 1,045
------------
$ 11,521
============
Continued
(62)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
7. Inventories:
Inventories are summarized as follows:
August 31,
---------------------------------------
2003 2002
-------------- ---------------
Finished goods $ 31,204 $ 27,425
Semi-finished goods 22,223 23,054
Work-in-process 8,933 8,478
Raw materials 28,089 26,989
-------------- ---------------
$ 90,449 $ 85,946
============== ===============
8. Credit Facilities:
To provide additional liquidity and flexibility in funding its operations, the
Company from time to time also borrows amounts under credit facilities and other
external sources of financing. At both August 31, 2003 and 2002, the Company had
a revolving credit facility providing a total of $65,000 in available revolving
credit for general business purposes. At August 31, 2003 and 2002, the Company
had $18,918 and $6,250 outstanding under this credit facility, respectively, all
of which is owed by its foreign subsidiaries. Under this credit facility, the
Company is required to comply with the following financial covenants: 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 the Company's and its subsidiaries' incurrence of liens; and a
requirement that the lender approve the incurrence of additional indebtedness
unrelated to the revolving credit facility when the aggregate principal amount
of such new additional indebtedness exceeds $75,000. This credit facility was
amended in fiscal 2003 to increase the approval limit from $50,000 to $75,000
for the requirement that the lender approve the incurrence of additional
indebtedness unrelated to the revolving credit facility. At August 31, 2003 and
2002, the Company was in compliance with all such covenants. Failure to remain
in compliance with these covenants could trigger an acceleration of the
Company's obligation to repay all outstanding borrowings under this credit
facility.
Certain other subsidiaries of the Company had revolving credit facilities
totaling the U.S. dollar equivalent of $17,970 and $20,694, of which $9,413 and
$9,882 were outstanding as of August 31, 2003 and 2002, respectively. In
addition, during fiscal 2003, the Company entered into a short-term note payable
with IMA, Inc. for $100 related to a non-compete arrangement pursuant to the
Company's acquisition of this business on July 1, 2003.
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,
2003 and 2002, the weighted average interest rates on short-term borrowings were
2.2% and 2.2% per annum, respectively. Combined borrowings under these
facilities increased $12,299 during fiscal year 2003 due primarily to the
Company's refinancing associated with its Czech Republic subsidiary.
Continued
(63)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
9. Accrued Compensation:
The components of accrued compensation at August 31, 2003 and 2002 are as
follows:
2003 2002
-------------- -------------
Accrued vacation pay $ 4,359 $ 3,431
Accrued payroll 5,664 2,919
Other 661 405
-------------- -------------
$10,684 $ 6,755
============== =============
10. Accrued Liabilities:
The components of accrued liabilities of August 31, 2003 and 2002 are as
follows:
2003 2002
-------------- -------------
Accrued professional fees $10,144 $ 2,496
Other 11,456 9,590
-------------- -------------
$21,600 $ 12,086
============== =============
Continued
(64)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
11. Long-Term Debt:
Long-term debt consists of the following: August 31,
2003 2002
----------------- ------------------
Note payable to Klein-Baker Medical, Inc. in March 2005, plus interest at a
variable rate based upon LIBOR plus 2.00% $ 2,000 $ -
Note payable to Diatek, Inc. in November 2004, plus interest at a variable
rate based upon LIBOR plus 2.00%, offset by certain charges owed to the
Company by the former owners of Diatek, Inc. 1,735 -
Industrial Development Authority Bonds, $3,500 face amount, subject to mandatory
annual sinking fund payments of $300 from December 1999 through December 2003;
plus interest at a variable rate ranging from 1.00% to 2.35% in 2003 and from
1.50% to 2.95%
in 2002. $ 300 $ 600
----------------- ------------------
Total debt 4,035 600
Less current maturities 300 300
----------------- ------------------
$ 3,735 $ 300
================= ==================
The Industrial Development Authority Bonds are collateralized by a $311 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 $1,256 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, 2003.
Following is a schedule by year showing the remaining maturities of long-term
debt:
Year Ending August 31, Total
--------------------------------- ----------------
2004 $ 300
2005 3,735
----------------
Total $ 4,035
================
Total interest costs for fiscal 2003, 2002 and 2001 were $618, $845 and $2,995,
respectively, of which $0, $218 and $911, respectively, were capitalized.
At August 31, 2003 and 2002, the carrying amount of long-term debt approximated
fair value.
Continued
(65)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Income Taxes:
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. The measurement
of deferred tax assets is reduced, if necessary, by a valuation allowance.
The provision (benefit) for income taxes consists of:
2003
-----------------------------------------------------------------------------------------------------
Federal State Foreign Total
----------------------- -------------------- ---------------------- ------------------------
Current $ 14,928 $ 665 $ 2,829 $ 18,422
Deferred 2,799 267 (240) 2,826
------------------- --------------- ----------------- --------------------
$ 17,727 $ 932 $ 2,589 $ 21,248
=================== =============== ================= ====================
2002
-----------------------------------------------------------------------------------------------------
Federal State Foreign Total
----------------------- -------------------- ---------------------- ------------------------
Current $ 18,242 $ 772 $ 1,856 $ 20,870
Deferred (1,940) (300) 147 (2,093)
------------------- --------------- ----------------- --------------------
$ 16,302 $ 472 $ 2,003 $ 18,777
=================== =============== ================= ====================
2001
-----------------------------------------------------------------------------------------------------
Federal State Foreign Total
----------------------- -------------------- ---------------------- ------------------------
Current $ 18,479 $ 1,050 $ 1,578 $ 21,107
Deferred 1,511 234 73 1,818
------------------- --------------- ----------------- --------------------
$ 19,990 $ 1,284 $ 1,651 $ 22,925
=================== =============== ================= ====================
Research and development tax credits were $600, $450 and $443 in fiscal 2003,
2002 and 2001, respectively. The Company's research and development tax credits
are currently being audited by the I.R.S.
