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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 0-10763
ATRION CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-0821819
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE ALLENTOWN PARKWAY, ALLEN, TEXAS 75002
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(972) 390-9800
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING AT
TITLE OF EACH CLASS JUNE 30, 1998
- --------------------------------------- --------------------------------------
COMMON STOCK, PAR VALUE $0.10 PER SHARE 3,201,645
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ATRION CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION 2
ITEM 1. Financial Statements
Consolidated Statements of Income (Unaudited)
For the Three Months and Six Months Ended
June 30, 1998 and 1997 3
Consolidated Balance Sheets (Unaudited)
June 30, 1998 and December 31, 1997 4-5
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended
June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 6. Exhibits and Reports on
Form 8-K 14
SIGNATURES 15
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PART I
FINANCIAL INFORMATION
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ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ----------------- ----------------- ----------------
(In thousands, except per share data) (In thousands, except per share data)
Revenues $ 11,375 $ 8,138 $ 21,537 $ 16,083
Cost of goods sold 6,740 5,073 13,167 10,176
-------- -------- -------- --------
Gross profit 4,635 3,065 8,370 5,907
-------- -------- -------- --------
Operating expenses:
Selling expense 1,382 542 2,344 1,103
General and administrative 1,811 1,552 3,452 3,151
Research and development 736 294 1,289 485
-------- -------- -------- --------
3,929 2,388 7,085 4,739
-------- -------- -------- --------
Operating income 706 677 1,285 1,168
-------- -------- -------- --------
Other income (expense):
Interest income (expense), net 137 35 330 (93)
Other income 12 130 40 163
-------- -------- -------- --------
149 165 370 70
-------- -------- -------- --------
Income from continuing operations before
provision for income taxes 855 842 1,655 1,238
Provision for income taxes 318 327 620 482
-------- -------- -------- --------
Income from continuing operations 537 515 1,035 756
Income from discontinued operations,
net of income taxes -- 550 -- 1,941
Gain on disposal of discontinued operations,
net of income taxes -- 17,002 -- 17,002
-------- -------- -------- --------
Net income $ 537 $ 18,067 $ 1,035 $ 19,699
======== ======== ======== ========
Earnings per basic share:
Continuing operations $ 0.17 $ 0.16 $ 0.32 $ 0.24
Discontinued operations -- 0.17 -- 0.60
Gain on disposal of discontinued operations -- 5.30 -- 5.29
-------- -------- -------- --------
$ 0.17 $ 5.63 $ 0.32 $ 6.13
======== ======== ======== ========
Weighted average basic shares outstanding 3,202 3,207 3,218 3,211
======== ======== ======== ========
Earnings per diluted share:
Continuing operations $ 0.17 $ 0.16 $ 0.32 $ 0.23
Discontinued operations -- 0.17 -- 0.60
Gain on disposal of discontinued operations -- 5.26 -- 5.24
-------- -------- -------- --------
$ 0.17 $ 5.59 $ 0.32 $ 6.07
======== ======== ======== ========
Dividends per share $ 0.00 $ 0.20 $ 0.00 $ 0.40
======== ======== ======== ========
Weighted average diluted shares outstanding 3,203 3,234 3,220 3,243
======== ======== ======== ========
The accompanying notes to consolidated financial statements are in integral part
of these statements.
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ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
ASSETS -------- ------------
- ------ (In thousands)
Current assets:
Cash and cash equivalents $ 7,846 $32,172
Accounts receivable 6,689 2,897
Inventories 8,302 3,960
Prepaid expenses and other 909 337
------- -------
23,746 39,366
------- -------
Property, plant and equipment:
Original cost 21,008 15,617
Less accumulated depreciation and amortization 3,608 2,475
------- -------
17,400 13,142
------- -------
Deferred charges:
Patents 3,743 908
Goodwill 14,116 4,862
Other 2,600 2,664
------- -------
20,459 8,434
------- -------
$61,605 $60,942
======= =======
(Continued)
The accompanying notes to consolidated financial statements are in integral part
of these statements.
