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EXHIBIT 13
ANNUAL REPORT
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AlaTenn Resources
1995 Annual Report
Broadening Our Focus
Enhancing Shareholder Value
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ALATENN RESOURCES, INC. (ALATENN), A DIVERSIFIED HOLDING COMPANY, PROVIDES
PIPELINE AND ENERGY SERVICES AND DESIGNS, MANUFACTURES, AND MARKETS INNOVATIVE
MEDICAL AND HEALTH CARE PRODUCTS.
PIPELINE AND ENERGY SERVICES
The Company's traditional pipeline subsidiaries transport natural gas
in the lower Tennessee Valley. The Company's newest pipeline subsidiary has
substantially completed a pipeline to transport an industrial gas. The
Company's energy marketing subsidiary provides energy services to industrial
and municipal customers both on and off the Company's pipeline systems.
ALABAMA-TENNESSEE NATURAL GAS COMPANY (ALABAMA-TENNESSEE), an
interstate pipeline company which began its deliveries of natural gas in 1950,
provides a vital energy link between upstream pipelines and municipal and
industrial customers.
TENNESSEE RIVER INTRASTATE GAS COMPANY, INC. (TRIGAS), an intrastate
pipeline company established in 1989, transports natural gas primarily to one
large industrial user.
ALATENN PIPELINE COMPANY, INC. (ALATENN PIPELINE), a company formed in
1994, has used the expertise developed in the natural gas pipeline business to
build, own and operate a pipeline for the transmission of gaseous oxygen
beginning in 1996.
ALATENN ENERGY MARKETING COMPANY, INC. (ATEMCO), an energy marketing
company organized in 1986 in response to changing regulations in the natural
gas industry, sells natural gas and provides other natural gas marketing
services to its customers.
MEDICAL AND HEALTH CARE PRODUCTS
In 1995 the Company expanded its medical and health care products
operations by introducing a new line of products and a new marketing
subsidiary.
RYDER INTERNATIONAL CORPORATION (RYDER), a company founded in 1968 and
acquired in 1994 by AlaTenn, designs, develops, manufactures and sells
innovative medical and health care products which range from contact lens
storage and disinfection systems to diagnostic and inflation devices.
ATRION MEDICAL PRODUCTS COMPANY, INC. (ATRION MEDICAL PRODUCTS), a
marketing company incorporated in 1995, markets medical products directly to
physicians, clinics and hospitals.
SOURCES OF REVENUE
1994 1995
Pipeline and Energy Services - 90% Pipeline and Energy Services - 86%
Medical and Health Care Products - 10% Medical and Health Care Products - 14%
[GRAPH] [GRAPH]
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FINANCIAL HIGHLIGHTS
For the year ended December 31, 1995 1994
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Revenues from pipeline and
energy services $ 69,354,000 $ 63,445,000
Revenues from medical and
health care products 11,025,000 6,876,000
Total revenues 80,379,000 70,321,000
Net income 5,340,000 4,690,000
Net income per share 2.52 2.22
Dividends per share 1.20 1.20
As of December 31, 1995 1994
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Total assets $ 48,506,000 $ 43,737,000
Long-term debt, including
current maturities 1,812,000 2,885,000
NET INCOME PER SHARE OPERATING REVENUES DIVIDENDS PER SHARE
(from continuing operations) (in millions)
[GRAPH] [GRAPH] [GRAPH]
1 Excludes favorable adjustments to take-or-pay provision and gain on the sale
of substantially all the assets of two natural gas distribution subsidiaries.
2 Excludes favorable adjustments to reserves previously established for
potentially unrecoverable take-or-pay expenses and for operations that were
previously discontinued.
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To Our Shareholders
AlaTenn Resources broadened its focus beyond its traditional pipeline and
energy services with its 1994 acquisition of a medical and health care products
company. As a result of this diversification, and higher earnings from our
energy marketing subsidiary, the Company's net income rose 14% in 1995 to $2.52
per share. Importantly, we achieved this diversification while maintaining a
strong balance sheet.
Our Pipeline and Energy Marketing Businesses
During 1995, we began construction of our 22-mile pipeline to transport gaseous
oxygen under a long-term contract with a large industrial gas supplier. We
expanded the magnitude of this project when it was announced that a major new
steel plant was to be built in north Alabama, boosting the requirements for
gaseous oxygen. We expect to begin operating our gaseous oxygen pipeline, on
schedule, in the spring of 1996.
[PICTURE]
In recent years, our interstate natural gas pipeline business has faced -- and
continues to face -- a less regulated, more competitive environment. A major
interstate pipeline company has announced its intention to build a pipeline
into our market area and has entered into agreements to transport substantially
all of the natural gas requirements for two of our major municipal customers in
north Alabama. We are challenging these arrangements in the state courts and
opposing the construction of the pipeline before the appropriate federal
regulatory agencies.
Our intrastate pipeline continues to benefit from long-term contracts with its
principal industrial customer. Our energy marketing subsidiary, which
accounted for a significant percentage of the Company's operating
income in 1995, increased the volumes of natural gas it sold in 1995 for
transportation on our own as well as other pipeline systems.
Our Medical and Health Care Products Businesses
This past year we witnessed great progress in our medical and health care
products business. For more than 25 years, Ryder has designed, developed,
manufactured, and sold innovative health care products for worldwide
distribution by its customers. As planned, in 1995 Ryder expanded its
operations by developing new products and services for its customers. We
anticipate that Ryder will continue to prosper as it
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applies its technical expertise to developing new medical and health care
products. Ryder's annual contribution has grown to 30% of the Company's
operating income in only two years.
Ryder's management team assisted the Company during 1995 in obtaining the
exclusive worldwide rights to manufacture and market a new line of medical
products, called LacriCATH, which we introduced in the first quarter of 1996.
With this line of medical products, ophthalmologists will be able to clear
blockages in tear ducts using a minimally invasive procedure. We are excited
about the benefits of this new product line and procedure, as well as the
opportunity for Ryder to manufacture an inflation device used with the
LacriCATH balloon catheter and to assemble the final kits. Our newly created
medical products marketing subsidiary will be responsible for worldwide
distribution of the LacriCATH product line directly to end users -- physicians,
clinics and hospitals. We believe the synergy between Ryder and our medical
products marketing subsidiary will enhance the Company's growth in the medical
and health care products field.
Our Corporate Name
While the Company continues to pursue internal and external opportunities for
growth, it remains dedicated to providing quality service, creating innovative
solutions and enhancing shareholder value. We believe that a new corporate
name would provide a unified identity for the Company's increasingly diverse
operations and would better reflect our vision for the Company's future. To
arrive at a new corporate name, we have drawn from the identities of our
Company and our subsidiaries. Accordingly, at our 1996 Annual Meeting of
Shareholders, we will ask our shareholders to approve the change of the
Company's corporate name from AlaTenn Resources, Inc. to ATRION Corporation.
By broadening our focus, we have laid the foundation for ongoing growth. We
envision building on our strengths as a diversified company to further enhance
shareholder value.
Respectfully,
/s/ Jerry A. Howard
- -------------------
Jerry A. Howard
Chairman, President and
Chief Executive Officer
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Pipeline and Energy Services
The Company's traditional business has been the transportation of natural gas.
However, in 1995, the Company expanded the scope of its pipeline operations by
committing to build, own and operate a 22-mile pipeline designed to transport
gaseous oxygen. By early 1996, AlaTenn Pipeline had substantially completed
construction of the gaseous oxygen pipeline. Under a long-term contract with
the gaseous oxygen supplier, AlaTenn Pipeline plans to begin operating its
pipeline in the spring of 1996.
The Company's natural gas pipelines serve industrial and municipal customers in
the lower Tennessee Valley. TRIGAS, which serves primarily one industrial
customer, extended a contract to transport supplemental volumes of natural gas
for that customer until 1999. As expected, volumes transported on TRIGAS
remained steady in 1995. Volumes of natural gas transported on the Company's
interstate pipeline, Alabama-Tennessee, increased by 13% in 1995.
ATEMCO, the Company's energy marketing subsidiary, supplied nearly 33% more
natural gas to its industrial and municipal customers in 1995 than in 1994. The
increased natural gas sales in 1995 can be attributed to colder weather, greater
requirements by industrial customers on Alabama-Tennessee's pipeline system and
more business from customers on other pipeline systems.
By early 1996, the Company had consummated the sale of the last of its small
natural gas distribution companies. The purchaser, a newly formed gas company,
has become a customer of ATEMCO.
With the federal government's decreased regulation of the natural gas industry,
the environment in which the Company's interstate natural gas pipeline operates
has become extremely competitive. In response to the challenges of this less
regulated environment, the Company's pipeline and energy marketing businesses
have used their existing expertise to create new opportunities.