The following deferred taxes and balance sheet classifications are recorded as
of August 31, 2003 and 2002:
Deferred tax assets (liabilities): 2003 2002
----------- -----------
Accounts receivable $ 274 $ 746
Inventories 5,294 3,783
Capital loss carryforward 3,392 1,994
Property, plant and equipment (9,231) (6,588)
Intangible assets 5,020 9,968
Accrued liabilities (10,729) (4,804)
Accrued compensation 1,095 924
Postretirement benefits other than pensions 3,755 3,509
--------------- ---------------
$ (1,130) $ 9,532
=============== ===============
Balance Sheet classification:
Current deferred tax assets $ 7,011 $ 5,377
Non-current deferred tax assets/(liabilities) (8,141) 4,155
--------------- ---------------
$ (1,130) $ 9,532
=============== ===============
Continued
(66)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
12. Income Taxes (Continued):
The Company has capital loss carryforwards related to marketable securities
sales of $8,845 at August 31, 2003 that expire on August 31, 2006. Management
considers projected future taxable income and tax planning strategies in
assessing the need for valuation allowances that reduce deferred tax assets.
Based upon historical taxable income and tax planning strategies that may be
implemented in the future, management believes it is more likely than not that
the Company will realize the benefits of these capital loss carryforwards as of
August 31, 2003.
The Company's intercompany pricing to an international subsidiary is currently
being audited. The Company believes that any tax assessment will be resolved
through competent authority proceedings. Competent authority proceedings are a
means to resolve intercompany pricing disagreements between tax authorities in
different countries.
The Company recorded the impact of changes in deferred tax assets associated
with the intercompany profits in the ending inventory of foreign subsidiaries as
a component of cost of sales through May 2002 in accordance with Accounting
Research Bulletin No. 51 ("ARB 51"). In order to record all income tax expense
or benefit in the income tax provision, beginning in June, 2002, the impact of
these changes are classified as a component of deferred income tax expense.
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:
2003 2002 2001
-------------- -------------- --------------
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
State income taxes, net of federal benefit 1.0 0.5 1.2
Foreign statutory tax rates differential 0.8 0.4 0.6
Foreign sales corporation - ETI (Extra Territorial
Income Exclusion) (4.2) (3.4) (3.2)
Research and development tax credit (1.6) (0.8) (0.6)
Other 0.8 0.8 -
---------- ----------- ------------
Effective tax rate 31.8 % 32.5 % 33.0 %
========== =========== ============
13. 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.
Continued
(67)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
13. Retirement Benefits (Continued):
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, which exceeds plan assets, was $3,952 and $3,948 at
August 31, 2003 and 2002, respectively.
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 the cost
of postretirement health benefit plans is based on comprehensive hospital,
medical, surgical and dental benefit provisions ("Other Benefits"). The
determination of the cost of 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,
2003 2002 2003 2002
---------------- --------------- ------------------ ---------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 64,369 $ 57,616 $ 9,849 $ 7,740
Service cost 2,743 2,935 319 233
Interest cost 4,335 4,062 795 544
Amendments 1,649 - - -
Actuarial loss 4,679 1,684 2,594 1,489
Benefits paid (2,293) (1,928) (544) (157)
---------------- --------------- ------------------ ---------------
Benefit obligation at end of year $ 75,482 $ 64,369 $ 13,013 $ 9,849
================ =============== ================== ===============
Pension Benefits Other Benefits
----------------------------------- -------------------------------------
August 31, August 31,
2003 2002 2003 2002
---------------- --------------- ------------------ ---------------
Change in plan assets:
Fair value of plan assets at beginning
of year $ 58,811 $ 64,768 $ - $ -
Actual return on plan assets 6,234 (6,534) - -
Transfer of investment income - (50) - -
Employer contributions 15,475 2,555 544 157
Benefits paid (2,293) (1,928) (544) (157)
---------------- --------------- ------------------ ---------------
Fair value of plan assets at end of year $ 78,227 $ 58,811 $ - $ -
================ =============== ================== ===============
Continued
(68)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
13. Retirement Benefits (Continued):
Pension Benefits Other Benefits
----------------------------------- -------------------------------------
August 31, August 31,
2003 2002 2003 2002
---------------- --------------- ------------------ ---------------
Funded status $ 2,745 $ (5,558) $ (13,013) $ (9,849)
Unrecognized net actuarial loss 17,401 12,968 3,695 1,205
Unrecognized prior service cost 9,924 8,941 (375) (459)
Unrecognized transition obligation (asset) (296) (403) 582 631
Unrecognized plan acquisition differential 1,173 1,322 (433) (462)
---------------- --------------- ------------------ ---------------
Prepaid (accrued) benefit cost $ 30,947 $ 17,270 $ (9,544) $ (8,934)
================ =============== ================== ===============
Pension Benefits Other Benefits
----------------------------------- -------------------------------------
Amounts recognized in the statement August 31, August 31,
of financial position consist of: 2003 2002 2003 2002
---------------- --------------- ------------------ ---------------
Prepaid benefit cost $ 32,016 $ 18,297 $ - $ -
Accrued benefit liability (3,952) (7,015) (9,544) (8,934)
Intangible asset 2,772 4,535 - -
Accumulated other comprehensive
Income 111 1,453 - -
---------------- --------------- ------------------ ---------------
Net amount recognized $ 30,947 $ 17,270 $ (9,544) $ (8,934)
================ =============== ================== ===============
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 $71,517, $61,267 and $78,227 for 2003, respectively,
and $60,269, $51,062 and $58,811 for 2002, respectively.
Continued
(69)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
13. Retirement Benefits (Continued):
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 $3,965, $3,952 and $0 for 2003, respectively, and
$4,100, $3,948 and $0 for 2002, respectively.