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ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY -------- ------------
- ------------------------------------ (In thousands)
Current liabilities:
Current maturities of long-term debt $ 203 $ 453
Accounts payable and accrued liabilities 5,473 5,320
-------- --------
5,676 5,773
-------- --------
Long-term debt, less current maturities 102 203
-------- --------
Other noncurrent liabilities 5,271 4,980
-------- --------
Stockholder's equity:
Common shares, par value $0.10 per share; authorized
10,000,000 shares, issued 3,419,953 shares 342 342
Paid-in capital 6,403 6,395
Retained earnings 45,716 44,681
Treasury shares, at cost (1,905) (1,432)
-------- --------
Total stockholders' equity 50,556 49,986
-------- --------
$ 61,605 $ 60,942
======== ========
The accompanying notes to consolidated financial statements are in integral part
of these statements.
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ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
-----------------------
1998 1997
-------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 1,035 $ 19,699
Adjustments to reconcile net income to
net cash provided by operating activities:
Income from discontinued operations -- (1,941)
Gain on disposal of discontinued operations -- (17,002)
Depreciation and amortization 1,572 955
Deferred income taxes 242 31
Other 107 (182)
-------- --------
2,956 1,560
Change in current assets and liabilities:
(Increase) in accounts receivable (1,710) (497)
(Increase) in other current assets (931) (336)
Increase (decrease) in accounts payable 760 (23)
Increase (decrease) in other current liabilities (526) 505
-------- --------
Net cash provided by continuing operations 549 1,209
Net cash provided by discontinued operations (168) 379
-------- --------
381 1,588
-------- --------
Cash flows from investing activities:
Property, plant and equipment additions - continuing operations (692) (646)
Property, plant and equipment additions - discontinued operations
-- (78)
Acquisition of subsidiary (23,198) --
Proceeds from disposal of discontinued operations -- 39,373
Other -- 8
-------- --------
(23,890) 38,657
-------- --------
Cash flows from financing activities:
Increase (decrease) in long-term indebtedness (352) (6,009)
Cash dividends paid -- (1,284)
Issuance of common stock 20 10
Repurchase of common stock (485) (126)
-------- --------
(817) (7,409)
Net increase in cash and cash equivalents (24,326) 32,836
Cash and cash equivalents at beginning of period 32,172 144
-------- --------
Cash and cash equivalents at end of period $ 7,846 $ 32,980
======== ========
Cash paid for:
Interest (net of capitalized amounts) $ 15 $ 251
Income taxes (net of refunds) $ 44 $ 2,015
The accompanying notes to consolidated financial statements are in integral part
of these statements.
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ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, all adjustments necessary for a fair
presentation of results of operations for the periods presented have
been included in the accompanying unaudited consolidated financial
statements of Atrion Corporation (the "Company"). Such adjustments
consist of normal recurring items. The accompanying financial
statements have been prepared in accordance with the instructions to
Form 10-Q and include the information and notes required by such
instructions. Accordingly, the consolidated financial statements and
notes thereto should be read in conjunction with the financial
statements and notes included in the Company's 1997 Annual Report on
Form 10-K.
(2) PURCHASE OF CERTAIN QUEST MEDICAL, INC. ASSETS.
On January 30, 1998, the Company, through a wholly owned Texas
subsidiary then known as "QMI Medical, Inc.", acquired certain assets
of Quest Medical, Inc. (including all rights to the name "Quest
Medical, Inc.") pursuant to the terms of an Asset Purchase Agreement,
dated as of December 29, 1997. The Company paid $22,922,028 (after
taking into account certain postclosing adjustments and excluding
$276,445 of related acquisition costs) in cash under the Asset Purchase
Agreement. This acquisition was accounted for using the purchase method
of accounting and, accordingly, the results of operations relating to
those assets prior to the acquisition date have not been included in
the Company's financial statements for the 1998 year-to-date period.
The Company recently changed the name of QMI Medical, Inc. to "Quest
Medical, Inc." and that subsidiary is herein referred to as "Quest."
The following table presents unaudited consolidated selected financial
data on a pro forma basis assuming the purchase of these assets had
occurred as of January 1, 1997. The unaudited consolidated pro forma
data reflect certain assumptions, which are based on estimates. The
unaudited consolidated 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 period presented, or of
future results.
