ITEM 1. BUSINESS:
	Certain of the information contained in this Form 10-K, including the discussion which follows in "Management's Discussion and Analysis of Financial Condition and Results of Operations" found in Item 7 of this Report, contain forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from such forward-looking statements, carefully review this Report, including Exhibit 99.1 hereto, as well as other information contained in Arrow International, Inc.'s periodic reports filed with the Securities and Exchange Commission (the "SEC" or "Commission").
	Arrow International, Inc. (together with its subsidiaries, "Arrow" or the "Company") was incorporated as a Pennsylvania corporation in 1975. Arrow develops, manufactures and markets a broad range of clinically advanced, disposable catheters and related products for critical care medicine and interventional cardiology and radiology. The Company's critical care products are used principally for central vascular access for administration of fluids, drugs, and blood products, patient monitoring and diagnostic purposes, as well as for pain management. These products are used by anesthesiologists, critical care specialists, surgeons, cardiologists, nephrologists and emergency and trauma physicians and other health care providers. Arrow's interventional procedure products are used by interventional cardiologists, interventional radiologists and electrophysiologists for such purposes as the diagnosis and treatment of heart and vascular disease and to provide short-term cardiac assist following cardiac surgery, serious heart attack or balloon angioplasty.
	Arrow's critical care products, which were originally introduced in 1977, accounted for 82.2%, 82.2% and 84.2% of net sales in fiscal 1996, 1995 and 1994, respectively. The majority of these products are vascular access catheters and related devices which consist principally of the following: the Arrow-Howes trademark Multi-Lumen Catheter, a catheter equipped with three or four channels that enables the simultaneous administration of multiple critical care therapies through a single puncture site; double-and single-lumen catheters which are designed for use in a variety of clinical procedures; the ARROWg+ard trademark antiseptic surface treatment that is applied to many of the Company's vascular access catheters to reduce the risk of catheter-related infection; percutaneous sheath introducers, which are used as a means for inserting cardiovascular and other catheterization devices into the vascular system during critical care procedures; and FlexTip Plus trademark epidural catheters, which are designed to minimize indwelling complications associated with conventional epidural catheters.
	In April 1995, the Company expanded its critical care product line by acquiring Therex Limited Partnership, a developmental stage company ("Therex"), engaged in the development, manufacture and marketing of implantable constant flow drug delivery pumps and a broad line of implantable vascular access ports used for the infusion of certain drugs over an extended period of time in connection with the treatment of cancer, other chronic diseases and chronic pain. The Company received FDA marketing clearance in March 1996 for its Model 3000 Constant Flow Implantable Pump for the administration of the chemotherapy drug, 2-Deoxy 5-Flourouridine (FUDR), for the treatment of liver cancer. Broader application of the pump for use with the drug, morphine, to relieve pain is anticipated following FDA marketing clearance, which the Company expects to receive in fiscal 1997. The pump is currently used with morphine in certain international markets.
	Arrow's interventional procedure products accounted for 17.5%, 17.6% and 15.2% of net sales in fiscal 1996, 1995 and 1994, respectively. These products include cardiac assist products, such as intra-aortic balloon pumps and catheters, which are used primarily to augment temporarily the pumping capability of the heart following cardiac surgery, serious heart attack or balloon angioplasty; electrophysiology products, such as pacing and mapping catheters, which are used primarily to provide temporary pacing of the heart and to map the electrical signals which activate the heart; the Berman trademark Angiographic Catheter, which is used for pediatric cardiac angiographic procedures; and other interventional procedure products, such as the Super Arrow- Flex trademark sheath, which provides a kink-resistant passageway for the
(2)
ITEM 1. BUSINESS (CONTINUED):
introduction of cardiac and other catheters into the vascular system. The Company entered the interventional procedure market in 1987 through the purchase of certain assets from Critikon, Inc. and, in February 1994, expanded into the field of cardiac assist by acquiring the intra-aortic balloon pump and catheter business of Kontron Instruments, Inc. ("Kontron Instruments").
	In March 1995, the Company extended its line of electrophysiology products by entering into agreements with Cardiac Pathways Corporation ("Cardiac Pathways") for certain distribution and manufacturing rights to Cardiac Pathways' Trio/Ensemble trademark mapping catheter system and Radii trademark radio frequency ablation catheters used for the diagnosis and treatment of certain cardiac tachyarrhythmias (conditions involving abnormal, potentially life-threatening electrical signals in the heart). For the Trio/Ensemble trademark mapping catheter, the Company's distribution rights are worldwide, with the exception of Japan and certain countries in Europe, where Cardiac Pathways had distribution arrangements already in place. For the Radii trademark radio frequency ablation catheter, the Company has distribution rights in Germany. The Company received FDA marketing clearance in December 1995 for the Trio/Ensemble trademark mapping catheter system and currently sells this product in the U.S. In connection with these agreements, the Company entered into an agreement with Cardiac Pathways to purchase for $9.0 million preferred stock convertible into approximately 9.5% of the then outstanding common stock of Cardiac Pathways, which was paid in two equal installments in June and December 1995. In connection with the initial public offering of Cardiac Pathways' common stock in June 1996, the Company converted its preferred stock into common stock of Cardiac Pathways representing approximately 9.2% of the outstanding common stock of Cardiac Pathways.
	The Company received FDA marketing clearance in May 1996 for its Narrow-Flex trademark reduced diameter (8 Fr.) intra-aortic balloon catheter based on new, patented construction technology. The Company believes this catheter is the smallest available with full 40cc balloon augmentation capability, the same degree of heart pumping augmentation that previously had been available only through the use of larger diameter catheters. This smaller diameter catheter takes up less space in the femoral artery than previously available catheters and, therefore, is designed to improve blood circulation to the lower extremities. Reduced blood flow to the leg is a major complication of intra-aortic balloon pumping.
	SALES AND MARKETING
	Arrow markets its products to physicians and hospitals through a combination of direct selling and independent distributors. Within each hospital, marketing efforts are targeted to those physicians, including critical care specialists, cardiologists, anesthesiologists, interventional radiologists, electrophysiologists and surgeons, most likely to use the Company's products. Arrow's products are generally sold in the form of pre-sterilized procedure kits containing the catheters and virtually all of the related medical components and accessories needed by the clinician to prepare for and perform the intended medical procedure. Additional sales revenue is derived from equipment provided for use in connection with certain of the Company's disposable products.
	In fiscal 1996, 1995 and 1994, 61.8%, 64.3% and 69.1%, respectively, of the Company's net sales were to U.S. customers. In this market, approximately 78% of the Company's fiscal 1996 revenue was generated by its direct sales force. The remainder resulted from shipments to independent distributors. For the majority of such distributors, the Company's products represent a principal product line. Direct selling generally generates higher gross profit margins than sales made through independent distributors.
	Internationally, the Company sells its products through ten direct sales subsidiaries serving markets in Japan, Germany, the Netherlands, France, Spain, Greece, Africa, Canada, Mexico and the Czech Republic. As of November 1, 1996, independent distributors in 58 additional countries service the remainder of the world. (3)
ITEM 1. BUSINESS (CONTINUED):
	To further promote growth in international sales, in August 1993, the Company opened a 40,000 square foot manufacturing facility in Chihuahua, Mexico to support marketing initiatives in Latin America and other markets and, in January 1996, completed construction of a 65,000 square foot manufacturing and research facility in the Czech Republic, which began shipments in the fourth quarter of fiscal 1996 to support the growing European market.
	Revenues, profitability and identifiable assets attributable to significant geographic areas are presented in Note 16 to the Company's Consolidated Financial Statements, included herein.
	In general, Arrow does not produce against a backlog of customer orders; production is based primarily on the level of inventories of finished products and projections of future customer demand with the objective of shipping from stock upon receipt of orders. No single customer accounts for a material part of the Company's sales. Usage of the Company's products by hospitals and physicians has not been materially influenced by seasonal factors.
	Rapid growth in U.S. health care costs, coupled with a lack of access by some U.S. citizens to adequate health care, has resulted in numerous legislative initiatives in the U.S. Congress during the last several years. While none of these initiatives have to date resulted in substantive legislation, the intent of these initiatives was, generally, to expand health care coverage for the uninsured and reduce the rate of growth of total health care expenditures. In addition, certain states have made significant changes to their Medicaid programs and have adopted various measures to expand coverage and limit costs. Implementation of government health care reform and other efforts to control costs may limit the price of, or the level at which reimbursement is provided for, the Company's products. The increased emphasis in the U.S. on health care cost containment has resulted in reduced growth in demand for certain of the Company's products in markets where Arrow has 80% or greater market shares, and protecting that market share has affected the Company's pricing in some instances. The Company presently believes that this emphasis is increasing the importance of competitive prices and may continue to reduce the U.S. growth rate for certain of the Company's products. The Company anticipates that Congress, state legislatures, foreign governments and the private sector will continue to review and assess alternative health care delivery and payment systems. The Company cannot predict what additional legislation or regulation, if any, relating to the health care industry may be enacted in the future or what impact the adoption of any federal, state or foreign health care reform, private sector reform or market forces may have on its business. No assurance can be given that any such reforms will not have a material adverse effect on the medical device industry in general, or the Company in particular.
	RESEARCH AND PRODUCT DEVELOPMENT
	Arrow is engaged in ongoing research and development to introduce clinically advanced new products, to enhance the effectiveness, ease of use, safety and reliability of its existing products and to expand the clinical applications for which use of its products is appropriate. The principal focus of the Company's research and development effort is to identify and analyze the needs of physicians in critical care medicine and interventional cardiology and radiology, and to develop products that address these needs. The Company views ideas submitted by physicians and other health care professionals as an important source of potential research and development projects. The Company believes that these end-users are often in the best position to conceive of new products and to recommend ways to improve the performance of existing products. Most of the Company's principal products and product improvements have resulted from collaborative efforts with physicians, other health care professionals or other affiliated entities. For certain proprietary ideas, the Company pays royalties to such persons, and in many instances, incorporates such person's name in the
(4)
ITEM 1. BUSINESS (CONTINUED):
tradename or trademark for the specific product. The Company also utilizes other outside consultants, inventors and medical researchers to carry on its research and development effort and sponsors research through medical associations and at various universities and teaching hospitals.
	In addition, in recent years, the Company has pursued research and development of certain specialized products in collaboration with other medical device manufacturers. Certain of the Company's strategic acquisitions and investments have provided the basis for its introduction of significant new products. For example, the Company's acquisition of the intra-aortic balloon pump and catheter business of Kontron Instruments significantly expanded its business in the field of interventional cardiology. The Company anticipates that its alliance with Cardiac Pathways will enhance its strategic presence in the field of electrophysiology, and the Company's acquisition of Therex provides it with a new product offering of implantable drug delivery devices that the Company believes represents an important addition to its critical care product line. Where appropriate, the Company plans to continue to complement its internal research and development efforts with similar acquisitions and collaborative arrangements.
	Research and development expenses totaled $14.1 million (6.1% of net sales), $11.3 million (5.3% of net sales) and $10.5 million (5.9% of net sales) in fiscal 1996, 1995 and 1994, respectively. Such amounts were used to develop new products, improve existing products and implement new technology to produce these products.
	Since 1988, the Company has been developing the Arrow (registered trademark) - Fischell Pullback Atherectomy Catheter (the "PAC") for the removal of atherosclerotic plaque. The Company acquired certain patents relating to the technology underlying the PAC in 1990. In conjunction with the acquisition, the Company entered into a research and development agreement under which the Company was required to make certain payments upon the PAC's achievement of specified development milestones. In July 1995, the Company amended this agreement to modify the terms of payment of, and recognize as pre-paid royalties, such milestone payments thereunder. Since December 1994, the Company has been conducting human clinical trials outside the U.S. using the PAC in coronary arteries, and in March 1995, the Company received FDA approval under an Investigational Device Exemption ("IDE") to conduct Phase I human clinical trials in the U.S. for use of the PAC in treating atherosclerosis of coronary arteries. The Company believes that use of the device for removing plaque at arterial junctions (bifurcations) and for debulking vessels prior to stenting is attracting increasing interest from cardiologists. The device has been used successfully in 93 cases internationally and in 48 U.S. Phase I clinical trials, and a Phase II study prior to a FDA Premarket Approval application ("P.M.A.") is expected to begin in fiscal 1997. Additional study sites in both the U.S. and abroad are currently being identified. Although the Company is focusing primarily on development of the PAC for treatment of atherosclerosis in coronary arteries, the Company also has conducted Phase II clinical trials of the device under an IDE for use in treating atherosclerosis of leg arteries.
	The Company has been developing a more compact intra-aortic balloon pump to augment temporarily the pumping capability of the heart following cardiac surgery, serious heart attack or balloon angioplasty. In fiscal 1997, the Company expects to introduce this pump in certain international markets and, later in fiscal 1997, to submit a 510(k) application for FDA marketing clearance for sale of this pump in the U.S.
	The Company began conducting clinical trials under an IDE in August 1996 for a catheter device which uses microwave energy for the ablation of cardiac tissue responsible for ventricular tachycardia. Currently marketed radio frequency ablation catheters rely on resistive heating to ablate tissue and, consequently, their effectiveness is highly dependent on physical contact with the targeted tissue and the resistive nature of the adjacent tissue. The Company's
(5)
ITEM 1. BUSINESS (CONTINUED):
microwave energy ablation catheter uses radiative heating to ablate tissue and, therefore, is not as dependent on precise contact with the targeted tissue and the resiliency of the adjacent tissue. The microwave ablation catheter's radiative heating mechanism is also capable of creating deeper, wider lesions which electrophysiologists indicate are necessary for the effective treatment of ventricular tachycardia using ablation therapy. This microwave ablation catheter also incorporates several advanced features that are designed to permit continuous monitoring of catheter/tissue interface temperature, reduce the risk of tissue overheating and enhance maneuverability of the catheter to facilitate proper placement in the heart. In June 1996, the Company acquired additional exclusive, worldwide rights with respect to the technology underlying its microwave ablation catheter program from Microwave Medical Systems, Inc., the owner of the patents relating thereto, for $3.2 million.
	The Company also began conducting U.S. clinical trials in April 1996 in advance of a 510(k) Premarket Notification for its new Percutaneous Thrombolytic Device ("PTD") for use in clearing thrombosed synthetic hemodialysis grafts. This mechanical rotating device, patented by Johns Hopkins University and exclusively licensed by the Company, has shown superior graft de-clotting results in animal studies when compared with presently used methods. The IDE is designed to compare this new device with the leading currently used device in a 122 patient human clinical trial. Product introduction and physician training for the PTD is underway in selected international markets.