Tony Burns, Vice President of Operations for AlaTenn's pipeline subsidiary
(left), and Mark Watkins, Plant Manager for a gaseous oxygen supplier in
Decatur, Alabama, inspect the supplier's connection point to AlaTenn's 22-mile
oxygen pipeline. For safety purposes, the underground pipeline uses small,
specially designed valves situated at intervals to equalize pressure around
main line valves.
[PICTURE]
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[PICTURE]
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Medical and Health Care Products
Ryder has been designing, developing and manufacturing high-quality health care
products for more than a quarter of a century. Ryder's product line now
includes not only ophthalmic products such as storage and disinfection systems
for soft contact lenses, but also diagnostic devices used in blood analysis and
tissue biopsies, and inflation devices used with balloon catheters.
Ryder generally enters into long-term exclusive agreements to manufacture
proprietary products for worldwide distribution by its customers. In 1995,
Ryder began to manufacture a patented medical device, designed by Ryder, which
is included in a blood-monitoring kit used by diabetics. Also in 1995, Ryder
contracted to produce a patented inflation device it had developed for a leader
in the balloon catheter business. This high-quality, reliable product inflates
the balloon catheter used in angioplasty procedures. Ryder anticipates
applying its inflation device technology to other specialties, including
ophthalmology, radiology and urology. At the request of a longtime customer,
Ryder entered into a short-term contract to package products for national
distribution.
Ryder also played an important role in the Company's acquisition of the
LacriCATH product line. Initially, Ryder was asked to develop an inflation
device for use with the LacriCATH balloon catheter. In late 1995, AlaTenn
purchased the exclusive worldwide manufacturing and marketing rights to the
entire product line. Ryder will not only manufacture the inflation device, but
will also package the catheter kit. In conjunction with the Company's new
medical products marketing subsidiary, Ryder will distribute the completed kits
to end users.
Since becoming a subsidiary of AlaTenn in 1994, Ryder has expanded its product
line, its marketing efforts, and its customer base. It has also contributed
significantly to the profitability of AlaTenn and to the Company's continuing
efforts to diversify its operations.
Sherry Hodges, an employee in the molding department at Ryder, pad prints
graduations on barrel components of balloon catheter inflators used by
physicians in angioplasty procedures. Looking on is Vandy Cruise, Ryder's Vice
President of Operations. The finished barrels are inspected and transferred
into a controlled environment room for final assembly.
[PICTURE]
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[PICTURE]
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Steps for Future Growth
AlaTenn expanded the scope of its medical and health care products business
during the last year by forming a medical products marketing subsidiary, ATRION
Medical Products. In 1995, the Company acquired the exclusive worldwide
marketing and manufacturing rights to a newly developed line of products to be
used in a patented ophthalmic surgical procedure. In the first quarter of
1996, ATRION Medical Products introduced this new minimally invasive procedure
and related product line to physicians, clinics and hospitals.
Each year, an estimated half million pediatric and adult patients suffer
painful or irritating blockages of the tear duct which result in epiphora, or
excessive tearing of the eye. The patented LacriCATH product, a sterile,
single-use balloon catheter, has been designed for use by ophthalmologists to
dilate the tear duct and remove those blockages. Clinical studies have shown
that patients who undergo this procedure bear no scarring, lose less blood and
resume normal daily activities sooner than patients undergoing conventional
surgery. Pediatric and adult versions of the LacriCATH products have received
clearance for marketing from the Food and Drug Administration.
ATRION Medical Products markets the LacriCATH line of products through
company-employed Clinical Sales Specialists strategically located across the
country. These products are now being sold in the United States and in
targeted markets abroad.
ATRION Medical Products represents the Company's entry into direct sales of
medical and health care products. By combining the marketing company's sales
efforts with Ryder's product development and manufacturing expertise, AlaTenn
is well-positioned to take advantage of other opportunities in the medical and
health care products field.
AlaTenn's new medical products marketing subsidiary, ATRION Medical Products,
has introduced the LariCATH product line. Steve Ferens, Vice President of
Sales for Ryder (left), and Mark Prodger, Vice President of Marketing for
ATRION Medical Products, (right), demonstrate the Ryder inflation device that
ophthalmologists use with the LariCATH balloon catheter.
[PICTURE]
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[PICTURE]
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of AlaTenn Resources, Inc.:
We have audited the accompanying consolidated balance sheets of AlaTenn
Resources, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income and cash flows for each of the three
years in the period ended December 31, 1995. 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 AlaTenn
Resources, Inc. and subsidiaries at December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 9, 1996
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CONSOLIDATED STATEMENTS OF INCOME
(For the years ended December 31, 1995, 1994 and 1993)
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1995 1994 1993
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(In thousands, except per share amounts)
OPERATING REVENUES $ 80,379 $ 70,321 $ 119,022
COST OF GOODS SOLD 63,082 54,728 106,881
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GROSS MARGIN 17,297 15,593 12,141
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OTHER OPERATING EXPENSES:
Operations 7,685 6,779 4,655
Maintenance 255 345 376
Depreciation and amortization 1,191 976 577
Taxes other than income taxes 355 360 321
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9,486 8,460 5,929
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OPERATING INCOME 7,811 7,133 6,212
RECOVERY OF ESTIMATED NONRECOVERABLE
TAKE-OR-PAY EXPENSE - - 3,636
INTEREST AND OTHER INCOME 753 482 529
INTEREST EXPENSE (193) (330) (248)
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NET INCOME BEFORE INCOME TAXES 8,371 7,285 10,129
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INCOME TAXES (NOTE 5) (3,031) (2,595) (3,362)
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INCOME FROM CONTINUING OPERATIONS 5,340 4,690 6,767
INCOME FROM DISCONTINUED OPERATIONS (NOTE 2) - - 565
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NET INCOME $ 5,340 $ 4,690 $ 7,332
=========================================================================================================================
EARNINGS PER SHARE:
EARNINGS FROM CONTINUING OPERATIONS $ 2.52 $ 2.22 $ 3.21
EARNINGS FROM DISCONTINUED OPERATIONS - - 0.27
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NET INCOME PER SHARE $ 2.52 $ 2.22 $ 3.48
=========================================================================================================================
AVERAGE COMMON SHARES OUTSTANDING 2,117 2,113 2,108
=========================================================================================================================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1994
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ASSETS: 1995 1994
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(In thousands)
CURRENT ASSETS:
Cash and temporary cash investments $ 2,811 $ 440
Accounts receivable, including $1,860,000 in 1995 and
$2,462,000 in 1994 of take-or-pay settlement costs
(Note 3) 13,890 10,643
Materials and supplies, at average cost 689 521
Inventories 717 745
Prepaid expenses 288 317
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18,395 12,666
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PROPERTY, PLANT AND EQUIPMENT:
Original cost 35,447 33,123
Less accumulated depreciation and amortization 15,725 15,117
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19,722 18,006
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OTHER ASSETS AND DEFERRED CHARGES:
Take-or-pay settlement costs (Note 3) - 2,197
Patents, net (Note 1) 5,505 5,944
Goodwill, net (Note 1) 2,652 2,765
Other 2,232 2,159
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10,389 13,065
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$ 48,506 $ 43,737
=========================================================================================================
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
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SHAREHOLDERS' EQUITY AND LIABILITIES: 1995 1994
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(In thousands)
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 4) $ 203 $ 203
Accounts payable and accrued liabilities, including $746,000 in 1994
of take-or-pay obligation (Note 3) 12,646 10,025
Accrued income and other taxes 537 621
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13,386 10,849
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LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 4) 1,609 2,682
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OTHER LIABILITIES AND DEFERRED CREDITS:
Accumulated deferred income taxes (Note 5) 1,559 1,299
Unamortized investment tax credits (Note 5) 243 256
Other 1,739 1,541
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3,541 3,096
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COMMON SHAREHOLDERS' EQUITY:
Common shares, par value $0.10 per share, authorized
10,000,000 shares, issued 2,280,000 shares 228 228
Paid-in capital 6,078 6,049
Retained earnings (Note 7) 25,525 22,725
Treasury shares, 160,916 shares in 1995 and 164,516 shares in 1994,
at cost (Note 6) (1,861) (1,892)
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29,970 27,110
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$ 48,506 $ 43,737
=========================================================================================================
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the years ended December 31, 1995, 1994 and 1993)
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1995 1994 1993
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,340 $ 4,690 $ 7,332
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,978 1,120 577
Deferred income taxes 260 (125) 19
Provision for estimated nonrecoverable take-or-pay
expense (Note 3) - - (3,636)
Net take-or-pay recoveries (Note 3) 1,735 1,128 1,563
Other 163 121 (587)
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9,476 6,934 5,268
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (3,615) 3,142 6,329
(Increase) in other current assets (110) (1,757) (180)
Increase (decrease) in accounts payable 3,376 (3,125) (2,156)
Increase (decrease) in other current liabilities (123) 585 396
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9,004 5,779 9,657
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Ryder assets (Note 2) - (11,124) -
Property, plant and equipment additions (3,080) (1,390) (578)
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(3,080) (12,514) (578)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in long-term indebtedness (1,073) 870 -
Issuance of common shares 60 80 139
Cash dividends paid (2,540) (2,536) (2,530)
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(3,553) (1,586) (2,391)
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NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS 2,371 (8,321) 6,688
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF YEAR 440 8,761 2,073
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CASH AND TEMPORARY CASH INVESTMENTS, END OF YEAR $ 2,811 $ 440 $ 8,761
========================================================================================================================
CASH PAID FOR:
Interest (net of capitalized amounts) $ 207 $ 315 $ 253
Income taxes (net of refunds) 2,931 2,742 2,294
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AlaTenn Resources is a diversified holding company which provides pipeline and
energy services to the lower Tennessee Valley area and manufactures products
for the medical and health care industry. The Company is engaged in two lines
of business: (1) pipeline and energy services - natural gas transmission and
marketing and (2) medical and health care products - manufacturing of
innovative products for the medical and health care products industry.