Pension Benefits Other Benefits
--------------------------------------- ------------------------------------
August 31, August 31,
Weighted-average assumptions as of 2003 2002 2001 2003 2002 2001
----------- ----------- --------- ---------- ---------- ---------
Discount rate 6.50% 7.00% 7.25% 6.50% 7.00% 7.25%
Expected return on plan assets 9.00% 11.00% 11.00% 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 12.00% 8.00% 8.50%
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 11 6 7
Pension Benefits Other Benefits
--------------------------------------- ------------------------------------
Components of net periodic (benefit) August 31, August 31,
cost for the fiscal years ended 2003 2002 2001 2003 2002 2001
----------- ----------- --------- ---------- ---------- ---------
Service cost $2,743 $2,935 $2,506 $319 $233 $224
Interest cost 4,336 4,062 3,751 795 544 517
Expected return on plan assets (6,492) (7,094) (7,625) - - -
Amortization of prior service costs 665 665 665 (84) (84) (84)
Amortization of transition obligation (asset) (107) (107) (107) 49 49 49
Amortization of net actuarial (gain) loss 503 (13) (853) 104 (1,436) (1,043)
Plan acquisition differential 150 150 150 (29) (29) (29)
----------- ----------- --------- ---------- ---------- ---------
Net periodic (benefit) cost $1,798 $598 ($1,513) $1,154 ($723) ($366)
=========== ============ ========= ========== ========== =========
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 $ 130 $ (105)
Effect on postretirement benefit obligation $ 1,312 $ (1,071)
Continued
(70)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
13. Retirement Benefits (Continued):
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 related to the Company's matching
contribution was $1,024, $1,064 and $1,117 for fiscal 2003, 2002 and 2001,
respectively.
In fiscal 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 $716, $718 and $176 for fiscal
2003, 2002 and 2001, respectively.
14. 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.
The following table provides information about the Company's sales by product
category:
2003 2002 2001
----------------------------- ------------------------------ -----------------------------
Critical Cardiac Critical Cardiac Critical Cardiac
Care Care Care Care Care Care
-------------- ----------- ------------- ------------ ------------ ------------
Sales to External $323,500 $56,900 $ 284,000 $ 56,800 $ 276,100 $ 57,900
customers
The following tables presents information about geographic areas:
2003
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
-------------- ---------- ------------ ---------- ------------ -------------
Sales to unaffiliated $ 249,900 $51,200 $ 60,400 $ 18,900 $ - $ 380,400
customers
Long-lived assets at
August 31 $ 330,129 $ 2,127 $ 38,984 $ 1,980 $ (121,203) $ 252,017
2002
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
-------------- ---------- ------------ ---------- ------------ -------------
Sales to unaffiliated $ 223,300 $48,100 $ 50,100 $ 19,300 $ - $ 340,800
customers
Long-lived assets at
August 31 $ 285,280 $ 2,194 $ 38,364 $ 2,309 $ (113,181) $ 214,966
2001
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
-------------- ---------- ------------ ---------- ------------ -------------
Sales to unaffiliated $ 220,000 $49,000 $ 48,000 $ 17,000 $ - $ 334,000
customers
Long-lived assets at
August 31 $ 300,988 $ 3,533 $ 32,347 $ 2,599 $ (112,549) $ 226,918
Continued
(71)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
15. Financial Instruments:
During fiscal 2003 and 2002, the percentage of the Company's sales invoiced in
currencies other than U.S. dollars was 22.7% and 21.9%, 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. Foreign currency forward contracts
are marked to market each accounting period, and the resulting gains or losses
on these contracts are recorded in other income / expense of the Company's
consolidated statements of income. Realized gains and losses on these contracts
are offset by the 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 forward 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 ongoing credit review
procedures.
At August 31, 2003, the Company had foreign currency forward contracts to sell
foreign currencies which mature at various dates through November 2003. The
following table identifies foreign currency forward contracts to sell foreign
currencies at August 31, 2003 and 2002 as follows:
August 31, 2003 August 31, 2002
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
------------ ------------ ------------ ------------
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ - $ - $ 1,471 $ 1,480
Canadian dollars 424 432 318 320
Euro 4,345 4,393 3,441 3,424
Mexican peso 627 626 793 792
African rand 396 404 192 187
------------ ------------ ------------ ------------
$ 5,792 $ 5,855 $ 6,215 $ 6,203
============ ============ ============ ============
Continued
(72)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
15. Financial Instruments (Continued):
At August 31, 2003, the Company also had foreign currency forward contracts to
buy foreign currencies which mature at various dates through September 2003. The
following table identifies foreign currency forward contracts to buy foreign
currencies at August 31, 2003 and August 31, 2002 as follows:
August 31, 2003 August 31, 2002
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
------------ ------------ ------------ ------------
Foreign currency: (U.S. Dollar Equivalents)
Czech koruna $ 672 $ 677 $ 3,848 $ 3,879
From time to time, the Company purchases 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. Other than the risk associated with the financial condition of the
counterparties, 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 pursuant to the terms of the
Foreign Currency Management Policy Statement as 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. Both time value and intrinsic
value gains and losses are recorded in shareholders' equity (as a component of
comprehensive income/(expense)) 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 2003
and 2002, the Company recognized a time value loss of $0 and $46, respectively,
against net sales offset by the recognition of intrinsic value gains of $294 and
$536, respectively. At August 31, 2003, the Company had no unrealized holding
gains or losses related to these foreign currency option contracts. At August
31, 2002, the Company had an unrealized holding loss of $286 related to these
foreign currency option contracts. The Company had no foreign currency option
contracts outstanding at August 31, 2003. The following table identifies foreign
currency option contracts at August 31, 2003 and August 31, 2002 as follows:
August 31, 2003 August 31, 2002
Premium Fair Market Premium Fair Market
Paid Value Paid Value
------------ ------------ ------------ ------------
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ - $ - $ 188 $ 8
Continued
(73)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
16. 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 had currently been a defendant in two related lawsuits alleging that
certain of its hemodialysis catheter products infringe patents owned by or
licensed to the plaintiffs. A trial date for these actions had been set for
September 29, 2003. On the trial date, the judge exhorted both parties to settle
out of court. During the fourth quarter of fiscal 2003, the Company established
a reserve of $8,000 in anticipation of reaching a settlement for these two
related lawsuits. In October 2003, the Company reached a settlement in principle
with the plaintiffs for the reserved amount. However, the final terms of this
proposed settlement are still under negotiation.