	In January 1994, the Company formed a cooperative relationship with Pennsylvania State University's Hershey Medical School for the commercial development of a fully implantable long-term Left Ventricular Assist Device ("LVAD"). Although LVADs are currently used to provide short-term cardiac assist to patients awaiting heart transplants, the Company's efforts are aimed at developing a fully implantable device to provide long-term cardiac assist for patients having insufficient ventricular heart function. In contrast to currently marketed LVADs, the LVAD currently under development by the Company is not intended merely as a bridge to heart transplant, but is designed, upon receipt of necessary regulatory approvals, to serve as a long-term cardiac assist device for certain patients. The Hershey Medical School LVAD has been in development for over fifteen years and has undergone extensive preclinical studies and testing. The product being developed for clinical trials will be electrically driven by a wearable battery pack transmitting power non-invasively through the skin to an implanted receiving coil that maintains a charge in batteries incorporated into the LVAD. These implanted batteries are capable of maintaining LVAD function for approximately 45 minutes without the aid of any external power source. In fiscal 1997, the Company expects to commence long-term durability testing of its LVAD, which must be satisfactorily completed before Phase I human clinical trials under an IDE can be commenced in the U.S. In addition, the Company currently anticipates conducting human clinical trials in Europe in fiscal 1998.
	There can be no assurance that the FDA or any foreign government regulatory authority will grant the Company authorization to market products under development or, if such authorization is obtained, that such products will prove competitive when measured against other available products.
	ENGINEERING AND MANUFACTURING
	Arrow has developed the core technologies that it believes are necessary for it to design, develop and manufacture complex, high quality catheter-related medical devices. This technological capability has enabled the Company to develop internally many of the major components of its products and reduce its unit manufacturing costs. To further help reduce manufacturing costs and improve efficiency, the Company has increasingly automated the production of its high-volume products and plans to continue to make significant capital expenditures to promote efficiency and reduce operating costs.
(6)
ITEM 1. BUSINESS (CONTINUED):
	Raw materials and purchased components essential to Arrow's business have typically been available within the lead times required by the Company and, consequently, procurement has not historically posed any significant problems in the operation of the Company's business. Although the Company currently maintains only one supplier for certain of its out-sourced components, it has identified alternative vendors for most of these items and, therefore, does not believe that it is dependent on any single supplier for major raw materials or components.
	PATENTS, TRADEMARKS, PROPRIETARY RIGHTS AND LICENSES
	Arrow believes that patents and other proprietary rights are important to its business. The Company also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. Arrow currently holds numerous U.S. patents and patent applications, as well as several foreign patents and patent applications which relate to aspects of the technology used in certain of the Company's products, including its radial artery catheter, percutaneous sheath introducer and interventional diagnostic catheter products. There can be no assurance that patent applications filed by the Company will result in the issuance of patents or that any patents owned by or licensed to the Company will provide competitive advantages for the Company's products or will not be challenged or circumvented by others.
	In addition, Arrow is a party to several license agreements with unrelated third parties pursuant to which it has obtained, for varying terms, the exclusive rights to certain patents held by such third parties in consideration for royalty payments. Many of the Company's major products, including its Arrow-Howes trademark Multi-Lumen Catheters and antiseptic surface treatment for catheters, have been developed pursuant to such license agreements. The Company has in the past also granted rights in certain patents relating to its Arrow-Howes trademark Multi-Lumen Catheters to others in consideration for royalty payments. The Company also has certain proprietary rights to aspects of the technology, including certain U.S. patents, used in the PAC. See "Research and Product Development." All of the existing patents owned by or licensed to the Company expire after November 1998. The U.S. patent licensed to the Company relating to its Arrow-Howes trademark Multi-Lumen Catheter expired in February 1995. Since the expiration of this patent, the Company has not experienced significant new competition in this market and the Company does not presently believe that such competition will have a material adverse effect on the Company's business, financial condition or results of operations for the foreseeable future.
	From time to time, the Company is subject to legal actions involving patent and other intellectual property claims. Based upon information presently available to the Company, the Company knows of no legal actions involving patent claims that are currently pending or threatened against the Company. Arrow owns a number of registered trademarks in the United States and, in addition, has obtained registration in many of its major foreign markets for the trademark ARROW registered trademark and certain other trademarks. Arrow Electronics, Inc., a publicly traded manufacturer of electronic and computer-related products ("Arrow Electronics"), has filed notices of opposition to the Company's applications for the trademark ARROW in the United States, South Africa, Israel, Korea, Portugal, Taiwan and Thailand and sought to cancel the Company's registration in Poland. The basis for Arrow Electronics' objection is the use of such trademark for catheter systems with electronic controls or displays (e.g., the Company's KAAT II PLUS trademark intra-aortic balloon pump). Subsequent to the opposition in the United States, on December 1, 1995 the Company filed a civil action against Arrow Electronics in the United States District Court in Philadelphia ("the Action") alleging trademark infringement and unfair competition arising out of Arrow Electronics' sales in the medical field. By declaratory judgment, the Company also seeks to have its rights in such trademark confirmed. In the Action, Arrow Electronics has asserted counterclaims of trademark and trade name infringement and unfair competition against the Company and is seeking a declaratory judgment that the Company is not entitled to registration for the same reasons raised in its U.S.
(7)
ITEM 1. BUSINESS (CONTINUED):
opposition. Decisions have been rendered in favor of the Company in the oppositions to the Korean and Taiwan applications and in the cancellation action in Poland; appeals have been filed by Arrow Electronics to both such decisions. A decision adverse to the Company has been received in Thailand. Trademark counsel in Thailand has recommended refiling the Company's trademark application. Decisions have not been rendered to date in the other jurisdictions. The outcome of the Action and the oppositions is not expected to have a material adverse effect on the Company's business, financial condition or results of operations.
	GOVERNMENT REGULATION
	As a manufacturer of medical devices, the Company is subject to extensive regulation by, among other governmental entities, the FDA and the corresponding agencies of states and foreign countries in which the Company sells its products. These regulations govern the introduction of new medical devices, the observance of certain standards with respect to the manufacture, testing and labeling of such devices, the maintenance of certain records, the tracking of such devices and other matters. Failure to comply with applicable federal, state or foreign laws or regulations could subject the Company to enforcement action, including product seizures, recalls, withdrawal of clearances or approvals, and civil and criminal penalties, any one or more of which could have a material adverse effect on the Company. In recent years, the FDA has pursued a more rigorous enforcement program to ensure that regulated businesses, like the Company's, comply with applicable laws and regulations. The Company believes that it is in substantial compliance with such governmental regulations. However, federal, state and foreign laws and regulations regarding the manufacture and sale of medical devices are subject to future changes. No assurance can be given that such changes will not have a material adverse effect on the Company.
	On occasion, the Company has received notifications, including warning letters, from the FDA of alleged deficiencies in the Company's compliance with FDA requirements. The Company believes that it has been able to address or correct such deficiencies. In addition, from time to time the Company has recalled, or issued safety alerts on, certain of its products. No such warning letter, recall or safety alert has had a material adverse effect on the Company, but there can be no assurance that a warning letter, recall or safety alert would not have such an effect in the future.
	Like other medical device manufacturers, the Company in recent years has experienced extended delays in obtaining FDA clearance or approval to market new products in the U.S. The FDA review process may continue to delay the Company's new product introductions in the future. It is possible that delays in receipt of, or failure to receive, any necessary clearance or approval could have a material adverse effect on the Company.
	COMPETITION
	Arrow faces substantial competition from a number of other companies in the market for catheters and related medical devices and equipment, including companies with greater financial and other resources. In response to increased concern about the rising costs of health care, U.S. hospitals and physicians are placing increasing emphasis on cost-effectiveness in the selection of products to perform medical procedures. The Company believes that its products compete primarily on the basis of product differentiation and quality and that its comprehensive manufacturing capability enables it to expedite the development and market introduction of new products and to reduce manufacturing costs, thereby permitting more effective responses to competitive pricing in an environment where the Company's ability to increase prices is limited.
(8)
ITEM 1. BUSINESS (CONTINUED):
	ENVIRONMENTAL COMPLIANCE
	The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. In the course of its business, Arrow is involved in the handling, storing and disposal of materials which are classified as hazardous. In June 1989, the Company was notified that it was among the potentially responsible parties under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), for the costs of investigating or remediating contamination at a waste recycling, treatment and disposal facility. The Company was notified by the U.S. Environmental Protection Agency ("EPA") in September 1995 of the means by which it may resolve its alleged liability with respect to the conduct of a remedial investigational feasibility study at this facility and of the opportunity to participate with other small waste contributors to this facility in a de minimis settlement which the EPA believes is likely to be appropriate for this facility. In December 1995, the Company indicated its interest in entering into such a de minimis settlement. In November 1991, the EPA made a formal request for information regarding the nature of the Company's waste that was transported to a municipal landfill which is included on the National Priority List under CERCLA. In June 1994, the Company, together with 16 other parties, was named in a complaint filed by a group of five companies seeking to recover costs incurred as a result of an EPA order directing such companies to take certain response actions in connection with environmental contamination of this landfill. The Company has been informed that further investigation as to the identification of additional potentially responsible parties is ongoing and, therefore, no determination has yet been made as to allocation of responsibility for such actions. CERCLA imposes strict joint and several liability for the costs of investigating and remediating certain contaminated properties. Although the costs of investigation, study and remediation at the sites referred to above may be substantial, the Company, based on present information, does not believe that its share of the liability for such matters will have a material adverse effect on its business, financial condition or results of operations. Therefore, the Company has not accrued any amounts toward such liability.
	The Company believes that its operations comply in all material respects with applicable environmental laws and regulations. While the Company continues to make capital and operational expenditures for protection of the environment, it does not anticipate that those expenditures will have a material adverse effect on its business, financial condition or results of operations.
	PRODUCT LIABILITY AND INSURANCE
	The design, manufacture and marketing of medical devices of the types produced by the Company entail an inherent risk of product liability. The Company's products are often used in intensive care settings with seriously ill patients. While the Company believes that, based on claims made against the Company in the past, the amount of product liability insurance maintained by the Company has been adequate, there can be no assurance that the amount of such insurance will be sufficient to satisfy claims made against the Company in the future or that the Company will be able to obtain insurance in the future at satisfactory rates or in adequate amounts.
	EMPLOYEES
	As of November 1, 1996, Arrow had 1,668 full-time employees. All of the Company's hourly-paid manufacturing employees at the Company's Reading and Wyomissing, Pennsylvania facilities are represented by the United Steelworkers of America AFL-CIO, Local 8467 (the "Union"). The Company and the Union are currently operating under a three-year agreement that expires in September 1997. The Company has never experienced an organized work stoppage or strike and considers its relations with its employees to be good.
(9)
ITEM 1. BUSINESS (CONTINUED):
	EXECUTIVE OFFICERS
	The executive officers of the Company and their ages and positions as of November 1, 1996 are listed below. All executive officers are elected or appointed annually and serve at the discretion of the Board of Directors. There are no family relationships among the executive officers of the Company.
	Name Age Current Position ---- --- ---------------- Marlin Miller, Jr. 64 President
Raymond Neag 65 Executive Vice President
John H. Broadbent, Jr. 58 Vice President-Finance 			 and Treasurer
T. Jerome Holleran 60 Vice President and Secretary
Philip B. Fleck 52 Vice President-Research 			 and Manufacturing
Paul L. Frankhouser 51 Vice President-Marketing
Thomas D. Nickel 57 Vice President-Regulatory Affairs 			 and Quality Assurance
Keith S. Bair 40 Controller
Mr. Miller has served as President and Chief Executive Officer and a director of the Company since it was founded in 1975. Mr. Miller is also President and a director of Arrow Precision Products, Inc. a corporation controlled by principal shareholders of the Company ("Precision"), and devotes approximately 10% of his business time to Precision. He is a director of Carpenter Technology Corporation, a manufacturer of specialty steel, and CoreStates Financial Corp., a financial institution.
Mr. Neag has served as Executive Vice President since April 1992 and prior thereto served as Senior Vice President of the Company. Mr. Neag has been an officer and a director of the Company since it was founded in 1975. Mr. Neag also serves as Secretary and a director of Precision.
Mr. Broadbent has served as Vice President - Finance, Treasurer and a director of the Company since it was founded in 1975. Mr. Broadbent also serves as Vice President-Finance, Treasurer and a director of Precision, and devotes approximately 10% of his business time to Precision.
Mr. Holleran has served as Vice President, Secretary and a director of the Company since it was founded in 1975. Since February 1986, Mr. Holleran has also been Vice President, Chief Operating Officer and a director of Precision. Mr. Holleran devotes approximately 90% of his business time to Precision and approximately 10% of his business time to Arrow. Since 1991, Mr. Holleran has served as President of Endovations, Inc., a subsidiary of Precision that manufactured and marketed certain gastroenterological medical products until the sale in June 1996 of a portion of its business to the Company and the remainder to an unrelated third party.
(10)
ITEM 1. BUSINESS (CONTINUED):
Mr. Fleck has served as Vice President - Research and Manufacturing of the Company since June 1994. From 1986 to June 1994, Mr. Fleck served as Vice President - Research and Engineering of the Company. From 1975 to 1986, Mr. Fleck served as Engineering Manager of the Company.
Mr. Frankhouser has served as Vice President-Marketing of the Company since 1986. From 1980 to 1986, Mr. Frankhouser served as Manager of Marketing of the Company.
Mr. Nickel has served as Vice President-Regulatory Affairs and Quality Assurance of the Company since 1991. From 1986 to 1991, Mr. Nickel served as Director of Regulatory Affairs and Quality Assurance of the Company.
Mr. Bair has served as Controller of the Company since 1991. From 1984 to 1991, Mr. Bair served as General Accounting Manager of the Company.
ITEM 2.
ITEM 2. PROPERTIES:
	The Company's corporate headquarters and principal research center are located in Reading, Pennsylvania in a 165,000 square foot facility completed in January 1992. This facility, which also includes manufacturing space, is located on 126 acres, a portion of which is subject to mortgage and related arrangements entered into in connection with a financing in the outstanding principal amount of $2.1 million as of August 31, 1996.
	Other major properties owned by the Company include a 130,000 square foot manufacturing and warehousing facility in Asheboro, North Carolina; a 145,000 square foot manufacturing facility in Wyomissing, Pennsylvania (of which approximately 34,000 square feet is leased to Precision); a 40,000 square foot manufacturing facility in Chihuahua, Mexico; a 49,000 square foot manufacturing and warehouse facility in Mount Holly, New Jersey, which became operational in December 1993; and a 65,000 square foot manufacturing and research facility in the Czech Republic, which became operational in January 1996.
	In addition, the Company leases a 55,000 square foot manufacturing facility in Everrett, Massachusetts and a 12,000 square foot manufacturing facility in Walpole, Massachusetts. The Company also leases sales offices and warehouse space in Canada, France, Germany, Japan, South Africa, the Netherlands, Spain and Greece, sales office space in Mexico and warehouse space in California.
	The Company considers all of its facilities to be in good condition and adequate to meet the present and reasonably foreseeable needs of the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS:
	The Company is a party to certain legal actions arising in the ordinary course of its business. Based upon information presently available to the Company, the Company believes that it has adequate legal defenses or insurance coverage for these actions and that the ultimate outcome of these actions will not materially adversely affect the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
	No matter was submitted to a vote of security holders during the fourth quarter of fiscal 1996, through the solicitations of proxies or otherwise.
(11)
PART II
ITEM 5.
