ARROW INTERNATIONAL INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the quarterly period ended November 30, 2002

or

( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.

For the transition period from ____________ to ____________

Commission File Number 0-20212

ARROW INTERNATIONAL, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania 23-1969991
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

2400 Bernville Road, Reading, Pennsylvania 19605
- ------------------------------------------ -------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (610) 378-0131
-------------------

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
- -

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
- -

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Shares Outstanding at January 10, 2003
--------- --------------------------------------

Common Stock, No Par Value 21,717,172

ARROW INTERNATIONAL, INC.

Form 10-Q Index

Page
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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets at November 30, 2002
and August 31, 2002 3-4

Consolidated Statements of Income 5

Consolidated Statements of Cash Flows 6-7

Consolidated Statements of Comprehensive
Income 8

Notes to Consolidated Financial Statements 9-13

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-23

Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23-25

Item 4. Controls and Procedures 25

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K 26

Signature 27

Certifications 28-29

Exhibit Index 30

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

See accompanying notes to consolidated financial statements

Continued

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Continued

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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements

(In thousands, except per share amounts)
(Unaudited)

Note 1 - Basis of Presentation:

These unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring accruals, which management considers
necessary for a fair presentation of the consolidated financial position,
results of operations, and cash flows of Arrow International, Inc. (the
"Company") for the interim periods presented. Results for the interim periods
are not necessarily indicative of results for the entire year. Such statements
are presented in accordance with the requirements of Form 10-Q and do not
include all disclosures normally required by generally accepted accounting
principles or those normally made on Form 10-K. These statements should be read
in conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report to Stockholders for the fiscal year
ended August 31, 2002.

Note 2 - Inventories:

Inventories are summarized as follows:
November 30, August 31,
2002 2002
------------------ ------------------
Finished goods $ 32,055 $ 27,425
Semi-finished goods 24,242 23,054
Work-in-process 9,687 8,478
Raw materials 27,338 26,989
------------------ ------------------
$ 93,322 $ 85,946
================== ==================

Note 3 - Commitments and Contingencies:

The Company is a party to certain legal actions, including product liability
matters, arising in the ordinary course of its business. From time to time, the
Company is also subject to legal actions involving patent and other intellectual
property claims.

The Company is currently a defendant in two related lawsuits alleging that
certain of its hemodialysis catheter products infringe patents owned by or
licensed to the plaintiffs. No trial dates have been set in these actions. Based
on information presently available to the Company and the advice of its patent
counsel, the Company believes that its products do not infringe any valid claim
of the plaintiffs' patents and that, consequently, it has adequate legal
defenses with respect to these actions.

A product liability lawsuit against the Company tried before a jury in Arkansas
state court resulted in a judgment against the Company in May 2001 of $175 in
compensatory damages and $4,000 in punitive damages. Appeal from that judgment
has been granted by the Arkansas state court of appeals and the Company is
preparing for oral arguments. Based on information presently available to the
Company and the advice of its product liability counsel, the Company believes
that it has strong grounds for obtaining a reversal of this judgment

Continued

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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements

(In thousands, except per share amounts)
(Unaudited)

Note 3 - Commitments and Contingencies (continued):

and a remand for a new trial, and intends to continue to pursue vigorously the
appeal. In addition, the Company believes that any damage award, whether
punitive or compensatory, that may ultimately be upheld in this case will be
covered by its product liability insurance policy. The Company's insurer has
commenced an action seeking a judicial declaration that it is not obligated to
indemnify the Company for punitive damages. Based on information presently
available to the Company and the opinion of its insurance litigation counsel,
the Company believes that any award of punitive damages resulting from the
product liability lawsuit would be covered by its insurance.

Although the ultimate outcome of any of these actions is not expected to have a
material adverse effect on the Company's business or financial condition,
whether an adverse outcome in any of these actions would materially adversely
affect the Company's reported results of operations in any future period cannot
be predicted with certainty.

Note 4 - Accounting Policies:

The Company has disclosed in Note 1 to its consolidated financial statements
included in its Annual Report on Form 10-K for the fiscal year ended August 31,
2002 those accounting policies that it considers to be significant in
determining its results of operations and financial position. There have been no
material changes to the critical accounting policies previously identified and
described in the Company's Form 10-K. The accounting principles utilized by the
Company in preparing its consolidated financial statements conform in all
material respects to generally accepted accounting principles in the United
States of America.