Principles of Consolidation
The consolidated financial statements include the accounts of AlaTenn
Resources, Inc. and its subsidiaries (the Company). All significant
intercompany transactions and balances have been eliminated in consolidation.
Property, Plant and Equipment
Property, plant and equipment are stated at original cost. The cost of
additions to property, plant and equipment includes direct labor and materials
costs, allocable overheads and, in the case of pipeline plant, an allowance for
the estimated cost of funds used during construction (AFUDC). Such provisions
for AFUDC are not reflected separately in the accompanying consolidated
statements of income as the amounts are not material. Maintenance and repairs,
including the cost of renewals of minor items of property, are charged
principally to expense as incurred. Replacements of property (exclusive of
minor items of property) are charged to the appropriate property accounts.
Upon retirement of a pipeline plant asset, its cost is charged to accumulated
depreciation together with the cost of removal, less salvage value.
Depreciation and Amortization
Depreciation on pipeline plant is calculated using the composite rate method
which approximated an average depreciation rate of 2.1% in 1995, 2.0% in 1994
and 2.1% in 1993. Depreciation on facilities and equipment used in the
manufacture of medical and health care products is calculated on a
straight-line basis over the useful lives of the assets. Goodwill is being
amortized at a rate of 4% per year and patents are being amortized over the
remaining lives of the individual patents.
Operating Revenue
The Company recognizes revenue from natural gas sales and transportation
service in the period the service is provided. Provision is made for possible
refund of revenues collected which are subject to future rate decisions.
Revenues from the sale of manufactured medical and health care products are
recognized on an accrual basis, at the time of sale.
Income Taxes
The Company's deferred income taxes reflect the impact of "temporary
differences" between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. These temporary differences
are determined in accordance with Statement of Financial Accounting Standard
No. 109 (SFAS 109), Accounting for Income Taxes (see Note 5). Investment tax
credits are deferred and amortized to income over the lives of the related
assets (see Note 5).
Inventory
Inventories are stated at lower of cost or market. Cost is determined by using
the first-in, first-out method.
Goodwill and Patents
Goodwill represents the excess of cost over the fair market value of tangible
and identifiable intangible net assets. Values assigned to patents were agreed
to at the time of the acquisition between selling and acquiring parties.
Temporary Cash Investments
Temporary cash investments are securities with original maturities of 90 days
or less. For purposes of the Consolidated Statements of Cash Flows, temporary
cash investments are considered cash equivalents.
Financial Presentation
Certain prior-year amounts have been reclassified to conform with current-year
presentation.
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 at the date of the
financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS AND DISPOSITIONS OF ASSETS AND SUBSIDIARIES
Acquisition of Ryder International
On April 19, 1994, the Company, through a wholly-owned subsidiary, purchased
the business of Ryder International Corporation by acquiring certain of its
operating assets and assuming substantially all of its liabilities. The
Company paid to Ryder International Corporation $11.1 million in cash, issued a
promissory note in the principal amount of $1.0 million and assumed liabilities
totaling $2.2 million. The acquisition was recorded using the purchase method
of accounting. Accordingly, the purchase price was
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allocated to the assets and liabilities acquired based on their estimated fair
values at the date of acquisition. The excess of the consideration paid over
the estimated fair value of the identifiable assets acquired of $2.4 million
was recorded as goodwill and is being amortized over 25 years. Only results
from operations subsequent to the acquisition date are reflected in the
accompanying consolidated financial statements. Following the closing, the
name of the Company's subsidiary was changed to Ryder International Corporation
(Ryder).
The following table presents selected unaudited financial data for the years
ended December 31, 1994 and 1993 on a pro forma basis assuming that the
purchase of the business of Ryder International Corporation had occurred as of
January 1, 1993. The pro forma data reflect asset and liability values and
other assumptions which are based on estimates and subject to revision. The
pro forma combined results presented have been prepared for comparative
purposes only and are not necessarily indicative of actual results that would
have been achieved had the acquisition occurred at the beginning of the periods
presented or of future results.
Twelve Months
Ended December 31,
1994 1993
(in thousands)
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Operating Revenues $73,925 $129,432
Income From Continuing
Operations 4,937 7,767
Net Income 4,937 8,332
Net Income Per Share 2.34 3.94
On October 27, 1995, the Company, through a new subsidiary, ATRION Medical
Products, Inc., purchased exclusive worldwide marketing and manufacturing
rights to a patented product for treating excessive tearing of the eye. The
Company acquired licensing rights to the product under a licensing agreement
with the product's inventor. The Company paid $425,000 and assumed certain
liabilities in connection with the acquisition of the product and licensing
rights. The line of products, called LacriCATH, provides a minimally invasive
procedure for clearing obstructions in the nasolacrimal duct. Ryder will
manufacture components for the product line and provide assembly of the kits.
Disposition of Assets
In the second quarter of 1993, the Company recorded income of $565,000 for
additional tax benefits associated with the disposal of the assets of End
Devices, Inc. which the Company sold in 1990. This income has been reflected
as income from discontinued operations in 1993 in the Consolidated Statements
of Income.
3. REGULATORY AND RATE MATTERS
The Company's interstate pipeline subsidiary, Alabama-Tennessee Natural Gas
Company (Alabama-Tennessee), is regulated by the Federal Energy Regulatory
Commission (FERC). The FERC establishes the maximum and minimum transportation
rates Alabama-Tennessee is permitted to charge its customers. The Company's
intrastate pipeline subsidiary, Tennessee River Intrastate Gas Company, Inc.
(TRIGAS), is regulated by the Alabama Public Service Commission (APSC). The
rates to TRIGAS's transportation customers are determined by negotiated
contracts which were approved by the APSC.
On April 1, 1993, Alabama-Tennessee increased its jurisdictional rates from
rates that had been in effect since April, 1990. This rate increase was agreed
to in an uncontested settlement with Alabama-Tennessee's customers which the
FERC approved on December 30, 1993. As a result of this settlement,
Alabama-Tennessee realized an increase in its jurisdictional revenues of
approximately $400,000 per year which was offset by the lower recovery of
certain demand charges, resulting in a net decrease in jurisdictional revenues
of approximately $350,000 per year compared with actual jurisdictional revenues
realized in the twelve months ended May 31, 1992, the base period used in the
rate filing.
During 1992, the FERC issued Order Nos. 636, 636-A and 636-B, respectively
(together hereafter referred to as the "Restructuring Rule"). Under the
Restructuring Rule, which is pending federal appellate court review, all
interstate natural gas pipelines were required to make a number of changes in
the structure of the services they provide effective with the 1993-1994 winter
heating season, the primary change being an "unbundling" or separation of
their sales services from their transportation services. Alabama-Tennessee
implemented restructured services on its system as of September 1, 1993 in
compliance with the FERC's orders under the Restructuring Rule.
Alabama-Tennessee did not have any contracts with producers for the purchase of
natural gas supplies at the time of restructuring and, therefore, did not incur
any gas supply realignment costs directly with producers in connection with its
implementation of restructured service under the Restructuring Rule. However,
Alabama-Tennessee's historical supplier, Tennessee Gas Pipeline Company (TGP),
made a series of filings with the FERC, commencing in 1993, for recovery from
its customers of certain transition
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costs incurred as a result of its implementation of services under the
Restructuring Rule, including $5.5 million from Alabama-Tennessee. As of
December 31, 1995, Alabama-Tennessee had paid this amount to TGP and has
recovered most of these costs and has contractual arrangements which allow for
the recovery of the balance over the next two years.
During the 1980s and early 1990s, many interstate natural gas pipelines
incurred significant take-or-pay liabilities owed to natural gas producers.