ITEM 5. MARKETS FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS:
	The Company's common stock has traded publicly on the Nasdaq National Market System under the symbol "ARRO" since June 9, 1992, the date that its common stock was initially offered to the public. The table below sets forth the high and low sale prices of the Company's common stock as reported by the Nasdaq National Market System and the quarterly dividends per share declared by the Company during the last eight fiscal quarters:
Quarter Ended High Low Dividends ============= ======================================
August 31, 1996 40 3/8 21 $.040 May 31, 1996 45 38 1/2 .040 February 29, 1996 46 3/4 35 .040 November 30, 1995 48 3/4 38 3/4 .035
August 31, 1995 45 1/4 37 $.035 May 31, 1995 39 3/4 29 3/4 .035 February 28, 1995 37 1/4 27 .035 November 30, 1994 28 3/4 22 3/4 .030
	As of November 1, 1996, there were approximately 985 registered shareholders of the Company's common stock.
(12)
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
	The following selected consolidated financial data for the years ended August 31, 1996, 1995, 1994, 1993 and 1992 have been derived from the Company's audited consolidated financial statements. The consolidated financial statements of the Company as of August 31, 1996 and 1995 and for each of the three years in the period ended August 31, 1996 together with the notes thereto and the related report of Coopers & Lybrand L.L.P., independent accountants, are included elsewhere herein. The following data should be read in conjunction with the Company's audited consolidated financial statements, the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere herein.
	 	1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- 	(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF INCOME DATA: 	 Net sales $229,945 $213,014 $178,777 $150,157 $133,353 Cost of goods sold(1) 107,272 100,343 86,586 73,640 68,707 Gross profit 122,673 112,671 92,191 76,517 64,646 Operating expenses(1) Research, development and engineering 14,106 11,305 10,462 9,578 8,179 Selling, general, and administrative 54,154 48,119 	37,453 30,555 26,169 Total operating expenses 68,260 59,424 47,915 40,133 34,348 Operating income 54,413 53,247 44,276 36,384 30,298 Patent litigation settlement (income) (2) - - - 		- (7,000) Other expenses (income), net 2,300 (569) (812) (879) (1,154) Income before income taxes and cumulative effect of change in accounting principle 52,113 53,816 45,088 37,263 38,452 Provision for income taxes 19,282 19,374 16,232 13,564 14,381 -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle 32,831 34,442 28,856 23,699 24,071 Cumulative effect of change in accounting principle, net of tax (3) - - - 		- (3,380) -------- -------- -------- -------- -------- Net income $ 32,831 $ 34,442 $ 28,856 $ 23,699 $ 20,691 ======== ======== ======== ======== ========
Income per common share before cumulative effect of change in accounting principle (4) $ 1.41 $ 1.52 $ 1.29 $ 1.06 $ 4.74 Cumulative effect of change in accounting principle (4) - - - 		- (.81) -------- -------- -------- -------- -------- Net income per common share (4) $ 1.41 $ 1.52 $ 	1.29 $ 1.06 $ 3.93 ======== ======== ======== ======== ======== Cash dividends declared per common share (4) $ .155 $ .135 $ .115 $ .095 $ .30 Weighted average shares outstanding (4) 23,230 22,684 	22,394 22,355 5,186
(13)
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED):
		1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- 	 	(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Working capital $ 55,086 $ 52,863 $ 32,437 $ 29,730 $ 32,237 Total assets 299,421 262,510 209,720 141,003 	119,706 Notes payable and current maturities of long-term debt 34,001 23,508 	18,580 4,554 2,213 Long-term debt, excluding current maturities 15,988 20,463 	32,003 2,794 9,614 Shareholders' equity 219,774 190,937 132,803 106,362 84,787
(1) Cost of sales and operating expenses include non-recurring charges for vesting of restricted stock as of the Company's initial public offering on June 9, 1992. For the year ended August 31, 1992, these charges were $202 to cost of goods sold and $789 to operating expenses.
(2) This patent litigation settlement had the effect of increasing net income and net income per common share by $4,382 and $.20 (after giving effect to the recapitalization of the Company effected on June 9, 1992 in connection with the Company's initial public offering pursuant to which each previously outstanding share of the Company's Class A common stock and Class B common stock was converted into 5.0 and 5.25 shares of the Company's common stock, respectively (the "Recapitalization").
(3) In conjunction with the adoption of SFAS 106, the Company elected to recognize immediately the accumulated postretirement benefit obligation for current and future retirees. This had the effect of decreasing net income per common share in fiscal 1992 by $0.15 (after giving effect to the Recapitalization).
(4) Historical basis before giving effect to the Recapitalization for the year ended August 31, 1992. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for Earnings per Common Share adjusted for the Recapitalization.
(14)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
	The following discussion includes certain forward-looking statements. Such forward-looking statements are subject to a number of factors, including material risks, uncertainties and contingencies, which could cause actual results to differ materially from the forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see Exhibit 99.1 to this Report and the Company's periodic reports and other documents filed with the Commission.
RESULTS OF OPERATIONS
The following table presents for the three years ended August 31, 1996 statements of income expressed as a percentage of net sales and the period-to-period changes in the dollar amounts of the respective line items. 				 	Period-to-Period 	 	Percentage of Net Sales 	Percentage Increase ----------------------- ------------------- 		 			1996 1995 1994 		 	Year ended August 31, vs vs vs ----------------------- 		 1996 1995 1994 1995 1994 1993 ----- ----- ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 	7.9% 19.2% 19.1% Gross profit 53.3 52.9 51.6 8.9 22.2 20.5 Operating expenses: Research, development and engineering 6.1 5.3 5.9 	24.8 8.1 9.2 Selling, general and 	 administrative 23.5 22.6 20.9 12.5 28.5 22.6 ----- ----- ----- ----- ----- ----- Operating income 23.7 25.0 24.8 	2.2 20.3 21.7 Other expenses (income), net 1.0 (0.3) (0.4) * * * Income before income taxes and cumulative effect of change in accounting principle 22.7 25.3 25.2 (3.2) 19.4 21.0 Provision for income taxes 8.4 9.1 9.1 (0.5) 19.4 19.7 Income before cumulative effect of change in accounting principle 14.3 16.2 16.1 (4.7) 19.4 21.8 Cumulative effect of change in accounting principle - - - - - - ----- ----- ----- ----- ----- ----- Net income 14.3 16.2 16.1 (4.7) 19.4 21.8
* Not a meaningful comparison
(15)
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased by $16.9 million, or 7.9%, to $229.9 million in fiscal 1996 from $213.0 million in fiscal 1995. Net sales represent gross sales invoiced to customers, plus royalty income, less certain related charges, including freight costs, discounts, returns and other allowances. This increase was due primarily to an increase in unit volume in the Company's major product lines, including increased shipments of ARROWg+ard trademark Blue registered trademark antiseptic surface treated catheter products. Sales of critical care products increased 8.1% to $189.1 million from $175.0 million in fiscal 1995. Sales of interventional procedure products increased 7.4% to $40.3 million from $37.5 million in the previous year. International sales increased by $11.8 million, or 15.5%, to 38.2% of net sales, excluding royalty income, in fiscal 1996, compared to 35.7% in the prior year, principally as a result of growth in shipments of multi-lumen catheters and intra-aortic balloon catheters. The percentage of net sales attributable to the Company's direct sales force increased in fiscal 1996 to approximately 75% from approximately 72% in fiscal 1995, principally as a result of the Company's gradual conversion of dealer-based sales to direct sales.
This increase in net sales was lower than the Company anticipated due to an unforeseen reduction in the rate of growth in the U.S. market for certain high volume products, the strength of the U.S. dollar, particularly against the Japanese yen, and slower than anticipated new product introductions. Health care cost containment initiatives in the U.S. have reduced growth in demand in markets where Arrow has 80% or greater market shares, and protecting that market share has affected the Company's pricing in some instances. The Company anticipates that new sales and marketing strategies will result in increased U.S. sales of several products in fiscal 1997; however, U.S. demand for certain of the Company's core products is expected to remain sluggish. The Company also anticipates that demand in fiscal 1997 in international markets will continue to grow more rapidly than U.S. sales as the Company increases supply from its Mexico and new Czech Republic production facilities and expands international marketing activity. A return to the Company's traditionally higher rates of sales growth is dependent on its new products now in various stages of development or market introduction, as well as timely receipt of required regulatory approvals and timely completion of late stage research and development programs.
Gross profit increased 8.9% to $122.7 million in fiscal 1996 from $112.7 million in fiscal 1995. As a percentage of net sales, gross profit improved to 53.3% in fiscal 1996 from 52.9% in the prior year, due primarily to the reduction in manufacturing costs resulting from the Company's new sterilization facility which does not require the use of freon gas, operating efficiencies created by increased production at the Company's manufacturing facility in Mexico and increased sales of higher margin ARROWg+ard trademark Blue registered trademark antiseptic surface treated catheter products. This increase was lower than the Company anticipated due principally to the unfavorable impact of currency translations of foreign sales.
Research, development and engineering expenses in fiscal 1996 increased by 24.8% to $14.1 million from $11.3 million in fiscal 1995. As a percentage of net sales, these expenses increased to 6.1% in fiscal 1996 compared to 5.3% in fiscal 1995. These expenses increased primarily as a result of development expenses related to certain products of Therex, which was acquired in April 1995, and certain cardiac assist products.
Selling, general and administrative expenses increased by 12.5% to $54.1 million during fiscal 1996 from $48.1 million in the previous year, and increased as a percentage of net sales to 23.5% in fiscal 1996 compared to 22.6% in fiscal 1995. This percentage increase was due primarily to additions to the domestic direct sales force to replace a distributor in the New England area, the expansion of the Company's Japanese and European sales subsidiaries and the addition of expenses related to Therex.
(16)
FISCAL 1996 COMPARED TO FISCAL 1995 (CONTINUED):
Principally due to the above factors, operating income increased 2.2% to $54.4 million in fiscal 1996 from $53.2 million in fiscal 1995.
Other expenses (income), net, increased to $2.3 million in fiscal 1996 from $(0.6) million in fiscal 1995. Other expenses (income), net, consists principally of interest expense and foreign exchange gains and losses associated with the Company's direct sales subsidiaries, which resulted in a net loss in fiscal 1996, compared to a net gain in the prior fiscal year, due to the increased strength of the U.S. dollar.
As a result of the factors discussed above, income before income taxes decreased in fiscal 1996 by 3.2% to $52.1 million from $53.8 million in fiscal 1995. The effective income tax rate increased to 37.0% in fiscal 1996 from 36.0% in fiscal 1995, principally as a result of generating a larger proportion of earnings in higher tax jurisdictions and the reduction in the benefit of the research and development tax credit prior to its reinstatement on July 1, 1996.
Net income in fiscal 1996 decreased by 4.7% to $32.8 million from $34.4 million in fiscal 1995. As a percentage of net sales, net income represented 14.3% in fiscal 1996 compared to 16.2% in the previous year.
Net income per common share decreased to $1.41 for fiscal 1996, a decrease of $.11, or 6.9% per share, from $1.52 per share in fiscal 1995. Weighted average common shares outstanding increased to 23,229,687 in fiscal 1996 from 22,684,480 in fiscal 1995 as a result of the issuance on April 7, 1995 of 325,000 shares of Common Stock in connection with the acquisition of Therex and the issuance on May 8, 1995 of 500,000 shares of Common Stock in an underwritten public offering by the Company.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased by $34.2 million, or 19.2%, to $213.0 million in fiscal 1995 from $178.8 million in fiscal 1994. This increase was due primarily to an increase in unit volume in the Company's major product lines, the favorable impact of currency translations of foreign sales, increased shipments of ARROWg+ard trademark Blue registered trademark antiseptic surface treated catheter products and sales of intra-aortic balloon pumps and catheters. Sales of critical care products increased 16.2% to $175.0 million from $150.6 million in fiscal 1994. Sales of interventional procedure products increased 37.8% to $37.5 million from $27.2 million in the previous year. International sales increased by $20.9 million, or 37.9%, to 35.7% of net sales, excluding royalty income, in fiscal 1995, compared to 30.9% in the prior year, principally as a result of growth in shipments of multi-lumen catheters, the favorable impact of currency translations of foreign sales and sales of intra-aortic balloon pumps and catheters. The increase in international sales as a percentage of net sales was attributable principally to sales of intra-aortic balloon pumps and catheters and faster growth in international sales, as compared to U.S. sales, of the Company's principal product lines. The percentage of net sales attributable to the Company's direct sales force increased in fiscal 1995 to approximately 72% from approximately 70% in fiscal 1994, principally as a result of the Company's gradual conversion of dealer-based sales to direct sales.
Gross profit increased 22.2% to $112.7 million in fiscal 1995 from $92.2 million in fiscal 1994. As a percentage of net sales, gross profit improved to 52.9% in fiscal 1995 from 51.6% in the prior year, due primarily to the favorable impact of currency translations of foreign sales and a more profitable product and distribution mix. This impact was partially offset by higher sterilization costs resulting from the rising price of, and increasing excise tax imposed on, freon gas, which the Company used in its ethylene oxide sterilization process. The Company's new sterilization facility that does not require the use of freon gas became operational in May 1995. Because the Company uses the first-in, first-out (FIFO) method of inventory accounting, the Company did not realize lower costs through the use of this facility until late in the fourth quarter of fiscal 1995.
(17)
FISCAL 1995 COMPARED TO FISCAL 1994 (CONTINUED):
Research, development and engineering expenses in fiscal 1995 increased by 8.1% to $11.3 million from $10.5 million in fiscal 1994. As a percentage of net sales, these expenses decreased to 5.3% in fiscal 1995 compared to 5.9% in fiscal 1994. In July 1995, the Company amended its Arrow-Fischell trademark Pullback Atherectomy Catheter research and development and license agreements to modify the terms of payment of, and recognize as pre-paid royalties, certain milestone payments thereunder. These amendments have eliminated the need to make additional accruals toward these milestone payments under the research and development agreement.
Selling, general and administrative expenses increased by 28.5% to $48.1 million during fiscal 1995 from $37.5 million in the previous year, and increased as a percentage of net sales to 22.6% in fiscal 1995 compared to 20.9% in fiscal 1994. This percentage increase was due primarily to the relocation and expansion of the Company's sales offices and warehouse in Japan; the unfavorable impact of currency translations of foreign subsidiary operating expenses; the addition of sales and marketing expenses related to the Company's intra-aortic balloon pump and catheter business; operating expenses related to Arrow Iberia, the Company's direct sales subsidiary in Spain; and the amortization of goodwill resulting from the Company's acquisition of the intra-aortic balloon pump and catheter business of Kontron Instruments.
Principally due to the above factors, operating income increased 20.3% to $53.2 million in fiscal 1995 from $44.3 million in fiscal 1994.
Other expenses (income), net, decreased to $(0.6) million in fiscal 1995 from $(0.8) million in fiscal 1994. Other expenses (income), net, consists principally of gains on foreign exchange transactions associated with the Company's direct sales subsidiaries, which resulted in net gains in both periods, but were offset in fiscal 1995 and 1994 by interest expense of approximately $2.0 million and $1.0 million, respectively, on debt incurred primarily in connection with the acquisition of the Company's intra-aortic balloon pump and catheter business.
As a result of the factors discussed above, income before income taxes increased in fiscal 1995 by 19.4% to $53.8 million from $45.1 million in fiscal 1994. The effective income tax rate was 36.0% in both fiscal 1995 and fiscal 1994.