The preparation of these consolidated financial statements requires the
Company's management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as the disclosure
of contingent assets and liabilities at the date of its financial statements.
The Company bases its estimates on historical experience, actuarial valuations
and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Some of those judgments can be subjective and complex and,
consequently, actual results may differ from these estimates under different
assumptions or conditions. While for any given estimate or assumption made by
the Company's management there may be other estimates or assumptions that are
reasonable, the Company believes that, given the current facts and
circumstances, it is unlikely that applying any such other reasonable estimate
or assumption would materially impact the financial statements.

Certain prior period information has been reclassified for comparative purposes.

Continued

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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements

(In thousands, except per share amounts)
(Unaudited)

Note 5 - Segment Reporting:

The Company operates as a single reportable segment. The Company operates in
four main geographic regions, therefore, information by product category and
geographic areas is presented below.

The following table provides quarterly information about the Company's sales by
product category:

Note 6 - New Accounting Standards:

Financial Accounting Standard No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities", was issued in June 2002. This statement requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002.

Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", was issued in December 2002. This
statement provides companies with two additional alternative transition methods
for recognizing a company's voluntary decision to change its method of
accounting for stock-based employee compensation to the fair-value method. It
also amends the existing disclosure requirements

Continued

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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements

(In thousands, except per share amounts)
(Unaudited)

Note 6 - New Accounting Standards (continued):

of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation". The transition guidance and provisions of this statement for
annual disclosures are effective for fiscal years ending after December 15,
2002. The provisions for interim-period disclosures are effective for financial
reports that contain financial statements for interim periods beginning after
December 15, 2002. The Company is studying the provisions of this statement and
has not determined the impact, if any, that this statement may have on its
financial statements.

Note 7 - Business Acquisitions:

On September 3, 2002, the Company purchased the net assets of its former New
York City distributor, Stepic Medical, from Horizon Medical Products for $12,619
in cash which includes the relief from $5,539 of accounts receivable that had
been due from this distributor, subject to post-closing adjustments. Stepic
Medical had been the Company's distributor in the greater New York City area,
eastern New York State, and parts of Connecticut and New Jersey since 1977.

Although the Company's product line had been Stepic Medical's major business
prior to the purchase of its net assets by the Company, Stepic Medical had also
distributed the Horizon Medical Products product line and complementary critical
care products of other medical device manufacturers. As of September 4, 2002,
Horizon Medical Products initiated its own direct distribution of its products.
The acquisition has been accounted for using the purchase method of accounting.
The excess of the purchase price over the estimated fair value of the net assets
acquired was approximately $86. Intangible assets acquired of $3,451 are being
amortized over a period of five years. The results of operations of this
business are included in the Company's consolidated financial statements from
the date of acquisition. The cash purchase price for this acquisition was
allocated as follows:

Accounts receivable $10,090
Inventories 6,830
Other current assets 25
Property, plant and equipment 116
Goodwill and intangible assets 3,537
Current liabilities (7,979)
-------------
Total Purchase Price $12,619
=============

Continued

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ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements

(In thousands, except per share amounts)
(Unaudited)

Note 7 - Business Acquisitions (continued):

On November 25, 2002, the Company purchased specified assets and assumed
specified liabilities of Diatek, Inc., a company in the business of the
development, manufacture and sale of chronic hemodialysis catheters, for
approximately $10,827, subject to post-closing adjustments and contingent
payments. The products acquired in the transaction are expected to complement
the Company's existing hemodialysis product line. The acquisition has been
accounted for using the purchase method of accounting. The purchase price for
this acquisition did not exceed the estimated fair value of the net assets
acquired and, therefore, no goodwill has been recorded by the Company in
connection therewith. Intangible assets acquired of $10,127, consisting
primarily of intellectual property rights, are being amortized over a period of
20 years based on the legal life of the underlying acquired technology. An
independent valuation firm was used to determine the fair market value of the
intangible assets acquired. Pursuant to the asset purchase agreement relating to
this transaction, the Company may be required to make contingent payments to
Diatek based on the achievement of specified annual sales levels of certain
hemodialysis product lines. Any such payments would begin in fiscal 2004 based
on fiscal 2003 sales levels. The results of operations of this business are
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price for this acquisition was allocated as follows:

Accounts receivable $ 176
Inventories 423
Property, plant and equipment 179
Intangible assets 10,127
Current liabilities (78)
-------------
Total Purchase Price $10,827
=============

Pro forma financial information for the acquisitions described above is not
being furnished because these acquisitions did not involve a significant amount
of assets (within the meaning of federal securities laws) nor did they have any
material effect on the Company's results of operations or financial condition
for any of the periods presented.

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ARROW INTERNATIONAL, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

THE FOLLOWING DISCUSSION INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF FACTORS, INCLUDING
MATERIAL RISKS, UNCERTAINTIES AND CONTINGENCIES, WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, SEE EXHIBIT 99.1 TO THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 2002
AND THE COMPANY'S OTHER PERIODIC REPORTS AND DOCUMENTS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.