A product liability lawsuit against the Company tried before a jury in Arkansas
state court resulted in a judgment against the Company in May 2001 for $175 in
compensatory and $4,000 in punitive damages. In February 2003, the Company's
appeal from this judgment to the Arkansas state court of appeals was
unsuccessful. In April 2003, the Company's petition to the Arkansas Supreme
Court to hear the appeal of the state court of appeals' decision was denied. In
February 2003, the Company was successful in defending an action brought by its
insurer seeking a judicial declaration that it would not be obligated to
indemnify the Company for the punitive damages portion of the judgment. As a
result, all compensatory and punitive damages resulting from this product
liability lawsuit were covered by the Company's primary and excess product
liability insurance policies, other than deductibles of $250 then in effect
under such insurance policies.
The Company is also currently a defendant in a lawsuit in which the plaintiff
alleges that the Company's Cannon-Cath(TM) split-tip hemodialysis catheters,
which were acquired as part of the Company's acquisition in November 2002 of
specified assets of Diatek, Inc., infringe a patent owned by or licensed to the
plaintiffs. In November 2003, this lawsuit was stayed pending the U.S. Patent
and Trademark Office's ruling on its re-examination of the patent at issue,
which is not expected to occur until after fiscal 2004. Based on information
presently available to the Company, the Company believes that its products do
not infringe any valid claim of the plaintiff's patent and that, consequently,
it has meritorious legal defenses with respect to this action and is vigorously
contesting it.
Although the ultimate outcome of any of these actions is not expected to have a
material adverse effect on the Company's business or financial condition,
whether an adverse outcome in any of these actions would materially adversely
affect the Company's reported results of operations in any future period cannot
be predicted with certainty.
17. Stock Split
During the fourth quarter of fiscal 2003, the Company approved a two-for-one
split of its common stock effected on August 15, 2003, which was distributed to
all stockholders of record on August 1, 2003. The Company retained the rate of
its quarterly cash dividends, which resulted in the doubling of its quarterly
dividend. The accompanying financial statements and related footnotes, including
all share and per share amounts, have been adjusted to reflect these actions.
Continued
(74)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
18. New Accounting Standards:
Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", was issued in December 2002. This
statement provides companies with two additional alternative transition methods
for recognizing a company's voluntary decision to change its method of
accounting for stock-based employee compensation to the fair-value method. It
also amends the existing disclosure requirements of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation". The transition
guidance and provisions of this statement for annual disclosures are effective
for fiscal years ending after December 15, 2002. The provisions for
interim-period disclosures are effective for financial reports that contain
financial statements for interim periods beginning after December 15, 2002. As
of August 31, 2003, the Company has adopted the interim period and annual
disclosure requirements of this statement.
Financial Accounting Standard No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued in April 2003. This statement
amends and clarifies accounting and reporting for derivative instruments
embedded in other contracts and for hedging activities under Financial
Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The provisions of this statement are effective for all contracts
entered into or modified after June 30, 2003.
19. Sale of Securities:
Proceeds from the Company's sale of marketable securities of a medical device
company available for sale were $2,540 for fiscal 2002. Gains on the sale of
these securities in fiscal 2002 amounted to $1,703, and were included in
selling, general and administrative expenses in the Company's consolidated
statements of income.
20. Sale of Implantable Drug Infusion Pump Business:
On April 1, 2002, the Company completed the sale of substantially all of the
assets of its implantable drug infusion pump business for a sales price of
$13,000 in cash pursuant to an asset purchase agreement dated as of March 1,
2002. An estimated loss on the sale was recorded in the second quarter of fiscal
2002, during which period the Company's Board of Directors authorized the
transaction. The transaction was accounted for as a sale of a non-integrated
portion of a reporting unit, as defined by SFAS 142. After further adjustments
to the estimated loss were made in the third and fourth quarters of fiscal 2002,
the loss before tax on the transaction was $1,226 (after taxes, such loss was
$828, or $0.02 per basic and diluted common share), and was included in selling,
general and administrative expenses in the Company's consolidated statements of
income.
Continued
(75)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
21. Summary of Quarterly Results (unaudited):
Quarterly financial results for the year ended August 31, 2003 are as follows:
Quarter
------------------------------------------------------------
11/30/02 2/28/03 5/31/03 8/31/03
------------ ------------ ------------ ------------
Net sales $ 88,839 $ 92,757 $ 96,949 $ 101,831
Cost of goods sold 45,395 47,019 47,756 50,076
------------ ------------ ------------ ------------
Gross profit 43,444 45,738 49,193 51,755
Operating expenses
Research, development
and engineering 6,072 6,409 6,329 9,360
Selling, general and
administrative 20,186 21,735 22,649 24,784
Special charge* - - - 8,000
Operating income 17,186 17,594 20,215 9,611
Other expenses (income) 277 (71) (1,157) (1,361)
Income before income
taxes 16,909 17,665 21,372 10,972
Provision for income taxes 5,495 5,741 6,946 3,066
Net income $ 11,414 $ 11,924 $ 14,426 $ 7,906
Basic earnings
per common share $ 0.26 $ 0.28 $ 0.33 $ 0.18
Diluted earnings
per common share $ 0.26 $ 0.27 $ 0.33 $ 0.18
Weighted average shares used in
computing basic earnings per
common share 43,722 43,384 43,231 43,263
Weighted average shares used in
computing diluted earnings per
common share 43,879 43,742 43,667 43,807
* In the fourth quarter of fiscal 2003, the Company recorded a special charge
(see Note 2 - "Special Charges" above).
All historical share and per share amounts have been adjusted to reflect the
two-for-one split of the Company's common stock and the doubling of its
quarterly dividend effected on August 15, 2003.
