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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended November 30, 2003
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 0-20212
Arrow International, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-1969991
- ------------------------------- ------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2400 Bernville Road, Reading, Pennsylvania 19605
- ------------------------------------------ -------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (610) 378-0131
--------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at January 8, 2004
--------- -------------------------------------
Common Stock, No Par Value 43,485,916
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at November 30, 2003
and August 31, 2003 3-4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6-7
Consolidated Statements of Comprehensive Income 8
Notes to Consolidated Financial Statements 9-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24-25
Item 4. Controls and Procedures 25-26
PART II. OTHER INFORMATION
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26-27
Signature 28
Exhibit Index 29
Certifications 30-33
(2)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
November 30, August 31,
2003 2003
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 62,948 $ 46,975
Accounts receivable, net 87,218 82,467
Inventories 91,653 90,449
Prepaid expenses and other 18,472 14,978
Deferred income taxes 6,533 7,011
------------------------ -----------------------
Total current assets 266,824 241,880
------------------------ -----------------------
Property, plant and equipment 284,224 276,294
Less accumulated depreciation (153,073) (147,861)
------------------------ -----------------------
131,151 128,433
------------------------ -----------------------
Goodwill 42,652 42,732
Intangible and other assets, net 47,690 48,836
Prepaid pension costs 31,429 32,016
------------------------ -----------------------
Total other assets 121,771 123,584
------------------------ -----------------------
Total assets $ 519,746 $ 493,897
======================== =======================
See accompanying notes to consolidated financial statements
Continued
(3)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
November 30, August 31,
2003 2003
-------------------------- -------------------
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 1,537 $ 300
Notes payable 28,479 28,431
Accounts payable 15,605 11,727
Cash overdrafts 1,130 1,506
Accrued liabilities 22,935 21,600
Accrued compensation 9,089 10,684
Accrued income taxes 8,547 3,718
-------------------------- -----------------------
Total current liabilities 87,322 77,966
-------------------------- -----------------------
Long-term debt 2,000 3,735
Accrued postretirement benefit obligations 13,980 13,409
Deferred income taxes 8,183 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;
52,957,626 shares issued 45,661 45,661
Additional paid-in capital 7,142 5,840
Retained earnings 413,953 403,004
Less treasury stock at cost:
9,528,103 and 9,672,124 shares,
respectively (62,527) (63,472)
Accumulated other comprehensive
income (expense) 4,032 (387)
-------------------------- -----------------------
Total shareholders' equity 408,261 390,646
-------------------------- -----------------------
Total liabilities and shareholders' equity $ 519,746 $ 493,897
========================== =======================
See accompanying notes to consolidated financial statements
(4)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share amounts)
(Unaudited)
For the three months ended
--------------------------------------------------
November 30, November 30,
2003 2002
------------------------ ----------------------
Net sales $ 103,101 $ 88,839
Cost of goods sold 48,903 45,395
------------------------ ----------------------
Gross profit 54,198 43,444
------------------------ ----------------------
Operating expenses:
Research, development and engineering 6,844 6,072
Selling, general and administrative 25,738 20,186
------------------------ ----------------------
Operating income 21,616 17,186
------------------------ ----------------------
Other expenses (income):
Interest expense, net of amount capitalized 199 87
Interest income (90) (140)
Other, net 139 330
------------------------ ----------------------
Other expenses, net 248 277
------------------------ ----------------------
Income before income taxes 21,368 16,909
Provision for income taxes 6,944 5,495
------------------------ ----------------------
Net income $ 14,424 $ 11,414
======================== ======================
Basic earnings per common share $ 0.33 $ 0.26
======================== ======================
Diluted earnings per common share $ 0.33 $ 0.26
======================== ======================
Cash dividends per common share $ 0.080 $ 0.035
======================== ======================
Weighted average shares outstanding
used in computing basic earnings
per common share 43,343,619 43,722,406
======================== ======================
Weighted average shares outstanding
used in computing diluted earnings
per common share 43,982,988 43,879,188
======================== ======================
See accompanying notes to consolidated financial statements
(5)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the three months ended
---------------------------------------
November 30, November 30,
2003 2002
----------------- -----------------
Cash flows from operating activities:
Net income $ 14,424 $ 11,414
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 4,423 4,824
Amortization 1,253 937
401(K) plan stock contribution 217 180
Deferred income taxes 517 (431)
Unrealized holding gain on foreign currency options - 101
Increase in provision for postretirement benefit obligation 568 772
Decrease in prepaid pension costs 587 741
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net (2,014) (696)
Inventories (51) (133)
Prepaid expenses and other (3,370) (2,344)
Accounts payable and accrued liabilities 4,670 (4,356)
Accrued compensation (1,812) 674
Accrued income taxes 4,673 4,564
----------------- -----------------
Total adjustments 9,661 4,833
----------------- -----------------
Net cash provided by operating activities 24,085 16,247
----------------- -----------------
Cash flows from investing activities:
Capital expenditures (4,363) (3,657)
Decrease (increase) in intangible and other assets 43 (303)
