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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20212
ARROW INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-1969991
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2400 BERNVILLE ROAD
READING, PENNSYLVANIA 19605
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER: (610) 378-0131
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class: On Which Registered:
-------------------- --------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
(Title of Class)
Name of Exchange on which registered: The Nasdaq Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of November 1, 2001 was approximately $447,449,460.
The number of shares of Registrant's Common Stock outstanding on
November 1, 2001 was 21,850,468.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on January 16, 2002, which will be filed with the
Securities and Exchange Commission within 120 days after August 31, 2001, are
incorporated by reference in Part III of this report.
ITEM 1. BUSINESS:
CERTAIN OF THE INFORMATION CONTAINED IN THIS FORM 10-K, INCLUDING THE
DISCUSSION WHICH FOLLOWS IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" FOUND IN ITEM 7 OF THIS REPORT, CONTAIN
FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS,
CAREFULLY REVIEW THIS REPORT, INCLUDING EXHIBIT 99.1 HERETO, AS WELL AS OTHER
INFORMATION CONTAINED IN ARROW INTERNATIONAL, INC.'S PERIODIC REPORTS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC" OR "COMMISSION").
Arrow International, Inc. (together with its subsidiaries, "Arrow" or
the "Company") was incorporated as a Pennsylvania corporation in 1975. Arrow
develops, manufactures and markets a broad range of clinically advanced,
disposable catheters and related products for critical and cardiac care. The
Company's critical care products are used principally for central vascular
access for administration of fluids, drugs, and blood products, patient
monitoring and diagnostic purposes, as well as for pain management. These
products are used by anesthesiologists, critical care specialists, surgeons,
cardiologists, nephrologists, emergency and trauma physicians and other health
care providers. Arrow's cardiac care products are used by interventional
cardiologists, cardiac surgeons, interventional radiologists and
electrophysiologists for such purposes as the diagnosis and treatment of heart
and vascular disease and to provide short-term cardiac assist following cardiac
surgery, serious heart attack or balloon angioplasty.
Arrow's critical care products, which were originally introduced in
1977, accounted for 82.7%, 82.5% and 81.4% of net sales in fiscal 2001, 2000 and
1999, respectively. The majority of these products are vascular access catheters
and related devices which consist principally of the following: the
Arrow-Howes(TM) Multi-Lumen Catheter, a catheter equipped with three or four
channels that enables the simultaneous administration of multiple critical care
therapies through a single puncture site; double-and single-lumen catheters,
which are designed for use in a variety of clinical procedures; percutaneous
sheath introducers, which are used as a means for inserting cardiovascular and
other catheterization devices into the vascular system during critical care
procedures; radial artery catheters, which are used for measuring arterial blood
pressure and taking blood samples; FlexTip Plus(TM) epidural catheters, which
are designed to minimize indwelling complications associated with conventional
epidural catheters; and Percutaneous Thrombolytic Devices ("PTD"), which are
designed for clearance of thrombosed hemodialysis grafts in chronic hemodialysis
patients. Many of the Company's vascular access catheters are treated with the
ARROWg+ard(TM) or ARROWg+ard Blue Plus(TM) antiseptic surface treatments to
reduce the risk of catheter related infection. ARROWg+ard Blue Plus(TM) is a
stronger, longer lasting formulation OF ARROWg+ard(TM) and provides
antimicrobial treatment of the interior lumens and hubs of each catheter.
The Company's critical care product line also includes the implantable
constant flow drug delivery pumps and a broad line of implantable vascular
access ports used for the infusion of certain drugs over an extended period of
time to treat cancer, other chronic diseases and chronic pain, as well as custom
tubing sets to connect central venous catheters to blood pressure monitoring
devices and drug infusion systems.
Through its acquisition of Sometec, S.A., a French development company,
in September 1999, the Company continued the expansion of its critical care
product line by introducing a non-invasive esophageal ultrasound probe that
continuously measures descending aortic blood flow. This product, the
HemoSonic(TM) 100, provides an innovative, ultrasound-based approach to
hemodynamic monitoring.
(2)
ITEM 1. BUSINESS (CONTINUED):
Arrow's cardiac care products accounted for 17.3%, 17.5% and 18.6% of
net sales in fiscal 2001, 2000 and 1999, respectively. These products include
cardiac assist products, such as intra-aortic balloon pumps (IABP) and
catheters, which are used primarily to augment temporarily the pumping
capability of the heart following cardiac surgery, serious heart attack or
balloon angioplasty. The newest of these products is the AutoCAT(TM), the
Company's advanced automatic IABP which features AutoPilot(TM), a mode of
operation that automatically selects operating parameters for optimal cardiac
assist. The AutoCAT(TM) continuously monitors and selects the best signal from
multiple electrocardiogram and arterial pressure sources to automatically adjust
balloon inflation and deflation timing points. Other currently available pumps
require manual intervention on the part of the clinician to switch signal
sources and initiate balloon timing. The Company also distributes a new high
performance 8 French intra-aortic balloon catheter. This balloon catheter, the
Ultra 8(TM), is configured to enable it to be introduced through standard 8
French Cath Lab sheaths used for therapeutic interventions as well as through a
separate balloon sheath. The Ultra 8(TM) provides faster inflation and deflation
times than competitive catheters and has a larger central lumen that reduces the
potential for aortic pressure waveform dampening and facilitates placement over
standard size springwire guides.
The Company's cardiac care product line also includes electrophysiology
products, which are used primarily to map the electrical signals which activate
the heart; the Berman(TM) Angiographic Catheter, which is used for pediatric
cardiac angiographic procedures; and such other cardiac care products as the
Super Arrow-Flex(TM) sheath, which provides a kink-resistant passageway for the
introduction of cardiac and other catheters into the vascular system. In
addition, as further discussed below under "Research and Product Development,"
the Company currently has under development important new cardiac care products,
including the Arrow LionHeart(TM), a fully implantable Left Ventricular Assist
System ("LVAS") capable of taking over the entire work load of the left
ventricle, and CorAide(TM), a non-pulsatile centrifugal flow ventricular assist
device designed to be used for the treatment of congestive heart failure.
SALES AND MARKETING
Arrow markets its products to physicians and hospitals through a
combination of direct selling and independent distributors. Within each
hospital, marketing efforts are targeted to those physicians, including critical
care specialists, cardiologists, anesthesiologists, interventional radiologists,
electrophysiologists and surgeons, most likely to use the Company's products.
Arrow's products are generally sold in the form of pre-sterilized procedure kits
containing the catheters and virtually all of the related medical components and
accessories needed by the clinician to prepare for and perform the intended
medical procedure. Additional sales revenue is derived from equipment provided
for use in connection with certain of the Company's disposable products.
In fiscal 2001, 2000 and 1999, 65.9%, 64.1% and 64.8%, respectively, of
the Company's net sales were to U.S. customers. In this market, approximately
79.2% of the Company's fiscal 2001 revenue was generated by its direct sales
force. The remainder resulted from shipments to independent distributors. For
the majority of such distributors, the Company's products represent a principal
product line. Direct selling generally yields higher gross profit margins than
sales made through independent distributors.
Internationally, the Company sells its products through eleven direct
sales subsidiaries serving markets in Japan, Germany, the Netherlands, France,
Spain, Greece, Africa, Canada, Mexico, the Czech Republic and Slovakia. As of
November 1, 2001, independent distributors in 87 additional countries service
the remainder of the world.
To support growth in international sales, the Company operates a 40,000
square foot manufacturing facility in Chihuahua, Mexico and a 65,000 square foot
manufacturing and research facility in the Czech Republic. In fiscal 2001, the
Company began construction of additional manufacturing space at its facility in
the Czech Republic, which, when complete in December 2001, will double
manufacturing capacity at that facility. The Company also leased 22,500 square
feet of additional manufacturing space in Mexico during fiscal 2001.
(3)
ITEM 1. BUSINESS (CONTINUED):
SALES AND MARKETING (CONTINUED)
Revenues, profitability and long-lived assets attributable to
significant geographic areas are presented in Note 13 to the Company's
consolidated financial statements, included elsewhere herein.
In general, Arrow does not produce against a backlog of customer orders;
production is based primarily on the level of inventories of finished products
and projections of future customer demand with the objective of shipping from
stock upon receipt of orders. No single customer accounts for a material part of
the Company's sales. Usage of the Company's products by hospitals and physicians
has not been materially influenced by seasonal factors.
Government and private sector initiatives to limit the growth of health
care costs, including price regulation, competitive pricing, coverage and
payment policies, and managed-care arrangements, are continuing in the United
States and in many other countries where the Company does business. As a result
of these changes, the marketplace has placed increased emphasis on the delivery
of more cost-effective medical therapies. Government programs, including
Medicare and Medicaid, private health care insurance and managed-care plans have
attempted to control costs by limiting the amount of reimbursement such third
party payors will pay to hospitals, other medical institutions and physicians
for particular products, procedures or treatments. The increased emphasis on
health care cost containment has resulted in reduced growth in demand for
certain of the Company's products in markets in the U.S. where Arrow has 80% or
greater market shares, and protecting that market share has affected the
Company's pricing in some instances. The Company presently believes that this
emphasis has increased the importance of competitive prices and may continue to
reduce the U.S. growth rate for certain of the Company's products. The Company
also continues to face pricing pressures in certain product lines in European
markets as governments strive to curtail increases in health care costs. The
Company anticipates that the U.S. Congress, state legislatures, foreign
governments and the private sector will continue to review and assess
alternative health care delivery and payment systems. The Company cannot predict
what additional legislation or regulation, if any, relating to the health care
industry may be enacted in the future or what impact the adoption of any
federal, state or foreign health care reform, private sector reform or market
forces may have on its business. No assurance can be given that any such reforms
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
RESEARCH AND PRODUCT DEVELOPMENT
Arrow is engaged in ongoing research and development to introduce
clinically advanced new products, to enhance the effectiveness, ease of use,
safety and reliability of its existing products and to expand the clinical
applications for which use of its products is appropriate. The principal focus
of the Company's research and development effort is to identify and analyze the
needs of physicians in critical and cardiac care medicine, and to develop
products that address these needs. The Company views ideas submitted by
physicians and other health care professionals as an important source of
potential research and development projects. The Company believes that these
end-users are often in the best position to conceive of new products and to
recommend ways to improve the performance of existing products. Most of the
Company's principal products and product improvements have resulted from
collaborative efforts with physicians, other health care professionals or other
affiliated entities. For certain proprietary ideas, the Company pays royalties
to such persons, and in many instances, incorporates such persons' names in the
tradename or trademark for the specific product. The Company also utilizes other
outside consultants, inventors and medical researchers to carry on its research
and development effort and sponsors research through medical associations and at
various universities and teaching hospitals.