Results of Operations

Three Months Ended November 30, 2002 Compared to Three Months Ended November 30,
2001

Net sales for the three months ended November 30, 2002 increased 5.5% to $88.8
million, compared with $84.2 million in the same period last year due primarily
to an increase in critical care product sales and sales of products distributed
by Arrow's recently acquired Stepic subsidiary of products of other medical
device manufacturers in the first quarter of fiscal 2003. Net sales represent
gross sales invoiced to customers, less certain related charges, including
discounts, returns, rebates and other allowances. Revenue from sales is
recognized at the time products are shipped and title is passed to the customer.
The following is a summary of the Company's sales by product platform:

Sales by Product Platform
(in millions) Quarter ended
-------------
November 30, 2002 November 30, 2001
----------------- -----------------

Central Venous Catheters $42.7 $40.1
Specialty Catheters 30.4 28.9
Stepic distributed products 3.1 -
Drug Infusion Pumps - 2.0
----- -----
Subtotal Critical Care 76.2 71.0
Cardiac Care 12.6 13.2
----- -----
TOTAL $88.8 $84.2
===== =====

Sales of critical care products increased 7.3% to $76.2 million in the first
quarter of fiscal 2003 from $71.0 million in the comparable prior year period
due primarily to increased sales of central venous and special catheters offset
by decreased sales of drug infusion pump products as a result of the Company's
divestiture of its implantable drug infusion pump

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ARROW INTERNATIONAL, INC.

business on April 1, 2002, as discussed below. The strength of critical care
product sales in the first quarter of fiscal 2003 was primarily due to an
increasing number of hospitals that began purchasing the Company's newly
introduced procedure kits featuring its safety components. This trend is
expected to continue as hospitals seek to protect their personnel from
inadvertent blood exposure due to needle sticks and other sharp-related
injuries. Sales of specialty catheters increased in the first quarter of fiscal
2003 due to improved sales of the Company's Percutaneous Thrombolytic Device and
Arrow Walrus(TM) products. Sales of cardiac care products decreased by 4.5% to
$12.6 million in the first quarter of fiscal 2003 from $13.2 million in the
comparable prior year period, principally as a result of decreased sales to an
other medical device manufacturer. International sales increased by 5.0% to
$29.3 million in the first quarter of fiscal 2003 from $27.9 million in the
comparable prior year period, principally as a result of increased sales of
central venous and special catheters. International sales represented 33.0% of
net sales in the first quarter of fiscal 2003 compared to 33.1% in the same
prior year period. As a result of the weakness of the U.S. dollar relative to
currencies of countries in which the Company operates direct sales subsidiaries,
net sales for the quarter increased by $0.4 million.

On April 1, 2002, the Company completed the sale of substantially all of the
assets of its implantable drug infusion business pursuant to an asset purchase
agreement dated as of March 1, 2002. As a result of this divestiture, the
Company reported no sales of implantable drug infusion pump products for the
three months ended November 30, 2002, compared to $2.0 million of such sales in
the comparable period of fiscal 2002.

Gross profit decreased 0.7% to $43.4 million in the three months ended November
30, 2002 compared to $43.7 million in the same period of fiscal 2002. As a
percentage of net sales, gross profit decreased to 48.9% during the three months
ended November 30, 2002 from 51.9% in the comparable prior year period. The
decline in gross margin was due primarily to lower margins realized on the sale
of inventories which were adjusted to fair market value since they were acquired
as part of the Company's purchase of the net assets of Stepic Medical, the
Company's former New York City distributor, on September 3, 2002, and the
distribution of acquired products of other medical device manufacturers through
the Company's Stepic subsidiary.

Research, development and engineering expenses decreased by 9.0% to $6.1 million
in the three months ended November 30, 2002 from $6.7 million in the comparable
prior year period. As a percentage of net sales, these expenses decreased in the
first quarter of fiscal 2003 to 6.9% compared to 8.0% in the same period in
fiscal 2002. These decreases were due primarily to lower research and
development spending on the Arrow LionHeart(TM), the Company's Left Ventricular
Assist System, in addition to less research and development expenditures for the
Company's implantable drug infusion pump product line as a result of the
Company's divestiture of this business in April 2002. Research and development
spending increased for the CorAide(TM) continuous flow ventricular assist
system, the Company's joint research and development program with The Cleveland
Clinic Foundation.

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ARROW INTERNATIONAL, INC.