Cash paid for businesses acquired - (20,784)
----------------- -----------------
Net cash used in investing activities (4,320) (24,744)
----------------- -----------------
Cash flows from financing activities:
(Decrease) in notes payable (2,452) (357)
Reduction of long-term debt (498) -
(Decrease) increase in book overdrafts (376) 209
Dividends paid (3,462) (1,538)
Proceeds from stock options exercised 2,030 136
Purchase of treasury stock - (6,459)
----------------- -----------------
Net cash used in financing activities (4,758) (8,009)
----------------- -----------------
Effects of exchange rate changes on cash
and cash equivalents 966 50
Net change in cash and cash equivalents 15,973 (16,456)
Cash and cash equivalents at beginning of year 46,975 33,103
----------------- -----------------
Cash and cash equivalents at end of period $ 62,948 $ 16,647
================= =================
See accompanying notes to consolidated financial statements
Continued
(6)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
(Unaudited)
For the three months ended
------------------------------------------------
November 30, November 30,
2003 2002
--------------------- ----------------------
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 $ - $ 31,612
Liabilities assumed - 10,828
--------------------- ----------------------
Cash paid for assets $ - $ 20,784
===================== ======================
Cash paid for businesses acquired:
Working capital $ - $ 9,526
Property, plant and equipment - 294
Goodwill and intangible assets - 13,664
Notes payable and current maturities
of long-term debt - (700)
Long-term debt - (2,000)
--------------------- ----------------------
$ - $ 20,784
===================== ======================
Treasury Stock issued for 401(k) plan contribution $ 217 $ 180
===================== ======================
Dividends declared but not paid $ 3,474 $ 1,525
===================== ======================
See accompanying notes to consolidated financial statements
(7)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
For the three months ended
----------------------------------------
November 30, November 30,
2003 2002
----------------- -------------------
Net income $ 14,424 $ 11,414
Other comprehensive income (expense):
Foreign currency translation adjustments 4,419 (43)
Unrealized holding gain on foreign currency option
contracts - 101
----------------- -------------------
Other comprehensive income (expense) 4,419 58
----------------- -------------------
Total comprehensive income $ 18,843 $ 11,472
================= ===================
See accompanying notes to consolidated financial statements
(8)
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Presentation:
These unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring accruals, which management considers
necessary for a fair presentation of the consolidated financial position,
results of operations, and cash flows of Arrow International, Inc. (the
"Company") for the interim periods presented. Results for the interim periods
are not necessarily indicative of results for the entire year. Such statements
are presented in accordance with the requirements of Form 10-Q and do not
include all disclosures normally required by generally accepted accounting
principles or those normally made on Form 10-K. These statements should be read
in conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report to Stockholders for the fiscal year
ended August 31, 2003.
Note 2 - Inventories:
Inventories are summarized as follows:
November 30, 2003 August 31, 2003
---------------------- ---------------------
Finished goods $ 28,718 $ 31,204
Semi-finished goods 23,533 22,223
Work-in-process 8,765 8,933
Raw materials 30,637 28,089
---------------------- ---------------------
$ 91,653 $ 90,449
====================== =====================
Note 3 - Commitments and 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 been a defendant in two related lawsuits alleging that certain
of its hemodialysis catheter products infringed 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 agreed to a settlement in principle with the
plaintiffs for the reserved amount. In December 2003, the terms of this
settlement were finalized and the Company paid the $8,000 settlement amount in
January 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
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.
(9)
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 3 - Commitments and Contingencies (continued):
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.
Note 4 - Accounting Policies:
As a result of the Company's adoption in fiscal 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 of 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 No. 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.
Had compensation expense for stock options granted in fiscal 2004 and 2003 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 November 30, 2003 and 2002 would have been
reduced to the pro forma amounts indicated in the table below:
For the three months ended
--------------------------------------------
November 30, 2003 November 30, 2002
------------------- -------------------
Net income applicable to common shareholders
As reported $ 14,424 $ 11,414
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects (653) (320)
Pro forma $ 13,771 $ 11,094
Basic earnings per common share
As reported $ 0.33 $ 0.26
Pro forma $ 0.32 $ 0.25
Diluted earnings per common share
As reported $ 0.33 $ 0.26
Pro forma $ 0.31 $ 0.25
Continued
(10)
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 4 - Accounting Policies (continued)
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 either four or five
years. The information provided in the table above includes the impact of both
vested and nonvested options.
The Company has disclosed in Note 1 to its consolidated financial statements
included in its Annual Report on Form 10-K for the fiscal year ended August 31,
2003 those accounting policies that it considers to be significant in
determining its results of operations and financial position. There have been no
material changes to the critical accounting policies previously identified and
described in the Company's 2003 Form 10-K. The accounting principles utilized by
the Company in preparing its consolidated financial statements conform in all
material respects to generally accepted accounting principles in the United
States of America.