THREE MONTHS ENDED
JUNE 30
--------------------
1998 1997
------- -------
Revenues from continuing operations (000) $11,375 $11,813
Income from continuing operations (000) $ 537 $ 449
Net income (000) $ 537 $18,000
Net income per basic share $ 0.17 $ 5.61
Net income per diluted share $ 0.17 $ 5.57
SIX MONTHS ENDED
JUNE 30
--------------------
1998 1997
------- -------
Revenues from continuing operations (000) $22,658 $23,292
Income from continuing operations (000) $ 1,058 $ 506
Net income (000) $ 1,058 $19,449
Net income per basic share $ 0.33 $ 6.06
Net income per diluted share $ 0.33 $ 6.00
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ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For further information regarding the acquisition of these assets,
refer to the Company's Report on Form 8-K, filed with the Securities
and Exchange Commission on February 17, 1998, as amended on April 15,
1998.
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ATRION CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998
The Company's consolidated net income from continuing operations for
the quarter ended June 30, 1998 was $537,000, or $.17 per basic and
diluted share, compared with $515,000, or $.16 per basic and diluted
share, for the second quarter of 1997. The earnings per basic share
computations are based on weighted average basic shares outstanding of
3,201,645 in 1998 and 3,206,674 in 1997. The earnings per diluted share
computations are based on weighted average diluted shares outstanding
of 3,202,623 in 1998 and 3,234,122 in 1997.
Consolidated revenues of $11.4 million from continuing operations for
the second quarter of 1998 were $3.2 million or 40 percent higher than
revenues for the second quarter of 1997. The increase in revenues in
the second quarter of 1998, compared to the same period in the prior
year, was a result of the inclusion of the operations of Quest for the
1998 period. Gross profit of $4.6 million in the second quarter of 1998
was $1.6 million or 51 percent higher than that in the comparable
period of 1997 primarily due to the inclusion of the operations of
Quest in the current year period. The gross profit percentage in the
second quarter of 1998 of 41 percent is higher than the gross profit
percentage in the second quarter of 1997 of 38 percent due to the
inclusion of the operations of Quest in the 1998 period. Quest
generally has a higher gross profit percentage on sales than the
Company's other operations.
The Company's operating expenses of $3.9 million for the second quarter
of 1998 were $1.5 million higher than operating expenses for the second
quarter of 1997. This increase is primarily a result of the inclusion
of the operating expenses of Quest in the 1998 period. Operating income
in the second quarter of 1998 totaled $706,000 compared with $677,000
in 1997.
The Company believes that its revenues from continuing operations, cost
of goods sold, gross profit and operating expenses for the third and
fourth quarters of 1998 will be materially greater than those reported
for the same quarters last year (excluding the fourth quarter 1997
impairment loss) as a result of the inclusion of Quest's operations.
The increase in operating expenses for those quarters is expected to
result from the inclusion of Quest's operations at approximately the
level of operating expenses associated with Quest's product lines prior
to acquisition plus additional SG&A expenses associated with a planned
expansion of Quest's marketing organization and additional R&D expense
associated with planned enhancements to certain of Quest's product
lines. The Company anticipates that operating income for the third
quarter of 1998 will be at or below the Company's operating income in
the same quarter in 1997 as a result of the additional SG&A and R&D
expenses described above. The Company expects to report operating
income, even after taking into account the additional SG&A and R&D
expenses described above, for the fourth quarter of 1998. This compares
with the operating loss in the fourth quarter of 1997 primarily
resulting from significant nonrecurring charges.
Net interest income of $137,000 in the second quarter of 1998 was
$102,000 higher than net interest income in the same period in the
prior year. The net interest income amount in
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1998 reflects interest earned on the proceeds from the sale of the
Company's natural gas subsidiaries in May 1997 (as reduced in late
January 1998 for the purchase of assets now held by Quest). Other
income in the second quarter of 1998 of $12,000 was $118,000 lower than
the second quarter of 1997 primarily as a result of a one-time gain
during the 1997 period.
As a result of the additional SG&A and R&D expenses described above,
the Company expects that net income from continuing operations for the
third quarter of 1998 will be at or below the net income for the same
period of 1997. The Company expects to report net income from
continuing operations, even after taking into account the additional
SG&A and R&D expenses described above, for the fourth quarter of 1998.
This compares with the net loss from continuing operations in the
fourth quarter of 1997 primarily resulting from significant
nonrecurring charges.