Certain of the Company's strategic acquisitions and investments have
provided the basis for its introduction of significant new products. The Company
entered the field of cardiac care with the acquisition of Kontron Instruments
and supplemented this acquisition with its acquisition of the cardiac assist
division of C.R. Bard, Inc. The Company's acquisition of Therex, augmented by
its acquisition of the Strato/Infusaid implantable constant flow drug delivery
pump product line, provided
(4)
ITEM 1. BUSINESS (CONTINUED):
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
it with a product offering of implantable drug delivery devices. The Company's
acquisition of Sometec enabled it to introduce to the market its innovative
ultrasound hemodynamic monitoring device.
Research and development expenses totaled $25.2 million (7.5% of net
sales), $19.8 million (6.1% of net sales) and $20.3 million (6.8% of net sales)
in fiscal 2001, 2000 and 1999, respectively. Such amounts were used to develop
new products, improve existing products and implement new technology to produce
these products.
In January 1994, the Company formed a cooperative relationship with
Pennsylvania State University's Hershey Medical School for the commercial
development of a fully implantable long-term LVAS. Although LVASs are currently
used to provide short-term cardiac assist to patients awaiting heart
transplants, the Company's efforts are aimed at developing a fully implantable
device to provide long-term cardiac assist for patients having insufficient left
ventricular heart function. In contrast to currently marketed LVASs, the Arrow
LionHeart(TM), the LVAS currently under development by the Company, is not
intended as a bridge-to-heart transplant, but is designed, upon receipt of
necessary regulatory approvals, to serve as a long-term cardiac assist device
for certain patients. The Arrow LionHeart(TM) has been in development for over
sixteen years and has undergone extensive preclinical studies and testing. The
Company believes that its Arrow LionHeart(TM) LVAS, which is capable of taking
over the entire workload of the left ventricle, represents a significant advance
in mechanical circulatory assist technology. Because the Arrow LionHeart(TM) is
the first fully implantable "destination therapY" device, the ability of the
patient to experience an improved quality of life for an extended period of time
may be enhanced. The device has no lines or cables protruding through the skin
to power the system, thus eliminating a potential source of infection. It is
fully implanted in the body and does not replace the heart, but assists in the
pumping function of the heart's left ventricle. The device is electrically
driven by a wearable battery pack that transmits power non-invasively through
the skin to charge internal batteries and power the blood pump. In addition, the
Arrow LionHeart(TM) enables patients to experience limited periods of untethered
movement with energy supplied from rechargeable batteries implanted as part of
the device.
In fiscal 1997, the Company began long-term durability testing of the
LionHeart(TM). The Company conducted animal trials of the device in fiscal 1999.
The first human implant of the LionHeart(TM) took place in Germany in October
1999 as part of an ongoing European clinical investigation, sponsored by the
Company, to demonstrate the safety and performance of the LionHeart(TM) for the
purpose of obtaining a European Conformity (CE) mark.
On February 8, 2001, the Company received U.S. Food and Drug
Administration (FDA) approval under an Investigational Device Exemption (IDE) to
begin Phase I human clinical trials in the United States of the LionHeart(TM).
The Phase I trial was initially limited to seven patients at up to five U.S.
sites. On February 28, 2001, the Company announced the first United States human
implant of the LionHeart(TM) under the IDE. By August 1, 2001, the Company had
enrolled all seven U.S. patients in the Phase I U.S. feasibility trial
authorized in February under the IDE.
(5)
ITEM 1. BUSINESS (CONTINUED):
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
On September 28, 2001, the FDA deferred the Company's request to expand
this Phase 1 trial to an additional seven patients, suggesting that patient
inclusion and exclusion criteria be reviewed and requesting clarification on two
issues of device function. The Company's meeting with the FDA on October 12,
2001 determined the additional information required by the FDA to resume the
Phase I U.S. trial of the LionHeart(TM) with healthier patients. The Company has
recently provided this information to the FDA, whose response is expected in
December 2001. Discussion of the nature of the pivotal Phase II trial will be
ongoing with respect to end points and the appropriate number of patients. Based
on its discussions with the FDA, the Company believes that a randomized trial is
not appropriate or necessary.
The Company's European clinical trial of the LionHeart(TM) continues
and, on November 1, 2001, the Company announced an additional implant of the
LionHeart(TM) in Pavia, Italy bringing the total number of patients who have
received the LionHeart(TM) in Europe to 15 and the number of sites in Europe
which have implanted the device to five, with two additional European sites
trained and currently screening prospective patients. The European trial
protocol presently limits the device to patients that are ineligible for heart
transplant due to age or health history. The protocol is now being expanded to
include patients eligible for heart transplant, but unlikely to receive a
transplant due to the shortage of donor hearts. The Company believes the
LionHeart(TM) has the potential of improving the quality of life for this group
without the risks of driveline infection associated with currently available
bridge-to-transplant devices.
Based on the current status of the Arrow LionHeart(TM) program, the
Company believes that the CE mark required for European sale can be achieved
early in the 2002 calendar year and that a Phase II U.S. trial can begin in the
first half of the new year.
On April 18, 2001, the Company entered into an agreement with The
Cleveland Clinic Foundation ("CCF") for the exclusive license of CCF's patents
in the field of non-pulsatile centrifugal flow ventricular assist devices for
the treatment of congestive heart failure and a related agreement for continued
research and development on the CorAide(TM) ventricular assist device that had
been a joint development effort of CCF and the National Institute of Health.
The CorAide(TM) device utilizes a unique magnetically suspended flow
pumping mechanism that uses the moving blood as its lubricating system. Arrow
considers the CorAide(TM) device to be one of the most promising continuous flow
bridge-to-transplant devices currently in development and believes it may
represent a future generation permanent ventricular assist device if human organ
systems prove to be adaptable to non-pulsatile blood flow over a long period of
time. In IN VIVO trials to date, the CorAide(TM) device has shown excellent
performance without the use of anticoagulant drug therapy. Moreover, its smaller
size, low power requirements and lower cost relative to other ventricular assist
devices currently under development provide a promising approach for
bridge-to-transplant patients.
(6)
ITEM 1. BUSINESS (CONTINUED):
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
The initial goal of the new joint CCF/Arrow development program is to
commence human clinical trials of the device with patients needing ventricular
support prior to receiving a donor heart. These trials should provide better
understanding of human tolerance for non-pulsatile flow devices. The development
program presently anticipates beginning human clinical trials in Europe by the
end of calendar year 2002.
The Company believes the CorAide(TM) development program is
complimentary to its ongoing program to develop and market the Arrow
LionHeart(TM) LVAS.
Since 1988, the Company has been developing the Arrow(R)-Fischell
Pullback Atherectomy Catheter (the "PAC") for the removal of atherosclerotic
plaque. The Company acquired certain patents relating to the technology
underlying the PAC in 1990. In the fourth quarter of 1998, the Company began a
European multi-center randomized study to evaluate the effectiveness of the PAC
for the removal of plaque from restenosed coronary stents. The study continues
to date.
In recent years, the Company had conducted research to determine whether
the use of microwave energy catheters for the ablation of cardiac tissue
responsible for ventricular tachycardia represented a potentially more effective
treatment for ventricular tachycardia than currently marketed radio frequency
ablation catheters. Based on the results of this research, the Company elected
to discontinue this research program during fiscal 2000. The Company is
continuing to evaluate the technological feasibility of liver ablation using
this technology.
During the fourth quarter of fiscal 2000, the Company received approval
to begin separate U.S. and European trials of the Company's Percutaneous
Thrombolytic Device for the treatment of deep vein thrombosis. The Deep Vein
Thrombosis study is a feasibility study involving three clinical sites and a
total of ten patients. The primary objective of the study is to determine the
initial safety and feasibility of the Percutaneous Thrombactomy Device for the
treatment of iliofemoral deep vein thrombosis. As of November 1, 2001, there are
two patients enrolled in the study, the first of whom was enrolled in February
2001. An additional four patients are enrolled in the European clinical trial.
There can be no assurance that the FDA or any foreign government
regulatory authority will grant the Company authorization to market products
under development or, if such authorization is obtained, that such products will
prove competitive when measured against other available products.
ENGINEERING AND MANUFACTURING
Arrow has developed the core technologies that the Company believes are
necessary for it to design, develop and manufacture complex, high quality
catheter-related medical devices. This technological capability has enabled the
Company to develop internally many of the major components of its products and
reduce its unit manufacturing costs. To help further reduce manufacturing costs
and improve efficiency, the Company has increasingly automated the production of
its high-volume products and plans to continue to make significant capital
expenditures to promote efficiency and reduce operating costs.