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.
Certain prior period information has been reclassified for comparative purposes.
Note 5 - Segment Reporting:
The Company operates as a single reportable segment. The Company operates in
four main geographic regions, therefore, information by product category and
geographic areas is presented below.
The following table provides quarterly information about the Company's sales by
product category:
Quarter ended Quarter ended
November 30, 2003 November 30, 2002
------------------------------------ --------------------------------------
Critical Cardiac Critical Cardiac
Care Care Care Care
---------------- ----------------- ----------------- -----------------
Sales to external
customers $ 89,000 $ 14,100 $ 76,200 $ 12,600
Continued
(11)
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 5 - Segment Reporting (continued):
The following tables present quarterly information about geographic areas:
Quarter ended November 30, 2003
---------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Consolidated
------------- ------------- -------------- ------------ --------------------
Sales to unaffiliated
customers $ 67,200 $ 15,600 $ 15,000 $ 5,300 $ 103,100
Quarter ended November 30, 2002
---------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Consolidated
------------- ------------- -------------- ------------ --------------------
Sales to unaffiliated
customers $ 59,500 $ 12,900 $ 12,400 $ 4,000 $ 88,800
Note 6 - New Accounting Standards:
Financial Accounting Standard (FAS) No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" was revised in December 2003. This
Statement revises employers' disclosures about pension plans and other
postretirement benefits plans. It does not change the measurement or recognition
of those plans required by FAS No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". It requires additional
disclosures to those in the original Statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans.
The provisions of the original Statement 132 remain in effect until the
provisions of the revised Statement are adopted. This Statement is effective for
financial statements relating to fiscal years ending after December 15, 2003.
The interim-period disclosure requirements for this Statement are effective for
interim periods beginning after December 15, 2003, which the Company will adopt
in its second fiscal quarter ending February 29, 2004.
Note 7 - 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 November 30, 2003, pursuant to the asset purchase agreement, the Company
had paid in cash the entire $12,636 purchase price for this acquisition, of
which $12,229 had been paid as of November 30, 2002. 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
(12)
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 7 - 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. As of November 30, 2003, 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. As of November 30, 2003, pursuant to the asset purchase
agreement, the Company had paid $8,935 in cash, of which $8,555 had been paid as
of November 30, 2002, and recorded a liability classified as long-term debt of
up to an additional $2,000 for potential purchase price and related adjustments.
The products acquired in the transaction are expected to complement the
Company's existing hemodialysis product line. The 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 is required to make royalty payments to Diatek's former
owners based on the achievement of specified annual sales levels of certain
hemodialysis product lines. The Company anticipates that such payments may begin
later 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. As of
November 30, 2003, 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
=============
Continued
(13)
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 7 - Business Acquisitions (continued):
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 periods presented.
Note 8 - 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
Company's shareholders on January 19, 2000, and the 1999 Stock Incentive Plan
(the "1999 Plan"), which was approved by the Company's 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 three months ended November 30, 2003 and November 30, 2002,
respectively.
In the three months ended November 30, 2003 and November 30, 2002, the Company
granted 1,240,000 and 6,000 options, respectively, to key employees to purchase
shares of the Company's common stock pursuant to the 1999 Plan. The option price
per share ranged from $25.00 - $25.80 during the three months ended November 30,
2003 and was $17.78 in the same period of fiscal 2003. These amounts represent
the fair market value of the common stock of the Company on the respective dates
that the options were granted. The options expire ten years from the grant date.
The options vest ratably over either four or five years, at one year intervals
from the grant date and, once vested, are exercisable at any time.
In the first three months of each of fiscal 2004 and 2003, there were no options
granted by the Company to its directors to purchase shares of the Company's
common stock pursuant to the Directors Plan.