Net income in fiscal 1995 increased by 19.4% to $34.4 million from $28.9 million in fiscal 1994. As a percentage of net sales, net income represented 16.2% in fiscal 1995 compared to 16.1% in the previous year.
Net income per common share increased to $1.52 for fiscal 1995, an increase of $.23, or 17.8% per share, from $1.29 per share in fiscal 1994. Weighted average common shares outstanding increased to 22,684,480 in fiscal 1995 from 22,393,517 in fiscal 1994 as a result of the issuance on April 7, 1995 of 325,000 shares of Common Stock in connection with the acquisition of Therex and the issuance on May 8, 1995 of 500,000 shares of Common Stock in an underwritten public offering by the Company.
(18)
The following table compares Historical Earnings per Common Share with Earnings per Common Share adjusted for the Recapitalization, retroactive to the earliest year presented:
HISTORICAL DATA: 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Income per common share before cumulative effect of change in accounting principle $ 1.41 $ 1.52 $ 1.29 $ 1.06 $ 4.74 Cumulative effect of change in accounting principle - - - - (.81) ------ ------ ------ ------ ------ Net income per common share $ 1.41 $ 1.52 $ 1.29 $ 1.06 $ 3.93 ------ ------ ------ ------ ------ Weighted average shares outstanding (000 omitted) 23,230 22,684 22,394 22,355 5,186 ------ ------ ------ ------ ------
RECAPITALIZED DATA: Income per common share before cumulative effect of change in accounting principle $ 1.10 Cumulative effect of change in accounting principle (.15) ------ Net income per common share $ . 95 ------ Weighted average shares outstanding (000 omitted) 21,831 ------
LIQUIDITY AND CAPITAL RESOURCES
For the year ended August 31, 1996, net cash provided by operations was $31.5 million, an increase of $2.6 million from the prior year. This increase was due primarily to changes in operating assets and liabilities. Accounts receivable increased by $6.8 million for the year ended August 31, 1996, compared to an $8.2 million increase in the prior year. Accounts receivable, measured in days sales outstanding, increased to 76 days at August 31, 1996, from 67 days at August 31, 1995, due principally to an increase in the collection period for the Company's international sales.
Net cash used in the Company's investing activities increased to $38.5 million in fiscal 1996 from $29.0 million in the prior year, principally as a result of an increase of $5.7 million in capital expenditures related to the construction and equipping of the Company's new manufacturing and research facility in the Czech Republic, payment in December 1995 of the remaining $4.5 million to Cardiac Pathways pursuant to an agreement to purchase for $9.0 million preferred stock convertible into approximately 9.5% of the then outstanding common stock of Cardiac Pathways, payment of a $3.0 million pre-paid royalty to Cardiac Pathways in December 1995 in exchange for certain distribution and manufacturing rights acquired by the Company upon receipt of FDA 510(k) marketing clearance in December 1995 for Cardiac Pathways' Trio/Ensemble trademark mapping catheter system and payment of $3.2 million to Microwave Medical Systems, Inc. in May 1996 for the purchase of certain technology related to the Company's microwave ablation catheter program.
Net cash provided by financing activities decreased to $2.4 million in fiscal 1996 compared to $5.6 million in fiscal 1995. This change resulted principally from an increase in borrowings under the Company's revolving credit facility, offset by repayments of long-term debt.
(19)
As of August 31, 1996, the Company had U.S. bank credit facilities providing a total of $55.0 million in available revolving credit for general business purposes, of which $31.0 million remained unused. In addition, certain of the Company's foreign subsidiaries have revolving credit facilities totaling the U.S. dollar equivalent of $8.9 million, of which $5.2 million remained unused as of August 31, 1996. Combined borrowing under these credit facilities increased $13.2 million and $3.5 million during the years ended August 31, 1996 and 1995, respectively.
During fiscal 1996, 1995 and 1994, the percentage of the Company's sales invoiced in currencies other than the U.S. dollar was 27.0%, 25.1% and 19.5%, respectively. In addition, a small part of the Company's cost of goods sold is denominated in foreign currencies. As a partial hedge against adverse fluctuations in exchange rates, the Company periodically enters into foreign currency exchange contracts with certain major financial institutions. By their nature, all such contracts involve risk, including the risk of nonperformance by counterparties. Accordingly, losses relating to these contracts could have a material adverse effect upon the Company's business, financial condition and results of operations. Based upon the Company's knowledge of the financial condition of the counterparties to its existing forward contracts, the Company believes that it does not have any material exposure to any individual counterparty. The Company's policy prohibits the use of derivative instruments for speculative purposes. As of November 1, 1996, outstanding foreign currency exchange contracts totaling the U.S. dollar equivalent of $20.8 million mature at various dates through May 1997. The Company expects to continue to utilize foreign currency exchange contracts to manage its exposure, although there can be no assurance that the Company's efforts in this regard will be successful.
Based upon its present plans, the Company believes that its working capital, operating cash flow and available credit sources will be adequate to repay current portions of long-term debt, to finance currently planned capital expenditures and to meet the currently foreseeable liquidity needs of the Company.
During the periods discussed above, the overall effects of inflation and seasonality on the Company's business were not significant.
(20)
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	See Item 14 (a) (1) and (2).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
	Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
	Information regarding directors and nominees for directors of the Company, as well as certain other information required by this item, will be included in the Company's Proxy Statement to be issued in connection with its 1997 Annual Meeting of Shareholders (the "Proxy Statement"), and is incorporated herein by reference. The information regarding executive officers required by this item is contained herein in Part I under the caption "Executive Officers."
ITEM 11.
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.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
	Information regarding certain relationships and related transactions with management of the Company will be included in the Proxy Statement and is incorporated herein by reference.
(21)
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K:
	(a) (1) The following financial statements of the Company are filed as part of this Form 10-K. 		 			Page ---- 	1. Report of Independent Accountants 24
	2. Consolidated Balance Sheets at 		August 31, 1996 and 1995 	25,26
	3. Consolidated Statements of Income 	for the years ended August 31, 1996, 		1995 and 1994 27
	4. Consolidated Statements of Cash Flows 		for the years ended August 31, 1996, 	 	1995 and 1994 	28,29
	5. Consolidated Statements of Changes in 		Shareholders' Equity for the years ended 		August 31, 1996, 1995 and 1994 30
	6. Notes to Consolidated Financial Statements 31-45
	(a) (2) The following financial statement schedules of the Company are filed as part of this Form 10-K: 				Page ---- 	1. Report of Independent Accountants on 		Financial Statement Schedule 46
	2. Schedule II - Valuation and Qualifying Accounts 47
	Other statements and schedules are not presented because they are either not required or the information required by statements or schedules is presented elsewhere.
	(a) (3) See Exhibit Index on pages 48 through 58 hereof for a list of the Exhibits filed or incorporated by reference as part of this report.
	(b) Reports on Form 8-K:
		None
(22)
SIGNATURES
	Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
				ARROW INTERNATIONAL, INC.
				By: /s/ John H. Broadbent, Jr. -------------------------- 				 John H. Broadbent, Jr. 				 Vice President-Finance 				 and Treasurer
Dated: November 27, 1996
	Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
	Signatures Title 	Date
/s/ Marlin Miller, Jr. Director, President and 	November 27, 1996 - -------------------------- (Marlin Miller, Jr.) Chief Executive Officer 		(Principal Executive 		Officer)
/s/ Raymond Neag Director, Executive 	November 27, 1996 - -------------------------- (Raymond Neag) Vice President
/s/ John H. Broadbent, Jr. Director, Vice President- 	November 27, 1996 - -------------------------- (John H. Broadbent, Jr.) Finance and Treasurer 	 	(Principal Financial 		 Officer and Principal 	Accounting Officer)
/s/ T. Jerome Holleran Director, Vice President, 	November 27, 1996 - -------------------------- (T. Jerome Holleran) Secretary
/s/ Robert L. McNeil, Jr. Director 	November 27, 1996 - -------------------------- (Robert L. McNeil, Jr.)
/s/ Richard T, Niner Director 	November 27, 1996 - -------------------------- (Richard T. Niner)
/s/ George W. Ebright Director November 27, 1996 - -------------------------- (George W. Ebright)
(23)
Coopers & Lybrand
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Arrow International, Inc.:
We have audited the accompanying consolidated balance sheets of Arrow International, Inc. as of August 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arrow International, Inc. as of August 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center Philadelphia, Pennsylvania September 27, 1996
(24)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands, Except Share Amounts)
August 31, ------------------------ 			 	1996 1995 --------- --------- ASSETS
Current assets: 	Cash and cash equivalents $ 4,807 $ 9,453 	Accounts receivable, less allowance for doubtful accounts 		of $774 and $650 in 1996 and 1995, respectively 50,093 43,399 	Inventories 43,509 33,887 	Prepaid expenses and other 9,575 8,806 	Deferred income taxes 2,709 1,129 --------- --------- 		Total current assets 110,693 96,674 --------- ---------
Property, plant and equipment: 	Land and improvements 5,520 5,486 	Buildings and improvements 71,674 61,381 	Machinery and equipment 65,457 54,823 	Construction-in-progress 15,900 14,419 --------- --------- 				158,551 136,109 Less accumulated depreciation (49,552) (40,088) --------- --------- 			 	108,999 96,021 --------- ---------
Goodwill, net of accumulated amortization of $6,730 	and $4,185 in 1996 and 1995, respectively 51,754 54,533 Intangible and other assets, net of accumulated amortization of 	$6,894 and $5,802 in 1996 and 1995, respectively 27,975 13,007 Deferred income taxes - 2,275 --------- ---------
		Total assets $ 299,421 $ 262,510 ========= =========
See notes to consolidated financial statements
Continued
(25)
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, continued
(All Dollar Amounts in Thousands, Except Share Amounts)
	 August 31, ------------------------- 	 		 	 1996 1995
LIABILITIES
Current liabilities: 	Current maturities of long-term debt $ 6,293 $ 8,969 	Notes payable 27,708 14,539 	Accounts payable 8,079 6,729 	Accrued liabilities 6,297 5,715 	Accrued compensation 5,493 6,264 	Accrued income taxes 1,738 1,595 --------- --------- 		Total current liabilities 55,607 43,811
Long-term debt 15,988 20,463 Accrued postretirement benefit obligation 7,577 7,299 Deferred income taxes 476 - Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred Stock, no par value; 	5,000,000 shares authorized; 	none issued - - Common stock, no par value; 	50,000,000 shares authorized; 	issued 26,478,813 	shares in 1996 and 1995 45,580 45,608 Retained earnings 183,502 154,272 	Less cost of treasury stock: 		3,249,914 and 3,247,805 shares 		in 1996 and 1995, respectively (8,308) (8,240) Cumulative translation adjustment (532) - Unearned compensation (469) (703) --------- ---------
		Total shareholders' equity 219,773 190,937 --------- ---------
		Total liabilities and shareholders' equity $ 299,421 $ 262,510 ========= =========
See notes to consolidated financial statements
(26)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(All Dollar Amounts in Thousands, Except per Share Amounts)
	 	 for the years ended August 31, ---------------------------------- 	 	1996 1995 1994 --------- --------- ---------
Net sales $ 229,945 $ 213,014 $ 178,777 Cost of goods sold 107,272 100,343 86,586 --------- --------- --------- Gross profit 122,673 112,671 92,191 --------- --------- --------- Operating expenses: Research, development and engineering 14,106 11,305 10,462 Selling, general and administrative 54,154 48,119 37,453 --------- --------- --------- 	 	68,260 59,424 47,915 --------- --------- --------- Operating income 54,413 53,247 44,276 --------- --------- --------- Other expenses (income): 	Interest expense, net of amounts capitalized 1,849 1,974 1,024 	Interest income (611) (239) (130) 	Other, net 1,062 (2,304) (1,706) --------- --------- --------- 	 	2,300 (569) (812) --------- --------- --------- Income before income taxes 52,113 53,816 45,088
Provision for income taxes 19,282 19,374 16,232 --------- --------- ---------
Net income $ 32,831 $ 34,442 $ 28,856 ========= ========= =========
Net income per common share $ 1.41 $ 1.52 $ 1.29 ========== ========== ========== Cash dividends per common share $ .155 $ .135 $ .115 ========== ========== ========== Weighted average shares outstanding 23,229,867 22,684,480 22,393,517 ========== ========== ==========
See notes to consolidated financial statements
(27)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Dollar Amounts in Thousands)
	 for the years ended August 31, ------------------------------ 1996 1995 1994 -------- -------- -------- Cash flows from operating activities: Net income $ 32,831 $ 34,442 $ 28,856 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 9,746 	8,087 	6,985 Amortization of intangible assets 3,637 	3,378 	2,043 Amortization of unearned compensation 210 	226 160 Deferred income taxes 1,171 	2,113 	(1,874) Other (157) 	304 	352 Changes in operating assets and liabilities: Accounts receivable (6,819) (8,178) 	(6,665) Inventories (9,623) 	(7,225) 	(2,147) Prepaid expenses and other (769) 	(3,325) 	(112) Accounts payable and accrued liabilities 1,931 	(2,094) 	(1,031) Accrued compensation (771) 	1,115 546 Accrued income taxes 143 	67 	(2,065) -------- -------- -------- 	 Total adjustments (1,301) 	(5,532) (3,808) -------- -------- -------- 	 Net cash provided by operating activities 31,530 28,910 	25,048 -------- -------- -------- Cash flows from investing activities: Capital expenditures, net (22,724) (17,275) (16,970) Increase in intangible and other assets (15,826) (5,330) (6,079) Cash paid for business acquired - (6,442) (41,417) -------- -------- -------- 	 Net cash used in investing activities (38,550) (29,047) (64,466) -------- -------- -------- Cash flows from financing activities: Increase in notes payable 13,168 3,453 8,384 Proceeds from issuance of long-term debt 12,037 4,967 40,280 Principal payments of long-term debt (19,187) (15,033) (5,430) Proceeds from issuance of common stock - 15,293 - 	Dividends paid (3,601) (3,083) (2,575) Purchase of treasury stock (43) 	(24) - -------- -------- -------- 	 Net cash provided by financing activities 2,374 	5,573 40,659 -------- -------- -------- Net change in cash and cash equivalents (4,646) 5,436 1,241 Cash and cash equivalents at beginning of year 9,453 	4,017 2,776 -------- -------- -------- Cash and cash equivalents at end of year $ 4,807 	 $ 9,453 $ 4,017 ======== ======== ========
See notes to consolidated financial statements
Continued
(28)
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(All Dollar Amounts in Thousands)
	 	for the years ended August 31, ------------------------------ 	1996 1995 1994 -------- -------- -------- Supplemental disclosures of cash flow information:
Cash paid during the year for: Interest (net of amount capitalized) $ 1,849 $ 1,974 $ 1,024 Income taxes $ 17,305 $ 19,449 $ 16,481
Supplemental schedule of noncash investing and financing activities:
During 1996, 1995 and 1994, the Company assumed liabilities in conjunction with the purchase of certain intangible assets as follows:
Fair value of assets acquired $ - $ 19,488 $ - Fair value of common stock issued - 11,253 - Cash paid for assets - 6,442 - -------- -------- -------- Liabilities assumed $ - $ 1,793 $ - ======== ======== ========
Cash paid for business acquired: 	Working capital, other than cash $ - $ (61) $ 4,010 	Property, plant and equipment - 150 315 	Goodwill - 6,353 37,092 -------- -------- -------- 	$ - $ 6,442 $ 41,417 ======== ======== ========
See notes to consolidated financial statements
(29)
ARROW INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY for the years ended August 31, 1994, 1995 and 1996
(All Dollar Amounts in Thousands Except Share Amounts)
See notes to consolidated financial statements
(30)
ARROW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Amounts)
1. Summary of Significant Accounting Policies:
General: Arrow International, Inc. develops, manufactures and markets a broad range of clinically advanced, disposable catheters and related products for critical care and interventional medical procedures.