(7)
ITEM 1. BUSINESS (CONTINUED):
ENGINEERING AND MANUFACTURING (CONTINUED)
Raw materials and purchased components essential to Arrow's business
have typically been available within the lead times required by the Company and,
consequently, procurement has not historically posed any significant problems in
the operation of the Company's business. Although the Company currently
maintains only one supplier for certain of its out-sourced components, it has
identified alternative vendors for most of these items and, therefore, does not
believe that it is dependent on any single supplier for major raw materials or
components.
PATENTS, TRADEMARKS, PROPRIETARY RIGHTS AND LICENSES
Arrow believes that patents and other proprietary rights are important
to its business. The Company also relies upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain its competitive position. Arrow currently holds numerous U.S. patents
and patent applications, as well as several foreign patents and patent
applications which relate to aspects of the technology used in certain of the
Company's products, including its radial artery catheter, percutaneous sheath
introducer, interventional diagnostic catheter products, left ventricular assist
device, and esophageal ultrasound probe jacket. There can be no assurance that
patent applications filed by the Company will result in the issuance of patents
or that any patents owned by or licensed to the Company will provide competitive
advantages for the Company's products or will not be challenged or circumvented
by others.
In addition, Arrow is a party to several license agreements with
unrelated third parties pursuant to which it has obtained, for varying terms,
the exclusive rights to certain patents held by such third parties in
consideration for royalty payments. Many of the Company's major products,
including its Arrow-Howes(TM) Multi-Lumen Catheters and antiseptic surface
treatment for catheters, have been developed pursuant to such license
agreements. The Company has in the past granted rights in certain patents
relating to its Arrow-Howes(TM) Multi-Lumen Catheters to others in consideration
for royalty payments. The Company's U.S. patent for its Quick Flash(R) Radial
Artery Catheter expired on November 5, 2001. Although it is possible that the
Company will face new competition in this market, based on information currently
available to it, the Company does not presently believe that any such new
competition will have a material adverse effect on the Company's business,
financial condition or results of operations for the foreseeable future. All
other existing patents owned by or licensed to the Company relating to any of
its major products expire after fiscal 2002.
From time to time, the Company is subject to legal actions involving
patent and other intellectual property claims. The Company is currently a
defendant in two related lawsuits alleging that certain of its hemodialysis
catheter products infringe patents owned by a third party. Based upon
information presently available to the Company, the Company believes it has
adequate legal defenses with respect to these actions. Although the ultimate
outcome of these actions is not expected to have a material adverse effect on
the Company's business or financial condition, whether an adverse outcome in
these actions would materially adversely affect the Company's reported results
of operations in any future period cannot be predicted with certainty.
(8)
ITEM 1. BUSINESS (CONTINUED):
PATENTS, TRADEMARKS, PROPRIETARY RIGHTS AND LICENSES (CONTINUED)
On March 19, 2001, the Company and Medtronic, Inc. reached a settlement
of pending patent litigation (Civil Action No. CV-00-11271 PBS) in the United
States District Court for the District of Massachusetts. The settlement also
ends all litigation pending worldwide between the parties, including actions in
Germany, Belgium, The Netherlands, and the European Patent Office. As part of
the settlement, the Company has granted Medtronic a worldwide license under U.S.
Patent No. 4,978,338 and its foreign counterparts. This settlement has not had,
and is not expected to have in the future a material adverse effect on the
Company's business, financial condition or results of operations.
On August 17, 2001, the United States District Court for the District of
New Jersey granted Datascope Corp.'s motion for summary judgment in its
declaratory judgment lawsuit that certain claims of the Company's U.S. Patent
No. Re. 34,993 relating to its IAB catheter were invalid and that Datascope did
not infringe other claims of that patent which remain valid. This judgment does
not result in any liability to Arrow and is not expected to have any material
adverse effect on the Company's business, financial condition or results of
operations.
Arrow owns a number of registered trademarks in the United States and,
in addition, has obtained registration in many of its major foreign markets for
the trademark ARROW(R) and certain other trademarks.
GOVERNMENT REGULATION
As a developer, manufacturer and marketer of medical devices, the
Company is subject to extensive regulation by, among other governmental
entities, the FDA and the corresponding state, local and foreign regulatory
agencies in jurisdictions in which the Company sells its products. These
regulations govern the introduction of new medical devices, the observance of
certain standards with respect to the manufacture, testing and labeling of such
devices, the maintenance of certain records, the tracking of such devices and
other matters. Failure to comply with applicable federal, state, local or
foreign laws or regulations could subject the Company to enforcement action,
including product seizures, recalls, withdrawal of marketing clearances or
approvals, and civil and criminal penalties, any one or more of which could have
a material adverse effect on the Company. In recent years, the FDA has pursued a
more rigorous enforcement program to ensure that regulated businesses, like the
Company's, comply with applicable laws and regulations. The Company believes
that it is in substantial compliance with such governmental regulations.
However, federal, state, local and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes. No
assurance can be given that such changes will not have a material adverse effect
on the Company.
On occasion, the Company has received notifications, including warning
letters, from the FDA of alleged deficiencies in the Company's compliance with
FDA requirements. The Company believes that it has been able to address or
correct such deficiencies. In addition, from time to time the Company has
recalled, or issued safety alerts on, certain of its products. No such warning
letter, recall or safety alert has had a material adverse effect on the Company,
but there can be no assurance that a warning letter, recall or safety alert
would not have such an effect in the future.
(9)
ITEM 1. BUSINESS (CONTINUED):
GOVERNMENT REGULATION (CONTINUED)
In the early to mid 1990's, the review time by the FDA to clear medical
devices for commercial release lengthened and the number of marketing clearances
and approvals decreased. In response to public and congressional concern, the
FDA Modernization Act of 1997 was adopted with the intent of bringing better
definition to the clearance process for new medical products. While FDA review
times have improved since passage of the 1997 Act, there can be no assurance
that the FDA review process will not continue to delay the Company's
introduction of new products in the U.S. in the future. In addition, many
foreign countries have adopted more stringent regulatory requirements which also
have added to the delays and uncertainties associated with the release of new
products, as well as the clinical and regulatory costs of supporting such
releases. It is possible that delays in receipt of, or failure to receive, any
necessary clearance or approval for the Company's new product offerings could
have a material adverse effect on the Company's business, financial condition or
results of operations.
COMPETITION
Arrow faces substantial competition from a number of other companies in
the market for catheters and related medical devices and equipment, including
companies with greater financial and other resources. In addition, in response
to increased concern about the rising costs of health care, U.S. hospitals and
physicians are placing increasing emphasis on cost-effectiveness in the
selection of products to perform medical procedures. The Company believes that
its products compete primarily on the basis of product differentiation, product
quality and cost-effectiveness, and that its comprehensive manufacturing
capability enables it to expedite the development and market introduction of new
products and to reduce manufacturing costs, thereby permitting the Company to
respond more effectively to competitive pricing in an environment where its
ability to increase prices is limited.
ENVIRONMENTAL COMPLIANCE
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. In the course of its
business, the Company is involved in the handling, storing and disposal of
materials, which are classified as hazardous. In 1991, the U.S. Environmental
Protection Agency ("EPA") made a formal request to the Company for information
about wastes which may have been disposed of at a landfill site ("Site") located
near Reading, Pennsylvania. The Site, which was closed in 1986, is a former
municipal waste disposal landfill that was added to the National Priorities List
("NPL"), as authorized by the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), in 1989. In 1997, the EPA
advised the Company that the agency regarded the Company to be a potentially
responsible party ("PRP") with respect to environmental contamination associated
with the Site. In 1998, the EPA advised the Company that the agency regarded the
Company to be a DE MINIMIS party (a party whose alleged contribution of waste
materials to the Site is minimal in terms of volume and toxicity), and was
eligible for a DE MINIMIS settlement under CERCLA. In January 2000, this matter
was settled by the Company without any material adverse effect on its business,
financial condition or results of operations.
(10)
ITEM 1. BUSINESS (CONTINUED):
ENVIRONMENTAL COMPLIANCE (CONTINUED)
In a separate matter, in 1989, the Company was notified that it was
among the PRPs under CERCLA for the costs of investigating or remediating
contamination at a waste recycling, treatment and disposal facility located in
Maryland. In August 2001, the Company was invited by the EPA to enter into a
proposed global consent decree for DE MINIMIS parties with the United States
District Court for the District of Maryland, which, if approved, would resolve
the Company's potential liability with respect to the facility on a DE MINIMIS
basis. The Company has indicated its interest in entering into such a DE MINIMIS
settlement, but currently has no knowledge as to when the proposed consent
decree will be presented to the court or when it may be approved.
The Company believes that its operations comply in all material respects
with applicable environmental laws and regulations. While the Company continues
to make capital and operational expenditures for protection of the environment,
it does not anticipate that these expenditures will have a material adverse
effect on its business, financial condition or results of operations.
PRODUCT LIABILITY AND INSURANCE
The design, manufacture and marketing of medical devices of the types
produced by the Company entail an inherent risk of product liability. The
Company's products are often used in surgical and intensive care settings with
seriously ill patients. While the Company believes that, based on claims made
against the Company in the past, the amount of product liability insurance
maintained by the Company has been adequate, there can be no assurance that such
insurance will be available or in an amount sufficient to satisfy claims made
against the Company in the future or that the Company will be able to obtain
insurance in the future at satisfactory rates or in adequate amounts. Product
liability claims in the future, regardless of their ultimate outcome, could
result in costly litigation and could have a material adverse effect on the
Company's business, reputation, its ability to attract and retain customers for
its products and its results of operations.