Alabama-Tennessee and the other subsidiaries of the Company did not incur any
direct take-or-pay obligations to natural gas suppliers or producers. However,
through various orders issued during the period from 1988 to 1992, the FERC
allowed TGP to pass on to its customers, including Alabama-Tennessee, certain
buyout and buydown costs. The portion of this take-or-pay obligation which
Alabama-Tennessee owed to TGP under various FERC approved orders, including
interest, totaled $23 million, all of which was paid by Alabama-Tennessee
during the period from 1988 through 1995.
In 1991, Alabama-Tennessee reached a settlement with its customers which
provided for the recovery of a portion of the take-or-pay costs billed to it by
TGP over a five-year period. The Company currently estimates that
Alabama-Tennessee will ultimately recover approximately 89% of the $23 million
take-or-pay costs billed by TGP. Alabama-Tennessee's take-or-pay accounts
receivable balance, net of customer payments, was $1.8 million as of December
31, 1995.
In 1989, the Company recorded a net provision for estimated nonrecoverable
take-or-pay expense of $6.4 million. However, changes in the allocation
methodology employed by the FERC and agreements with customers in 1991
resulted in a favorable after-tax adjustment of $3.4 million in the estimate
for non-recoverable take-or-pay expense. Based on this favorable adjustment
and a favorable settlement with the Internal Revenue Service (IRS) in 1993
concerning the Company's treatment of take-or-pay payments and collections in
certain tax returns, the Company recorded income in 1993 of $3.6 million,
reduced by income taxes of $1.3 million.
The facilities of Ryder, the Company's medical and health care products
subsidiary, are registered with the Food and Drug Administration (FDA). All
medical products are manufactured in accordance with Good Manufacturing
Practices as set forth in the Food, Drug and Cosmetic Act of 1938. The FDA does
not establish or regulate price levels for products manufactured by Ryder.
4. LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt as of year-end consisted of the following (in thousands):
1995 1994
- ----------------------------------------------------------------------------------
Revolving credit agreement $ - $ 870
Industrial revenue bonds 812 1,015
Notes payable 1,000 1,000
- ----------------------------------------------------------------------------------
1,812 2,885
Less amounts due in one year 203 203
- ----------------------------------------------------------------------------------
$ 1,609 $ 2,682
==================================================================================
The Company has entered into a $20 million revolving credit agreement with a
bank. Under this agreement there is a $10 million unsecured revolving facility
and a $10 million revolving facility which must be secured at the time it is
used. The term of the agreement has been extended through January 20, 1997,
and the Company has the right to extend the term through January 20, 1998. At
any time during the term of the agreement, the Company may convert any or all
outstanding amounts, under either facility, to a secured term loan with a
minimum maturity of two years. The Company's ability to borrow funds under
the secured and unsecured credit facilities is contingent on meeting certain
restrictions in the loan agreement. The Company currently is in compliance
with all requirements. At December 31, 1995, the Company had no borrowings
under the revolving loan commitment.
The industrial revenue bonds bear interest at 70% of the prime rate with a
minimum rate of 6%, payable monthly, and are secured by Ryder's land, buildings
and equipment, and by a Company guaranty. In April 1994, Ryder executed a
promissory note, guaranteed by the Company, for $1.0 million to the former
owner of the business. Interest is paid quarterly at 6% on the unpaid balance.
The aggregate maturities of long-term debt for the next five years and
thereafter, are as follows:
1996 1997 1998 1999 2000 and
(In thousands) Thereafter
- ----------------------------------------------------------------------------------------------------------------
$203 $703 $703 $203 $0
================================================================================================================
17
21
5. INCOME TAXES
The items comprising income tax expense are as follows:
1995 1994 1993
(In thousands)
- ------------------------------------------------------------------------------------------------------------------
Current - Federal $2,729 $2,563 $2,404
- State 260 260 247
- ------------------------------------------------------------------------------------------------------------------
2,989 2,823 2,651
- ------------------------------------------------------------------------------------------------------------------
Deferred - Federal 27 (207) 73
- State 28 (7) 87
- ------------------------------------------------------------------------------------------------------------------
55 (214) 160
- ------------------------------------------------------------------------------------------------------------------
Investment tax (13) (14) (14)
- ------------------------------------------------------------------------------------------------------------------
Total income tax expense $3,031 $2,595 $2,797
==================================================================================================================
On February 10, 1992, the Financial Accounting Standards Board (FASB) issued
Statement No. 109, "Accounting For Income Taxes", which changed the criteria
for measuring the provisions of income taxes and recognizing deferred tax
assets and liabilities on the balance sheet. The Company adopted the new
accounting and disclosure rules of SFAS 109 in the first quarter of 1993 and
did not restate prior periods. The adoption of SFAS 109 required a one-time
adjustment that increased income by $184,000 in the first quarter of 1993.
Temporary differences and carryforwards which gave rise to a significant
portion of deferred tax assets and liabilities as of December 31, 1995 and 1994
are as follows:
1995 1994
(In thousands)
- ---------------------------------------------------------------------------
Deferred tax assets:
Deferred investment tax credits $ 88 $ 93
Provisions for refunds 120 465
Benefit plans 406 251
Other, net 414 369
- ---------------------------------------------------------------------------
Subtotal 1,028 1,178
Valuation allowance - -
- ---------------------------------------------------------------------------
Total deferred tax assets $1,028 $1,178
===========================================================================
Deferred tax liabilities:
Depreciation and basis differences $2,069 $1,928
Pensions 138 135
Other, net 380 414
- ---------------------------------------------------------------------------
Total deferred tax liabilities $2,587 $2,477
===========================================================================
No valuation allowance is deemed necessary, as the Company anticipates
generating adequate future taxable income to realize the benefits of all
deferred tax assets on the balance sheet.
Total income tax expense differs from the amount which would be provided by
applying the statutory federal income tax rate to pretax earnings as
illustrated below:
1995 1994 1993
(In thousands)
- ------------------------------------------------------------------------------------------------------------------
Income tax expense at
statutory federal
income tax rate $2,846 $2,477 $3,444
Increase(decrease)
resulting from:
State income taxes 190 166 232
Tax exempt interest - (46) (40)
Other, net (5) (2) (839)
- ------------------------------------------------------------------------------------------------------------------
Total income tax expense $3,031 $2,595 $2,797
==================================================================================================================
6. COMMON SHARES
The Company utilized 4,600 and 4,200 treasury shares in 1995 and 1994,
respectively, to make distributions under its Restricted Shares Compensation
Plan for Non-employee Directors and its 1994 Stock Incentive Plan (see Note
10). On May 4, 1995, the Board of Directors authorized a program under which
the Company may repurchase up to 100,000 shares of its common stock in
open-market or negotiated transactions at such times and at such prices as
management may from time to time decide. In 1995 the Company repurchased 1,000
shares of its common stock under the Stock Repurchase Program. At December 31,
1995 there were 160,916 shares being held in treasury and the cost of the
shares is shown as a reduction in common shareholders' equity in the
Consolidated Balance Sheets.
The Company has adopted a Common Share Purchase Rights Plan which is intended
to protect the interests of shareholders in the event of a hostile attempt to
take over the Company. The Rights, which are not presently exercisable and do
not have any voting powers, represent the right of the Company's shareholders
to purchase at a substantial discount, upon the occurrence of certain events,
common shares of the Company or of an acquiring company involved in a business
combination with the Company.
7. RETAINED EARNINGS
The following is a recap of consolidated retained earnings for the years ended
December 31, 1995, 1994 and 1993:
1995 1994 1993
(In thousands)
- ------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $22,725 $20,571 $15,769
Add - net income for
the year 5,340 4,690 7,332
Deduct - cash dividends,
$1.20 per share in
1995, 1994 and 1993 (2,540) (2,536) (2,530)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year $25,525 $22,725 $20,571
==================================================================================================================
18
22
8. REVENUES FROM MAJOR CUSTOMERS
In 1995, approximately $20.0 million (24.8%) and $10.0 million (12.4%) of the
Company's operating revenues were attributable to two natural gas customers.
In 1994, approximately $23.0 million (32.4%) and $8.8 million (12.4%) of the
Company's operating revenues were attributable to two natural gas customers.
In 1993, approximately $24.6 million (20.7%), $18.4 million (15.5%), $18.1
million (15.2%) and $13.2 million (11%) of the Company's operating revenues
were attributable to four natural gas customers.
9. EMPLOYEE RETIREMENT AND BENEFIT PLANS
A noncontributory retirement plan is maintained for all regular employees of
the Company. The plan provides benefits based on years of service and other
factors. The Company's funding policy is to make the annual contributions
required by applicable regulations and recommended by its actuary.