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Arrow International, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the fiscal 1996 presentation.
Cash and Cash Equivalents: The Company considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents. The carrying amount of cash and cash equivalents approximated fair value.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Inventory Valuation: Inventories are valued at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.
Property, Plant and Equipment: Property, plant and equipment are stated at cost and are depreciated over the estimated useful lives of the assets using the straight-line method. Upon retirement, sale or other disposition, the cost and accumulated depreciation are eliminated from the accounts and any gain or loss is included in operations.
Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired and is being amortized using the straight-line method over 25 years. The recoverability of goodwill is periodically reviewed by the Company. In assessing recoverability, many factors are considered, including operating results and cash flows. The Company believes that no impairment of goodwill existed at August 31, 1996.
Intangible and Other Assets: Intangible and other assets, net, include certain assets acquired resulting from business acquisitions and investments and are being amortized using the straight-line method over their estimated periods of benefits.
Revenue Recognition: Revenue is recognized at the time products are shipped and title has passed to the customer. Net sales represent gross sales invoiced to customers, plus royalty income, less certain related charges, including freight costs, discounts, returns and other allowances.
Continued
(31)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued):
Income Taxes: The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns using current tax rates.
Undistributed earnings of the Company's foreign subsidiaries are indefinitely reinvested and amounted to $6,588 and $5,527 at August 31, 1996 and 1995, respectively. No deferred taxes have been provided on these earnings.
Foreign Currency Translation: Most of the Company's foreign subsidiaries use the U.S. dollar as the functional currency. Monetary assets and liabilities are translated at year- end exchange rates and inventories, property and nonmonetary assets and liabilities at historical rates. Income and expense accounts are translated at the average rates in effect during the year, except that depreciation, amortization and cost of sales are translated at historical rates. Adjustments resulting from the translation of the entities are included in "Other expenses (income)" of the consolidated statements of income. Foreign subsidiaries that use the local currency as the functional currency translate all assets and liabilities at year-end exchange rates, all income and expense accounts at average rates and record adjustments from the translation in a separate component of shareholders' equity. Gains and losses resulting from transactions of the Company and its foreign subsidiaries are included in "Other expenses (income)". Aggregate foreign exchange (gains) and losses were $919, ($3,090) and ($2,105) for the years ended August 31, 1996, 1995 and 1994, respectively.
Concentration of Credit Risk: Concentration of credit risk with respect to trade receivables is limited due to both the large number of customers and their geographic dispersion. As of August 31, 1996 and 1995, the Company had no significant concentrations of credit risk.
Postretirement Benefits Other Than Pensions: Postretirement health care and life insurance benefits are recorded using the accrual method of accounting based on actuarially determined costs which are recognized over the period from the date of hire to the full eligibility date of employees who are expected to qualify for such benefits.
2. Business Acquisitions:
On April 7, 1995, the Company acquired Therex Limited Partnership, a developmental stage company ("Therex"), for approximately $6,300 in cash and 325,000 shares of Common Stock valued at $34 5/8 per share. Therex is engaged in the development, manufacture and marketing of implantable, constant flow delivery pumps and a broad line of implantable vascular access ports. The acquisition has been accounted for using the purchase method of accounting. The cost of the acquisition has been allocated on the basis of the fair market value of the assets acquired and the liabilities assumed. The excess of the purchase price over the estimated fair market value of the net assets acquired of approximately $17,631 was recognized as goodwill and is being amortized over a period of 25 years. Pro forma results of operations are not significant.
On February 8, 1994, the Company purchased all of the outstanding common stock of Kontron Instruments, Inc. ("Kontron Instruments") for approximately $41,400, subject to certain adjustments. Kontron Instruments develops, manufactures, markets and services intra-aortic balloon pumps and catheters frequently used to temporarily augment the pumping capability of the heart following heart
Continued
(32)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business Acquisitions (Continued):
surgery, balloon angioplasty or serious heart attack. The funds used to acquire Kontron Instruments were provided by the proceeds from the incurrence of $40,000 in long-term debt and approximately $1,400 in borrowings under the Company's existing bank credit facilities.
The acquisition has been accounted for under the purchase method of accounting and, accordingly, the results of Kontron Instruments have been included in the accompanying consolidated financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market values of the assets acquired and the liabilities assumed. The excess of the aggregate purchase price over the estimated fair market values of the net assets acquired of approximately $37,100 was recognized as goodwill and is being amortized over a period of 25 years.
The following unaudited pro forma financial information combines the consolidated results of operations as if Kontron Instruments had been acquired as of the beginning of the period presented. Pro forma adjustments include only the effects of events directly attributed to a transaction that are factually supportable and expected to have a continuing impact. The pro forma adjustments contained in the table below include amortization of intangibles, interest expense on the acquisition debt and the related income tax effects.
			 	For the Year 			 	 Ended, 				 August 31, 1994 --------------- 	Net sales $ 185,694 	Net income $ 28,913 	Net income per common share $ 1.29
The pro forma financial information does not necessarily reflect the operating results that would have occurred had the acquisition been consummated as of the above dates, nor is such information indicative of future operating results. In addition, the pro forma financial results contain estimates since Kontron Instruments did not maintain information on a period comparable with the Company's fiscal year-end.
Continued
(33)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Employees' Stock Plans:
The 1992 Stock Incentive Plan authorizes the granting of stock options, stock appreciation rights and restricted stock.
On December 1, 1993 and February 11, 1994, the Company issued 44,900 and 8,200 shares, respectively, of restricted Common Stock to certain employees pursuant to its 1992 Stock Incentive Plan. The market value of the shares awarded was $932 and $190, respectively. The transactions were recorded as unearned compensation in a separate component of shareholders' equity and are being amortized to expense over the five year vesting period.
On January 17, 1996, the Company granted 171,700 options to key employees of the Company and its subsidiaries pursuant to the 1992 Stock Incentive Plan. The option price per share was equal to the fair market value of the Common Stock on the date the option was granted and shall expire ten years from the date such option was granted. These options are exercisable upon the first anniversary of the date of grant and each of the following four years at the rate of 20% per year.
The Arrow International, Inc. Directors Stock Incentive Plan was approved by shareholders on January 17, 1996. The plan provides for a maximum of 100,000 non-qualified stock options. The option price per share is equal to the fair market value of the Common Stock on the date the option is granted. The term of each option is ten years and an option becomes exercisable one year after the date of grant. Under the plan, members of the Board of Directors of the Company and its subsidiaries are eligible to participate in this plan if they are not also employees or consultants of the Company and its subsidiaries, were not shareholders at the time of the Company's initial public offering on June 9, 1992, and do not serve on the Board as representatives of the interest of shareholders who have made an investment in the Company. An initial grant of 5,000 options shall be made upon each eligible director's initial election to the Board and an additional 500 options on the date each year when directors are elected to the Board.
Stock option activity is summarized below:
			Number Option Price Expiration 			of shares per share Date --------- ---------- -------- Outstanding at beginning of year - - - Granted 176,700 $38.00 2006 Exercised - - - Canceled - - - --------- ---------- -------- Outstanding at August 31, 1996 176,700 $38.00 2006 Exercisable at August 31, 1996 - - -
The Company follows the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations, which require compensation expense for options to be recognized only if the market price of the underlying stock exceeds the exercise price on the date of grant. Accordingly, the Company has not recognized compensation expense for its options granted in fiscal 1996.
Continued
(34)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Related Party Transactions:
Certain of the Company's facilities, personnel and services are being utilized by Arrow Precision Products, Inc. ("Precision"). Precision is related to the Company through common ownership. The Company charged Precision $478, $367 and $573 for the cost of such utilization during the years ended August 31, 1996, 1995 and 1994, respectively. The Company made purchases from Precision amounting to $1,222, $1,085 and $1,108 for the years ended August 31, 1996, 1995 and 1994, respectively. In addition, the Company made payments on behalf of Precision related to certain costs incurred by Precision for which the Company was reimbursed, amounting to $974, $1,025 and $1,170 during the years ended August 31, 1996, 1995 and 1994, respectively. The Company had a net receivable from Precision of $107 and $194 at August 31, 1996 and 1995, respectively.
In June 1996, the Company purchased for $1,135 certain assets from a subsidiary of Precision that manufactured and marketed gastroenterological medical products.
5. Rent Expense:
The Company leases certain warehouses and production facilities, office equipment and vehicles under leases with varying terms.
Rent expense under operating leases totaled $3,094, $2,684 and $1,838 for the years ended August 31, 1996, 1995 and 1994, respectively. Following is a schedule by year showing future minimum rentals under operating leases.
	Year Ending August 31, Total --------------------- -------- 		1997 $ 2,761 	 	1998 1,924 	 	1999 715 		2000 222 	 	2001 30 	 	Thereafter - -------- 		$ 5,652 ========
Continued
(35)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Inventories:
Inventories are summarized as follows:
		1996 1995 -------- --------	 Finished goods $ 16,878 $	13,246 Semi-finished goods 10,010 	7,133 Work-in-process 7,107 	5,768 Raw materials 9,514 	7,740 -------- -------- 	$ 43,509 $	33,887 ======== ========
7. Credit Facilities:
As of August 31, 1996 and 1995, the Company had U.S. bank credit facilities providing a total of $55,000 and $25,000 in revolving credit for general business purposes of which $30,978 and $10,763 remained unused. Interest, based on either bids provided by the bank or the prime rate, London Interbank Offered Rates (LIBOR) or Certificate of Deposit rates, plus applicable margins, is payable monthly during the revolving credit period. At August 31, 1996 and 1995, the weighted average interest rates on short-term borrowings were 5.6% and 6.3%, respectively. At August 31, 1996 and 1995, certain of the Company's foreign subsidiaries had available revolving credit facilities, at market rates of interest, totaling the U.S. dollar equivalent of $8,894 and $1,787, under which $3,685 and $302 was outstanding, respectively. At August 31, 1996, the Company is required to maintain tangible net worth (total assets less total liabilities and intangible assets) of at least $50,000, working capital of $10,000 and a working capital ratio of 1.25 to 1. At August 31, 1996 and 1995, the carrying amount of short-term borrowings approximated fair value.
8. Accrued Compensation:
The components of accrued compensation at August 31, 1996 and 1995 are as follows:
		1996 1995 -------- ------- Accrued vacation pay $ 2,480 $	2,232 Accrued payroll 1,149 	2,334 Accrued productivity plan compensation 1,772 	1,626 Other 92 72 -------- ------- 	$ 5,493 $	6,264 ======== =======
Continued
(36)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Long-Term Debt:
Long-term debt consists of the following:
	 	1996 1995 ------- -------- Bank note payable in equal quarterly installments of $1,250 through February 1997, plus interest at a variable rate based upon the London Interbank Offered Rate (LIBOR) plus 0.875%, currently 6.47% at August 31, 1996 $ 2,500 $ 7,500
Bank note payable in equal quarterly installments of $500 through May 1999, plus interest at a variable rate based upon LIBOR plus 0.875%, currently 6.486% at August 31, 1996 3,500 5,500
Bank note payable in February 1999, paid in July 1996, plus interest at a variable rate based upon LIBOR plus 0.875%, previously 6.434% at August 31, 1995 - 	10,000
Bank note payable in July 2001, plus interest at a variable rate based upon LIBOR plus 0.75%, currently 4.31% at August 31, 1996 12,037 -
Bank note payable in quarterly installments of $411 through October 1997, plus interest at 4.2% 2,019 3,904
Individual, $1,500 face amount, noninterest bearing; due in semi-annual installments of $62 through July 1997, net of imputed interest of $81 at 8.72% 125 228
Industrial Development Authority Bonds, $3,500 face amount, subject to mandatory annual sinking fund payments of $200 from December 1989 through December 1998; and $300 from December 1999 through December 2003; plus interest at a floating rate of 2.85% to 5.5% in 1996 2,100 2,300 ------- ------- Total debt $22,281 $29,432
Less current maturities 6,293 8,969 ------- ------- 	$15,988 $20,463 ======= =======
Continued
(37)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Long-Term Debt (Continued):
The Industrial Development Authority Bonds are collateralized by a $2,147 letter of credit, and the Company's headquarters, research and development, and manufacturing facility in Reading, PA.
Following is a schedule by year showing maturities of long-term debt for each of the five years in the period ending August 31, 2001:
	Year Ending August 31, Total --------------------- ------- 		1997 $ 6,293 	 	1998 2,251 	 	1999 300 	 	2000 300 		 2001 300 		 Thereafter 12,837 ------- 			$22,281 ======= Total interest costs for fiscal 1996, 1995 and 1994 were $3,170, $3,055 and $1,953, respectively, of which $1,321, $1,081 and $929, respectively, were capitalized.
At August 31, 1996 and 1995, the carrying amount of long term debt approximated fair value.
10. Income Taxes:
The provision for income taxes consists of: ---------------------------------------- 	Federal State 	Foreign Total -------- -------- -------- -------- 	Current $ 15,459 $ 1,405 $ 	1,247 $ 18,111 	Deferred 1,030 141 - 1,171 -------- -------- -------- -------- 	 	$ 16,489 $ 1,546 $ 	1,247 $ 19,282 ======== ======== ======== ========
---------------------------------------- 	 	Federal State 	Foreign Total -------- -------- -------- -------- 	Current $ 13,714 $ 1,203 $ 	2,344 $ 17,261 	Deferred 1,855 258 - 2,113 -------- -------- -------- -------- 		$ 15,569 $ 1,461 $ 	2,344 $ 19,374 ======== ======== ======== ========
---------------------------------------- 		Federal State 	Foreign Total -------- -------- -------- -------- 	Current $ 12,769 $ 1,312 $ 970 $ 15,051 	Deferred 1,127 54 - 1,181 -------- -------- -------- -------- 		$ 13,896 $ 1,366 $ 970 $ 16,232 ======== ======== ======== ======== Continued (38)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes (Continued):
Research and development tax credits were $88, $463 and $459 in fiscal 1996, 1995 and 1994, respectively.