In December 2002, the Company received regulatory approval in Germany to begin a
clinical trial of the CorAide(TM) device. Implantation training and hospital
review board approvals are currently underway with the first implants of this
smaller centrifugal pump presently anticipated to take place during the first
quarter of calendar year 2003. Initial implants of the CorAide(TM) will be for
bridge-to-transplant and bridge-to-recovery patients.

In December 2002, European patient number 26 was implanted with the Arrow
LionHeart(TM) at the German Heart Center in Bad Oyenhausen, Germany bringing the
total number of European implants of the device to 26 and the total number of
worldwide implants to 34. To date, the total number of European sites approved
to implant the device is ten and the total number of worldwide approved sites is
15. Later in January 2003, the Company plans to submit clinical trial data to
its European Notified Body, TUV Product Service, that the Company believes is
supportive of its application to sell the Arrow LionHeart(TM) device in Europe
with the required CE mark. The Company anticipates that it will receive approval
to CE mark the Arrow LionHeart(TM) for sale in Europe in the first half of
calendar year 2003.

Selling, general and administrative expenses increased by 5.8% to $20.2 million
during the three months ended November 30, 2002 from $19.1 million in the
comparable prior year period and, as a percentage of net sales, increased to
22.7% in the first quarter of fiscal 2003 from 22.6% in the comparable period of
fiscal 2002. This increase was due primarily to several offsetting factors,
including: increased legal costs in connection with a patent dispute relating to
certain of the Company's hemodialysis catheter products (see Item 1. Notes to
Consolidated Financial Statements - Note 3); increased expenses relating to the
Company's defined benefit pension plans; increased expenses relating to an
expansion of the Company's European headquarters in Brussels, Belgium; costs
incurred in connection with the Company's acquisition of Stepic Medical, as
further discussed below in this Item 2; and a decrease in expenses relating to
the Company's implantable drug infusion pump business, as a result of its having
been sold in April 2002.

Principally due to the above factors, operating income decreased in the first
quarter of fiscal 2003 by 3.9% to $17.2 million from $17.9 million in the
comparable prior year period.

Other expenses (income), net, amounted to $0.3 million of expense during the
first quarter of each of fiscal 2003 and fiscal 2002. Other expenses (income),
net, consist principally of interest expense and foreign exchange gains and
losses associated with the Company's direct sales subsidiaries.

As a result of the factors discussed above, income before income taxes decreased
during the first quarter of fiscal 2003 by 4.5% to $16.9 million from $17.7
million in the comparable prior year period. For the first quarter of each of
fiscal 2003 and 2002, the Company's effective income tax rate was 32.5%.

Net income in the first quarter of fiscal 2003 decreased by 4.2% to $11.4
million from $11.9 million in the comparable fiscal 2002 period. As a percentage
of net sales, net income represented 12.8% in the three months ended November
30, 2002 compared to 14.2% in the same period of fiscal 2002.

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ARROW INTERNATIONAL, INC.

Basic and diluted earnings per common share were $0.52 in the three months ended
November 30, 2002, down 3.7%, or $0.02 per share, from $0.54 in the comparable
prior year period. Weighted average shares of common stock outstanding used in
computing basic earnings per common share decreased to 21,861,203 in first
quarter of fiscal 2003 from 21,891,355 in the comparable prior year period.
Weighted average shares of common stock outstanding used in computing diluted
earnings per common share decreased to 21,939,594 in first quarter of fiscal
2003 from 22,026,856 in the comparable prior year period. These decreases were
primarily a result of the Company's share repurchase program, which, as
discussed below, remains in effect.

Liquidity and Capital Resources

Arrow's primary source of funds is cash generated from operations, as shown in
the Company's Consolidated Statement of Cash Flows. For the three months ended
November 30, 2002, net cash provided by operations was $16.2 million, a decrease
of $4.2 million from the comparable prior year period, due primarily to
increased accounts receivable and increased payments of accrued liabilities.
Accounts receivable, measured in days sales outstanding during the period,
increased to 82 days at November 30, 2002 from 80 days at August 31, 2002, due
primarily to increased accounts receivable in connection with the Company's
purchase of the net assets of Stepic Medical, as further discussed below, and
the timing of sales.

Accrued liabilities decreased $1.4 million in the three months ended November
30, 2002 compared to a $1.0 million increase in the same period of fiscal 2002
due primarily to payments in the first quarter of fiscal 2003 for product
liability and workers compensation premiums.

Net cash used in the Company's investing activities increased to $24.7 million
in the three months ended November 30, 2002 from $5.5 million in the comparable
period of fiscal 2002, due primarily to the Company's business acquisitions
completed in the first quarter of fiscal 2003, as further discussed below.