Net pension income for 1995, 1994 and 1993 included the following components:
1995 1994 1993
(In thousands)
- ----------------------------------------------------------------------------------------
Service cost $ 112 $ 139 $ 94
Interest cost 287 277 271
Actual (return) loss on assets (919) 66 (429)
Net amortization and deferral 509 (492) 20
- ----------------------------------------------------------------------------------------
Net periodic pension income $ (11) $ (10) $ (44)
========================================================================================
The following schedule sets forth the plan's funded status as of December 31,
1995 and 1994 and the amounts recognized in the Company's Consolidated Balance
Sheets during those years:
1995 1994
(In thousands)
- ----------------------------------------------------------------------------------------------
Actuarial present value
of benefit obligation
Vested $ 3,353 $ 2,827
Non-vested 17 33
- ----------------------------------------------------------------------------------------------
Accumulated benefit obligation $ 3,370 $ 2,860
- ----------------------------------------------------------------------------------------------
Projected benefit obligation $(4,123) $(3,436)
Plan assets at fair value 5,263 4,569
- ----------------------------------------------------------------------------------------------
Plan assets in excess of
projected benefit obligation 1,140 1,133
Unrecognized net gain (156) (128)
Unrecognized net assets at date
of initial adoption (558) (618)
- ----------------------------------------------------------------------------------------------
Prepaid pension asset $ 426 $ 387
==============================================================================================
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation shown above was 7.25% in 1995 and
8.50% in 1994. The rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
shown above was 6% in both 1995 and 1994. The expected long-term rate of
return on assets was 8% in both years. At December 31, 1995, plan assets were
invested approximately 40% in fixed income securities, 4% in cash and cash
equivalents and 56% in equity securities.
Effective July 1, 1992, the Company adopted a nonqualified Supplemental
Executive Retirement Plan (SERP) which provides additional pension benefits to
certain executive officers of the Company. Expense recognized in connection
with the SERP in 1995, 1994 and 1993 was $69,000, $50,000 and $40,000,
respectively.
The Company also sponsors a defined contribution 401(k) plan and a supplemental
thrift plan for its employees, including Ryder's employees who were added to
the plan on August 1, 1994. These plans provide participants a mechanism for
making contributions for retirement savings. Each participant may contribute
certain amounts of eligible compensation. The Company makes a matching
contribution to the plans. The Company's contribution under these plans was
$245,000 in 1995, $166,000 in 1994 and $104,000 in 1993.
The Company also provides certain contributory postretirement health care and
life insurance benefits to full-time employees of Alabama-Tennessee. The
Company's commitment towards the cost of these postretirement health care
benefits in the year 2000 and later is capped based on the levels provided in
1999.
The Company adopted FASB Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions"(SFAS 106) effective as of January
1, 1993. Prior to 1993, the Company recognized these postretirement benefits in
the year the benefits were paid. In its last rate case, Alabama-Tennessee was
allowed by the FERC to recover SFAS 106 costs in its rates. Therefore, the
adoption of this new standard did not have a material impact on the Company's
financial results. Alabama-Tennessee, in compliance with requirements by the
FERC, has established a VEBA trust and is currently funding and plans to
continue funding these expenses, calculated in accordance with SFAS 106. The
expected long-term
19
23
rate of return on plan assets was 8.0% as of December 31, 1995. The investment
income of the trust is subject to federal income tax.
The following schedule presents the plan's funded status reconciled with
amounts recognized in the Company's Consolidated Balance Sheet as of December
31, 1995 and 1994:
1995 1994
(In thousands)
- ----------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $(365) $(355)
Fully eligible active plan participants (140) (118)
Other active plan participants (175) (113)
- ----------------------------------------------------------------------------------
Total $(680) $(586)
Plan Assets 202 122
- ----------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation
in excess of plan assets $(478) $(464)
Unrecognized prior service cost - -
Unrecognized net loss (gain) 25 (25)
Unrecognized transition obligation 470 498
- ----------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 17 $ 9
==================================================================================
Net periodic postretirement benefit cost included the following components:
1995 1994
(In thousands)
- ----------------------------------------------------------------------------------
Service cost $ 13 $ 15
Interest cost 49 44
Actual (return) loss on plan assets (27) 3
Amortization of transition obligation
over 20 years 28 28
Net amortization and deferral 19 (9)
- ----------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 82 $ 81
==================================================================================
The assumed rate of increase in the per capita cost of covered health care
benefits for pre age 65 plan participants is 11.0% for 1996 and is assumed to
decrease gradually to 5.5% by 2007 and then remain level. For post age 64
participants, the rate is 11.0% for 1996 and is assumed to decrease gradually
to 5.0% by 2008 and then remain level. Increasing the assumed health care cost
trend rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by $2,400 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1995 by $200.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% at December 31, 1995 and 8.50% at December 31, 1994.
10. STOCK OPTION PLAN
During 1994, the shareholders of the Company approved the adoption of the
Company's 1994 Key Employee Stock Incentive Plan (the Stock Incentive Plan).
The Stock Incentive Plan provides for the grant to key employees of incentive
and nonqualified options and restricted shares up to 105,000 common shares of
the Company. The purchase price of the shares under option must be at least
equal to the fair market value of such shares on the date of grant. The options
granted become exercisable no earlier than six months and one day after date of
grant and expire ten years after date of grant. The purchase price, if any, to
be paid for restricted shares is fixed by the Compensation Committee of the
Company. During 1990, the shareholders of the Company approved the adoption of
the Company's 1990 Stock Option Plan which provided for the grant to key
employees of incentive and nonqualified options to purchase common shares of
the Company.
Option transactions for the years 1993, 1994 and 1995 are as follows:
Shares Price Per Share
- ----------------------------------------------------------------------------
Options outstanding
at December 31, 1992 49,000 $10.125 - 24.125
Granted in 1993 28,500 $22.75
Exercised in 1993 (3,500) $14.875 - 20.00
- -----------------------------------------------------------------------------
Options outstanding
at December 31, 1993 74,000 $10.125 - 24.125
Granted in 1994 37,350 $17.50 - 21.75
Exercised in 1994 - -
- -----------------------------------------------------------------------------
Options outstanding
at December 31, 1994 111,350 $10.125 - 24.125
Granted in 1995 44,100 $18.00
Expired in 1995 (1,500) $22.75
Exercised in 1995 (1,800) $10.125 - 17.50
- -----------------------------------------------------------------------------
Options outstanding
at December 31, 1995 152,150 $10.125 - 24.125
=============================================================================
As of December 31, 1995 there remained 24,800 shares for which options may be
granted in the future under the Stock Incentive Plan.
20
24
11. SEGMENT INFORMATION
Beginning in 1994, with the acquisition of Ryder, the Company classifies its
continuing operations into two industry segments which are described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Summarized financial information for these segments is as follows:
Segment
--------------------------------------
Pipeline Medical and
& Energy Health Care Consoli-
Services Products dated
- --------------------------------------------------------------------------
Revenues -1995 $69,354 $11,025 $80,379
-1994 63,445 6,876 70,321
Operating income -1995 5,762 2,049 7,811
-1994 5,899 1,234 7,133
Depreciation -1995 588 603 1,191
-1994 567 409 976
Identifiable assets -1995 32,994 15,512 48,506
-1994 28,216 15,521 43,737
==========================================================================
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 1995 and 1994 are as follows:
Earnings
Quarter Operating Operating Net Per
Ended Revenue Income Income Share
(In thousands, except per share amounts)
- ---------------------------------------------------------------------
3/31/95 $22,474 $2,301 $1,531 $0.72
6/30/95 16,349 1,831 1,261 0.60
9/30/95 18,134 1,862 1,254 0.59
12/31/95 23,422 1,817 1,294 0.61
- ---------------------------------------------------------------------
3/31/94 $20,007 $1,817 $1,288 $0.61
6/30/94 16,519 1,751 1,096 0.52
9/30/94 16,695 1,767 1,139 0.54
12/31/94 17,100 1,798 1,167 0.55
=====================================================================
21
25
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------
Operating revenues:
Industrial sales (3) $41,767 $40,688 $ 62,234 $ 56,825 $48,570
Resale sales (3) 10,942 8,506 49,132 45,734 35,503
Transportation 11,069 11,050 6,525 4,550 4,219
Natural gas marketing 5,486 3,119 1,052 14,474 5,270
Distribution sales 90 82 79 68 284
Medical and health care products 11,025 6,876 - - -
- -----------------------------------------------------------------------------------------------------------------------
Total operating revenues $80,379 $70,321 $119,022 $121,651 $93,846
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 5,340 $ 4,690 $ 6,767 $ 4,665 $ 7,934
Net income (1) (2) 5,340 4,690 7,332 4,665 8,375
Total assets 48,506 43,737 42,653 42,766 44,858
Long-term debt (incl. current maturities) 1,812 2,885 - - -
Income from continuing operations,
per share 2.52 2.22 3.21 2.23 3.80
Net income per share 2.52 2.22 3.48 2.23 4.01
Dividends per share 1.20 1.20 1.20 1.18 1.10
Average shares outstanding 2,117 2,113 2,108 2,094 2,089
Pipeline sales volumes (MMBtu) - - 3,182 372 667
Pipeline transportation volumes
(MMBtu) (3) 46,361 42,098 42,297 41,550 39,842
Natural gas marketing volumes
(MMBtu) 4,630 2,599 836 7,897 3,358
- -----------------------------------------------------------------------------------------------------------------------
(1) The 1993 amount includes income of $565,000 related to discontinued
operations and $2.3 million attributable to a favorable revision of an
after-tax provision recorded in 1989 of $6.4 million for estimated
nonrecoverable take-or-pay expense.