The Company recorded income from discontinued operations in the second
quarter of 1997 of $550,000 or $.17 per basic and diluted share. The
Company also recorded a gain on the disposal of discontinued operations
relating to the sale of its natural gas subsidiaries of $17 million, or
$5.30 per basic share and $5.26 per diluted share, in the second
quarter of 1997. There was no similar transaction during the second
quarter of 1998.
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998
The Company's consolidated net income from continuing operations for
the six-month period ended June 30, 1998 was $1.0 million, or $.32 per
basic and diluted share, compared with $756,000, or $.24 per basic
share and $.23 per diluted share, for the first six months of 1997. The
earnings per basic share computations are based on weighted average
basic shares outstanding of 3,217,939 in 1998 and 3,211,005 in 1997.
The earnings per diluted share computations are based on weighted
average diluted shares outstanding of 3,220,152 in 1998 and 3,242,787
in 1997.
Consolidated revenues of $21.5 million from continuing operations for
the six months ended June 30, 1998 were $5.4 million or 34 percent
higher than revenues for the six months ended June 30, 1997. The
increase in revenues for the first six months of 1998, compared to the
same period in the prior year, was primarily a result of the inclusion
of the operations of Quest for five months in the current year period.
Gross profit of $8.4 million for the first six months of 1998 was $2.5
million or 42 percent higher than that in the comparable period of 1997
primarily due to the inclusion of the operations of Quest in the
current year period. The gross profit percentage for the first six
months of 1998 of 39 percent is higher than the gross profit percentage
in the same period of 1997 of 37 percent due to the inclusion of the
operations of Quest in the 1998 period. Quest generally has a higher
gross profit percentage on sales than the Company's other operations.
The Company's operating expenses of $7.1 million for the first six
months of 1998 were $2.3 million higher than operating expenses for the
first six months of 1997. This increase is primarily a result of the
inclusion of the operating expenses of Quest in the 1998 period.
Operating income in the six months ended June 30,1998 totaled $1.3
million compared with $1.2 million in the same period of 1997.
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Net interest income of $330,000 in the first six months of 1998 was
$423,000 higher than interest expense in the same period in the prior
year. Net interest income in the 1998 period reflects interest earned
on the proceeds from the sale of the Company's natural gas subsidiaries
in May 1997 (as reduced in late January 1998 for the purchase of assets
now held by Quest). Other income for the six-month period ended June
30,1998 of $40,000 was $123,000 lower than other income for the same
period of 1997 primarily as a result of a one-time gain during the 1997
period.
The Company recorded income from discontinued operations in the
six-month period ended June 30,1997 of $1.9 million or $.60 per basic
and diluted share. The Company also recorded a gain on the disposal of
discontinued operations relating to the sale of its natural gas
subsidiaries of $17 million, or $5.29 per basic share and $5.24 per
diluted share, for the six months ended June 30,1997. There was no
similar transaction during the same period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash and cash equivalents of $7.8
million compared with $32.2 million at December 31, 1997. The asset
acquisition in January 1998 used approximately $23.2 million of the
Company's existing cash balance. The Company believes that its
remaining cash and cash equivalents, cash flows from operations,
borrowings available under the Company's revolving loan agreement and
other equity and debt financing, which the Company believes would be
available if needed, would be sufficient to fund operations, including
the Company's previously announced increase of $1.5 to $2.0 million in
annual SG&A and R&D expenses which is currently being implemented in
connection with the expansion of certain of the Company's product lines
and of the Company's marketing organization, potential projects, and
budgeted capital expenditures over the next two years.
In January 1998, the Board of Directors discontinued the payment of
quarterly cash dividends. Such action was taken to facilitate the
Company's growth strategy as well as to bring the Company's dividend
policy more in line with other companies in the medical products
industry.