Continued
(14)
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 8 - Stock Option Plans (continued):
Stock option activity for the three month periods ended November 30, 2003 and
2002 is summarized in the tables below:
For the three months ended
-------------------------------------------------------------------------------
November 30, 2003 November 30, 2002
--------------------------------------- ------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------- ------------------- --------------- -----------------
Outstanding at September 1 2,318,260 $16.81 2,414,510 $16.75
Granted 1,240,000 $25.26 6,000 $17.78
Exercised (132,190) $15.39 (8,960) $15.14
Terminated (20,150) $17.77 (24,240) $17.37
---------------- ---------------
Outstanding at November 30 3,405,920 $19.94 2,387,310 $16.81
Exercisable at November 30 1,359,778 $16.25 1,209,830 $15.73
Stock options outstanding at November 30, 2003 are summarized in the table below:
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- -------------------------- --------------- -------------------- ------------- -------------- ---------------
$12.56 - $17.50 897,220 5.05 $14.20 767,618 $14.30
$17.51 - $21.47 1,268,700 7.09 $18.84 592,160 $18.76
$21.48 - $25.80 1,240,000 9.81 $25.26 - -
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
(15)
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 8 - Stock Option Plans (continued):
The per share weighted average value of stock options granted in the first three
months of fiscal 2004 and 2003 was $10.56 and $4.25, respectively. The fair
value was estimated as of the grant date using the Black-Scholes option pricing
model with the following average assumption:
November 30, 2003 November 30, 2002
--------------------- ---------------------
Risk-free interest rate 2.58% 2.96%
Dividend yield 1.33% 1.74%
Volatility factor 44.02% 23.81%
Expected lives 5 years 4 years
Had compensation expense for stock options granted in fiscal 2004 and 2003 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 November 30, 2003 and 2002 would have been
reduced to the pro forma amounts indicated in the table below:
For the three months ended
-----------------------------------------------
November 30, 2003 November 30, 2002
--------------------- ---------------------
Net income applicable to common shareholders
As reported $ 14,424 $ 11,414
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects (653) (320)
Pro forma $ 13,771 $ 11,094
Basic earnings per common share
As reported $ 0.33 $ 0.26
Pro forma $ 0.32 $ 0.25
Diluted earnings per common share
As reported $ 0.33 $ 0.26
Pro forma $ 0.31 $ 0.25
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 either four or five
years. The information provided in the table above includes the impact of both
vested and nonvested options.
(16)
ARROW INTERNATIONAL, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF FACTORS, INCLUDING
MATERIAL RISKS, UNCERTAINTIES AND CONTINGENCIES, WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, SEE ITEM 1. BUSINESS - CERTAIN
RISKS RELATING TO ARROW IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED AUGUST 31, 2003 AND THE COMPANY'S OTHER PERIODIC REPORTS AND
DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
Results of Operations
Three Months Ended November 30, 2003 Compared to Three Months Ended November 30,
2002
Net sales for the three months ended November 30, 2003 increased 16.1% to $103.1
million, compared to $88.8 million in the same period last year, due primarily
to an increase in critical care product sales and a favorable foreign exchange
impact during the first quarter of fiscal 2004 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 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
(in millions) Quarter ended
-------------
November 30, 2003 November 30, 2002
----------------- -----------------
Central Venous Catheters $53.6 $42.7
Specialty Catheters 32.3 30.4
Stepic distributed products 3.1 3.1
--- ---
Subtotal Critical Care 89.0 76.2
Cardiac Care 14.1 12.6
---- ----
TOTAL $103.1 $88.8
====== =====
Sales of critical care products increased 16.8% to $89.0 million in the first
quarter of fiscal 2004 from $76.2 million in the comparable prior year period
due primarily to increased sales of central venous and specialty catheters.
Sales of central venous catheters increased in the first quarter of fiscal 2004
due primarily to a continued increase in the number of hospitals that are
purchasing the Company's 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 in fiscal
2003. Sales of specialty catheters increased in the first quarter of fiscal 2004
due to improved sales of epidural products, arterial products and intravenous
and extension sets. Sales of cardiac care products increased by 11.9% to $14.1
million in the first quarter of fiscal 2004 from $12.6 million in the comparable
prior year period due primarily to increased sales of intra-aortic balloon pump
products. International sales increased by 22.5% to $35.9 million in the first
quarter of fiscal 2004 from $29.3 million in the comparable prior year period
principally as a result of increased sales of central venous and specialty
catheters and the effect of foreign currency as noted below. International sales
represented 34.8% of net sales in the first quarter of fiscal 2004 compared to
33.0% in the same prior year period. 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 the quarter increased by $3.2 million.
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ARROW INTERNATIONAL, INC.
Gross profit increased 24.9% to $54.2 million in the three months ended November
30, 2003 compared to $43.4 million in the same period of fiscal 2003. As a
percentage of net sales, gross profit increased to 52.6% during the three months
ended November 30, 2003 from 48.9% in the comparable prior year period. The
increase in gross margin was due primarily to (1) lower margins realized in the
first quarter of fiscal 2003 on the sale of inventories of products acquired as
part of the Company's purchase of the net assets of Stepic Medical, the
Company's former New York City distributor, in September 2002; (2) higher than
average margins realized on the sale of renal access products associated with
the Company's acquisition of Diatek on November 25, 2002; and (3) higher margins
on products distributed in Florida and certain southeastern states as a result
of the Company's acquisition of its former distributor, IMA, Inc., on July 1,
2003, which enabled the Company to conduct direct sales activity in this region.
Research, development and engineering expenses increased by 11.5% to $6.8
million in the three months ended November 30, 2003 from $6.1 million in the
comparable prior year period. As a percentage of net sales, these expenses
decreased in the first quarter of fiscal 2004 to 6.6% compared to 6.9% in the
same period in fiscal 2003. The increase in research, development and
engineering expenses was due primarily to increased research and development
spending on the Arrow LionHeart(TM), the Company's Left Ventricular Assist
System, offset in part by lower 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.