On September 3, 2002, the Company purchased the net assets of its former New
York City distributor, Stepic Medical, from Horizon Medical Products for $12.6
million in cash which includes the relief from $5.5 million of accounts
receivable that had been due from this distributor, subject to post-closing
adjustments. Stepic Medical had been the Company's distributor in the greater
New York City area, eastern New York State, and parts of Connecticut and New
Jersey since 1977.

Although the Company's product line had been Stepic Medical's major business
prior to the purchase of its net assets by the Company, Stepic Medical had also
distributed the Horizon Medical Products product line and complementary critical
care products of other medical device manufacturers. As of September 4, 2002,
Horizon Medical Products initiated its own

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ARROW INTERNATIONAL, INC.

direct distribution of its products. The acquisition has been accounted for
using the purchase method of accounting. The excess of the purchase price over
the estimated fair value of the net assets acquired was approximately $0.1
million. Intangible assets acquired of $3.5 million are being amortized over a
period of five years. The results of operations of this business are included in
the Company's consolidated financial statements from the date of acquisition.
This purchase price for this acquisition was allocated as follows:

(in millions)
Accounts receivable $10.1
Inventories 6.8
Other current assets -
Property, plant and equipment 0.1
Goodwill and intangible assets 3.5
Current liabilities (7.9)
----------
Total Purchase Price $12.6
==========

On November 25, 2002, the Company purchased specified assets and assumed
specified liabilities of Diatek, Inc., a company in the business of the
development, manufacture and sale of chronic hemodialysis catheters, for
approximately $10.8 million, subject to post-closing adjustments and contingent
payments. The products acquired in the transaction are expected to complement
the Company's existing hemodialysis product line. The acquisition has been
accounted for using the purchase method of accounting. The purchase price for
this acquisition did not exceed the estimated fair value of the net assets
acquired, and therefore, no goodwill has been recorded by the Company in
connection therewith. Intangible assets acquired of $10.1 million, consisting
primarily of intellectual property rights, are being amortized over a period of
20 years based on the legal life of the underlying acquired technology. An
independent valuation firm was used to determine the fair market value of the
intangible assets acquired. Pursuant to the asset purchase agreement relating to
this transaction, the Company may be required to make contingent payments to
Diatek based on the achievement of specified annual sales levels of certain
hemodialysis product lines. Any such payments would begin in fiscal 2004 based
on fiscal 2003 sales levels. The results of operations of this business are
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price for this acquisition was allocated as follows:

(in millions)
Accounts receivable $ 0.2
Inventories 0.4
Property, plant and equipment 0.2
Intangible assets 10.1
Current liabilities (0.1)
----------
Total Purchase Price $10.8
==========

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ARROW INTERNATIONAL, INC.

As part of the Company's 1998 purchase of assets of the cardiac assist division
of C.R. Bard, Inc., the Company also agreed to acquire specified assets and
assume specified liabilities of the Belmont Instruments Corporation for $7.3
million based on the achievement of certain milestones. The Company paid $2.3
million in fiscal 2000, $3.5 million in fiscal 2001, and $1.0 million in fiscal
2002 for achievement of milestones during those periods. During the three months
ended November 30, 2002, the Company paid $250,000 to Belmont for achievement of
an additional milestone, representing the seventh of eight quarterly
installments of $250,000 payable by the Company (which payments commenced in
April 2001), leaving $250,000 remaining to be paid as of November 30, 2002. The
acquisition was accounted for using the purchase method of accounting. The
excess of the purchase price over the estimated fair value of the net assets
acquired was approximately $7.1 million. The results of operations of this
business are included in the Company's consolidated financial statements from
the date of acquisition.

Financing activities used $8.0 million of net cash in the three months ended
November 30, 2002, compared to $10.8 million in the comparable prior year
period, primarily as a result of a decrease in the Company's repayment of
borrowings under its U.S. revolving credit facility offset in part by an
increase in the Company's use of cash to purchase shares of its common stock in
the open market in connection with its share repurchase program. The Company's
Board of Directors has authorized the repurchase of up to a maximum of 2,000,000
shares under the share repurchase program. During the three months ended
November 30, 2002, the Company purchased 197,200 shares of its common stock
under this program for $6.4 million. As of November 30, 2002, the Company had
repurchased a total of 1,616,000 shares under this program for approximately
$50.1 million since the program's inception in March 1999.