(2) The 1991 amount includes a $1.0 million after-tax gain on sale of assets
and income of $3.4 million attributable to a favorable revision of an after-tax
provision recorded in 1989 of $6.4 million for estimated nonrecoverable
take-or-pay expense.
(3) Revenues and volume amounts include sales volumes in MMMBtu of 25,790 in
1995, 19,924 in 1994, 33,538 in 1993, 38,436 in 1992 and 35,855 in 1991 which
were sold to pipeline customers by a marketing subsidiary of the Company.
22
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
AlaTenn Resources is a diversified holding company which is engaged in
two lines of business: (1) pipeline and energy services and (2) medical and
health care products.
The Company's energy services are provided primarily by Alabama-Tennessee
Natural Gas Company (Alabama-Tennessee), Tennessee River Intrastate Gas Company,
Inc. (TRIGAS) and AlaTenn Energy Marketing Company, Inc. (ATEMCO).
Alabama-Tennessee operates an interstate natural gas pipeline which provides
natural gas transportation service directly to eight industrial plants and 17
municipal gas systems in the Tennessee Valley and is regulated by the Federal
Energy Regulatory Commission (FERC). TRIGAS which operated an intrastate
natural gas pipeline in northern Alabama serves primarily one major industrial
customer with which it has long-term contracts. ATEMCO is a natural gas
marketing company which provides various services to its customers, including
the sale of natural gas to customers both on and off the Company's pipeline
systems.
The Company, through a subsidiary, AlaTenn Pipeline Company, Inc. (AlaTenn
Pipeline Company), began in 1995 and substantially completed in early 1996
construction of a 22-mile pipeline, consisting of approximately 17 miles of
8-5/8-inch and 5 miles of 12-inch high pressure steel pipeline to transport
gaseous oxygen, under a long-term contract with a large industrial gas
supplier, to one of the Company's existing natural gas customers.
The Company's medical and health care products business is conducted by
Ryder International Corporation (Ryder) and ATRION Medical Products, Inc.
(ATRION Medical Products). Ryder, which was acquired in April 1994, is
principally engaged in the design, development, manufacture and sale of
proprietary products for the medical and health care industry. Ryder currently
holds a number of design and use patents. Its products include disposable or
semi-disposable soft contact lens storage and disinfection systems as well as
diagnostic and medical products used or distributed, both domestically and
internationally, by major medical and health care companies (see Notes 2 and 11
of Notes to Consolidated Financial Statements).
On October 27, 1995, the Company through a new subsidiary, ATRION Medical
Products purchased exclusive worldwide marketing and manufacturing rights to a
newly developed line of products to be used in a patented ophthalmic surgical
procedure for treating excessive tearing of the eye. The Company acquired the
product and licensing rights to the product, under a licensing agreement with
the product's inventor, for $425,000 and the assumption of certain
liabilities. The line of products, called LacriCATH enables ophthalmologists
to perform a minimally invasive procedure for clearing obstructions in the
nasolacrimal duct. Ryder will manufacture certain components for the product
line and provide assembly of the kits.
During the last ten years, the natural gas industry has undergone
substantial change, in part in response to certain actions taken by the FERC to
promote greater competition within the industry. The FERC's actions to increase
the availability of transportation services on the nation's interstate pipeline
system, together with the oversupply of deliverable natural gas, have had a
significant impact on the way pipeline companies operate. The Company has
responded to these changes by expanding its efforts in the energy sector through
the development of ATEMCO, a natural gas marketing company, as well as
construction by TRIGAS of an intrastate pipeline which was placed into service
in 1990. The Company has also diversified by expanding into the medical and
health care products industry through the acquisition of Ryder and the
formation of ATRION Medical Products.
RESULTS OF OPERATIONS
The Company's 1995 net income was $5.3 million or $2.52 per share compared
with $4.7 million or $2.22 per share in 1994 and with $7.3 million or $3.48 per
share in 1993. However, net income in 1993 included income from a favorable
adjustment to a 1989 provision for estimated nonrecoverable take-or-pay expense
and a favorable adjustment to a reserve established in 1989 for a discontinued
operation. Excluding these items, net income in 1993 was $4.4 million or $2.11
per share.
Operating revenues were $80.4 million in 1995 compared with $70.3 million
in 1994 and $119.0 million in 1993. Natural gas revenues totaled $69.4 million
in 1995, increasing from $63.4 million in 1994 which had decreased from $119.0
million in 1993. The increase in natural gas revenues in 1995 was attributable
to higher sales volumes by ATEMCO, both to customers on the Company's pipeline
system and to off-system customers, offset somewhat by a decrease in natural gas
prices in 1995 as compared to 1994. The decline in natural gas revenues in 1994
as compared to 1993 was primarily attributable to lower sales volumes by ATEMCO,
lower Alabama-Tennessee revenues due to the impact of Order 636 on operations
and lower spot market natural gas prices in 1994 compared with 1993. ATEMCO's
sales volumes increased by 33% in 1995 compared with 1994 sales while 1994
sales decreased by 34% from 1993 levels. The increase in ATEMCO's sales in 1995
resulted from a 27% increase in pipeline sales as well as greater sales to
off-system customers. The reduction in ATEMCO's sales in 1994 compared with
1993 resulted from reduced sales to customers on the Company's pipeline system
partially offset by higher sales to off-system customers between those years.
Revenues of $11.0 million and $6.9 million for 1995 and 1994, respectively, were
attributable to the operations of Ryder, acquired by the Company in April
1994. The increase in revenues at Ryder between years is attributable to the
inclusion of a full year's operations in 1995 compared to eight months in the
prior year, but also reflected, on a comparable basis, higher sales volumes. The
acquisition of Ryder's business was recorded using the purchase method of
accounting. Accordingly, only results from Ryder's operations
23
27
subsequent to the acquisition date of April 19, 1994 are reflected in the
Company's financial statements for 1995 and 1994 and results for prior periods
are not included.
As a result of regulatory changes culminating with FERC Order No. 636,
customers on the Company's pipeline systems have gained considerable flexibility
over the past several years in contracting directly with producers and marketing
companies for their natural gas supplies. While such changes have required
Alabama-Tennessee to transport natural gas as opposed to its traditional role as
a seller of natural gas, ATEMCO has been able to provide numerous services to
its customers in the new environment which have helped to offset revenues lost
at Alabama-Tennessee. Transportation service accounted for 100% of
Alabama-Tennessee's pipeline throughput during 1995 and 1994 compared with 93%
in 1993.
As a result of lower natural gas costs and an improved industrial economy,
total natural gas deliveries on the Company's pipeline systems have remained at
high levels over the past several years. Deliveries of natural gas on the
Company's pipelines totaled 46.3 million MMBtu in 1995 compared with 42.1
million MMBtu in 1994 and 45.5 million MMBtu in 1993. The 10% increase in
throughput in 1995 compared to 1994 was due primarily to higher deliveries to
industrial customers, as well as to colder weather which resulted in higher
deliveries to municipal customers. The 7% decrease in deliveries in 1994
compared to 1993 was due to warmer weather in 1994 and higher than normal
deliveries in 1993 to the TVA steam plant that could not get alternate fuels due
to the flooding on the Mississippi River. The availability of low-priced natural
gas supplies during this period had a favorable impact on the utilization of the
Company's pipelines and decreased the attractiveness of alternate fuels. Some of
the industrial customers directly or indirectly served by the Company's
pipelines have the capability to burn fuels other than natural gas, and these
customers generally switch from natural gas when it costs more than an alternate
fuel.
The Company's cost of sales were $63.1 million in 1995 compared with $54.7
million in 1994 and $106.9 million in 1993. In 1995, the cost of purchased
natural gas was $57.6 million and the cost of sales for the medical and health
care products segment was $5.4 million. In 1994, the cost of purchased natural
gas was $51.5 million and the cost of sales for the medical and health care
products segment after its acquisition in April 1994 was $3.2 million. The
increase in purchased natural gas costs for 1995 and 1994 was consistent with
the changes in revenues discussed above.