Continued
(76)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
21. Summary of Quarterly Results (unaudited): (Continued)
Quarterly financial results for the year ended August 31, 2002 are as follows:
Quarter
------------------------------------------------------------
11/30/01 2/28/02 5/31/02 8/31/02
------------ ------------ ------------ ------------
Net sales $ 84,202 $ 85,826 $ 86,712 $ 84,019
Cost of goods sold 40,495 41,458 43,378 44,294
------------ ------------ ------------ ------------
Gross profit 43,707 44,368 43,334 39,725
Operating expenses
Research, development
and engineering 6,730 6,389 6,854 6,192
Selling, general and
administrative 19,069 18,784 19,611 20,942
Special charges* - - - 8,005
Operating income 17,908 19,195 16,869 4,586
Other expenses (income) 255 380 (25) 171
Income before income
taxes 17,653 18,815 16,894 4,415
Provision for income taxes 5,737 6,115 5,491 1,434
Net income $ 11,916 $ 12,700 $ 11,403 $ 2,981
Basic earnings
per common share $ 0.27 $ 0.29 $ 0.26 $ 0.07
Diluted earnings
per common share $ 0.27 $ 0.29 $ 0.25 $ 0.07
Weighted average shares used in
computing basic earnings per
common share 43,783 43,724 43,856 43,938
Weighted average shares used in
computing diluted earnings per
common share 44,054 44,134 44,444 44,210
* In the fourth quarter of fiscal 2002, the Company recorded a special charge
(see Note 2 - "Special Charges" above).
All historical share and per share amounts have been adjusted to reflect the
two-for-one split of the Company's common stock and the doubling of its
quarterly dividend effected on August 15, 2003.
Continued
(77)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
22. 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, 2003,
2002 and 2001:
2003 2002 2001
---------------- ---------------- ----------------
Average common shares 43,399,363 43,825,856 43,990,788
outstanding
Common shares issuable(1) 373,890 385,226 249,946
---------------- ---------------- ----------------
Average common shares
outstanding assuming dilution 43,773,253 44,211,082 44,240,734
(1) Issuable primarily under stock option plans.
All historical share and per share amounts have been adjusted to reflect the
two-for-one split of the Company's common stock and the doubling of its
quarterly dividend effected on August 15, 2003.
(78)
SCHEDULE II
ARROW INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
Additions
----------------------------
Charges/
(Credits)
Balance at to Charged Balance at
Beginning Cost and to Other End
Description of Period Expenses Accounts Deductions(1) of Period
- -------------------------------------- ----------- ------------ ------------ -------------- ------------
For the year ended August 31, 2001:
Accounts receivable:
Allowance for doubtful accounts $ 1,012 $ 817 $ - $ 864 $ 965
=========== ============ ============ ============== ============
Inventory:
Inventory Reserves $ 1,421 $ 866 $ - $ 181 $ 2,106
=========== ============ ============ ============== ============
For the year ended August 31, 2002:
Accounts receivable:
Allowance for doubtful accounts $ 965 $ 462 $ - $ 471 $ 956
=========== ============ ============ ============== ============
Inventory:
Inventory Reserves $ 2,106 $ 686 $ - $ 685 $ 2,107
=========== ============ ============ ============== ============
For the year ended August 31, 2003:
Accounts receivable:
Allowance for doubtful accounts $ 956 $ 552 $ - $ 518 $ 990
=========== ============ ============ ============== ============
Inventory:
Inventory Reserves $ 2,107 $ 1,717 $ - $ 388 $ 3,436
=========== ============ ============ ============== ============
(1) Deductions represent write-offs of accounts receivable and scrap inventory.
(79)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including its Chief Executive
Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of
the Company's disclosure controls and procedures as of August 31, 2003. Based on
that evaluation, the Company's management, including its CEO and CFO, have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. There have been no changes in the Company's internal
controls over financial reporting or in other factors identified in connection
with this evaluation that occurred during the three months ended August 31, 2003
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and nominees for directors of the Company,
as well as certain other information required by this item, will be included in
the Company's Proxy Statement to be issued in connection with its 2004 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 under the caption "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation of Arrow's directors and
executive officers will be included in the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
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.
Continued
(80)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS (CONTINUED)
The following table sets forth certain information regarding the Company's
equity compensation plans as of August 31, 2003.
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warranties and rights warrants and rights reflected in column (a))
- ----------------------------------- ------------------------- ----------------------- -------------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders 2,318,260 $16.81 12,582,430
Equity compensation plans
not approved by security
holders - - -
Total 2,318,260 $16.81 12,582,430
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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company's independent accountants and auditors are
PricewaterhouseCoopers LLP, Certified Public Accountants. PricewaterhouseCoopers
LLP has served as the Company's independent accountants and auditors since
fiscal 1985.
AUDIT FEES
The aggregate fees for professional services rendered by
PricewaterhouseCoopers LLP in connection with its audit of the Company's annual
consolidated financial statements, statutory audit of the Company's foreign
subsidiaries, and reviews of the interim financial statements included in the
Company's quarterly reports on Form 10-Q were $646,040 and $610,095 for the
fiscal years ended August 31, 2003 and 2002, respectively.
AUDIT-RELATED FEES
In addition to fees disclosed under "Audit Fees" above, the aggregate fees
for professional services rendered by PricewaterhouseCoopers LLP for assurance
and related services that are reasonably related to the performance of the audit
and reviews of the Company's financial statements were $69,400 and $224,240 for
the fiscal years ended August 31, 2003 and 2002, respectively. Such services
included accounting consultations and audits in connection with acquisitions,
and additional assurance and related services for the Company's foreign
subsidiaries.
(81)
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES (CONTINUED)
TAX FEES
The aggregate fees for professional services rendered by
PricewaterhouseCoopers LLP for tax compliance, tax planning and tax advice for
the Company's U.S. and foreign subsidiaries were $737,973 and $352,160 for the
fiscal years ended August 31, 2003 and 2002, respectively.