EMPLOYEES
As of November 1, 2001, Arrow had 3,273 full-time employees. All of the
Company's hourly-paid manufacturing employees at the Company's Reading and
Wyomissing, Pennsylvania facilities are represented by the United Steelworkers
of America AFL-CIO, Local 8467 (the "Union"). The Company and the Union are
currently operating under a three-year agreement that expires in September 2003.
The Company has never experienced an organized work stoppage or strike and
considers its relations with its employees to be good.
(11)
ITEM 1. BUSINESS (CONTINUED):
EXECUTIVE OFFICERS
The executive officers of the Company and their ages and positions as of
November 1, 2001 are listed below. All executive officers are elected or
appointed annually and serve at the discretion of the Board of Directors. There
are no family relationships among the executive officers of the Company.
Name Age Current Position
---- --- ----------------
Marlin Miller, Jr. 69 Chairman and Chief Executive Officer
Philip B. Fleck 57 President and Chief Operating Officer
Paul L. Frankhouser 56 Executive Vice President
Frederick J. Hirt 53 Vice President-Finance, Chief Financial
Officer and Treasurer
T. Jerome Holleran 65 Secretary
Carl N. Botterbusch 38 Vice President and General Manager,
Cardiac Assist Division
Thomas D. Nickel 62 Vice President-Regulatory Affairs
and Quality Assurance
Scott W. Hurley 43 Controller
Mr. Miller has served as Chief Executive Officer and a director of the
Company since it was founded in 1975. He served as President from 1975 to
January 1999. Mr. Miller is also President and a director of Arrow Precision
Products, Inc. ("Precision"), a corporation controlled by principal shareholders
of the Company. Precision is in the process of liquidation and, in fiscal 2001,
Mr. Miller devoted none of his time to Precision. He is a director of Carpenter
Technology Corporation, a manufacturer of specialty steel.
Mr. Fleck has served as President of the Company since January 1999. From
June 1994 to January 1999, he served as Vice President - Research and
Manufacturing of the Company. From 1986 to June 1994, Mr. Fleck served as Vice
President - Research and Engineering of the Company. From 1975 to 1986, Mr.
Fleck served as Engineering Manager of the Company.
Mr. Frankhouser has served as Executive Vice President of the Company
since January 1999. He served as Vice President-Marketing of the Company from
1986 until January 1999. From 1980 to 1986, Mr. Frankhouser served as Manager of
Marketing of the Company.
Mr. Hirt has served as Vice President - Finance, Chief Financial Officer
and Treasurer of the Company since August 1998. Prior to joining the Company,
Mr. Hirt served in various capacities with Pharmacia & Upjohn, Inc., from 1980
to 1998, where he most recently served as Vice President, Accounting and
Reporting.
Mr. Holleran has served as Secretary and a director of the Company since
its founding in 1975 and, until September 1997, also served as a Vice President.
From July 1996, Mr. Holleran served as President and Chief Executive Officer of
Precision Medical Products, Inc., a former subsidiary of Precision, which
manufactures and markets certain non-catheter medical products and was sold on
August 29, 1997 to certain employees of Precision, including Mr. Holleran. He is
now the Chairman
(12)
ITEM 1. BUSINESS (CONTINUED):
EXECUTIVE OFFICERS (CONTINUED)
and Chief Executive Officer of Precision Medical Products, Inc. From February
1986 to September 1997, Mr. Holleran was also Vice President, Chief Operating
Officer and a director of Precision. From 1991 to 1996, Mr. Holleran served as
President of Endovations, Inc., a subsidiary of Precision that manufactured and
marketed certain gastroenterological medical products, until the sale in June
1996 of a portion of the Endovations business to the Company and the remainder
to an unrelated third party.
Mr. Botterbusch has served as Vice President and General Manager of the
Company's Cardiac Assist Division since July 17, 2001. From January 1999 to
March 2001, Mr. Botterbusch served as Vice President, Research and Engineering
of the Company. He served as Manager, Product Development, Research and
Engineering from 1993 to January 1999, as Group Leader, Research and Development
from 1987 to 1993 and, from 1985, when he joined the Company, to 1987, as a
Project Engineer of the Company.
Mr. Nickel has served as Vice President-Regulatory Affairs and Quality
Assurance of the Company since 1991. From 1986 to 1991, Mr. Nickel served as
Director of Regulatory Affairs and Quality Assurance of the Company.
Mr. Hurley has served as Controller of the Company since April 1998. Prior
to joining the Company, from 1990 to 1998 he served in various capacities with
Rhone-Poulenc Rorer, most recently as a Director of Finance.
ITEM 2. PROPERTIES:
The Company's corporate headquarters and principal research center are
located in a 165,000 square foot facility in Reading, Pennsylvania. This
facility, which also includes manufacturing space, is located on 126 acres.
Other major properties owned by the Company include a 165,000 square
foot manufacturing and warehousing facility in Asheboro, North Carolina; a
145,000 square foot manufacturing facility in Wyomissing, Pennsylvania; a 40,000
square foot manufacturing facility in Chihuahua, Mexico; a 49,000 square foot
manufacturing and warehouse facility in Mount Holly, New Jersey; and a 65,000
square foot manufacturing and research facility in the Czech Republic, at which,
as discussed under Item 1. "Business: Sales and Marketing," the Company is
constructing additional manufacturing space.
In addition, the Company leases a 55,000 square foot manufacturing
facility in Everett, Massachusetts, a 12,000 square foot manufacturing facility
in Walpole, Massachusetts, a 7,700 square foot sales office and distribution
center in Woburn, Massachusetts, and a 22,500 square foot manufacturing facility
in Camargo, Mexico. The Company also leases sales offices and warehouse space in
Canada, France, Germany, Japan, South Africa, the Netherlands, Spain and Greece,
sales office space in Mexico and warehouse space in California.
The Company considers all of its facilities to be in good condition and
adequate to meet the present and reasonably foreseeable needs of the Company.
ITEM 3. LEGAL PROCEEDINGS:
The Company is a party to certain legal actions, including product
liability matters, arising in the ordinary course of its business. Based upon
information presently available to the Company, the Company believes it has
adequate legal defenses or insurance coverage for these actions and, except as
set forth under "Item 1. Business: Patents, Trademarks, Regulatory Rights and
Licenses", that the ultimate outcome of these actions would not have a material
adverse effect on the Company's business, financial condition or results of
operations.
(13)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 2001 through the solicitations of proxies or otherwise.
PART II
ITEM 5. MARKETS FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS:
The Company's common stock has traded publicly on The Nasdaq Stock
Market under the symbol "ARRO" since June 9, 1992, the date that its common
stock was initially offered to the public. The table below sets forth the high
and low sale prices of the Company's common stock as reported by the Nasdaq
Stock Market and the quarterly dividends per share declared by the Company
during the last eight fiscal quarters:
Quarter Ended High Low Dividends
============= ==================================================
August 31, 2001 39.4000 34.7600 $.065
May 31, 2001 38.2500 34.8750 .065
February 28, 2001 39.2500 34.1250 .065
November 30, 2000 40.3125 35.4375 .060
August 31, 2000 37.1250 31.8750 $.060
May 31, 2000 39.6250 28.5625 .060
February 29, 2000 39.5000 25.8750 .060
November 30, 1999 30.0625 23.7500 .055
As of November 1, 2001, there were approximately 612 registered
shareholders of the Company's common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
August 31, 2001, 2000, 1999, 1998 and 1997 have been derived from the Company's
audited consolidated financial statements. The consolidated financial statements
of the Company as of August 31, 2001 and 2000 and for each of the three years in
the period ended August 31, 2001, together with the notes thereto and the
related report of PricewaterhouseCoopers LLP, independent accountants, are
included elsewhere herein. The following data should be read in conjunction with
the Company's audited consolidated financial statements, the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are included elsewhere herein.
(14)
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
2001 2000 1999 1998 1997
----------- ----------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales $ 334,042 $ 325,714 $ 300,318 $ 265,314 $ 250,059
Cost of goods sold 158,573 156,107 143,953 118,780 115,240
Gross profit 175,469 169,607 156,365 146,534 134,819
Operating expenses
Research, development and engineering 25,209 19,771 20,335 18,393 15,871
Selling, general, and administrative 78,499 74,921 71,091 62,672 57,185
Special charges* - 3,320 12,819 36,249 -
Total operating expenses 103,708 98,012 104,245 117,314 73,056
Operating income 71,761 71,595 52,120 29,220 61,763
Other expenses (income), net 2,291 2,145 (3,221) 1,638 2,031
Income before income taxes 69,470 69,450 55,341 27,582 59,732
Provision for income taxes 22,925 23,266 19,646 19,010 22,997
----------- ------------ ------------ ----------- -----------
Net income $ 46,545 $ 46,184 $ 35,695 $ 8,572 $ 36,735
=========== ============ ============ =========== ===========
Basic earnings per common share $ 2.12 $ 2.06 $ 1.54 $ 0.37 $ 1.58
=========== ============ ============ =========== ===========
Diluted earnings per common share $ 2.10 $ 2.05 $ 1.54 $ 0.37 $ 1.58
=========== ============ ============ =========== ===========
Cash dividends per common share $ .255 $ .235 $ .215 $ .195 $ .175
Weighted average shares used in computing
basic earnings per common share 21,995 22,451 23,195 23,225 23,227
Weighted average shares used in computing
diluted earnings per common share 22,120 22,519 23,195 23,225 23,227
BALANCE SHEET DATA:
Working capital $ 125,556 $90,050 $ 107,901 $ 98,826 $ 81,460
Total assets 417,710 385,814 358,333 324,116 320,373
Notes payable and current maturities of
long-term debt 50,722 60,481 33,272 30,252 24,653
Long-term debt, excluding current maturities 600 900 11,105 11,686 12,043
Shareholders' equity 326,089 285,204 278,167 247,868 245,917
Certain prior period amounts in the table above have been reclassified to
conform to the fiscal 2001 presentation (see Note 1 of the Notes to Consolidated
Financial Statements).