Gross margins were $17.3 million in 1995 compared with $15.6 million in
1994 and $12.1 million in 1993. Energy margins of $11.7 million in 1995
decreased $.2 million compared with 1994 as slightly higher margins at ATEMCO
were more than offset by lower pipeline margins at Alabama-Tennessee and
TRIGAS. The lower pipeline margins in 1995 were the result of favorable
one-time adjustments in 1994 at Alabama-Tennessee and higher margins in 1994 at
TRIGAS due to higher rates resulting from temporary pricing adjustments,
partially offset by the favorable effect of higher throughput. Energy gross
margins in 1994 decreased $.2 million compared with 1993 due to higher sales
volumes to the TVA steam plant in 1993, lower earnings in 1994 at
Alabama-Tennessee related to the restructuring of two industrial contracts and
to the lower recovery of certain demand charges. These reductions more than
offset the favorable impact of higher margins from the Company's natural gas
marketing subsidiary due to increased marketing opportunities as a result of
Order 636, a full year of higher margins on sales to a major customer which
increased its contract volumes in June of 1993.
Margins from medical and health care products increased by $1.9 million in
1995 compared with 1994. Ryder's 1995 results included a full year of Ryder's
business compared to only eight months in 1994, and on a comparable basis with
the prior year, include higher sales volumes, a more favorable product mix and
lower unit operating costs.
The Company, through ATEMCO and Alabama-Tennessee, presently has contracts
with a major industrial customer for the sale and transportation of natural gas.
In 1995, gross margin under these contracts totaled $2.1 million. On August 31,
1997, certain of these contracts expire and the Company does not expect one of
the contracts, which provides an annual gross margin of $1.0 million, to be
renewed. However, the Company anticipates that margins from AlaTenn Pipeline
Company's long-term contract with a gaseous oxygen supplier will partially
offset this annual loss of margin. Also, the Company recently extended until
1999 an existing contract with a major industrial customer on TRIGAS.
Operations and maintenance expenses were $7.9 million in 1995 compared with
$7.1 million in 1994 and $5.0 million in 1993. This increase of $.8 million from
1994 to 1995 resulted from a $.9 million increase in expenses in the medical and
health care products segment, offset by a $.1 million decrease in the pipeline
and energy services segment. For 1995 and 1994, $2.9 million and $2.0 million,
respectively, of total operations and maintenance expenses, including an
allocation of such expenses from affiliates, were attributable to the medical
and health care products segment. Expenses at Ryder increased by $.6 million,
primarily due to the inclusion of Ryder operations for a full year in 1995 as
compared to a partial year in 1994, the year of its acquisition. The $.1 million
decrease in operations and maintenance expenses for the pipeline and energy
services segment in 1995 compared with 1994 was due to the capitalization of
expenses related to the construction of a pipeline to transport gaseous oxygen
to an industrial customer. The $.1 million increase in operations and
maintenance expense for this segment in 1994 compared with 1993 was due to
higher legal and regulatory expenses along with the capitalization of expenses
for certain major capital projects in 1993.
Operating income for 1995 was $7.8 million compared with $7.1 million in
1994 and $6.2 million in 1993. For 1995, $2.0 million of operating income
resulted from the medical and health care products segment as compared with $1.2
million in 1994. Higher sales and margins at Ryder in 1995 resulted in increased
operating income from the medical and health care products, due in part to the
inclusion of a full year of
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Ryder's business as compared to a partial year in 1994. This was partially
offset by start-up costs at the Company's new medical and health care products
marketing subsidiary. The $.1 million decrease in operating income from the
pipeline and energy services segment in 1995 compared with 1994 was due to lower
margins as described above and the $.3 million decrease in operating income in
1994 compared to 1993 was due to lower margins from the natural gas transmission
business on the Company's pipelines and higher operations and maintenance
expenses.
Interest and other income amounted to $753,000 in 1995 compared with
$482,000 in 1994 and $529,000 in 1993. The increase in other income in 1995
compared with 1994 reflects higher miscellaneous tooling sales at Ryder,
capitalized interest on construction projects, income from a joint venture
project and higher earnings on investments, partially offset by a decrease in
interest income on the take-or-pay receivable due from Alabama-Tennessee's
customers. The decrease in other income in 1994 compared with 1993 primarily
reflects lower interest on the take-or-pay receivable between years. The
decrease in 1994 also reflects lower invested cash balances in 1994 compared
with 1993, partially offset by higher interest rates in 1994.
Interest expense was $193,000 in 1995 compared with $330,000 in 1994
and $248,000 in 1993. The decrease in 1995 is due to lower borrowings under the
Company's loan revolver while the increase in 1994 relates to interest on debt
incurred in the acquisition of the business of Ryder and higher interest rates.
Income taxes were $3.0 million in 1995 compared with $2.6 million in
1994 and $3.4 million in 1993. Income taxes for 1993 include $1.3 million for
taxes associated with the $3.6 million favorable adjustment of the Company's
provision for estimated nonrecoverable take-or-pay expense and reflect a $.2
million one-time favorable adjustment for the implementation of SFAS 109. Other
differences between years reflect changes in pre-tax income between the
respective years.
IMPACT OF INFLATION
The Company experiences the effects of inflation primarily in the
prices it pays for labor, materials and services. Over the last three years,
the Company has experienced the effects of moderate inflation in these costs.
At times the Company has been able to offset a portion of these increased costs
by increasing the rates it charges for transportation of natural gas and
through cost escalators in certain sales contracts in its medical and health
care products segment.
LIQUIDITY AND CAPITAL RESOURCES
On January 20, 1995, the Company terminated an existing loan agreement
and entered into a new $20 million revolving loan agreement to be utilized for
the funding of operations and for major capital projects or acquisitions,
subject to certain limitations and restrictions (see Note 4 of Notes to
Consolidated Financial Statements). There was no indebtedness under this
agreement at December 31, 1995 while the Company had $.9 million in
indebtedness under the previous loan agreement as of December 31, 1994 and no
indebtedness as of December 31, 1993. The Company did not borrow any
significant amounts under its revolving loan agreement during 1995 or 1993
because excess cash and cash flow from operations were sufficient to fund cash
requirements during these periods.
As of December 31, 1995, the Company had cash and temporary cash
investments of $2.8 million, compared with $.4 million and $8.8 million at the
end of 1994 and 1993, respectively. The Company had long-term debt of $1.6
million as of December 31, 1995 compared with $2.7 million as of December 31,
1994 and no long-term debt at the end of 1993. The decrease in long-term debt
in 1995 was due to the repayment of debt under the loan agreement and the
payment of the annual installment on industrial revenue bonds at Ryder. The
decrease in cash and increase in long-term debt during 1994 was primarily due
to the acquisition of the business of Ryder. In April 1994, the Company
purchased the business of Ryder for $11.1 million in cash, issued a promissory
note in the principal amount of $1.0 and assumed liabilities of $2.2 million.
Capital expenditures for plant and equipment totaled $3.1 million in
1995. Of this amount, the majority was attributable to the partial
construction of a 22-mile pipeline to deliver gaseous oxygen to an industrial
customer. In 1994, excluding the assets acquired in the purchase of the Ryder
business, capital expenditures for plant and equipment totaled approximately
$1.4 million, compared with $.6 million in 1993. The capital expenditures in
1994 and 1993 were related to the improvement of existing facilities and
replacement of certain equipment at Alabama-Tennessee. The primary items
providing cash flow in 1995 were earnings from operations and net take-or-pay
collections. The most significant uses of cash flow in 1995 were capital
expenditures of $3.1 million, payment of $2.5 million of dividends on common
shares and repayment of debt.
Based on settlements with its customers which became final in 1991,
Alabama-Tennessee anticipates collections of approximately $1.8 million during
1996, which will complete its recovery of take-or-pay payments from its
customers. Alabama-Tennessee has no remaining liability to Tennessee Gas
Pipeline (TGP) for take-or-pay. The Company has budgeted capital expenditures
of approximately $2.6 million in 1996 and $.9 million in 1997. A major portion
of the 1996 budget is for the completion of the 22-mile, gaseous oxygen
pipeline. The Company believes that cash flows from operations, cash recoveries
of take-or-pay by Alabama-Tennessee from its customers, and borrowings under the
Company's new revolving loan agreement and other term financing which the
Company believes would be available, if necessary, will be sufficient to fund
the construction of the pipeline described above, potential projects and
budgeted capital expenditures for the next two years.
RATE AND REGULATORY MATTERS
On April 1, 1993, Alabama-Tennessee increased its jurisdictional rates
from rates that had been in effect since April 1, 1990. This rate increase was
agreed to in an uncontested settlement with Alabama-Tennessee's customers which
the FERC approved. As a result of this settlement, Alabama-Tennessee realized
an increase in its jurisdictional revenues of approximately $400,000 per year
which was more than offset by the
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lower recovery of certain demand charges, resulting in a net decrease of
approximately $350,000 per year compared with actual jurisdictional revenues
realized in the twelve months ended May 31, 1992, the base period used in the
rate filing.