As previously reported, the Company received approval to CE mark the Arrow
LionHeart(TM) Left Ventricular Assist System (LVAS) on November 7, 2003,
enabling it to market the device within the European Economic Area for permanent
implantation or "destination therapy." The first order for start-up equipment
and training from a new implanting center was received in December 2003. The
Company is continuing its efforts to gain commitment from several additional
centers for implantation of the device in greater numbers of patients during the
remainder of fiscal 2004. In addition to expanding the base of implanting
centers beyond those who participated in the clinical trial, the near-term focus
of the LionHeart(TM) program will be on obtaining optimal clinical results and
on evaluation of several system enhancements. The Company believes that these
enhancements will increase the patient population for whom the device is
suitable and provide improved quality of life for recipients. The Company
expects that any revenue generated from initial sales of the Arrow LionHeart(TM)
will be offset by expanded marketing and clinical support costs and will not
contribute to earnings during fiscal 2004.
In addition, the Company is continuing its US clinical trial of the
LionHeart(TM) and the total number of US implants to date remains at ten. The
tenth patient enrolled in the US LionHeart(TM) trial continues to recover as
expected and was recently discharged from the hospital. This patient was
implanted as part of a US Phase I human clinical trial of the LionHeart(TM),
under an Investigational Device Exemption received from the US Food and Drug
Administration in February 2001, which the Company expects to complete in fiscal
2004. To date, the total number of U.S. sites approved to perform the remaining
four implants under the Phase I trial remains at eight and these institutions
are presently screening for appropriate patients.
The Company is continuing to evaluate modifications to the CorAide(TM)
continuous flow ventricular assist device to resolve the causes for the elevated
level of hemolysis (plasma-free hemoglobin) experienced in the first implant of
the device and continues to believe that significant design changes will not be
required. While there can be no assurance that the Company will resolve the
problem, the Company believes that clinical trials of the CorAide(TM) device
should resume later in fiscal 2004.
During the first quarter of fiscal 2004, the Company continued its limited sales
release of the AutoCAT(R)2 WAVE(TM) intra-aortic balloon pump and associated
LightWAVE(TM) catheter system. Full market release in the US and Europe of this
new technology is planned for the second quarter of fiscal 2004. The Company
also released the UltraFlex(TM) 7.5 Fr intra-aortic balloon catheter during the
first quarter of fiscal 2004. This
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ARROW INTERNATIONAL, INC.
catheter, the smallest intra-aortic balloon catheter on the market, incorporates
the Company's proprietary tubing reinforcement technology to prevent kinking.
Selling, general and administrative expenses increased by 27.2% to $25.7 million
during the three months ended November 30, 2003 from $20.2 million in the
comparable prior year period and, as a percentage of net sales, increased to
25.0% in the first quarter of fiscal 2004 from 22.7% in the comparable period of
fiscal 2003. This increase was due primarily to several factors, including the
following: (1) selling, general and administrative expenses of $1.8 million
incurred in connection with the Company's acquisitions of Diatek, the
NeoCare(R) product line and IMA, Inc., its former Florida distributor; (2)
increased legal costs of $0.8 associated with the Company's defense of patent
litigation relating to certain of its hemodialysis catheter products (see Item
1. Notes to Consolidated Financial Statements - Note 3); (3) increased selling,
general and administrative expenses of $0.5 million related to an increase in
the accrual for the Company's income growth bonus plan; and (4) an increase in
selling, general and administrative expenses of $0.3 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.
Principally due to the above factors, operating income increased in the first
quarter of fiscal 2004 by 25.6% to $21.6 million from $17.2 million in the
comparable prior year period.
Other expenses (income), net, was $0.2 million of expense in the first quarter
of fiscal 2004 as compared to $0.3 million of expense in the same prior year
period. Other expenses (income), net, consist principally of interest expense
and foreign exchange gains and losses associated with the Company's direct sales
subsidiaries.
As a result of the factors discussed above, income before income taxes increased
during the first quarter of fiscal 2004 by 26.6% to $21.4 million from $16.9
million in the comparable prior year period. For the first quarter of each of
fiscal 2004 and 2003, the Company's effective income tax rate was 32.5%.
Net income in the first quarter of fiscal 2004 increased by 26.3% to $14.4
million from $11.4 million in the comparable fiscal 2003 period. As a percentage
of net sales, net income represented 14.0% in the three months ended November
30, 2003 compared to 12.8% in the same period of fiscal 2003.
Basic and diluted earnings per common share were $0.33 in the three months ended
November 30, 2003, up 26.9%, or $0.07 per share, from $0.26 in the comparable
prior year period. Weighted average shares of common stock outstanding used in
computing basic earnings per common share decreased to 43,343,619 in first
quarter of fiscal 2004 from 43,722,406 in the comparable prior year period
primarily a result of the Company's share repurchase program, which, as
discussed below, remains in effect. Weighted average shares of common stock
outstanding used in computing diluted earnings per common share increased to
43,982,988 in first quarter of fiscal 2004 from 43,879,188 in the comparable
prior year period primarily as a result of an increase in potentially dilutive
shares resulting from an increased share price offset in part by the impact of
the Company's share repurchase program.