* See Note 2 of the Notes to Consolidated Financial Statements for the fiscal
1999 and 2000 special charges. In the fourth quarter of fiscal 1998, in
accordance with Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the Company recorded a non-cash pre-tax special charge of $36,249
($31,960 after tax or $1.38 per basic and diluted common share) to write
down to fair value certain goodwill and intangible assets.
(15)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
THE FOLLOWING DISCUSSION INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS.
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF FACTORS, INCLUDING
MATERIAL RISKS, UNCERTAINTIES AND CONTINGENCIES, WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, SEE EXHIBIT 99.1 TO THIS REPORT
AND THE COMPANY'S PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE
COMMISSION.
RESULTS OF OPERATIONS
The following table presents for the three years ended August 31, 2001
Consolidated Statements of Income expressed as a percentage of net sales and the
period-to-period percentage changes in the dollar amounts of the respective line
items.
Period-to-Period
Percentage of Net Sales Percentage Change
--------------------------------- ---------------------------------
2001 2000 1999
Year Ended August 31, vs vs vs
---------------------------------
2001 2000 1999 2000 1999 1998
------- ------- ------ ------ ------- -------
Net sales 100.0% 100.0% 100.0% 2.6% 8.5% 13.2%
Gross profit 52.5 52.1 52.1 3.5 8.5 6.7
Operating expenses:
Research, development and
engineering 7.5 6.1 6.8 27.5 (2.8) 10.6
Selling, general and
administrative 23.5 23.0 23.6 4.8 5.4 13.4
Special charges - 1.0 4.3 (100.0) (74.1) (64.6)
------- ------- ------ ------- ------- -------
Operating income 21.5 22.0 17.4 0.2 37.4 78.4
Other expenses (income), net 0.7 0.7 (1.0) 6.9 (166.6) *
Income before income taxes 20.8 21.3 18.4 - 25.5 100.6
Provision for income taxes 6.9 7.1 6.5 (1.5) 18.4 3.3
------- ------- ------ ------- ------ ------
Net income 13.9 14.2 11.9 0.8 29.4 316.4
Certain prior period amounts in the table above have been reclassified to
conform to the fiscal 2001 presentation (see Note 1 of the Notes to Consolidated
Financial Statements).
* Not a meaningful comparison
(16)
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales increased by $8.3 million, or 2.6%, to $334.0 million in fiscal 2001
from $325.7 million in fiscal 2000. Net sales represent gross sales invoiced to
customers, less certain related charges, including discounts, returns and other
allowances. Sales of critical care products increased 2.8% to $276.1 million
from $268.7 million in fiscal 2000, due primarily to increased shipments of
central venous and special catheters. Sales of cardiac care products increased
1.6% to $57.9 million from $57.0 million in fiscal 2000, due primarily to
increased shipments of intra-aortic balloon ("IAB") pump products. International
sales decreased by $3.0 million, and represented 34.1% of net sales in fiscal
2001, compared to 35.9% in the prior year, principally as a result of the
increased strength of the U.S. dollar, which reduced sales by $7.3 million for
fiscal 2001 when compared to the prior fiscal year.
For the fiscal year ended August 31, 2001, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10 which requires that freight expense be
classified in the Company's income statement as a cost of sales. Previously, the
Company had accounted for freight charges as primarily a reduction of net sales
and in some cases as marketing expense.
Gross profit increased 3.5% to $175.5 million in fiscal 2001 from $169.6 million
in fiscal 2000 due primarily to increased sales volume. As a percentage of net
sales, gross profit was 52.5% in fiscal 2001 compared to 52.1% in fiscal 2000,
due primarily to more efficient manufacturing during the periods in which the
inventory sold was produced and higher margins on special catheters.
Research, development and engineering expenses in fiscal 2001 increased by 27.5%
to $25.2 million from $19.8 million in fiscal 2000. As a percentage of net
sales, these expenses increased to 7.5% in fiscal 2001, compared to 6.1% in
fiscal 2000, due primarily to $5.6 million of incremental research and
development spending on the Arrow LionHeart(TM), LVAS, and CorAide(TM), the
Company's joint research and development program with CCF. See "Item 1.
Business - Research and Product Development."
Selling, general and administrative expenses increased by 4.8% to $78.5 million
during fiscal 2001 from $74.9 million in the previous year, and were 23.5% of
net sales in fiscal 2001 compared to 23.0% in fiscal 2000. The increase was due
primarily to increased legal expenses relating to patent litigation matters. See
"Item 1. Business - Patents, Trademarks, Proprietary Rights and Licenses."
In the first quarter of fiscal 2000, the Company recorded a non-cash pre-tax
special charge of $3.3 million ($2.2 million after-tax or $.10 per basic and
diluted common share) related primarily to a write-down for the in-process
research and development acquired in connection with the Company's acquisition
of Sometec, S.A. (see Notes 2 and 3 of Notes to Consolidated Financial
Statements). The technology acquired is a compact monitoring device that
measures and monitors the descending aortic blood flow during anesthesia and
intensive care. The device provides real-time aortic blood flow (a measurement
of cardiac output) by using both pulsed Doppler for measuring blood velocity and
M-mode ultrasound to accurately measure the aortic diameter. The monitoring
system consists of four main components: the main console (monitor), a
transesophageal probe, a disposable jacket and an articulated probe holder. The
monitor provides the physician with a continuous display of a patient's
hemodynamic profile, including aortic blood flow, heart rate, stroke volume,
peak velocity, acceleration, left ventricular ejection time and systemic
vascular resistance. To facilitate use of this device, a disposable jacket,
containing an acoustic gel, is placed over the probe utilizing a special vacuum
mounting tool supplied with the jacket. The Company believes that the speed and
ease of use of this new noninvasive measurement technique has the potential of
establishing cardiac output as a frequently used physician tool with value
similar to blood pressure, EKG and pulse oximetry
(17)
FISCAL 2001 COMPARED TO FISCAL 2000 (CONTINUED):
measurements. In accordance with SFAS No. 2, "Accounting for Research and
Development Costs" and FIN No. 4, "Applicability of SFAS No. 2 to Business
Combinations Accounted for by the Purchase Method", these costs related to the
special charge were charged to expense at the date of consummation of the
acquisition. The value assigned to purchase Sometec in-process technology was
based on a valuation prepared by an independent third-party appraisal company.
Each of the technologies under development at the date of acquisition was
reviewed for technological feasibility, stage of completeness at the acquisition
date, and scheduled release dates of products employing the technology to
determine whether the technology was complete or under development. At the
acquisition date, the research and development project was estimated to be 75%
complete. Incomplete development efforts at the time of acquisition included
improved portability, software development and development of the disposable
sheath. The valuation was based on the estimated cash flows resulting from
commercially viable products discounted to present value using a risk-adjusted
after-tax discount rate of 22%. The research and development costs from these
projects have commenced. Some cash inflows from these projects have commenced.
However, while the Company believes these projects will be completed as planned,
the Company cannot assure that they will be completed on schedule or, once
completed, that the new products resulting from these projects will be
successfully introduced into the marketplace. The Company does not anticipate
material adverse changes from historical pricing, margins and expense levels as
a result of the introduction of the new technologies related to the projects.
Principally due to the above factors, operating income increased 0.2% to $71.8
million in fiscal 2001 from $71.6 million in fiscal 2000.
Other expenses (income), net, increased to $2.3 million of expense in fiscal
2001 from $2.1 million of expense in fiscal 2000. Other expenses (income), net,
consists principally of interest expense and foreign exchange gains and losses
associated with the Company's direct sales subsidiaries. Aggregate foreign
exchange losses in fiscal 2001 were $0.4 million and in fiscal 2000 aggregate
foreign exchange gains were $0.1 million, including gains relating to foreign
currency contracts of $0.4 million in fiscal 2001 and losses of less than $0.1
million in fiscal 2000.
As a result of the factors discussed above, income before income taxes was $69.5
million for both fiscal 2001 and 2000. In fiscal 2001, the Company reduced its
annual effective tax rate to 33.0% from 33.5% in fiscal 2000 due to anticipated
research and development tax credits.
Net income in fiscal 2001 increased by 0.8% to $46.5 million from $46.2 million
in fiscal 2000. As a percentage of net sales, net income represented 13.9% in
fiscal 2001 compared to 14.2% in the previous year.
Basic earnings per common share were $2.12 and diluted earnings per common share
were $2.10 in fiscal 2001. Basic earnings per common share increased 2.9% in
fiscal 2001, or $.06 per share, from $2.06 per common share in fiscal 2000.
Diluted earnings per common share increased 2.4% in fiscal 2001, or $.05 per
share, from $2.05 per share in the prior year primarily as a result of the above
factors. Weighted average shares of common stock outstanding used in computing
basic earnings per common share decreased to 21,995,394 in fiscal 2001 from
22,450,581 in the prior year. Weighted average shares of common stock
outstanding used in computing diluted earnings per common share decreased to
22,120,367 in fiscal 2001 from 22,518,928 in the prior year. These decreases are
a result of the Company's previously announced share repurchase program, which
remains in effect, partially offset by the Company's issuance during fiscal 2001
of 25,000 shares from treasury to CCF as a pre-paid royalty for the rights
granted to the Company by CCF under the Company's license agreement with CCF.