Deferred taxes are recorded based upon differences between financial statement and tax bases of assets and liabilities. The following deferred taxes and balance sheet classifications are recorded as of August 31, 1996 and 1995:
1996 1995 Deferred tax assets (liabilities): ------- ------- Accounts receivable $ 266 $ 217 Inventories 1,578 (182) Property, plant and equipment (3,530) 	(262) Intangible assets 912 	112 Accrued liabilities (903) 	(320) Accrued compensation 730 	809 Postretirement benefits other than pensions 3,180 3,030 ------- ------- 		$ 2,233 $ 3,404 ======= =======
Balance Sheet classification: Current deferred tax assets $ 2,709 $ 1,129 Non current deferred tax assets - 2,275 Non current deferred tax liabilities (476) - ------- ------- 			$ 2,233 $ 3,404 ======= =======
The sources of significant temporary differences which gave rise to deferred taxes and their effects were as follows: 	 	1996 1995 1994 ------- ------- ------- Depreciation and amortization $ 1,731 $ 1,307 $ (39) Common stock issued to employees 94 26 (64) Accrued vacation pay (15) (140) (75) Inventories (1,759) (399) 527 Postretirement benefits and other liabilities (150) (154) (121) Intangible assets 735 1,365 955 Other 535 108 (2) ------- ------- ------- 	$ 1,171 $ 2,113 $ 1,181 ======= ======= =======
The following is a reconciliation of the statutory federal income tax rate to the Company's effective tax rate expressed as a percentage of income from operations before income taxes:
		1996 1995 1994 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 1.9 2.2 3.0 Foreign statutory tax rates differential 3.0 2.3 1.2 Foreign sales corporation (3.3) (2.5) (1.7) Research and development tax credit - (1.0) (1.0) Other .4 - (0.5) ---- ---- ---- Effective tax rate 37.0% 36.0% 36.0% ==== ==== ==== Continued
(39)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Retirement Benefits:
Pension Plans:
The Company has noncontributory pension plans that cover substantially all employees. Benefits under the plans are based upon an employee's compensation and years of service and, where applicable, the provisions of negotiated labor contracts. It is the Company's policy to make contributions to these plans sufficient to meet the minimum funding requirements of applicable laws and regulations plus such additional amounts, if any, as the Company's actuarial consultants advise to be appropriate. The projected unit credit method is utilized for determination of actuarial amounts.
The following tables set forth the plan's funded status and amounts recognized in the Company's balance sheet at August 31, 1996 and 1995:
		1996 1995 --------- --------- Actuarial present value of benefit obligations: Vested $ (18,131) $ (17,014) Nonvested (623) (1,062) --------- --------- Accumulated benefit obligation (18,754) (18,076) Effect of projected future salary increases (5,321) (4,637) --------- --------- Projected benefit obligation (24,075) (22,713) Less plan assets at fair value 29,807 26,270 --------- --------- Plan assets in excess of projected benefit obligation 5,732 3,557 Unrecognized net (gain) (4,876) (2,836) Unrecognized net obligation 963 968 --------- ---------- Prepaid pension asset $ 1,819 $ 1,689 ========= ==========
Net periodic pension cost includes the following components:
	 	 1996 1995 1994 ------- ------- -------- Service cost $ 1,577 $ 1,278 $ 1,212 Interest cost 1,701 1,501 1,312 Actual return on plan assets (3,455) (2,686) 	(512) Net amortization and deferral 924 482 (1,719) ------- ------- -------- Net periodic pension cost $ 747 $ 575 $ 293 ======= ======= ======== In 1996 and 1995, the discount rates and rates of increases of future compensation levels used in determining the actuarial present value of projected benefit obligations were 8.0% and 5.0% and 7.5% and 5.0%, respectively. In 1996 and 1995, the expected long-term rates of return on assets were 9.5% and 9.0%, respectively.
Plan assets consist principally of U.S. government securities, short-term investments, other equity securities and cash equivalents.
Continued
(40)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Retirement Benefits (Continued):
Postretirement Benefits Other Than Pensions:
The Company provides limited amounts of postretirement health and life insurance benefit plan coverage for substantially all of its employees. The determination of postretirement benefit cost for postretirement health benefit plans is based on comprehensive hospital, medical, surgical, and dental benefit provisions. The determination of postretirement benefit cost for postretirement life insurance benefits is based on stated policy amounts.
For the years ended August 31, 1996, 1995 and 1994, respectively, the components of periodic expense for the postretirement benefits are as follows:
					1996 1995 1994 ------ ------ ------ Service cost - benefits earned during year $ 305 $ 297 $ 298 Interest cost on postretirement benefit obligation 300 280 246 ------ ------ ------ Total expense $ 605 $ 577 $ 544 ====== ====== ======
At August 31, 1996 and 1995, respectively, the actuarial and recorded liabilities for these postretirement benefits, none of which have been funded, are as follows:
			 		1996 	1995 -------- -------- Accumulated postretirement benefit obligation: Retirees and dependents $ 1,645 $ 1,601 Fully eligible active plan participants 1,157 1,152 Other active participants 2,426 	3,063 -------- ------- Excess of accumulated postretirement benefit obligation over assets 5,228 5,816 Unrecognized prior service credit 963 989 Unrecognized gain 1,646 	636 -------- ------- Liability included on the balance sheet 7,837 7,441 Less current portion 260 	142 -------- ------- Noncurrent liability $ 7,577 $	7,299 ======== ======= The assumed discount rate at the beginning and end of the year used to measure the accumulated postretirement benefit obligation was 7.5% and 8.0%, respectively. The annual rate of increase in the per capita cost of covered health care benefits was assumed to be 8.0% in 1997; the rate was assumed to decrease gradually to 5.0% over the next 12 years and remain level thereafter. An increase of one percentage point in the assumed health care cost trend rates for each future year would have increased the aggregate of the service and interest cost components of 1996 net periodic postretirement benefit cost by $92 and would have increased the accumulated postretirement benefit obligation as of August 31, 1996 by $654.
Savings Plan:
The Company has a defined contribution savings plan that covers substantially all of its eligible U.S. employees. The purpose of the plan is generally to provide additional financial security to employees during retirement. Participants in the savings plan may elect to contribute, on a before-tax basis, a certain percent of their annual earnings with the Company matching a portion of these contributions. Expense under the plan was $737, $657 and $602 for the fiscal years ended August 31, 1996, 1995 and 1994, respectively. Continued
(41)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Foreign Operations:
	The following tables present information about operations in different geographic areas: 	 	 		United Foreign 		 	States Operations Eliminations Consolidated Sales to unaffiliated --------- --------- ---------- --------- 	customers $ 167,914 $ 62,031 - $ 229,945 Transfers between geographic areas 44,071 - $ 	(44,071) - --------- --------- ---------- --------- Total revenue $ 211,985 $ 62,031 $ 	(44,071) $ 229,945 ========= ========= ========== ========= Operating income $ 51,534 $ 2,879 $ 54,413 ========= ========= Other income, net (2,300) --------- Income from operations before income taxes $ 52,113 ========= Identifiable assets at August 31 $ 305,726 $ 58,171 $ 	(64,476) $ 299,421 ========= ========= ========== ========= ---------------------------------------------------- 		 	United Foreign 			 States Operations Eliminations Consolidated Sales to unaffiliated --------- --------- ------------ --------- 	customers $ 159,705 $ 53,309 - $ 213,014 Transfers between geographic areas 31,513 - $ 	(31,513) - --------- --------- ---------- --------- Total revenue $ 191,218 $ 53,309 $ (31,513) $ 213,014 ========= ========= ========== ========= Operating income $ 46,855 $ 6,392 $ 53,247 ========= ========= Other income, net 569 --------- Income from operations before income taxes $ 53,816 ========= Identifiable assets at August 31 $ 275,064 $ 39,136 $ (51,690) $ 262,510 ========= ========= ========== ========= 		 	United Foreign 		 	States Operations Eliminations Consolidated Sales to unaffiliated --------- --------- ---------- --------- 	customers $ 143,908 $ 34,869 - $ 178,777 Transfers between geographic areas 20,430 - $	 (20,430) - --------- --------- ---------- --------- Total revenue $ 164,338 $ 34,869 $ 	(20,430) $ 178,777 ========= ========= ========== ========= Operating income $ 42,435 $ 1,841 $ 44,276 ========= ========= Other income, net 812 Income from operations --------- before income taxes $ 45,088 ========= Identifiable assets at August 31 $ 214,188 $ 20,055 $ 	(24,523) $ 209,720 ========= ========= ========== =========
Export sales for domestic operations to unaffiliated customers were $25,562, $22,531 and $20,116 for the years ended August 31, 1996, 1995 and 1994, respectively.
Continued
(42)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Foreign Exchange Contracts:
During fiscal 1996 and 1995, the percentage of the Company's sales invoiced in currencies other than U.S. dollars was 27.0% and 25.1%, respectively. In addition, a small part of the Company's cost of goods sold is denominated in foreign currencies. As a partial hedge against adverse fluctuations in exchange rates, the Company periodically enters into foreign currency exchange contracts with certain major financial institutions. At August 31, 1996, the Company had forward exchange contracts to sell foreign currency totaling $20,750, which mature at various dates through May 1997. The Company expects to continue to utilize foreign currency exchange contracts to manage its exposure, although there can be no assurance that the Company's efforts in this regard will be successful.
14. Contingencies:
The Company is a party to certain legal actions arising in the ordinary course of its business. Based upon information presently available, the Company believes it has adequate legal defenses or insurance coverage for these actions and that the ultimate outcome of these actions would not have a material effect on the Company's financial position or results of operations.
15. Adoption of New Accounting Standards:
The Company will adopt the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (FAS 121) in its first quarter of fiscal 1997. In accordance with FAS 121, the Company will evaluate the carrying value of its long-lived assets and intangibles, including goodwill, when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company does not anticipate the effect of adopting this new standard to have a material effect on the Company's consolidated financial position or results of operations.
The Company will adopt the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123) in the first quarter of fiscal 1997. The Company will continue to measure compensation cost using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company does not anticipate the effect of adopting this new standard to have a material effect on the Company's consolidated financial position or results of operations.
Continued
(43)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Summary of Quarterly Results (unaudited):
Quarterly financial results for the year ended August 31, 1996 are as follows:
	 (Thousands of dollars, except per share amounts)
		Quarter --------------------------------------- 	 	11-30-95 2-29-96 5-31-96 8-31-96 FY 1996 -------- -------- -------- -------- --------
Net sales $ 54,511 $ 58,779 $ 57,548 $	59,107 $229,945 Cost of goods sold 24,829 27,556 27,772 	27,114 107,272 -------- -------- -------- -------- -------- Gross profit 29,682 31,223 29,776 	31,993 122,673
Operating expenses Research, development and engineering 3,159 3,240 3,631 	4,075 14,106 Selling, general and administrative 13,169 12,729 13,660 	14,596 54,154
Operating income 13,354 15,254 12,485 13,322 54,413
Other expenses (income) 215 671 844 572 2,300
Income before income taxes 13,139 14,583 11,641 	12,750 52,113
Provision for income taxes 4,861 5,396 4,307 	4,717 19,282
Net income $ 8,278 $ 9,187 $ 7,334 $ 	8,033 $ 32,831
Net income per common share $ .36 $ .40 $ .32 $ .35 $ 1.41
Weighted average shares outstanding (000's) 23,231 23,230 23,229 	23,229 23,230
Continued
(44)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Summary of Quarterly Results (unaudited)(Continued):
Quarterly financial results for the year ended August 31, 1995 are as follows:
	 (Thousands of dollars, except per share amounts)
		 Quarter ---------------------------------------- 		 11-30-94 2-28-95 5-31-95 8-31-95 FY 1995 -------- Net sales $ 47,712 $ 52,226 $ 55,464 $	57,612 $213,014 Cost of goods sold 22,930 25,290 25,606 	26,517 100,343 -------- -------- -------- -------- -------- Gross profit 24,782 26,936 29,858 31,095 112,671
Operating expenses Research, development and engineering 2,659 2,671 2,866 3,109 11,305 Selling, general and administrative 11,051 11,119 12,827 13,122 48,119
Operating income 11,072 13,146 14,165 14,864 53,247
Other expenses (income) (188) 223 (157) (447) (569)
Income before income taxes 11,260 12,923 14,322 	15,311 53,816
Provision for income taxes 4,054 4,652 5,156 5,512 19,374
Net income $ 7,206 $ 8,271 $ 9,166 $ 9,799 $ 34,442
Net income per common share $ .32 $ .37 $ .40 $ .42 $ 1.52
Weighted average shares outstanding (000's) 22,408 22,407 22,683 	23,231 22,684
(45)
Coopers & Lybrand
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Arrow International, Inc.:
Our report on the consolidated financial statements of Arrow International, Inc. is included on page 24 of this Form 10-K. In connection with our audit of such consolidated financial statements, we have also audited the related consolidated financial statement schedule listed in the index on page 22 of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
	
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center Philadelphia, Pennsylvania September 27, 1996
(46)
SCHEDULE II
ARROW INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(1) Deductions represent write-off of accounts receivable and investment.
(47)
EXHIBIT INDEX
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
3.1 Restated Articles of Incorporated by reference Incorporation of from Exhibit 3.1 to the 	 the Company. Company's Annual Report 					 on Form 10-K for the fiscal 					 year ended August 31, 1992
3.2 By-laws of the Company, Incorporated by reference 	 as amended and from Exhibit 3.4 to the 	 restated. Company's Registration 					 Statement on Form S-1 File 					 No. 33-47163 ("Registration 					 Statement")
4.1 Form of Common Stock Incorporated by reference 	 certificate. from Exhibit 4.1 to the 					 Company's Registration 					 Statement
10.1 1992 Stock Incentive Plan. Incorporated by reference from 					 Exhibit 10.1 to the Company's 					 Registration Statement
10.2 Investment Plan - 401(k). Incorporated by reference from 					 Exhibit 10.2 to the Company's 					 Registration Statement
10.3.1 Amended and Restated Incorporated by reference 	 Retirement Plan for from Exhibit 10.3 to the 	 Salaried Employees of Company's Registration 	 the Company, effective Statement 	 September 1, 1989.
10.3.2 Amended and Restated Incorporated by reference 	 Retirement Plan for from Exhibit 10.3.2 to the 	 Salaried Employees of Company's Annual Report on 	 the Company, effective Form 10-K for the year ended 	 September 1, 1989, as August 31, 1993 (the "1993 	 amended. Form 10-K")
10.4 Amended and Restated Incorporated by reference from 	 Restricted Stock Bonus Exhibit 10.4 to the Company's 	 Plan. Registration Statement
10.5 Split Dollar Life Incorporated by reference from 	 Insurance Agreements, Exhibit 10.5 to the Company's 	 dated December 16, Registration Statement 	 1991, between the 	 Company and James H. 	 Miller, as Trustee 	 under the provisions 	 of a certain Irrevocable 	 Trust Agreement with 	 Marlin Miller, Jr. dated 	 December 13, 1991.
(48)
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
10.6 Split Dollar Life Incorporated by reference from 	 Insurance Agreements, Exhibit 10.6 to the Company's 	 dated December 16, Registration Statement 	 1991, between the Company 	 and Raymond Neag 	 Irrevocable Trust, dated 	 October 11, 1991, Evelyn 	 Neag, Trustee.
10.7 Split Dollar Life Incorporated by reference from 	 Insurance Agreements, Exhibit 10.7 to the Company's 	 dated December 16, Registration Statement 	 1991, between the Company 	 and Robert E. Gedney, as 	 Trustee under the 	 provisions of a certain 	 Irrevocable Trust 	 Agreement with John H. 	 Broadbent, Jr. dated 	 December 13, 1991.