To provide additional liquidity and flexibility in funding its operations, the
Company from time to time also borrows amounts under credit facilities and other
external sources of financing. At November 30, 2002, the Company had a revolving
credit facility providing a total of $65.0 million in available revolving credit
for general business purposes, of which $5.9 million was outstanding. Under this
credit facility, the Company is required to comply with the following financial
covenants: maintain a ratio of total liabilities to tangible net worth (total
assets less total liabilities and intangible assets) of no more than 1.5 to 1
and a cash flow coverage ratio of 1.25 to 1 or greater; a limitation on certain
mergers, consolidations and sales of assets by the Company or its subsidiaries;
a limitation on its and its subsidiaries' incurrence of liens; and a requirement
that the lender approve the incurrence of additional indebtedness unrelated to
the revolving credit facility when the aggregate principal amount of such new
additional indebtedness exceeds $50.0 million. At November 30, 2002, the Company
was in compliance with all such covenants. Failure to remain in compliance with
these covenants could trigger an acceleration of the Company's obligation to
repay all outstanding borrowings under this credit facility. In addition,
certain other subsidiaries of the Company had revolving credit facilities
totaling the U.S. dollar equivalent of $18.1 million, of which $9.6 million was
outstanding as of November 30, 2002. Interest rate terms for both U.S. and
foreign bank credit facilities are based on either bids provided by the lender
or the prime rate, London Interbank Offered Rates (LIBOR) or Certificate of
Deposit Rates, plus applicable margins.

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ARROW INTERNATIONAL, INC.

Certain of these borrowings, primarily those with U.S. banks, are due on demand.
Interest is payable monthly during the revolving credit period. Combined
borrowings under these facilities decreased $0.6 million and $3.0 million during
the three months ended November 30, 2002 and November 30, 2001, respectively.

A summary of all of the Company's contractual obligations and commercial
commitments as of November 30, 2002 were as follows:

- ------------------
*Includes short-term indebtedness of the Company and its subsidiaries under
various revolving credit facilities, as discussed above in this Item 2.

During the three month periods ended November 30, 2002 and 2001, the percentage
of the Company's sales invoiced in currencies other than U.S. dollars was 22.8%
and 20.8%, respectively.

In addition, a part of the Company's cost of goods sold is denominated in
foreign currencies. The Company enters into foreign currency exchange and
foreign currency option contracts, which are derivative financial instruments,
with major financial institutions to reduce the effect of these foreign currency
risks, primarily on U.S. dollar cash inflows resulting from the collection of
intercompany receivables denominated in foreign currencies and to hedge
anticipated sales in foreign currencies to foreign subsidiaries. Such
transactions occur throughout the year and are probable, but not firmly
committed. Forward contracts are marked to market each accounting period, and
the resulting gains or losses on these contracts are recorded in Other Income /
Expense of the Company's consolidated statements of income. Realized gains and
losses on these contracts are offset by changes in the U.S. dollar value of the
foreign denominated assets, liabilities and transaction being hedged. The
premiums paid on the foreign currency option contracts are recorded as assets
and amortized over the life of the option. Other than the risk associated with
the financial condition of the counterparties, the Company's maximum exposure
related to foreign currency options is limited to the premiums paid. The total
premiums authorized to be paid in any fiscal year cannot exceed $1.0 million
pursuant to the terms of the Foreign Currency Management Policy

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ARROW INTERNATIONAL, INC.

Statement approved by the Company's Board of Directors in fiscal 2001. Gains and
losses on purchased option contracts result from changes in intrinsic or time
value. Both time value and intrinsic value gains and losses are recorded in
shareholders' equity (as a component of comprehensive income) until the period
in which the underlying sale by the foreign subsidiary to an unrelated third
party is recognized, at which point those deferred gains and losses are
recognized in net sales. By their nature, all such contracts involve risk,
including the risk of nonperformance by counterparties. Accordingly, losses
relating to these contracts could have a material adverse effect upon the
Company's business, financial condition and results of operations. Based upon
the Company's knowledge of the financial condition of the counterparties to its
existing 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 30,
2002 outstanding foreign currency exchange contracts totaling the U.S. dollar
equivalent of $12.0 million mature at various dates through February 2003 and
foreign currency option contracts with a fair market value of less than $0.1
million mature at various dates through February 2003. The Company expects to
continue to utilize foreign currency exchange and foreign currency option
contracts to manage its exposure, although there can be no assurance that the
Company's efforts in this regard will be successful.

In fiscal 2001, the Company's Board of Directors approved spending of up to
$10.0 million for the construction of additional manufacturing capacity,
including related equipment, at its existing manufacturing and research facility
in the Czech Republic. Construction of the additional space at this facility was
completed in December 2001. As of November 30, 2002, the Company has spent $9.9
million on this construction, which includes $1.1 million in the first quarter
of fiscal 2003. The Company has completed this construction as of November 30,
2002, but additional equipment will continue to be purchased as production
requirements warrant.