As a result of Order No. 636 and several amendments issued by FERC in 1992, all
interstate natural gas pipelines were required to make a number of changes in
the structure of the services they provide prior to the end of 1993.
Alabama-Tennessee implemented restructured services pursuant to the new orders
on September 1, 1993. Alabama-Tennessee did not have any contracts with
producers for the purchase of natural gas supplies and, therefore, has not
directly incurred any gas supply realignment costs with producers in connection
with its implementation of restructured services under Order No. 636. For more
information on this matter, see Note 3 of Notes to Consolidated Financial
Statements.
ACCOUNTING PRONOUNCEMENTS
In March, 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" (SFAS 121). This statement requires that
long-lived assets be reviewed for impairment whenever events or changes in the
circumstances indicate that the carrying amount for an asset may not be
recoverable. This statement also imposes stricter criteria for regulatory
assets by requiring that such assets be probable of future recovery at each
balance sheet date. The Company must adopt this standard by January 1, 1996 and
does not expect that the adoption will have a material impact on the financial
position or results of operations of the Company.
In October, 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). This statement is effective for
transactions that are entered into in fiscal years beginning after December 15,
1995. SFAS 123 establishes a fair value-based method of accounting for employee
stock options. This method provides for a compensation cost to be charged to
results of operations at the grant date. However, the statement allows
companies to continue to follow the accounting treatment prescribed by APB
Opinion No. 25. Opinion 25 generally requires compensation cost to be
recognized only for the excess of the quoted market price at the grant date
over the price that an employee must pay to acquire the stock. Companies
electing to continue with Opinion 25 must make disclosure of net income as if
Statement 123 had been adopted. The Company has not yet determined the method
of accounting that it will follow for stock options. However, it does not
expect that adoption of the requirements of Statement 123 would have a material
impact on the results of operations.
The Company is subject to the provisions of Statement of Accounting Standards
71, "Accounting for the Effects of Certain Types of Regulation." Regulatory
assets represent probable future revenue to the Company associated with certain
costs which will be recovered from customers through the regulatory, or
ratemaking process. The Company had no material regulatory assets on its books
as of December 31, 1995.
OTHER MATTERS
Environmental matters have gained increased attention in the natural gas
pipeline and distribution industry over the past few years. The Company
believes that its properties and operations in both the pipeline and energy
services segment as well as the medical and health care products segment are in
full compliance with all applicable environmental statutes and regulations.
There are no administrative or judicial proceedings arising under environmental
statutes pending or known to be contemplated by governmental agencies to which
the Company is a party.
As has been previously reported, the City of Decatur, Alabama received
authorization from the FERC in 1994 to construct a pipeline that would bypass
Alabama-Tennessee's facilities and allow Decatur to connect directly to TGP. It
does not appear at this time that Decatur will continue to pursue this option
since Decatur and the City of Huntsville have recently entered into contracts
with Southern Natural Gas Company (Southern), a wholly owned subsidiary of
Sonat, Inc., for natural gas transportation services. In order to provide
service under these contracts, Southern plans to construct a new pipeline to
serve the Huntsville/Decatur area, which now receives its natural gas supplies
through Alabama-Tennessee and TGP. Southern has filed an application with the
FERC to build a 110-mile pipeline from Tuscaloosa, Alabama to North Alabama to
provide such service to Huntsville and Decatur beginning in or after the fourth
quarter of 1997. These contracts with Southern cover substantially all of the
natural gas requirements of Huntsville and Decatur.
The Company is opposing Southern's application at the FERC and on February 9,
1996 filed a lawsuit in state court in Alabama against Southern and the City of
Huntsville. The Company is asserting that the contract between Southern and
Huntsville violates Alabama's competitive bid law and is requesting that the
contract be declared void.
In the meantime, Alabama-Tennessee continues to maintain firm transportation
contracts with both cities. Contracts with Decatur for approximately 93% of
that municipality's contract volume expire on November 1, 1997 with the
remaining due to expire on November 1, 2000. Contracts with Huntsville for
approximately 86% of that municipality's contract volume expire on April 1,
1998 with the balance also expiring on November 1, 2000. In 1995, Huntsville
and Decatur accounted for approximately 4% of the Company's revenues and 16%,
or $2.8 million, of the Company's gross margin.
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DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Emile A. Battat
President and Chief
Executive Officer
Piedmont Enterprises, Inc.
Riverside, Connecticut
Jerry A. Howard
Chairman of the Board, President
and Chief Executive Officer
Richard O. Jacobson
President and Chief
Executive Officer
Jacobson Warehouse Company, Inc.
Des Moines, Iowa
John H.P. Maley
Consultant
Signal Mountain, Tennessee
Jerome J. McGrath
Of counsel to the law firm of
Gallagher, Boland, Meiburger
& Brosnan
Washington, D.C.
Hugh J. Morgan, Jr.
Chairman of the Board
National Bank of Commerce
of Birmingham
Birmingham, Alabama
J. Kenneth Smith
Retired, Former Director,
Government Relations
Oryx Energy Company
Gretna, Louisiana
Roger F. Stebbing
President and Chief Executive Officer
Stebbing and Associates, Inc. and
Marlboro Enterprises, Inc.
Signal Mountain, Tennessee
John P. Stupp, Jr.
Executive Vice President
and Secretary
Stupp Bros., Inc.
St. Louis, Missouri
EXECUTIVE OFFICERS
Jerry A. Howard
Chairman of the Board, President
and Chief Executive Officer
AlaTenn Resources, Inc.
Chairman of the Board or
President of all subsidiaries
George G. Petty
Vice President -- Finance,
Chief Financial Officer and
Secretary-Treasurer
AlaTenn Resources, Inc.
Jeffery Strickland
Vice President -- Corporate Development,
Assistant Secretary and Assistant
Treasurer AlaTenn Resources, Inc.
Richard Rabenau
President and Secretary
Ryder International Corporation
Gus Magrini
President and Secretary
AlaTenn Energy Marketing Company, Inc.
OFFICERS OF PRINCIPAL SUBSIDIARIES
ALABAMA-TENNESSEE NATURAL
GAS COMPANY
Jerry A. Howard
Chairman of the Board, President and
Chief Executive Officer
George G. Petty
Vice President -- Finance, Chief
Financial Officer and
Secretary-Treasurer
Robert A. Burns
Vice President -- Operations
Donald A. Whittington
Vice President -- Customer Services
and Regulatory Affairs
Jeffery Strickland
Vice President -- Planning
RYDER INTERNATIONAL CORPORATION
Jerry A. Howard
Chairman of the Board
Richard Rabenau
President and Secretary
Daniel S. Clark
Vice President -- Regulatory
and Quality
Vandy J. Cruise
Vice President -- Operations
Steven E. Ferens
Vice President -- Sales
Rowland W. Kanner
Vice President -- Technology
Stephen P. Lisak
Vice President -- Engineering
TENNESSEE RIVER INTRASTATE GAS COMPANY, INC.
Jerry A. Howard
Chairman of the Board
and President
Gus Magrini
Vice President
George G. Petty
Secretary and Treasurer
Jeffery Strickland
Asst. Secretary and
Asst. Treasurer
ALATENN ENERGY MARKETING COMPANY, INC.
Jerry A. Howard
Chairman of the Board
Gus Magrini
President and Secretary
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CORPORATE DATA
COMPANY OFFICE
P.O. Box 918
Florence, Alabama 35631
Telephone: (205) 383-3631
REGISTRAR AND TRANSFER AGENT
American Stock Transfer and Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
FORM 10-K
A copy of the Company's Form 10-K Annual Report to the Securities and Exchange
Commission may be obtained by any shareholder without charge by written request
to:
Corporate Secretary
AlaTenn Resources, Inc.
Post Office Box 918
Florence, Alabama 35631
STOCK INFORMATION
The Company's common shares trade in the Nasdaq National Market (Symbol ATNG).
As of March 15, 1996, there were approximately 3,300 shareholders in the
Company, including beneficial owners holding shares in nominee or "street"
name. The high and low closing prices as reported by Nasdaq for each quarter of
1995 and 1994 are shown below along with the quarterly cash dividends paid per
share.
1995
- ------------------------------------------------------------------
Quarter March June Sept. Dec.
Ended 31 30 30 31
High 19 3/4 20 1/4 22 22
Low 16 1/2 17 5/8 19 3/4 20 1/4
Dividends
per share $.30 $.30 $.30 $.30
1994
- ------------------------------------------------------------------
Quarter March June Sept. Dec.
Ended 31 30 30 31
High 22 1/4 20 1/2 18 3/4 18 1/2
Low 19 3/4 18 17 1/2 16 1/2
Dividends
per share $.30 $.30 $.30 $.30
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