10.8 Split Dollar Life Incorporated by reference from 	 Insurance Agreements, Exhibit 10.8 to the Company's 	 dated December 16, 1991 Registration Statement 	 between the Company and 	 Donald M. Mewhort, as 	 Trustee under Agreement 	 of Trust dated October 8, 	 1991, created by T. 	 Jerome Holleran, Settlor 	 (the "Holleran Split 	 Dollar Life Insurance 	 Agreements").
10.8.1 Assignment, dated April 24, Incorporated by reference from 	 1992, of the rights and Exhibit 10.8.1 to the Company's 	 obligations under the Registration Statement 	 Holleran Split Dollar Life 	 Insurance Agreements from 	 the Company to Arrow 	 Precision Products, Inc.
10.9 License Agreement, dated Incorporated by reference from 	 October 23, 1981, between Exhibit 10.9 to the Company's 	 Dr. Ketan Shevde and the Registration Statement 	 Company.
10.10 License Agreement, dated Incorporated by reference from 	 January 18, 1992, between Exhibit 10.10 to the Company's 	 Innovation Associates, Registration Statement 	 Inc. and the Company.
10.11 License Agreement, dated Incorporated by reference from 	 March 28, 1991, between Exhibit 10.11 to the Company's 	 Daltex Medical Sciences, Registration Statement 	 Inc. and the Company.
10.12 Agreement and Compromise Incorporated by reference from 	 and Release, dated Exhibit 10.12 to the Company's 	 November 30, 1988, Registration Statement 	 between Michael A. Berman, 	 Critikon, Inc. and the 	 Company.
(49)
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
10.13 License Agreement, dated Incorporated by reference from 	 April 15, 1982, between Exhibit 10.13 to the Company's 	 Dr. Randolph M. Howes and Registration Statement 	 the Company, as amended 	 pursuant to the Addendum 	 to License Agreement, 	 dated August 26, 1986, 	 among Dr. Randolph M. 	 Howes, Janice Kinchen 	 Howes and the Company, 	 and the Second Addendum 	 to License Agreement, 	 dated October 9, 1990, 	 among Dr. Randolph M. 	 Howes, Janice Kinchen 	 Howes, Baham & Anderson 	 and the Company.
10.14 License Agreement, dated Incorporated by reference from 	 September 16, 1988, Exhibit 10.14 to the Company's 	 between J. Daniel Registration Statement 	 Raulerson and the Company, 	 as amended pursuant to 	 Addendum to License 	 Agreement, dated November 	 27, 1989, between J. 	 Daniel Raulerson and the 	 Company.
10.15 License Agreement, dated Incorporated by reference from 	 February 24, 1984, between Exhibit 10.15 to the Company's 	 Blair Medical Products, Registration Statement 	 Inc. and the Company.
10.16 Stock Purchase Agreement, Incorporated by reference from 	 dated October 24, 1990, Exhibit 10.16 to the Company's 	 among Robert E. Fischell, Registration Statement 	 Standard Associates, Cymed 	 Ventures, Inc., Arrow 	 International Investment 	 Corp. and the Company.
10.17 License Agreement, dated Incorporated by reference from 	 October 24, 1990, between Exhibit 10.17 to the Company's 	 Medical Innovative Registration Statement 	 Technologies R&D Limited 	 Partnership and the 	 Company.
10.18 Research and Development Incorporated by reference from 	 Agreement, dated October Exhibit 10.18 to the Company's 	 24, 1990, between Medical Registration Statement 	 Innovative Technologies 	 R&D Limited Partnership 	 and the Company.
(50)
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
10.19 License Agreement, dated Incorporated by reference from 	 February 24, 1992, Exhibit 10.19 to the Company's 	 between Cathco, Inc. and Registration Statement 	 the Company.
10.20 Settlement Agreement, Incorporated by reference from 	 dated September 30, 1991, Exhibit 10.20 to the Company's 	 among Dr. Randolph M. Registration Statement 	 Howes, Janice Kinchen 	 Howes, Baham & Anderson, 	 the Company and Baxter 	 Health care Corporation 	 and related License 	 Agreement, dated September 	 30, 1991, among Dr. 	 Randolph M. Howes, Janice 	 Kinchen Howes, Baham & 	 Anderson, the Company and 	 Baxter Health care 	 Corporation.
10.21 Agreement between the Incorporated by reference from 	 Company, Arrow Precision Exhibit 10.21 to the Company's 	 Products, Inc. and United Annual Report on Form 10-K for 	 Steelworkers of America the year ended August 31, 1994 	 AFL/CIO Local 8467. (the "1994 Form 10-K")
10.22 Extension of Lease Incorporated by reference from 	 Agreement between Indian Exhibit 10.22 to the Company's 	 Mills Associates and the Registration Statement 	 Company, dated December 4, 	 1991, extending the Lease, 	 dated February 5, 1988, 	 between Lyco Associates 	 and the Company.
10.23.1 Amended and Restated Incorporated by reference from 	 Retirement Plan for Exhibit 10.23 to the Company's 	 Hourly-Rated Employees Registration Statement 	 of the Wyomissing Plant 	 of the Company, effective 	 September 1, 1989.
10.23.2 Amended and Restated Incorporated by reference from 	 Retirement Plan for Exhibit 10.23.2 to the 	 Hourly-Rated Employees Company's 1993 Form 10-K 	 of the Wyomissing Plant 	 of the Company, effective 	 September 1,1989, as 	 amended.
10.24.1 Amended and Restated Incorporated by reference from 	 Retirement Plan for Exhibit 10.24 to the Company's 	 Hourly-Rated Employees Registration Statement 	 of the North Carolina 	 and New Jersey Plants of 	 the Company, effective 	 September 1, 1989.
(51)
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
10.24.2 Amended and Restated Incorporated by reference from 	 Retirement Plan for Exhibit 10.24.2 to the 	 Hourly-Rated Employees Company's 1993 Form 10-K 	 of the North Carolina 	 and New Jersey Plants of 	 the Company, effective 	 September 1, 1989, as 	 amended.
10.25.1 Loan Agreement, dated Incorporated by reference from 	 January 3, 1986, among Exhibit 10.25.1 to the Company's 	 the Company, Arrow Medical Registration Statement 	 Products, Limited, Arrow 	 International Export 	 Corporation, and Hamilton 	 Bank.
10.25.2 First Amendment to Loan Incorporated by reference from 	 Agreement, dated March 18, Exhibit 10.25.2 to the Company's 	 1987, among the Company, Registration Statement 	 Arrow Medical Products, 	 Limited, Arrow 	 International Export 	 Corporation, and Hamilton 	 Bank.
10.25.3 Second Amendment to Loan Incorporated by reference from 	 Agreement, dated March 31, Exhibit 10.25.3 to the Company's 	 1988, among the Company, Registration Statement 	 Arrow Medical Products, 	 Limited, Arrow 	 International Export 	 Corporation, and Hamilton 	 Bank.
10.25.4 Third Amendment to Loan Incorporated by reference from 	 Agreement, dated March 31, Exhibit 10.25.4 to the Company's 	 1989, among the Company, Registration Statement 	 Arrow Medical Products, 	 Limited, Arrow 	 International Export 	 Corporation, and Hamilton 	 Bank.
10.25.5 Fourth Amendment to Loan Incorporated by reference from 	 Agreement, dated March 30, Exhibit 10.25.5 to the Company's 	 1990, among the Company, Registration Statement 	 Arrow Medical Products, 	 Limited, Arrow 	 International Export 	 Corporation, and Hamilton 	 Bank.
10.25.6 Fifth Amendment to Loan Incorporated by reference from 	 Agreement, dated March 1, Exhibit 10.25.6 to the Company's 	 1991, among the Company, Registration Statement 	 Arrow Medical Products, 	 Limited, Arrow 	 International Export 	 Corporation, and Hamilton 	 Bank.
(52)
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
10.25.7 Sixth Amendment to Loan Incorporated by reference from Agreement, dated July 15, Exhibit 10.25.7 to the Company's 	 1991, among the Company, Registration Statement 	 Arrow Medical Products, 	 Limited, Arrow 	 International Export 	 Corporation, and Hamilton 	 Bank.
10.25.8 Seventh Amendment to Loan Incorporated by reference from 	 Agreement, dated September Exhibit 10.25.8 to the Company's 	 6, 1991, among the Company, Registration Statement 	 Arrow Medical Products, 	 Limited, Arrow 	 International Export 	 Corporation, and Hamilton 	 Bank.
10.25.9 Eighth Amendment to Loan Incorporated by reference from 	 Agreement, dated February Exhibit 10.25.9 to the Company's 	 21, 1992, among the Registration Statement 	 Company, Arrow Medical 	 Products, Limited, Arrow 	 International Export 	 Corporation, and Hamilton 	 Bank.
10.25.10 Letters of Amendment, dated Incorporated by reference from 	 April 10, 1992, and May 19, Exhibit 10.25.17 to the Company's 	 1992, to Loan Agreement Registration Statement 	 between the Company and 	 Hamilton Bank.
10.25.11 Ninth Amendment to Loan Incorporated by reference from 	 Agreement, dated May 27, Exhibit 10.25.18 to the Company's 	 1992, among the Company, Registration Statement 	 Arrow Medical Products, 	 Limited, Arrow 	 International Export 	 Corporation, and Hamilton 	 Bank.
10.25.12 Letter Agreement, dated Incorporated by reference from 	 February 25, 1993, among Exhibit 10.25.12 to the 1994 	 the Company, Arrow Form 10-K 	 Medical Products, Limited, 	 Arrow International Export 	 Corporation, and CoreStates 	 Hamilton Bank, and Note 	 relating thereto.
10.25.13 Letter Agreement, dated Incorporated by reference from 	 January 31, 1994, among Exhibit 10.25.13 to the 1995 	 the Company, Arrow Medical Form 10-K 	 Products, Limited, Arrow 	 International Export 	 Corporation, and CoreStates 	 Hamilton Bank, and Note 	 relating thereto.
(53)
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
10.25.14 Letter Agreement, dated Incorporated by reference from 	 March 6, 1995, among the Exhibit 10.25.14 to the 1995 	 Company, Arrow Medical Form 10-K 	 Products, Limited, Arrow 	 International Export 	 Corporation, and CoreStates 	 Hamilton Bank, and Note 	 relating thereto.
10.25.15 Letter Agreement, dated Incorporated by reference from 	 November 14, 1995, among Exhibit 10.25.15 to the 1995 	 the Company, Arrow Form 10-K 	 Medical Products, Limited, 	 Arrow International 	 Export Corporation, and 	 CoreStates Hamilton Bank, 	 and Note relating thereto.
10.25.16 Letter Agreement, dated Incorporated by reference from 	 February 23, 1996, among Exhibit 10.25.16 to the 	 the Company, Arrow Medical Company's Form 10-Q for 	 Products, Limited, Arrow the second quarter period 	 International Export ended February 29, 1996 	 Corporation, and CoreStates 	 Hamilton Bank, and Note 	 relating thereto.
10.25.17 Letter Agreement, dated Incorporated by reference from 	 January 29, 1996 among the Exhibit 10.25.17 to the Company's 	 Company and First Union Form 10-Q for the second quarter 	 National Bank, and note period ended February 29, 1996 	 relating thereto.
10.25.18 Letter Agreement, dated Filed with this report 	 July 11, 1996, among the 	 Company, Arrow Medical 	 Products, Limited, Arrow 	 International Export 	 Corporation, and CoreStates 	 Hamilton Bank, and Note 	 relating thereto.
10.26.1 Installment Sale Agreement Incorporated by reference from between Berks County Exhibit 10.25.10 to the Company's 	 Industrial Development Registration Statement 	 Authority and the Company, 	 dated as of December 1, 	 1988.
10.26.2 Indenture of Trust between Incorporated by reference from 	 Berks County Industrial Exhibit 10.25.11 to the Company's 	 Development Authority and Registration Statement 	 Bankers Trust Company, as 	 trustee, dated as of 	 December 1, 1988.
(54)
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
10.26.3 Irrevocable Direct Pay Incorporated by reference from 	 Letter of Credit, dated Exhibit 10.25.12 to the Company's 	 December 28, 1988, issued Registration Statement 	 for the benefit of Bankers 	 Trust Company, as trustee 	 under the Indenture of 	 Trust, for the account of 	 the Company.
10.26.4 Letter of Credit Note from Incorporated by reference from 	 the Company payable to the Exhibit 10.25.13 to the Company's 	 order of Hamilton Bank, Registration Statement 	 dated December 28, 1988.
10.26.5 Letter of Credit Incorporated by reference from 	 Reimbursement Agreement Exhibit 10.25.14 to the Company's 	 between the Company and Registration Statement 	 Hamilton Bank, dated as 	 of December 1, 1988.
10.26.6 Accommodation Mortgage, Incorporated by reference from 	 Security Agreement and Exhibit 10.25.15 to the Company's 	 Second Assignment of Registration Statement 	 Installment Sale 	 Agreement, dated as of 	 December 15, 1988, by 	 and among Berks County 	 Industrial Development 	 Authority, the Company 	 and Hamilton Bank.
10.27 Variable Amount Grid Incorporated by reference from 	 Note Agreement, dated Exhibit 10.25.16 to the Company's 	 May 8, 1991, between Registration Statement 	 the Company and First 	 Union National Bank.
10.28 Purchase Agreement, dated Incorporated by reference from 	 January 20, 1984, between Exhibit 10.26 to the Company's 	 the Company and Arrow Registration Statement 	 Research Partners.
10.29 Form of Research and Incorporated by reference from 	 Development Agreement, Exhibit 10.27 to the Company's 	 dated August 2, 1982, Registration Statement 	 between the Company and 	 Arrow Research Partners.
10.30 Arrow International, Inc. Incorporated by reference from 	 Profit Sharing Plan Exhibit 10.30 to the Company's 					 Registration Statement
10.31 Agreement, dated May 19, Incorporated by reference from 	 1992, between the Company Exhibit 10.32 to the Company's 	 and Arrow Precision Registration Statement 	 Products, Inc.
(55)
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
10.32 Agreement, dated September Incorporated by reference from 	 22, 1993, among Microwave Exhibit 10.32 to the Company's 	 Medical Systems, Inc., the 1993 Form 10-K 	 Company and Kenneth L. 	 Carr.
10.33 License and Exclusive Incorporated by reference from 	 Supply Agreement, dated Exhibit 10.33 to the Company's 	 September 22, 1993, 1993 Form 10-K 	 between Microwave Medical 	 Systems, Inc. and the 	 Company.
10.34 Stock Purchase Agreement, Incorporated by reference from 	 dated as of January 28, Exhibit 2 to the Company's 	 1994 between Kontron Current Report on Form 8-K 	 Instruments Holding N.V. filed with the Securities and 	 and the Company. Exchange Commission on 					 February 18, 1994
10.35 Loan Agreement, dated Incorporated by reference from 	 as of February 8, 1994, Exhibit 10.35 to the 1994 	 among the Company, Arrow Form 10-K 	 Medical Products, Limited, 	 Arrow International Export 	 Corporation, and CoreStates 	 Hamilton Bank, and Notes 	 relating thereto.