Based upon its present plans, the Company believes that its working capital,
operating cash flow and available credit resources will be adequate to repay
current portions of long-term debt, to finance currently planned capital
expenditures and repurchases of the Company's stock in the open market, and to
meet the currently foreseeable liquidity needs of the Company.

During the periods discussed above, the overall effects of inflation and
seasonality on the Company's business were not significant.

Critical Accounting Policies and Estimates

The Company has disclosed in Note 1 to its consolidated financial statements and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations included in its Annual Report on Form 10-K for the fiscal year ended
August 31, 2002 those accounting policies that it considers to be significant in
determining its results of operations and financial position. There have been no
material changes to the critical accounting policies previously identified and
described in the Company's Form 10-K. The accounting principles utilized by the
Company in preparing its consolidated financial statements conform in all
material respects to generally accepted accounting principles in the United
States of America.

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ARROW INTERNATIONAL, INC.

The preparation of these consolidated financial statements requires the
Company's management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as the disclosure
of contingent assets and liabilities at the date of its financial statements.
The Company bases its estimates on historical experience, actuarial valuations
and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Some of those judgments can be subjective and complex and,
consequently, actual results may differ from these estimates under different
assumptions or conditions. While for any given estimate or assumption made by
the Company's management there may be other estimates or assumptions that are
reasonable, the Company believes that, given the current facts and
circumstances, it is unlikely that applying any such other reasonable estimate
or assumption would materially impact the financial statements.

Effective September 1, 2002, the Company adopted the provisions of Financial
Accounting Standard No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The impact of the adoption of this
statement was not material to the Company's earnings in the three months ended
November 30, 2002.

New Accounting Standards

Financial Accounting Standard No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities", was issued in June 2002. This statement requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002.

Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", was issued in December 2002. This
statement provides companies with two additional alternative transition methods
for recognizing a company's voluntary decision to change its method of
accounting for stock-based employee compensation to the fair-value method. It
also amends the existing disclosure requirements of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation". The transition
guidance and provisions of this statement for annual disclosures are effective
for fiscal years ending after December 15, 2002. The provisions for
interim-period disclosures are effective for financial reports that contain
financial statements for interim periods beginning after December 15, 2002. The
Company is studying the provisions of this statement and has not determined the
impact, if any, that this statement may have on its financial statements.

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ARROW INTERNATIONAL, INC.

Cautionary Statement Under The Private Securities Litigation Reform Act of 1995

Certain statements contained in this report or in other written or oral
statements made from time to time by the Company may contain forward-looking
statements as defined in the Private Securities Litigation Act of 1995. Such
statements may use words such as "anticipate," "estimate," "expect," "believe,"
"may," "intend" and similar words or terms. Although the Company believes that
the expectations in such forward-looking statements are reasonable, the Company
can give no assurance that such expectations will prove to have been correct.
The forward-looking statements are based upon a number of assumptions and
estimates that, while presented with specificity and considered reasonable by
the Company, are inherently subject to significant business, economic and
competitive risks, uncertainties and contingencies which are beyond the control
of the Company, and upon assumptions with respect to future business decisions
which are subject to change. Accordingly, the forward-looking statements are
only an estimate, and actual results will vary from the forward-looking
statements, and these variations may be material. The Company is not obligated
to update any forward-looking statement, but investors are urged to consult any
further disclosures the Company makes in the Company's filings with the
Securities and Exchange Commission. Consequently, the inclusion of the
forward-looking statements should not be regarded as a representation by the
Company of results that actually will be achieved. Forward-looking statements
are necessarily speculative in nature, and it is usually the case that one or
more of the assumptions in the forward-looking statements do not materialize.
Investors are cautioned not to place undue reliance on the forward-looking
statements. The Company cautions investors that the factors set forth below,
which are described in further detail in Exhibit 99.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 2002 and in its other
filings with the Securities and Exchange Commission, could cause the Company's
results to differ materially from those stated in the forward-looking
statements. These factors include: (i) stringent regulation of the Company's
products by the U.S. Food and Drug Administration and, in some jurisdictions, by
state, local and foreign governmental authorities; (ii) the highly competitive
market for medical devices and the rapid pace of product development and
technological change in this market; (iii) pressures imposed by the health care
industry to reduce the cost or usage of medical products and services; (iv)
dependence on patents and proprietary rights to protect the Company's trade
secrets and technology; (v) risks associated with the Company's international
operations; (vi) potential product liability risks inherent in the design,
manufacture and marketing of medical devices; (vii) risks associated with the
Company's use of derivative financial instruments; and (viii) dependence on the
continued service of key members of the Company's management.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Financial Instruments:

During the three month periods ended November 30, 2002 and 2001, the percentage
of the Company's sales invoiced in currencies other than U.S. dollars was 22.8%
and 20.8%, respectively. In addition, a small part of the Company's cost of
goods sold is denominated in foreign currencies. The Company enters into foreign
currency forward contracts, which are derivative financial instruments, with
major financial institutions to reduce the effect of these foreign currency risk
exposures, primarily on U.S. dollar cash inflows resulting from the collection
of intercompany receivables denominated in foreign currencies. Such transactions

-23-

ARROW INTERNATIONAL, INC.

occur throughout the year and are probable, but not firmly committed. Forward
contracts are marked to market each accounting period, and the resulting gains
or losses on these contracts are recorded in Other Income / Expense of the
Company's consolidated statements of income. Realized gains and losses on these
contracts are offset by the changes in the U.S. dollar value of the foreign
denominated assets, liabilities and transactions being hedged. The Company does
not use financial instruments for trading or speculative purposes. The Company
expects to continue to utilize foreign currency exchange contracts to manage its
exposure, although there can be no assurance that the Company's efforts in this
regard will be successful.

The Company's exposure to credit risk consists principally of trade receivables.
Hospitals and international dealers account for a substantial portion of trade
receivables and collateral is generally not required. The risk associated with
this concentration is limited due to the Company's on-going credit review
procedures. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."

At November 30, 2002, the Company had forward exchange contracts to sell foreign
currencies which mature at various dates through February 2003. The following
table identifies forward exchange contracts to sell foreign currencies at
November 30, 2002 and August 31, 2002:

-24-

ARROW INTERNATIONAL, INC.

From time to time, the Company purchases foreign currency option contracts to
hedge anticipated sales in foreign currencies to foreign subsidiaries. The
option premiums paid are recorded as assets and amortized over the life of the
option. Other than the risk associated with the financial condition of the
counterparties, the Company's maximum exposure related to foreign currency
options is limited to the premiums paid. The total premiums authorized to be
paid in any fiscal year cannot exceed $1.0 million pursuant to the terms of the
Foreign Currency Management Policy Statement as approved by the Company's Board
of Directors in fiscal 2001. Gains and losses on purchased option contracts
result from changes in intrinsic or time value. Both time value and intrinsic
value gains and losses are recorded in shareholders' equity (as a component of
comprehensive income) until the period in which the underlying sale by the
foreign subsidiary to an unrelated third party is recognized, at which point
those deferred gains and losses are recognized in net sales. During the three
months ended November 30, 2002 and 2001, the Company recognized a time value
loss of $0 and $32, respectively, against net sales in addition to the
recognition of an intrinsic value loss of $106 and gain of $114, respectively.
At November 30, 2002, the Company has unrealized holding losses of $185 related
to these foreign currency option contracts and has foreign currency option
contracts which mature at various dates through February 2003. The following
table identifies foreign currency option contracts at November 30, 2002 and
August 31, 2002:

Item 4. Controls and Procedures

Based on their evaluation as of a date within 90 days of the filing of this
quarterly report on Form 10-Q, the Company's Chief Executive Officer and its
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective to ensure that information required to be disclosed
in the reports that the Company files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their evaluation. There were no significant deficiencies or material
weaknesses and, therefore, there were no corrective actions taken.

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ARROW INTERNATIONAL, INC.

PART II. OTHER INFORMATION

Item 6. Exhibits and reports on Form 8-K

(a) Exhibits

See Exhibit Index on page 30 for a list of the Exhibits filed
as part of this report.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended
November 30, 2002.

-26-

ARROW INTERNATIONAL, INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

ARROW INTERNATIONAL, INC.
(Registrant)

Date: January 13, 2003 By: /s/ Frederick J. Hirt
--------------------------------------
(signature)

Frederick J. Hirt
Chief Financial Officer
Vice President-Finance & Treasurer
(Principal Financial Officer and
Chief Accounting Officer)

-27-

CERTIFICATIONS

I, Marlin Miller, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Arrow International,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: January 13, 2003
/s/ Marlin Miller, Jr.
--------------------------------------
Marlin Miller, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)

-28-

CERTIFICATIONS

I, Frederick J. Hirt, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Arrow International,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: January 13, 2003

/s/ Frederick J. Hirt
-------------------------------------------------
Frederick J. Hirt
Chief Financial Officer, Vice President/Finance
and Treasurer
(Principal Financial Officer and Chief Accounting
Officer)

-29-

EXHIBIT INDEX

EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
- ------ ---------- ----------------

99.1 Certification of Chief Executive Officer Filed herewith.
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

99.2 Certification of Chief Financial Officer Filed herewith.
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

-30-