ALL OTHER FEES
PricewaterhouseCoopers LLP did not provide the Company with any other
services during the fiscal years ended August 31, 2003 and 2002.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee of the Company's Board of Directors pre-approves on an
annual basis the audit, audit-related, tax and other non-audit services to be
rendered by the Company's accountants based on historical information and
anticipated requirements for the following fiscal year. The Audit Committee
pre-approves specific types or categories of engagements constituting audit,
audit-related, tax and other non-audit services as well as the range of fee
amounts corresponding to each such engagement. To the extent that the Company's
management believes that a new service or the expansion of a current service
provided by the Company's accountants is necessary or desirable, such new or
expanded services are presented to the Audit Committee for its review and
approval prior to the Company's engagement of its accountants to render such
services. No non-audit services were approved by the Audit Committee pursuant to
Rule 2-01, paragraph (c)(7)(i)(C) of SEC Regulation S-X during the fiscal year
ended August 31, 2003.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The financial statements listed in the Index to Consolidated
Financial Statements under Item 8 of this report are filed as part of this
report.
(2) Financial Statement Schedule II of the Company is filed as part of
this report.
Other statements and schedules are not presented because they are either
not required or the information required by statements or schedules is presented
elsewhere.
(3) See Exhibit Index on pages 84 through 90 of this report for a list
of the exhibits filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K:
o Current Report on Form 8-K, dated July 1, 2003, reporting under Item
12. "Results of Operations and Financial Condition", announcing the
Company's third quarter earnings.
o Current Report on Form 8-K, dated September 30, 2003, reporting under
Item 12. "Results of Operations and Financial Condition", announcing
the Company's fourth quarter earnings.
(82)
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 and
Vice President of Finance
Dated: November 26, 2003
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/ Carl G. Anderson, Jr. Director, Chairman and November 26, 2003
- ------------------------------ Chief Executive Officer
(Carl G. Anderson, Jr.) (Principal Executive Officer)
/s/ Frederick J. Hirt Chief Financial Officer and November 26, 2003
- ------------------------------ Vice President of Finance
(Frederick J. Hirt) (Principal Financial and
Accounting Officer)
/s/ Marlin Miller, Jr. Director November 26, 2003
- ------------------------------
(Marlin Miller, Jr.)
/s/ Raymond Neag Director November 26, 2003
- ------------------------------
(Raymond Neag)
/s/ John H. Broadbent, Jr. Director November 26, 2003
- ------------------------------
(John H. Broadbent, Jr.)
/s/ T. Jerome Holleran Director November 26, 2003
- ------------------------------
(T. Jerome Holleran)
/s/ Richard T. Niner Director November 26, 2003
- ------------------------------
(Richard T. Niner)
/s/ George W. Ebright Director November 26, 2003
- ------------------------------
(George W. Ebright)
/s/ Alan M. Sebulsky Director November 26, 2003
- ------------------------------
(Alan M. Sebulsky)
/s/ John E. Gurski Director November 26, 2003
- ------------------------------
(John E. Gurski)
/s/ R. James Macaleer Director November 26, 2003
- ------------------------------
(R. James Macaleer)
(83)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING
- ---------------- ----------------------------------------------- -----------------------------------------------------
3.1 Restated Articles of Incorporation of the Incorporated by reference from Exhibit 3.1 to the
Company. Company's Annual Report on Form 10-K for the fiscal
year ended August 31, 1992
3.2 By-laws of the Company, as amended and Incorporated by reference from Exhibit 3.2 to the
restated. Company's Quarterly Report on Form 10-Q for the
third quarter period ended May 31, 2002
4.1 Form of Common Stock certificate. Incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-1 File
No. 33-47163 (the "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) Summary Plan Incorporated by reference from Exhibit 10.2 to the
Description (as Amended on June 1, 2001). Company's Quarterly Report on Form 10-Q for the
third quarter period ended May 31, 2002 (the "May
31, 2001 Form 10-Q")
10.3 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit 10.3.2 to
Salaried Employees of the Company, effective the Company's Annual Report on Form 10-K for the
September 1, 1989, as amended. year ended August 31, 1993 (the "1993 Form 10-K")
10.4 Amended and Restated Restricted Stock Bonus Incorporated by reference from Exhibit 10.4 to the
Plan. Company's Registration Statement
10.5 Split Dollar Life Insurance Agreements, dated Incorporated by reference from Exhibit 10.5 to the
December 16, 1991, between the Company and Company's 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, dated Incorporated by reference from Exhibit 10.6 to the
December 16, 1991, between the Company and Company's Registration Statement
Raymond Neag Irrevocable Trust, dated October
11, 1991, Sevier J. Neag, Trustee.
(84)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING
- ---------------- ----------------------------------------------- -----------------------------------------------------
10.7 Split Dollar Life Insurance Agreements, dated Incorporated by reference from Exhibit 10.7 to the
December 16, 1991, between the Company and Company's Registration Statement
Robert E. Gedney, as Trustee under the
provisions of a certain Irrevocable Trust
Agreement with John H. Broadbent, Jr. dated
December 13, 1991.
10.8 Split Dollar Life Insurance Agreements, dated Incorporated by reference from Exhibit 10.8 to the
December 16, 1991 between the Company and Company's 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, 1992, of the Incorporated by reference from Exhibit 10.8.1 to
rights and obligations under the Holleran the Company's Registration Statement
Split Dollar Life Insurance Agreements from
the Company to Arrow Precision Products, Inc.
10.9 License Agreement, dated March 28, 1991, Incorporated by reference from Exhibit 10.11 to the
between Daltex Medical Sciences, Inc. and the Company's Registration Statement
Company.
10.9.1 Modification Agreement, dated October 25, Incorporated by reference Exhibit 10.11.1. to the
1995, to License Agreement between Daltex Company's Quarterly Report on Form 10-Q for the
Medical Sciences, Inc. and the Company third quarter period ended May 31, 1997 (the "May
31, 1997 Form 10-Q")
10.9.2 Second Modification Agreement, dated May 30, Incorporated by reference from Exhibit 10.11.2 to
1997, to License Agreement between Daltex the May 31, 1997 Form 10-Q
Medical Sciences, Inc. and the Company.
(85)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING
- ---------------- ----------------------------------------------- -----------------------------------------------------
10.10 Agreement and Compromise and Release, dated Incorporated by reference from Exhibit 10.12 to the
November 30, 1988, between Michael A. Berman, Company's Registration Statement
Critikon, Inc. and the Company.