Liquidity and Capital Resources
Arrow's primary source of funds continues to be cash generated from operations,
as shown in the Company's consolidated statements of cash flows included in Item
1 of this report. For the three months ended November 30, 2003, net cash
provided by operations was $24.1 million, an increase of $7.9 million, or 48.8%,
from the comparable prior year period, due primarily to an increase in accounts
payable and accrued liabilities offset in part by a decrease in accrued
compensation. Accounts receivable, measured in days sales outstanding during the
period, decreased to 77 days at November 30, 2003 from 79 days at August 31,
2003, due primarily to increased collection efforts by the Company.
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ARROW INTERNATIONAL, INC.
Accounts payable increased $3.9 million in the three months ended November 30,
2003 compared to a $0.1 million decrease in the same period of fiscal 2003 due
primarily to the transition to a new accounts payable system and the timing of
the Company's payments to its vendors. Accrued liabilities increased $1.3
million in the three months ended November 30, 2003 compared to a $1.1 million
decrease in the same period of fiscal 2003 due primarily to higher payments in
the first quarter of fiscal 2003 for accrued product liability and workers
compensation insurance costs.
Accrued compensation decreased $1.6 million in the first quarter of fiscal 2004
compared to a $0.7 million increase in the comparable period of fiscal 2003 due
primarily to an increase in the annual payments of certain accrued bonuses to
senior management in fiscal 2004 as well as an increase in the payments of
accrued sales commissions.
The Company paid $8.0 million in January 2004 in settlement of two related
patent infringement lawsuits pertaining to certain of its hemodialysis catheter
products. This amount was previously reserved in the fourth quarter of fiscal
2003. In December 2003, the Company received a previously recorded income tax
refund of $6.9 million related to the settlement of an Internal Revenue Service
audit pertaining primarily to depreciation and tax credits related to research
and development costs.
Net cash used in the Company's investing activities decreased to $4.3 million in
the three months ended November 30, 2003 from $24.7 million in the comparable
period of fiscal 2003, due primarily to the Company's business acquisitions
completed in the first quarter of fiscal 2003, as further discussed below.
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 November 30, 2003, pursuant to the
asset purchase agreement, the Company had paid in cash the entire $12.6 million
purchase price for this acquisition, of which $12.2 million had been paid as of
November 30, 2002. 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. As of November 30, 2003, 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. As of November 30, 2003, pursuant to the asset
purchase agreement, the Company had paid $8.9 million in cash, of which $8.6
million had been paid as of November 30, 2002, and recorded a liability
classified as long-term debt of up to an additional $2.0 million for potential
purchase price and related 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
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ARROW INTERNATIONAL, INC.
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 fair
market value of the intangible assets acquired. Pursuant to the asset purchase
agreement relating to this transaction, the Company is required to make royalty
payments to Diatek's former owners based on the achievement of specified annual
sales levels of certain hemodialysis product lines. The Company anticipates that
such payments may begin later in fiscal 2004 based on fiscal 2003 sales levels
and are being expensed as occured. The results of operations of this business
are included in the Company's consolidated financial statements from the date of
acquisition. As of November 30, 2003, 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
==========
Financing activities used $4.8 million of net cash in the three months ended
November 30, 2003, compared to $8.0 million in the same prior year period,
primarily as a result of a decrease 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, offset in part by an increase in dividend payments as a
result of the Company's doubling of its quarterly dividend in connection with
its stock split effected in the fourth quarter of fiscal 2003 as well as an
increase in the Company's repayment of borrowings under its revolving credit
facility. 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. As of
November 30, 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. No shares were repurchased by the Company under the program in the
three months ended November 30, 2003.
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 November 30, 2003, the Company had a revolving
credit facility providing a total of $65.0 million in available revolving credit
for general business purposes, of which $20.2 million was outstanding, 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 $75.0 million. At November 30, 2003,
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 foreign subsidiaries of the Company had revolving credit
facilities totaling the U.S. dollar equivalent of $19.2 million, of which $8.3
million was outstanding as of November 30, 2003. 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.
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. Combined
borrowings under these facilities
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ARROW INTERNATIONAL, INC.
increased $0.1 million and $0.6 million during the three months ended November
30, 2003 and November 30, 2002, respectively.