YEAR 200 ISSUES
The Company is taking action to assess the nature and extent of the
work required to make its information systems, products, facilities and
equipment Year 2000 ready. The Company's operating units are currently
using several different information systems. As a part of the Company's
ongoing efforts to achieve operating synergies, the Company is
reviewing various measures to integrate and update its information
systems and, in connection therewith, is also seeking to determine
which systems are Year 2000 compliant and whether updated or
replacement systems will be Year 2000 ready. The Company is also
contacting suppliers to determine whether they are Year 2000 compliant
and, if not, intends to monitor their progress and take appropriate
actions. In addition, the Company has reviewed its products that
process information that may be date sensitive and believes that those
products are not Year 2000 sensitive products. The Company's facilities
and equipment are also being examined to determine whether they are
Year 2000 ready. The Company has not completed its assessment of its
information systems, products, facilities and equipment and,
accordingly, has not determined the costs associated with its efforts
to
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prepare for Year 2000. However, the Company currently believes that the
costs of addressing its Year 2000 transition will not have a material
adverse effect on the Company's financial condition or business
operations. Given the uncertain consequences of failure to resolve
significant Year 2000 issues, however, there is no assurance that any
one or more of such failures would not have a material adverse impact
on the Company. The Company has not yet developed a contingency plan
addressing failure to be Year 2000 ready.
FORWARD-LOOKING STATEMENTS
The statements in this Management's Discussion and Analysis that are
forward-looking are based upon current expectations, and actual results
may differ materially. Therefore, the inclusion of such forward-looking
information should not be regarded as a representation by the Company
that the objectives or plans of the Company would be achieved. Such
statements include, but are not limited to, the Company's expectations
regarding future revenues, future cost of sales, future gross profit
and gross profit percentage, future expenses, future operating income
and net income, future liquidity and capital resources and Year 2000
compliance and impact. Words such as "anticipates," "believes,"
"expects," "estimated" and variations of such words and similar
expressions are intended to identify such forward-looking statements.
Forward-looking statements contained herein involve numerous risks and
uncertainties, and there are a number of factors that could cause
actual results to differ materially including, but not limited to, the
following: changing economic, market and business conditions, the
effects of governmental regulation, the impact of competition and new
technologies, slower-than-anticipated introduction of new products or
implementation of marketing strategies, changes in the prices of raw
materials, the ability to attract and retain qualified personnel and
the loss of any significant customer. In addition, assumptions relating
to budgeting, marketing, product development and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic review which may cause the Company to
alter its marketing, capital expenditures or other budgets, which in
turn may affect the Company's results of operations and financial
condition.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1998 Annual Meeting of Stockholders ("Annual
Meeting") on May 12, 1998 at the Company's corporate office in Allen,
Texas. The stockholders voted to approve certain amendments to the
Company's 1997 Stock Incentive Plan with 1,436,167 shares voted for the
approval, 638,320 shares voted against, 33,561 abstentions and 476,324
broker nonvotes. At such meeting, the Company's stockholders also voted
to approve the Company's 1998 Outside Director Stock Option Plan with
1,551,561 shares voted for the approval of the plan, 505,214 shares
voted against the plan, 28,289 abstentions and 499,358 broker nonvotes.
At such meeting, the Company's stockholders also ratified the Board of
Director's appointment of Arthur Andersen LLP as independent
accountants with 2,559,783 shares voted for ratification, 10,252 voted
against and 14,337 abstentions. The voting with respect to the nominees
for election as directors was as follows:
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
Jerry A. Howard 2,521,159 63,213
Roger F. Stebbing 2,521,459 62,913
John P. Stupp, Jr. 2,521,459 62,913
The terms of the following directors continued after the meeting: Emile
A. Battat, John H. P. Maley, J. Kenneth Smith, Richard O. Jacobson,
Jerome J. McGrath and Hugh J. Morgan, Jr.
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedules (filed electronically only)
(b) Reports on Form 8-K
(1) The Company filed a current report on Form 8-K/A,
Amendment No. 1 to Form 8-K, dated April 15, 1998 which
amended Item 7. "Financial Statements, Pro Forma
Financial Information and Exhibits" of the Company's
Form 8-K dated February 17, 1998. This amendment to Form
8-K provided the financial statements of Quest Medical,
Inc. CVS Operations and the required pro forma financial
information.
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SIGNATURES
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.
Atrion Corporation
------------------
(Registrant)
Date: August 14, 1998 /s/ Jerry A. Howard
-----------------------
Jerry A. Howard
President and
Chief Executive Officer
Date: August 14, 1998 /s/ Jeffery Strickland
-----------------------
Jeffery Strickland
Vice President and
Chief Financial Officer
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