10.11 License Agreement, dated September 16, 1988, Incorporated by reference from Exhibit 10.14 to the
between J. Daniel Raulerson and the Company, Company's Registration Statement
as amended pursuant to Addendum to License
Agreement, dated November 27, 1989, between
J. Daniel Raulerson and the Company.
10.12 Stock Purchase Agreement, dated October 24, Incorporated by reference from Exhibit 10.16 to the
1990, among Robert E. Fischell, Standard Company's Registration Statement
Associates, Cymed Ventures, Inc., Arrow
International Investment Corp. and the
Company.
10.13 Settlement Agreement, dated September 30, Incorporated by reference from Exhibit 10.20 to the
1991, among Dr. Randolph M. Howes, Janice 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.
10.14 Agreement dated August 4, 2003 between the Filed herewith
Company and United Steelworkers of America
AFL/CIO Local 8467.
10.15 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit 10.23.2 to
Hourly-Rated Employees of the Wyomissing the 1993 Form 10-K
Plant of the Company, effective September
1,1989, as amended.
10.16 Amended and Restated Retirement Plan for Incorporated by reference from Exhibit 10.24.2 to
Hourly-Rated Employees of the North Carolina the 1993 Form 10-K
and New Jersey Plants of the Company,
effective September 1, 1989, as amended.
(86)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING
- ---------------- ----------------------------------------------- -----------------------------------------------------
10.17.1 Installment Sale Agreement between Berks Incorporated by reference from Exhibit 10.25.10 to
County Industrial Development Authority and the Company's Registration Statement
the Company, dated as of December 1, 1988.
10.17.2 Indenture of Trust between Berks County Incorporated by reference from Exhibit 10.25.11 to
Industrial Development Authority and Bankers the Company's Registration Statement
Trust Company, as trustee, dated as of
December 1, 1988.
10.17.3 Irrevocable Direct Pay Letter of Credit, Incorporated by reference from Exhibit 10.25.12 to
dated December 28, 1988, issued for the the Company's Registration Statement
benefit of Bankers Trust Company, as trustee
under the Indenture of Trust, for the account
of the Company.
10.17.4 Letter of Credit Reimbursement Agreement Incorporated by reference from Exhibit 10.25.14 to
between the Company and Hamilton Bank, dated the Company's Registration Statement
as of December 1, 1988.
10.17.5 Accommodation Mortgage, Security Agreement Incorporated by reference from Exhibit 10.25.15 to
and Second Assignment of Installment Sale the Company's Registration Statement
Agreement, dated as of December 15, 1988, by
and among Berks County Industrial Development
Authority, the Company and Hamilton Bank.
10.18 Agreement, dated September 22, 1993, among Incorporated by reference from Exhibit 10.32 to the
Microwave Medical Systems, Inc., the Company 1993 Form 10-K
and Kenneth L. Carr.
10.19 Stock Purchase Agreement, dated as of January Incorporated by reference from Exhibit 2 to the
28, 1994 between Kontron Instruments Holding Company's Current Report on Form 8-K filed with the
N.V. and the Company. Securities and Exchange Commission on February 18,
1994
10.20 Loan Agreement between Arrow Japan KK and the Incorporated by reference from Exhibit 10.37 to the
Bank of Tokyo (with English translation). Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 10,
1995 ("the 1995 Form 8-K")
(87)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING
- ---------------- ----------------------------------------------- -----------------------------------------------------
10.21 Thoratec Laboratories Corporation Incorporated by reference from Exhibit 10.38 to the
International Medical Products Distributor 1995 Form 8-K
Agreement, dated as of January 19, 1995,
between Thoratec Laboratories Corporation and
the Company.
10.22 Purchase Agreement, dated as of April 7, Incorporated by reference from Exhibit 10.39 to the
1995, among the Company, TLP Acquisition 1995 Form 8-K
Corp., Therex Corporation, Therex Limited
Partnership Holding Corporation and each of
the other persons signatory thereto.
10.23 Amendment, dated July 27, 1995, to License Incorporated by reference from Exhibit 10.43 to the
Agreement, dated October 24, 1990, between 1995 Form 10-K
Medical Innovative Technologies R&D Limited
Partnership and the Company.
10.24 Amendment, dated July 27, 1995, to Research Incorporated by reference from Exhibit 10.44 to the
and Development Agreement, dated October 24, 1995 Form 10-K
1990, between Medical Innovative Technologies
R&D Limited Partnership and the Company.
10.25 Directors Stock Incentive Plan Incorporated by reference from Exhibit 10.47 to the
1996 Form 10-K
10.26 Purchase Agreement, dated June 1, 1996, Incorporated by reference from Exhibit 10.48 to the
between Arrow Tray Products, Inc. (formerly 1996 Form 10-K
known as Endovations, Inc.) and the Company.
10.27 Purchase Agreement, dated August 3, 1998, Incorporated by reference from Exhibit 10.49 to the
between Medical Parameters, Inc. and the Company's Annual Report on Form 10-K for the fiscal
Company. year ended August 31, 1999 (the "1999 Form 10-K")
10.28 Asset Purchase Agreement, dated November 5, Incorporated by reference from Exhibit 10.52 to the
1997, between Arrow Interventional, Inc., 1999 Form 10-K
Boston Scientific Corporation and IABP
Corporation.
(88)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING
- ---------------- ----------------------------------------------- -----------------------------------------------------
10.29 Mutual Release Agreement, dated July 20, Incorporated by reference from Exhibit 10.53 to the
1998, between Arrow International, Inc. and 1999 Form 10-K
Daltex Medical Sciences, Inc.
10.30 Exclusive License Agreement, dated February Incorporated by reference from Exhibit 10.54 to the
14, 1996 between Arrow International, Inc. 1999 Form 10-K
and Israel Schur, M.D.
10.31 Directors Stock Incentive Plan (as amended on Incorporated by reference from Exhibit 10.55 to the
January 19, 2000) 2000 Form 10-K
10.32 1999 Stock Incentive Plan Incorporated by reference from Exhibit 10.56 to the
2000 Form 10-K
10.33 Loan Agreement, dated April 12, 2001, among Incorporated by reference from Exhibit 10.57 to the
First Union National Bank, First Union May 31, 2001 Form 10-Q
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.