A summary of all of the Company's contractual obligations and commercial
commitments as of November 30, 2003 were as follows:
PAYMENTS DUE OR COMMITMENT
EXPIRATION BY PERIOD
------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS AND MORE
COMMERCIAL COMMITMENTS LESS THAN 1 - 3 3 - 5 THAN 5
(IN MILLIONS) TOTAL 1 YEAR YEARS YEARS YEARS
- -------------------------------------------------- ----------- ------------- ---------- ----------- -----------
Long-term debt $ 3.7 $ 1.7 $2.0 $ - $ -
Operating leases 12.1 5.7 4.4 0.9 1.1
Purchase obligations(1) 23.5 23.5 - - -
Other long-term obligations 0.4 - 0.1 0.1 0.2
Lines of credit(2) 28.5 28.5 - - -
Standby letters of credit 1.7 1.7 - - -
----------- ------------- ---------- ----------- -----------
Total cash contractual obligations and
commercial commitments $ 69.9 $ 61.1 $6.5 $1.0 $1.3
=========== ============= ========== =========== ===========
(1) Includes open purchase orders primarily relating to purchases of raw
materials and equipment, and certain services, including consulting and
information systems.
(2) Includes short-term indebtedness of the Company and its subsidiaries under
various revolving credit facilities, as discussed above in this Item 2.
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, to the
extent the Company determines to do so, 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 and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations included in its Annual Report on Form 10-K for the fiscal year ended
August 31, 2003 those accounting policies that it considers to be significant in
determining its results of operations and financial position. There have been no
material changes to the critical accounting policies previously identified and
described in the Company's 2003 Form 10-K. The accounting principles utilized by
the Company in preparing its consolidated financial statements conform in all
material respects to generally accepted accounting principles in the United
States of America.
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
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ARROW INTERNATIONAL, INC.
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.
New Accounting Standards
Financial Accounting Standard (FAS) No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" was revised in December 2003. This
Statement revises employers' disclosures about pension plans and other
postretirement benefits plans. It does not change the measurement or recognition
of those plans required by FAS No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and No 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". It requires additional
disclosures to those in the original Statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans.
The provisions of the original Statement 132 remain in effect until the
provisions of the revised Statement are adopted. This Statement is effective for
financial statements relating to fiscal years ending after December 15, 2003.
The interim-period disclosure requirements for this Statement are effective for
interim periods beginning after December 15, 2003, which the Company will adopt
in its second fiscal quarter ending February 29, 2004.
Cautionary Statement Under The Private Securities Litigation Reform Act of 1995
Certain statements contained in this report or in other written or oral
statements made from time to time by the Company may contain forward-looking
statements as defined in the Private Securities Litigation Act of 1995. Such
statements may use words such as "anticipate," "estimate," "expect," "believe,"
"may," "intend" and similar words or terms. Although the Company believes that
the expectations in such forward-looking statements are reasonable, the Company
can give no assurance that such expectations will prove to have been correct.
The forward-looking statements are based upon a number of assumptions and
estimates that, while presented with specificity and considered reasonable by
the Company, are inherently subject to significant business, economic and
competitive risks, uncertainties and contingencies which are beyond the control
of the Company, and upon assumptions with respect to future business decisions
which are subject to change. Accordingly, the forward-looking statements are
only an estimate, and actual results will vary from the forward-looking
statements, and these variations may be material. The Company is not obligated
to update any forward-looking statement, but investors are urged to consult any
further disclosures the Company makes in the Company's filings with the
Securities and Exchange Commission. Consequently, the inclusion of the
forward-looking statements should not be regarded as a representation by the
Company of results that actually will be achieved. Forward-looking statements
are necessarily speculative in nature, and it is usually the case that one or
more of the assumptions in the forward-looking statements do not materialize.
Investors are cautioned not to place undue reliance on the forward-looking
statements. The Company cautions investors that the factors set forth below,
which are described in further detail in Item 1. Business - Certain Risks
Relating to Arrow in the Company's Annual Report on Form 10-K for the fiscal
year ended August 31, 2003 and in its other filings with the Securities and
Exchange Commission, could cause the Company's results to differ materially from
those stated in the forward-looking statements. These factors include: (1)
stringent regulation of the Company's products by the U.S. Food and Drug
Administration and, in some jurisdictions, by state, local and foreign
governmental authorities; (2) the highly competitive market for medical devices
and the rapid pace of product development and technological change in this
market; (3) pressures imposed by the health care industry to reduce the cost or
usage of medical products and services; (4) dependence on patents and
proprietary rights to protect the Company's trade secrets and technology; (5)
risks associated with the Company's international operations; (6) potential
product liability risks inherent in the design, manufacture and
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ARROW INTERNATIONAL, INC.
marketing of medical devices; (7) risks associated with the Company's use of
derivative financial instruments; and (8) dependence on the continued service of
key members of the Company's management.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Financial Instruments:
During the three month periods ended November 30, 2003 and 2002, the percentage
of the Company's sales invoiced in currencies other than U.S. dollars was 23.3%
and 23.2%, respectively. In addition, 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 transaction 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. 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. As of November 30, 2003, outstanding foreign currency forward
contracts totaling the U.S. dollar equivalent of $11.5 million mature at various
dates through February 2004. As of November 30, 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 risk associated with
this concentration is limited due to the Company's on-going credit review
procedures.