10.36 Loan Agreement, dated Incorporated by reference from 	 February 8, 1994, between Exhibit 10.36 to the 1994 	 the Company and First Form 10-K 	 Union National Bank of 	 North Carolina, and Note 	 relating thereto.
10.37 Loan Agreement between Incorporated by reference from 	 Arrow Japan KK and the Exhibit 10.37 to the Company's 	 Bank of Tokyo (with Current Report on Form 8-K filed 	 English translation). with the Securities and Exchange 					 Commission on April 10, 1995 			 		 ("the 1995 Form 8-K")
10.38 Thoratec Laboratories Incorporated by reference from Corporation International Exhibit 10.38 to the 1995 	 Medical Products Form 8-K 	 Distributor Agreement, 	 dated as of January 19, 	 1995, between Thoratec 	 Laboratories Corporation 	 and the Company.
(56)
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
10.39 Series F Preferred Incorporated by reference from 	 Stock Purchase Agreement, Exhibit 10.39 to the 1995 	 dated as of March 8, Form 8-K 	 1995, between Cardiac 	 Pathways Corporation and 	 the Company.
10.40 Manufacturing and Supply Incorporated by reference from 	 Agreement, dated as of Exhibit 10.40 to the 1995 	 March 8, 1995, between Form 8-K 	 Cardiac Pathways 	 Corporation and the 	 Company.
10.41 International Distributor Incorporated by reference from 	 Agreement, dated as of Exhibit 10.41 to the 1995 	 March 8, 1995, between Form 8-K 	 Cardiac Pathways 	 Corporation and Arrow.
10.42 Purchase Agreement, dated Incorporated by reference from 	 as of April 7, 1995, among Exhibit 10.39 to the 1995 	 the Company, TLP Form 8-K 	 Acquisition Corp., Therex 	 Corporation, Therex 	 Limited Partnership 	 Holding Corporation and 	 each of the other persons 	 signatory thereto.
10.43 Amendment, dated July 27, Incorporated by reference from 	 1995, to License Exhibit 10.43 to the 1995 	 Agreement, dated October Form 10-K 	 24, 1990, between 	 Medical Innovative 	 Technologies R&D Limited 	 Partnership and the 	 Company.
10.44 Amendment, dated July 27, Incorporated by reference from 	 1995, to Research and Exhibit 10.44 to the 1995 	 Development Agreement, Form 10-K 	 dated October 24, 1990, 	 between Medical 	 Innovative Technologies 	 R&D Limited Partnership 	 and the Company.
10.45 Amended and Restated Incorporated by reference from 	 License Agreement dated Exhibit 10.45 to the Company's 	 May 24, 1996, between Form 10-Q for the third quarter 	 Microwave Medical period ended May 31, 1996 	 Systems, Inc. and the 	 Company.
10.46 Loan Agreement, dated Filed with this report 	 July 11,1996, between 	 AMH (Arrow Medical 	 Holdings) B.V. and 	 CoreStates Bank, N.A., 	 and Note relating thereto.
(57)
Exhibit Description Number of Exhibit Method of Filing - ------- ----------- ----------------
10.47 Directors Stock Incentive Filed with this report 	 Plan
10.48 Purchase Agreement, dated Filed with this report 	 June 1, 1996, between 	 Arrow Tray Products, Inc. 	 (formerly known as 	 Endovations, Inc.) and 	 the Company.
18 Preferability Letter of Incorporated by reference from 	 Coopers & Lybrand L.L.P. Exhibit 18 to the 1994 Form 10-K
21 Subsidiaries of the Filed with this report 	 Company.
23 Consent of Coopers & Filed with this report 	 Lybrand L.L.P.
27 Financial Data Schedule EDGAR
99.1 Cautionary Statement for Page 59 of this report 	 Purposes of the Safe 	 Harbor Provisions of the 	 Private Securities 	 Litigation Reform Act 	 of 1995.
(58)
EXHIBIT 21
Subsidiaries of the Company
1. Arrow International Export Corporation, a U.S. Virgin Islands corporation.
2. Arrow International Investment Corp., a Delaware corporation.
3. Arrow Medical Products, Ltd., a Pennsylvania corporation, qualified to do business in Canada.
4. Kontron Instruments, Inc., a California corporation.
5. Arrow-Japan K.K. (Arrow-Japan, Ltd., English translation), a company organized under the laws of Japan.
6. Arrow Deutschland, Gmbh., a limited liability corporation organized under the laws of Germany.
7. Arrow France S.A., a corporation organized under the laws of France.
8. Arrow Africa (Pty) Ltd., a corporation organized under the laws of South Africa.
9. AMH (Arrow Medical Holdings) B.V., a corporation organized under the laws of the Netherlands.
10. Arrow Holland Medical Products B.V., a corporation organized under the laws of the Netherlands.
11. Arrow Iberia, S.A., a corporation organized under the laws of Spain.
12. Arrow Hellas A.E.E., a corporation organized under the laws of Greece.
13. Arrow Internacional de Mexico, S.A. de C.V., a corporation organized under the laws of Mexico.
14. Arrow Internacional de Chihuahua, S.A. de C.V., a corporation organized under the laws of Mexico.
15. Arrow International CR, a.s., a corporation organized under the laws of the Czech Republic.
16. Therex Limited Partnership, a Delaware limited partnership.
17. Arrow Infusion, Inc., a Massachusetts corporation.
18. Arrow-Therex Corporation, a Delaware corporation.
19. Arrow Interventional, Inc., a Delaware corporation.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this annual report on Form 10- K of our reports dated September 27, 1996, on our audits of the consolidated financial statements and financial statement schedule of Arrow International, Inc. as of August 31, 1996 and 1995, and for the three years in the period ended August 31, 1996, appearing in the registration statement on Forms S-8 (SEC File Nos. 333-15215 and 33-71568) of Arrow International, Inc. filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center Philadelphia, Pennsylvania November 25, 1996
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
	From time to time, in both written reports and in oral statements by the Company's senior management, expectations and other statements are expressed regarding future performance of the Company. These forward-looking statements are inherently uncertain and investors must recognize that events could turn out to be different than such expectations and statements. Key factors impacting current and future performance are discussed in the Company's Annual Report on Form 10-K with which this Exhibit is filed and other filings with the Securities and Exchange Commission (the "Commission"). In addition to such information in the Company's Annual Report on Form 10-K and its other filings with the Commission, the following risk factors should be considered in evaluating the Company and its business, as well as in reviewing forward-looking statements contained in the Company's periodic reports filed with the Commission and in oral statements made by the Company's senior management. The Company's actual results could differ materially from such forward-looking statements due to material risks, uncertainties and contingencies, including, without limitation, those set forth below.
STRINGENT GOVERNMENT REGULATION
	The Company's products are subject to extensive regulation by the Food and Drug Administration (the "FDA") and, in some jurisdictions, by state and foreign governmental authorities. In particular, the Company must obtain specific clearance or approval from the FDA before it can market new products or certain modified products in the United States. With the exception of one product, the Company has, to date, obtained FDA marketing clearance only through the 510(k) premarket notification process. Certain products under development and future product applications, however, will require approval through the more rigorous Premarket Approval application ("PMA") process. The process of obtaining such clearances or approvals can be time consuming and expensive, and there can be no assurance that all clearances or approvals sought by the Company will be granted or that FDA review will not involve delays adversely affecting the marketing and sale of the Company's products. The Company is required to adhere to applicable regulations setting forth current Good Manufacturing Practices ("GMP") which require that the Company manufacture its products and maintain its records in a prescribed manner with respect to manufacturing, testing and control activities. In addition, the Company is required to comply with FDA requirements for labeling and promotion of its products. Failure to comply with applicable federal, state or foreign laws or regulations could subject the Company to enforcement action, including product seizures, recalls, withdrawal of clearances or approvals, and civil and criminal penalties, any one or more of which could have a material adverse effect on the Company. Medical device laws and regulations with similar substantive and enforcement provisions are also in effect in many of the foreign countries where the Company does business. Federal, state and foreign laws and regulations regarding the manufacture and sale of medical devices are subject to future changes. No assurance can be given that such changes will not have a material adverse effect on the Company.
SIGNIFICANT COMPETITION AND CONTINUAL TECHNOLOGICAL CHANGE
	The markets for medical devices are highly competitive. The Company currently competes with many companies in the development and marketing of catheters and related medical devices. Some of the Company's competitors have access to greater financial and other resources than the
(59)
Company. Furthermore, the markets for medical devices are characterized by rapid product development and technological change. The present or future products of the Company could be rendered obsolete or uneconomical by technological advances by one or more of the Company's current or future competitors. The Company's future success will depend upon its ability to develop new products and technology to remain competitive with other developers of catheters and related medical devices. The Company's business strategy emphasizes the continued development and commercialization of new products and the enhancement of existing products for the critical care and interventional procedure markets. There can be no assurance that the Company will be able to continue to successfully develop new products and to enhance existing products, to manufacture these products in a commercially viable manner, to obtain required regulatory approvals or to gain satisfactory market acceptance for such products.
COST PRESSURES ON MEDICAL TECHNOLOGY AND PROPOSED HEALTH CARE REFORM
	The Company's products are purchased principally by hospitals, hospital networks and hospital buying groups. Although the Company's products are used primarily for non-optional medical procedures, the Company believes that the overall escalating cost of medical products and services has led and will continue to lead to increased pressures upon the health care industry to reduce the cost or usage of certain products and services, which has included and will continue to include those of the Company. In the United States, these cost pressures are leading to increased emphasis on the price and cost- effectiveness of any treatment regimen and medical device. In addition, third party payors, such as governmental programs, private insurance plans and managed care plans, which are billed by hospitals for such health care services, are increasingly negotiating the prices charged for medical products and services and may deny reimbursement if they determine that a device was not used in accordance with cost-effective treatment methods as determined by the payor, was experimental, unnecessary or used for an unapproved indication. In international markets, reimbursement systems vary significantly by country. Many international markets have government managed health care systems that control reimbursement for certain medical devices and procedures and, in most such markets, there also are private insurance systems which impose similar cost restraints. There can be no assurance that hospital purchasing decisions or government or private third party reimbursement policies in the United States or in international markets will not adversely affect the profitability of the Company's products.
	In recent years, several comprehensive health care reform proposals have been introduced in the U.S. Congress. While none of these proposals have to date been adopted, the intent of these proposals was, generally, to expand health care coverage for the uninsured and reduce the rate of growth of total health care expenditures. In addition, certain states have made significant changes to their Medicaid programs and have adopted various measures to expand coverage and limit costs. Implementation of government health care reform and other efforts to control costs may limit the price of, or the level at which reimbursement is provided for, the Company's products. Similar initiatives to limit the growth of health care costs, including price regulation, are also underway in several other countries in which the Company does business. The Company anticipates that Congress, state legislatures, foreign governments and the private sector will continue to review and assess alternative health care delivery and payment systems. The Company cannot predict what additional legislation or regulation, if any, relating to the health care industry may be enacted in the future or what impact the adoption of any federal, state or foreign health care reform, private sector reform or market forces may have on its business. No assurance can be given that any such reforms will not have a material adverse effect on the medical device industry in general, or the Company in particular.
(60)
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
	The Company owns numerous U.S. and foreign patents and has several U.S. and foreign patent applications pending. The Company also has exclusive license rights to certain patents held by third parties. These patents relate to aspects of the technology used in certain of the Company's products. From time to time, the Company is subject to legal actions involving patent and other intellectual property claims. Successful litigation against the Company regarding its patents or infringement by the Company of the patent rights of others could have a material adverse effect on the Company. In addition, there can be no assurance that pending patent applications will result in issued patents or that patents issued to or licensed-in by the Company will not be challenged or circumvented by competitors or found to be valid or sufficiently broad to protect the Company's technology or to provide it with any competitive advantage. The Company also relies on trade secrets and proprietary technology that it seeks to protect, in part, through confidentiality agreements with employees, consultants and other parties. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information or that third parties will not otherwise gain access to the Company's trade secrets.
	There has been substantial litigation regarding patent and other intellectual property rights in the medical devices industry. Historically, litigation has been necessary to enforce certain patent and trademark rights held by the Company. Future litigation may be necessary to enforce patent and other intellectual property rights belonging to the Company, to protect trade secrets or know-how owned by the Company or to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of the Company and others. Any such litigation could result in substantial cost to and diversion of effort by the Company. Adverse determinations in any such litigation could subject the Company to significant liabilities to third parties, could require the Company to seek licenses from third parties and could prevent the Company from manufacturing, selling or using certain of its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
	The Company generates significant sales outside the United States and is subject to risks generally associated with international operations, such as unexpected changes in regulatory requirements, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political risks, fluctuations in currency exchange rates, foreign exchange controls which restrict or prohibit repatriation of funds, technology export and import restrictions or prohibitions, delays from customs brokers or government agencies and potentially adverse tax consequences resulting from operating in multiple jurisdictions with different tax laws, which could materially adversely impact the success of the Company's international operations. As its revenues from its international operations increase, an increasing portion of the Company's revenues and expenses are denominated in currencies other than U.S. dollars, and changes in exchange rates could have a greater effect on the Company's results of operations. There can be no assurance that such factors will not have a material adverse effect on the Company's future operations and, consequently, on the Company's business, results of operations and financial condition. In addition, there can be no assurance that laws or administrative practices relating to regulation of medical devices, taxation, foreign exchange or other matters of countries within which the Company operates will not change. Any such change could have a material adverse effect on the Company's business, financial condition and results of operations.
(61)
POTENTIAL PRODUCT LIABILITY
	The Company's business exposes it to potential product liability risks which are inherent in the testing and marketing of catheters and related medical devices. The Company's products are often used in intensive care settings with seriously ill patients. In addition, many of the medical devices manufactured and sold by the Company are designed to be implanted in the human body for long periods of time and component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks with respect to these or other products manufactured or sold by the Company could result in an unsafe condition or injury to, or death of, the patient. The occurrence of such a problem could result in product liability claims and/or a recall of, or safety alert relating to, one or more of the Company's products. There can be no assurance that the product liability insurance maintained by the Company will be available or sufficient to satisfy all claims made against it or that the Company will be able to obtain insurance in the future at satisfactory rates or in adequate amounts. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could result in costly litigation and could have a material adverse effect on the Company's business or reputation or on its ability to attract and retain customers for its products.
RISKS ASSOCIATED WITH DERIVATIVE FINANCIAL INSTRUMENTS
	As a partial hedge against adverse fluctuations in exchange rates, the Company periodically enters into foreign currency exchange contracts with certain major financial institutions. By their nature, all such contracts involve risk, including the risk of nonperformance by counterparties. Accordingly, losses relating to these contracts could have a material adverse effect upon the Company's business, financial condition and results of operations. The Company's policy prohibits the use of derivative instruments for speculative purposes.
DEPENDENCE ON KEY MANAGEMENT
	The Company's success depends upon the continued contributions of key members of its senior management team, certain of whom have been with the Company since its inception in 1975. Accordingly, loss of the services of one or more of these key members of management could have a material adverse effect on the business of the Company. None of these individuals has an employment agreement with the Company.
(62)