(See "Item 1. Business-Research and Product Development")
(18)
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales increased by $25.4 million, or 8.5%, to $325.7 million in fiscal 2000
from $300.3 million in fiscal 1999. Sales of critical care products increased
9.9% to $268.7 million from $244.5 million in fiscal 1999, due primarily to
increased shipments of central venous and special catheters. Sales of cardiac
care products increased 2.2% to $57.0 million from $55.8 million in fiscal 1999,
due primarily to increased shipments of IAB pump products. International sales
increased by $11.2 million, and represented 35.9% of net sales in fiscal 2000,
compared to 35.2% in the prior year, principally as a result of growth in
shipments of central venous catheter products and IAB pump and catheter
products. The percentage of net sales attributable to the Company's direct sales
force decreased in fiscal 2000 to approximately 73.4% compared to approximately
75.1% in fiscal 1999.
For the fiscal year ended August 31, 2001, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10 which requires that freight expense be
classified in the Company's income statement as a cost of sales. Previously, the
Company had accounted for freight charges as primarily a reduction of net sales
and in some cases as marketing expense.
Gross profit increased 8.5% to $169.6 million in fiscal 2000 from $156.4 million
in fiscal 1999 due primarily to increased sales volume. As a percentage of net
sales, gross profit was 52.1% in both fiscal 2000 and 1999.
Research, development and engineering expenses in fiscal 2000 decreased by 2.8%
to $19.8 million from $20.3 million in fiscal 2000. As a percentage of net
sales, these expenses decreased to 6.1% in fiscal 2000, compared to 6.8% in
fiscal 1999, due primarily to decreased spending in the development of
experimental and custom products.
Selling, general and administrative expenses increased by 5.4% to $74.9 million
during fiscal 2000 from $71.1 million in the previous year, and were 23.0% of
net sales in fiscal 2000 compared to 23.6% in fiscal 1999. The increase was due
primarily to increased amortization expense related to the Company's acquisition
of Sometec, S.A. in September 1999 and the cardiac assist division of C.R. Bard,
Inc. in December 1998.
In the first quarter of fiscal 2000, the Company recorded a non-cash pre-tax
special charge of $3.3 million ($2.2 million after-tax or $.10 per basic and
diluted common share) related primarily to a write-down for the in-process
research and development acquired in connection with the Company's acquisition
of Sometec, S.A. (see Note 2 and 3 of Notes to Consolidated Financial
Statements). The technology acquired is a compact monitoring device that
measures and monitors the descending aortic blood flow during anesthesia and
intensive care. The device provides real-time aortic blood flow (a measurement
of cardiac output) by using both pulsed Doppler for measuring blood velocity and
M-mode ultrasound to accurately measure the aortic diameter. The monitoring
system consists of four main components: the main console (monitor), a
transesophageal probe, a disposable jacket and an articulated probe holder. The
monitor provides the physician with a continuous display of a patient's
hemodynamic profile, including aortic blood flow, heart rate, stroke volume,
peak velocity, acceleration, left ventricular ejection time and systemic
vascular resistance. To facilitate use of this device, a disposable jacket,
containing an acoustic gel, is placed over the probe utilizing a special vacuum
mounting tool supplied with the jacket. The Company believes that the speed and
ease of use of this new noninvasive measurement technique has the potential of
establishing cardiac output as a frequently used physician tool with value
similar to blood pressure, EKG and pulse oximetry measurements. In accordance
with SFAS No. 2, "Accounting for Research and Development Costs" and FIN No. 4,
"Applicability of SFAS No. 2 to Business Combinations Accounted for by the
Purchase Method", these costs related to the special charge were charged to
expense at the date of consummation of the acquisition. The value assigned to
purchase Sometec in-process technology was based on a valuation prepared by an
independent third-party appraisal company. Each of the technologies under
development at the date of acquisition was reviewed for technological
feasibility, stage of completeness at the acquisition date, and scheduled
release dates of products employing
(19)
FISCAL 2000 COMPARED TO FISCAL 1999 (CONTINUED):
the technology to determine whether the technology was complete or under
development. At the acquisition date, the research and development project was
estimated to be 75% complete. Incomplete development efforts at the time of
acquisition included improved portability, software development and development
of the disposable sheath. The valuation was based on the estimated cash flows
resulting from commercially viable products discounted to present value using a
risk-adjusted after-tax discount rate of 22%. The research and development costs
from these projects have commenced. Some cash inflows from these projects have
commenced. However, while the Company believes these projects will be completed
as planned, the Company cannot assure that they will be completed on schedule
or, once completed, that the new products resulting from these projects will be
successfully introduced into the marketplace. The Company does not anticipate
material adverse changes from historical pricing, margins and expense levels as
a result of the introduction of the new technologies related to the projects.
In the second quarter of fiscal 1999, the Company recorded a non-cash pre-tax
special charge of $4.1 million ($2.7 million after tax or $.12 per basic and
diluted common share) related to the purchase of in-process IAB and pump
research and development as part of the Company's acquisition of the assets of
the cardiac assist division of C.R. Bard, Inc. The IAB and pumps are class 3
life saving medical devices regulated by the FDA. In accordance with Statement
of Financial Accounting Standards ("FAS") No. 2, "Accounting for Research and
Development Costs" and FASB Interpretation No. 4, "Applicability of FAS No. 2 to
Business Combinations Accounted for by the Purchase Method", these costs were
charged to expense at the consummation of the acquisition. The value assigned to
purchase IAB and pump in-process technology was based on a valuation prepared by
an independent third-party appraisal company. Each of the technologies under
development at the date of acquisition were reviewed for technological
feasibility, stage of completeness at the acquisition date, and scheduled
release dates of products employing the technology to determine whether the
technology was complete or under development. At the acquisition date, the
research and development projects were in various stages of completion ranging
from 50% to 80%. The valuation was based on the estimated cash flows resulting
from commercially viable products discounted to present value using risk
adjusted discount rates ranging from 29% to 32%. The research and development
costs and the net cash inflows from the projects commenced within a year of the
acquisition date.
In accordance with FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and consistent with the Company's accounting policy for
marketable equity securities, in the fourth quarter of fiscal 1999, the Company
determined that the decline in the fair value of its investment in Cardiac
Pathways Corporation was other than temporary. Accordingly, the Company
established a new basis in the investment at $0.4 million, equivalent to its
fair market value. As a result, the Company realized a special charge of $8.7
million before tax, $5.6 million after tax or $0.24 per basic and diluted common
share.
Principally due to the above factors, operating income increased 37.4% to $71.6
million in fiscal 2000 from $52.1 million in fiscal 1999.
Other expenses (income), net, decreased to $2.1 million of expense in fiscal
2000 from $(3.2) million of income in fiscal 1999, due primarily to larger
foreign exchange gains in fiscal 1999 and higher interest expense in fiscal
2000. Aggregate foreign exchange gains in fiscal 2000 were $0.1 million and in
fiscal 1999 were $4.4 million, including losses relating to foreign currency
contracts of less than $0.1 million in fiscal 2000 and gains of $0.7 million in
fiscal 1999.
(20)
FISCAL 2000 COMPARED TO FISCAL 1999 (CONTINUED):
As a result of the factors discussed above, income before income taxes increased
in fiscal 2000 by 25.5% to $69.5 million from $55.3 million in fiscal 1999. In
fiscal 2000, the Company reduced its annual effective tax rate to 33.5% from
35.5% in fiscal 1999 due to final disposition of tax audits.
Net income in fiscal 2000 increased by 29.4% to $46.2 million from $35.7 million
in fiscal 1999. As a percentage of net sales, net income represented 14.2% in
fiscal 2000 compared to 11.9% in the previous year. During the third quarter of
fiscal 2000, the Company completed a study of its fixed asset lives. The study
indicated that actual lives for certain asset categories were generally longer
than the useful lives for depreciation purposes. Therefore, the Company extended
the estimated useful lives of certain categories of property, plant and
equipment, effective March 1, 2000. The majority of the change in depreciation
related to manufacturing equipment. The change in depreciation expense related
to manufacturing equipment was included in inventory value and is being
recognized as the inventory is sold; the change in depreciation expense related
to non-manufacturing assets is reflected in operating expenses. This change in
estimated fixed asset lives resulted in decreased depreciation expense of $1.9
million and increased net income of $0.6 million for fiscal 2000. Basic and
diluted earnings per common share increased by $.02 in fiscal 2000 as a result
of this change.
Basic earnings per common share increased to $2.06 in fiscal 2000 from $1.54 per
share in fiscal 1999. Diluted earnings per common share increased to $2.05 in
fiscal 2000 from $1.54 per share in fiscal 1999. Weighted average common shares
outstanding decreased to 22,450,581 in fiscal 2000 from 23,195,115 in fiscal
1999 as a result of the Company's previously announced share repurchase program,
which remains in effect.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 2001, net cash provided by operations was $42.6 million, a decrease
of $14.2 million from the prior year, due primarily to increases in accounts
receivable, inventories and prepaid expenses. Accounts receivable, net of the
allowances for doubtful accounts, increased by $5.4 million for fiscal 2001,
compared to a $3.3 million increase in the prior year. Accounts receivable,
measured in days sales outstanding during the period, was 86 days at August 31,
2001 and 83 days at August 31, 2000. The increase in accounts receivable was due
primarily to sales to distributors which have longer payment terms. In addition,
as previously reported, one of the Company's major U.S. distributors has
continued to experience declining net sales and a significant net loss for the
period most recently reported. In October 2001, this distributor announced plans
to begin a formal review of its strategic alternatives, including a major
refinancing effort. The Company has accounts receivable due from this
distributor in the amount of $5.7 million as of August 31, 2001. Based on
information presently available to the Company and the payment history of this
distributor, the Company continues to believe the receivables due from this
distributor will be collected in the normal course of business. However, in the
event some or all of these receivables become uncollectible, the Company's
future results of operations could be materially adversely affected. The Company
intends to continue to monitor this situation closely to mitigate its future
credit risk exposure. Inventories increased $11.6 million in fiscal 2001 from
$82.8 million at August 31, 2000, due primarily to slower than expected sales of
the Company's Hemosonic products and to higher per unit manufacturing costs at
the Company's domestic manufacturing facilities in the second half of the year.