At November 30, 2003, the Company had foreign currency forward contracts to sell
foreign currencies which mature at various dates through February 2004. The
following table identifies foreign currency forward contracts to sell foreign
currencies at November 30, 2003 and August 31, 2003:
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ARROW INTERNATIONAL, INC.
November 30, 2003 August 31, 2003
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
-------------- ------------------ --------------- -----------------
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 1,373 $ 1,369 $ - $ -
Canadian dollars 303 308 424 432
Euro 5,854 5,969 4,345 4,393
Mexican peso 613 609 627 626
African rand 425 466 396 404
-------------- ------------------ --------------- -----------------
$ 8,568 $ 8,721 $ 5,792 $ 5,855
============== ================== =============== =================
At November 30, 2003, the Company also had foreign currency forward contracts to
buy foreign currencies which mature at various dates through February 2004. The
following table identifies forward exchange contracts to buy foreign currencies
at November 30, 2003 and August 31, 2003:
November 30, 2003 August 31, 2003
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
-------------- ------------------ --------------- -----------------
Foreign currency: (U.S. Dollar Equivalents)
Czech koruna $ 2,968 $ 2,997 $ 672 $ 677
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 $1.0 million 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 the
three months ended November 30, 2003 and 2002, the Company did not recognize any
time value losses against net sales but did recognize an intrinsic value gains
of $0 and $106, respectively. At November 30, 2003, the Company did not have any
unrealized holding losses related to these foreign currency option contracts.
The Company had no foreign currency option contracts outstanding at November 30,
2003 and August 31, 2003.
Item 4. 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 November 30, 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 Securities and
Exchange Commission's rules and forms. The
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ARROW INTERNATIONAL, INC.
Company has recently reviewed and taken action to clarify and expand its
policies and procedures relating to expenditures for property, plant and
equipment in excess of threshold amounts to require approval by appropriate
members of financial management. Other than the foregoing, 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 November 30, 2003 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II OTHER INFORMATION
Item 5. Other Information
Qualified Trading Plans
Two of the Company's directors and founders, Marlin Miller, Jr. and John H.
Broadbent, Jr., have informed the Company that, in order to diversify their
investment portfolios while avoiding conflicts of interest or the appearance of
any such conflict that might arise from their ongoing service to the Company, in
the first quarter of fiscal 2004 they established written plans in accordance
with SEC Rule 10b5-1 for gradually liquidating a portion of their personal
holdings of the Company's common stock. Both of these plans provide for weekly
stock sales and do not prohibit Mr. Miller or Mr. Broadbent from executing
additional transactions with respect to the Company's common stock.
Reimbursement of Life Insurance Premium Payments
As previously disclosed, in November 2003, the Company became aware that,
because of its inadvertent payment in July 2003 of premiums in the amounts of
$78,975 and $34,150 in respect of split-dollar life insurance policies owned by
certain trusts established by Mr. Miller and Mr. Broadbent, respectively, it may
not have been in compliance with the provisions of Section 13(k) of the
Securities Exchange Act of 1934. Mr. Miller and Mr. Broadbent are the former
Chairman and Chief Executive Officer and the former Vice President-Finance and
Treasurer, respectively, of the Company, and each is a director of the Company.
Neither of Mr. Miller nor Mr. Broadbent had an employment agreement or other
written arrangement with the Company that provided for the ongoing payment of
these premiums, although the terms of these split-dollar life insurance policies
had been in place for many years prior to the July 30, 2002 effective date of
Section 13(k). The Company received a refund of substantially all of these
premium payments from the owner trusts in December 2003 and expects to receive
the balance shortly. While it is not clear whether the Company's premium
payments in respect of these policies were in fact subject to the anti-loan
provisions of Section 13(k) of the Securities and Exchange Act of 1934, the
Company believes, upon its receipt of the balance of these premium payments,
that it will be in compliance with Section 13(k) and that the exposure, if any,
resulting from this matter will not be material to its financial condition or
results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page 29 for a list of the Exhibits
filed as part of this report.
(b) Reports on Form 8-K:
o Current Report on Form 8-K, dated September 30, 2003,
reporting under "Results of Operations and Financial
Condition," announcing the Company's fourth quarter
fiscal 2003 earnings
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ARROW INTERNATIONAL, INC.
o Current Report on Form 8-K, dated December 22, 2003,
reporting under Item 12. "Results of Operations and
Financial Condition," announcing the Company's first
quarter fiscal 2004 earnings.
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ARROW INTERNATIONAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARROW INTERNATIONAL, INC.
(Registrant)
Date: January 13, 2004 By: /s/ Frederick J. Hirt
-------------------------------
(signature)
Frederick J. Hirt
Chief Financial Officer and
Vice President of Finance
(Principal Financial Officer and
Chief Accounting Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
- ------ ---------- ----------------
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.
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