10.33.1 Second Amendment to Loan Agreement dated June Filed herewith
30, 2003, among Wachovia Bank, National
Association (f/k/a First Union National
Bank),Wachovia Bank, National Association,
London Branch (f/k/a 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., Arrow
International CR, A.S. and Arrow Italy S.R.L.
10.34 Arrow International, Inc. Defined Benefit Incorporated by reference from Exhibit 10.58 to the
Supplemental Executive Retirement Plan. May 31, 2001 Form 10-Q
(89)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING
- ---------------- ----------------------------------------------- -----------------------------------------------------
10.34.1 Amendment No. 1 to the Arrow International, Filed herewith
Inc. Defined Benefit Supplemental Executive
Retirement Plan
18 Preferability Letter of Incorporated by reference from Exhibit 18 to the
PricewaterhouseCoopers LLP. 1994 Form 10-K
21 Subsidiaries of the Company. Filed herewith
23 Consent of PricewaterhouseCoopers LLP. Filed herewith
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Furnished herewith
Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Furnished herewith
Chief Financial Officer.
32.1 Section 1350 Certification of the Chief Furnished herewith
Executive Officer.
32.2 Section 1350 Certification of the Chief Furnished herewith
Financial Officer.
(90)
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
1. Arrow International Export Corporation, a U.S. Virgin Islands corporation.
2. Arrow International Investment Corp., a Delaware corporation.
3. Arrow Medical Products, Ltd., a Pennsylvania corporation, qualified to do
business in Canada.
4. Kontron Instruments, Inc., a California corporation.
5. Arrow-Japan K.K. (Arrow-Japan, Ltd., English translation), a company
organized under the laws of Japan.
6. Arrow Deutschland Gmbh, a limited liability corporation organized under the
laws of Germany.
7. Arrow France S.A., a corporation organized under the laws of France.
8. Arrow Africa (Pty) Ltd., a corporation organized under the laws of South
Africa.
9. AMH (Arrow Medical Holdings) B.V., a corporation organized under the laws
of the Netherlands.
10. Arrow Holland Medical Products B.V., a corporation organized under the laws
of the Netherlands.
11. Arrow Iberia, S.A., a corporation organized under the laws of Spain.
12. Arrow Hellas Commercial A.E., a corporation organized under the laws of
Greece.
13. Arrow Internacional de Mexico S.A. de C.V., a corporation organized under
the laws of Mexico.
14. Arrow Internacional de Chihuahua, S.A. de C.V., a corporation organized
under the laws of Mexico.
15. Arrow International CR, A.S., a corporation organized under the laws of the
Czech Republic.
16. Therex Limited Partnership, a Delaware limited partnership.
17. Arrow Infusion, Inc., a Massachusetts corporation.
18. Arrow-Therex Corporation, a Delaware corporation.
19. Arrow Interventional, Inc., a Delaware corporation.
20. Arrow Slovensko s.r.o., a corporation organized under the laws of Slovakia
21. Medical Parameters, Inc., a Massachusetts corporation
22. Sometec, S.A.S.
23. Sometec, Inc.
24. Sometec Holdings, S.A.S.
25. Arrow Med Tech LLC
26. Arrow Italy S.r.l
27. The Stepic Medical Distribution Corporation
(91)
EXHIBIT 23
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CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-52622, 333-15215 and 33-71568) of Arrow
International, Inc. of our report dated October 3, 2003 relating to the
financial statements and financial statement schedule, which appears in this
Form 10-K for the year ended August 31, 2003. We also consent to the references
to us under the heading "Selected Financial Data" in such Registration
Statements.
PricewaterhouseCoopers LLP
PHILADELPHIA, PENNSYLVANIA
November 21, 2003
(92)
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Carl G. Anderson, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Arrow
International, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 26, 2003 /s/ Carl G. Anderson, Jr.
--------------------------------
Carl G. Anderson, Jr.
Chairman and
Chief Executive Officer
(93)
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Frederick J. Hirt, certify that:
1. I have reviewed this annual report on Form 10-K of Arrow
International, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 26, 2003 /s/ Frederick J. Hirt
-----------------------------
Frederick J. Hirt
Chief Financial Officer and
Vice President of Finance
(94)
EXHIBIT 32.1
SECTION 1350 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
In connection with the Annual Report on Form 10-K for the fiscal year ended
August 31, 2003 of Arrow International, Inc., a Pennsylvania corporation (the
"Company"), as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Carl G. Anderson, Jr., the Chairman and Chief
Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, to my
knowledge and upon a review of the Report, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company as of the dates and for periods presented as required
by such Report.
In rendering this certification, I note that I did not serve as Chief Executive
Officer of the Company during the period covered by the Report, having become
the Chief Executive Officer on September 1, 2003. This certification is
qualified by the foregoing and is based upon, among other things, my
responsibilities as Chief Executive Officer of the Company, my own due diligence
and representations made by certain other members of the Company's senior
management.
Date: November 26, 2003 /s/ Carl G. Anderson, Jr.
-------------------------
Carl G. Anderson, Jr.
Chairman and
Chief Executive Officer
(Principal Executive Officer)
(95)
EXHIBIT 32.2
SECTION 1350 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
In connection with the Annual Report on Form 10-K for the fiscal year ended
August 31, 2003 of Arrow International, Inc., a Pennsylvania corporation (the
"Company"), as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Frederick J. Hirt, the Vice President of Finance and
Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003,
to my knowledge and upon a review of the Report, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company as of the dates and for periods presented as required
by such Report.
This certification is based upon, among other things, my responsibilities as
Chief Financial Officer of the Company, my own due diligence and representations
made by certain other members of the Company's senior management.
Date: November 26, 2003 /s/ Frederick J. Hirt
--------------------------------
Frederick J. Hirt
Chief Financial Officer and
Vice President of Finance
(Principal Financial Officer)
(96)