Prepaid expenses increased $8.6 million in fiscal 2001 from $16.0 million at
August 31, 2000, due primarily to increases in prepaid pension costs and
anticipated tax refunds.
(21)
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in the Company's investing activities decreased to $28.1 million
in the year ended August 31, 2001 from $38.0 million in fiscal 2000 due
primarily to the use of less cash for business acquisitions.
At August 31, 2001, the Company had revolving credit facilities providing a
total of $65.0 million in available revolving credit for general business
purposes, of which $34.0 million was outstanding. In April 2001, the terms of
these facilities were amended and restated to, among other things, include
certain of the Company's subsidiaries as permitted borrowers, allowing up to
$25.0 million of the $65.0 million to be drawn upon by any one or more of these
subsidiaries in their local currency. In August 2001, the Company refinanced the
current portion of its long-term intercompany foreign denominated indebtedness
of $8.3 million through advances under these revolving credit facilities. The
Company has $6.6 million of both available and outstanding credit facilities
related to this foreign debt refinancing at August 31, 2001. Under these credit
facilities, the Company is required to comply with the following financial
convenants: maintain a ratio of total liabilities to tangible net worth (total
assets less total liabilities and intangible assets) of no more than 1.5 to 1
and a cash flow coverage ratio of 1.25 to 1 or greater; a limitation on certain
mergers, consolidations, and sales of assets by the Company or its subsidiaries;
a limitation on its and its subsidiaries' incurrence of liens; and a limitation
requirement that the lender approves the incurrence of indebtedness unrelated to
the revolving credit facility when the amounts are in an amount in excess of
$50.0 million in the aggregate. At August 31, 2001, the Company was in
compliance with all such covenants. In addition, certain other subsidiaries of
the Company had revolving credit facilities totaling the U.S. dollar equivalent
of $20.3 million, of which $9.8 million was outstanding as of August 31, 2001.
Interest rate terms for both U.S. and foreign bank credit facilities are based
on either bids provided by the lender or the prime rate, London Interbank
Offered Rates (LIBOR) or Certificate of Deposit Rates, plus applicable margins.
Certain of these borrowings, primarily those with U.S. banks, are due on demand.
Interest is payable monthly during the revolving credit period. At August 31,
2001, the weighted average interest rate on short-term borrowings was 4.7%.
Combined borrowings under these facilities decreased $1.7 million during fiscal
2001.
Financing activities used $15.3 million of net cash in fiscal 2001, due
primarily to the repayment of the Company's current portion of long-term foreign
denominated indebtedness and dividend payments. Financing activities used $18.3
million in fiscal 2000, primarily as a result of increased use of cash to
purchase shares of the Company's common stock in the open market in connection
with its previously announced share repurchase program offset by increased
borrowing related to the Company's acquisition of Sometec, S.A. in the first
quarter of fiscal 2000. During fiscal 2001, the Company repurchased a total of
36,900 shares of its common stock under this program for $1.3 million. As of
November 1, 2001, the Company had repurchased a total of 1,418,800 shares under
this program for approximately $43.7 million since the program's inception in
March 1999.
(22)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):
During fiscal 2001, 2000 and 1999, the percentage of the Company's sales
invoiced in currencies other than the U.S. dollar was 21.9%, 23.9% and 23.7%,
respectively. In addition, a small part of the Company's cost of goods sold is
denominated in foreign currencies. The Company enters into foreign currency
exchange and foreign currency option contracts, which are derivative financial
instruments, with major financial institutions to reduce the effect of these
foreign currency risks, primarily on U.S. dollar cash inflows resulting from the
collection of intercompany receivables denominated in foreign currencies and to
hedge anticipated sales in foreign currencies to foreign subsidiaries. Such
transactions occur throughout the year and are probable, but not firmly
committed. Forward contracts are marked to market each accounting period, and
the resulting gains or losses on these contracts are recorded in Other Income /
Expense of the Company's consolidated statements of income. Realized gains and
losses on these contracts are offset by changes in the U.S. dollar value of the
foreign denominated assets, liabilities and transactions being hedged. The
premiums paid on the foreign currency option contracts are recorded as assets
and amortized over the life of the option. The Company's maximum exposure
related to foreign currency options is limited to the premiums paid. The total
premiums authorized to be paid in any fiscal year cannot exceed $1.0 million per
the terms of the Foreign Currency Management Policy Statement approved by the
Company's Board of Directors in January 2001. Gains and losses on purchased
option contracts result from changes in intrinsic or time value. Time value
gains and losses are recognized immediately against net sales. Intrinsic value
gains and losses are recorded in shareholders' equity (as a component of
comprehensive income) until the period in which the underlying sale by the
foreign subsidiary to an unrelated third party is recognized, at which point
those deferred gains and losses are recognized in net sales. By their nature,
all such contracts involve risk, including the risk of nonperformance by
counterparties. Accordingly, losses relating to these contracts could have a
material adverse effect upon the Company's business, financial condition and
results of operations. Based upon the Company's knowledge of the financial
condition of the counterparties to its existing forward contracts, the Company
believes that it does not have any material exposure to any individual
counterparty. The Company's policy prohibits the use of derivative instruments
for speculative purposes. As of November 1, 2001, outstanding foreign currency
exchange contracts totaling the U.S. dollar equivalent of $4.8 million mature at
various dates through December 2001 and foreign currency option contracts with a
fair market value of $0.2 million mature at various dates through May 2002. The
Company expects to continue to utilize foreign currency exchange and foreign
currency option contracts to manage its exposure, although there can be no
assurance that the Company's efforts in this regard will be successful.
The Company's exposure to credit risk consists principally of trade receivables.
Hospitals and international dealers account for a substantial portion of trade
receivables and collateral is generally not required. Other than as described
above with respect to one of the Company's major U.S. distributors, the Company
believes that its risk associated with this concentration is limited due to the
Company's on-going credit review procedures.
As part of the Company's 1998 purchase of assets of the cardiac assist division
of C.R. Bard, Inc., the Company also agreed to acquire specified assets and
assume specified liabilities of the Belmont Instruments Corporation for $7.3
million based on the achievement of certain milestones. The Company paid $2.3
million in fiscal 2000 for achievement of milestones during that period. During
fiscal 2001, the Company paid $3.5 million to Belmont for achievement of
additional milestones. Included in the fiscal 2001 payments was the first two of
eight quarterly installments of $0.3 million payable by the Company (which
commenced in April 2001), leaving $1.5 million remaining to be paid as of August
31, 2001. The acquisition was accounted for using the purchase method of
accounting. The excess of the purchase price over the estimated fair value of
the net assets acquired of approximately $7.1 million is being amortized over a
period of 10 years. The results of operations of this business are included in
the Company's consolidated financial statements from the date of acquisition.
(23)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):
In October 2000, the Company's Board of Directors approved spending of up to
$10.0 million for the construction of additional manufacturing capacity at its
existing manufacturing and research facility in the Czech Republic. The approved
spending includes amounts required for construction of the additional space as
well as all equipment required to meet production needs at such space. This new
construction commenced during fiscal 2001 and is proceeding as planned, with an
anticipated completion date in December 2001. As of August 31, 2001, the Company
had spent $3.8 million on this construction.
Based upon its present plans, the Company believes that its working capital,
operating cash flow and available credit sources will be adequate to repay
current portions of long-term debt, to finance currently planned capital
expenditures and to meet the currently foreseeable liquidity needs of the
Company.
During the periods discussed above, the overall effects of inflation and
seasonality on the Company's business were not significant.
NEW ACCOUNTING STANDARDS
Financial Accounting Standard No. 141, "Business Combinations", addresses
financial accounting and reporting for business combinations, including the
requirement that all business combinations within the scope of the statement are
to be accounted for using the purchase method. The Company was required to adopt
the provisions of FAS No. 141 as of July 1, 2001.
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets",
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. The statement addresses how intangible assets should be
accounted for in financial statements upon their acquisition and how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. FAS No. 142 becomes effective
for the Company's first quarter of fiscal 2003, but earlier adoption is
permitted. The Company is currently evaluating the impact FAS No. 142 will have
on its financial statements.
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company is studying the provisions of
this statement and has not determined the impact that this statement may have on
it.
(24)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Due to the global nature of its operations, the Company is subject to the
exposures that arise from foreign exchange rate fluctuations. Such exposures
arise from transactions denominated in foreign currencies, primarily from
translation of results of operations from outside the United States,
intercompany loans, and intercompany purchases of inventory. The Company is also
exposed to interest rate changes.
The Company's objective in managing its exposure to foreign currency
fluctuations is to minimize earnings and cash flow volatility associated with
foreign exchange rate changes. The Company enters into various contracts that
change in value as foreign exchange rates change to protect the value of its
existing foreign currency assets, liabilities, commitments, and anticipated
foreign currency revenues to meet these objectives. The contracts involve
Japanese yen and other foreign currencies. The gains and losses on these
contracts are offset by changes in the value of the related exposures in the
Company's income statement. It is the Company's policy to enter into foreign
currency transactions only to the extent true exposures exist. The Company does
not enter into foreign currency transactions for speculative purposes.
The fair value of all the Company's foreign currency forward exchange
contracts outstanding at August 31, 2001 was less than $0.1 million, which does
not represent the Company's actual exposure. The following analysis estimates
the sensitivity of the fair value of all foreign currency forward exchange
contracts to hypothetical 10% favorable and unfavorable changes in spot exchange
rates at August 31, 2001 and 2000:
Fair Value of Foreign Currency
Forward Exchange Contracts
----------------------------
(in millions)
August 31, 2001 August 31, 2000
--------------- ---------------
10% adverse rate movement $ (0.9) $ (1.1)
At August 31st rates - -
10% favorable rate movement 0.6 0.8
In addition, the fair value of all the Company's foreign currency option
contracts outstanding at August 31, 2001 was less than $0.1 million, which does
not represent the Company's actual exposure. The following analysis estimates
the sensitivity of the fair value of all foreign currency forward exchange
contracts to hypothetical 10% favorable and unfavorable changes in spot exchange
rates at August 31, 2001 and 2000:
Fair Value of Foreign Currency
Option Contracts
-----------------
(in millions)
August 31, 2001 August 31, 2000
--------------- ---------------
10% adverse rate movement $ - $ -
At August 31st rates - -
10% favorable rate movement 0.5 -
Any gains and losses on the fair value of forward and option contracts
would be largely offset by losses and gains on the underlying transactions or
anticipated transactions. These offsetting gains and losses are not reflected in
the above analysis.
Additional Quantitative and Qualitative disclosures about market risk
(e.g., interest rate and foreign currency exchange risk) are set forth in Note
14 of the Notes to Consolidated Financial Statements contained herein.
(25)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 (a) (1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Information regarding directors and nominees for directors of the
Company, as well as certain other information required by this item, will be
included in the Company's Proxy Statement to be issued in connection with its
2002 Annual Meeting of Shareholders (the "Proxy Statement"), and is incorporated
herein by reference. The information regarding executive officers required by
this item is contained herein in Part I under the caption "Executive Officers".
PART III
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation of Arrow's directors and
executive officers will be included in the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of the Company's common stock
by certain beneficial owners and by management of the Company will be included
in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
with management of the Company will be included in the Proxy Statement and is
incorporated herein by reference.
(26)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K:
(a) (1) The following financial statement schedule of the Company is
filed as part of this Form 10-K.
PAGE
Report of Independent Accountants 29
Consolidated Balance Sheets at
August 31, 2001 and 2000 30,31
Consolidated Statements of Income
for the years ended August 31, 2001,
2000 and 1999 32
Consolidated Statements of Comprehensive
Income for the years ended August 31, 2001,
2000 and 1999 33
Consolidated Statements of Cash Flows
for the years ended August 31, 2001,
2000 and 1999 34,35
Consolidated Statements of Changes in Shareholders' Equity for the
years ended August 31, 2001, 2000 and 1999 36-38
Notes to Consolidated Financial Statements 39-63
(a) (2) The following financial statement schedule of the Company is
filed as part of this Form 10-K:
PAGE
2. Schedule II - Valuation and Qualifying Accounts 64
Other statements and schedules are not presented because they are either
not required or the information required by statements or schedules is presented
elsewhere.
(a) (3) See Exhibit Index on pages 65 through 75 hereof for a list of
the Exhibits filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K:
None
(27)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARROW INTERNATIONAL, INC.
By: /s/ Frederick J. Hirt
------------------------------------
Frederick J. Hirt
Chief Financial Officer,
Vice President-Finance and Treasurer
Dated: November 21, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- -----
/s/ Marlin Miller, Jr. Director, Chairman and November 21, 2001
- -----------------------------
(Marlin Miller, Jr.) Chief Executive Officer
(Principal Executive
Officer)
/s/ Raymond Neag Director November 21, 2001
- -----------------------------
(Raymond Neag)
/s/ Frederick J. Hirt Chief Financial Officer, November 21, 2001
- ----------------------------- Vice President -
(Frederick J. Hirt) Finance and Treasurer
(Principal Financial and
Accounting Officer)
/s/ John H. Broadbent, Jr. Director November 21, 2001
- -----------------------------
(John H. Broadbent, Jr.)
/s/ T. Jerome Holleran Director, Secretary November 21, 2001
- -----------------------------
(T. Jerome Holleran)
/s/ Richard T. Niner Director November 21, 2001
- -----------------------------
(Richard T. Niner)
/s/ George W. Ebright Director November 21, 2001
- -----------------------------
(George W. Ebright)
/s/ Alan M. Sebulsky Director November 21, 2001
- -----------------------------
(Alan M. Sebulsky)
/s/ John E. Gurski Director November 21, 2001
- -----------------------------
(John E. Gurski)
/s/ Carl G. Anderson, Jr. Director November 21, 2001
- -----------------------------
(Carl G. Anderson, Jr.)
/s/ R. James Macaleer Director November 21, 2001
- -----------------------------
(R. James Macaleer)
(28)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Arrow International, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 27 present fairly, in all material
respects, the financial position of Arrow International, Inc. and its
subsidiaries (the "Company") at August 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page 27 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 4, 2001
(29)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
August 31,
----------------------------------
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,968 $ 3,959
Accounts receivable, less allowance for doubtful accounts
of $965 and $1,012 in 2001 and 2000, respectively 79,151 73,796
Inventories 94,420 82,801
Prepaid expenses and other 24,596 15,964
Deferred income taxes 2,850 3,131
------------ ------------
Total current assets 203,985 179,651
------------ ------------
Property, plant and equipment:
Land and improvements 5,601 5,582
Buildings and improvements 78,159 77,194
Machinery and equipment 141,294 127,120
Construction-in-progress 16,437 13,520
------------ ------------
241,491 223,416
Less accumulated depreciation (115,231) (101,976)
------------ ------------
126,260 121,440
------------ ------------
Goodwill, net of accumulated amortization of $12,165
and $9,432 in 2001 and 2000, respectively 43,268 38,879
Intangible and other assets, net of accumulated amortization of
$15,632 and $12,149 in 2001 and 2000, respectively 41,269 41,270
Deferred income taxes 2,928 4,574
------------ ------------
Total assets $ 417,710 $ 385,814
============ ============
See notes to consolidated financial statements
Continued
(30)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, continued
(In thousands, except share amounts)
August 31,
----------------------------------
2001 2000
------------ ------------
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 300 $ 8,400
Notes payable 50,422 52,081
Accounts payable 8,164 8,151
Cash overdrafts 1,964 1,195
Accrued liabilities 8,629 9,316
Accrued compensation 6,557 8,049
Accrued income taxes 2,393 2,409
------------ ------------
Total current liabilities 78,429 89,601
Long-term debt 600 900
Accrued postretirement and pension benefit obligations 12,592 10,109
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
5,000,000 shares authorized;
none issued - -
Common stock, no par value;
50,000,000 shares authorized;
issued 26,478,813 shares in 2001 and 2000 45,661 45,661
Additional paid-in capital 930 38
Retained earnings 332,806 291,870
Less treasury stock at cost:
4,477,413 and 4,477,910 shares
in 2001 and 2000, respectively (45,995) (45,092)
Accumulated other comprehensive (expense) (7,313) (7,273)
------------ ------------
Total shareholders' equity 326,089 285,204
------------ ------------
Total liabilities and shareholders' equity $ 417,710 $ 385,814
============ ============
See notes to consolidated financial statements
(31)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
for the years ended August 31,
----------------------------------------------------
2001 2000 1999
--------------- -------------- --------------
Net sales $ 334,042 $ 325,714 $ 300,318
Cost of goods sold 158,573 156,107 143,953
--------------- ------------ -------------
Gross profit 175,469 169,607 156,365
--------------- ------------ -------------
Operating expenses:
Research, development and engineering 25,209 19,771 20,335
Selling, general and administrative 78,499 74,921 71,091
Special charges - 3,320 12,819
--------------- ------------ -------------
103,708 98,012 104,245
--------------- ------------ -------------
Operating income 71,761 71,595 52,120
--------------- ------------ -------------
Other expenses (income):
Interest expense, net of amount capitalized 2,686 2,534 1,328
Interest income (789) (589) (353)
Other, net 394 200 (4,196)
--------------- ------------ -------------
2,291 2,145 (3,221)
--------------- ------------ -------------
Income before income taxes 69,470 69,450 55,341
Provision for income taxes 22,925 23,266 19,646
--------------- ------------ -------------
Net income $ 46,545 $ 46,184 $ 35,695
=============== ============ =============
Basic earnings per common share $ 2.12 $ 2.06 $ 1.54
=============== ============= =============
Diluted earnings per common share $ 2.10 $ 2.05 $ 1.54
=============== ============= =============
Cash dividends per common share $ .255 $ .235 $ .215
=============== ============= =============
Weighted average shares used in computing
basic earnings per common share 21,995,394 22,450,581 23,195,115
=============== ========== =============
Weighted average shares used in computing
diluted earnings per common share 22,120,367 22,518,928 23,195,115
=============== ========== =============
See notes to consolidated financial statements
(32)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
for the Years Ended August 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Net income $ 46,545 $ 46,184 $ 35,695
Other comprehensive income (expense):
Foreign currency translation adjustments (182) (2,643) (113)
Unrealized holding gain on foreign currency
option contracts 114 - -
Unrealized holding gain (loss) on securities, net of taxes
($(108), $(713), and $545, respectively)) 173 1,177 (1,758)
Reclassification adjustment for (gains) losses on securities
included in net income, net of taxes ($76, $0,
and $(3,082), respectively)) (123) - 5,598
Minimum pension liability adjustment (22) - -
---------------- -------------- --------------
Other comprehensive income (expense) (40) (1,466) 3,727
---------------- --------------- --------------
Total comprehensive income $ 46,505 $ 44,718 $ 39,422
=============== ============== ==============
See notes to consolidated financial statements
(33)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)