1
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, 1999 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 Identification No.)
Incorporation or Organization)
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 AUGUST 5, 1999
- --------------------------------------- -------------------------------
COMMON STOCK, PAR VALUE $0.10 PER SHARE 2,474,029
2
ATRION CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION 2
ITEM 1. Financial Statements
Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended
June 30, 1999 and 1998 3
Consolidated Balance Sheets (Unaudited)
June 30, 1999 and December 31, 1998 4-5
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended
June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 12
ITEM 6. Exhibits and Reports on
Form 8-K 13
SIGNATURES 14
1
3
PART I
FINANCIAL INFORMATION
2
4
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- -------
(In thousands, except (In thousands, except
per share data) per share data)
Revenues $ 12,737 $ 11,375 $ 24,318 $21,537
Cost of goods sold 7,527 6,740 14,483 13,167
-------- -------- -------- -------
Gross profit 5,210 4,635 9,835 8,370
-------- -------- -------- -------
Operating expenses:
Selling expense 1,822 1,382 3,489 2,344
General and administrative 1,796 1,811 3,448 3,452
Research and development 679 736 1,379 1,289
-------- -------- -------- -------
4,297 3,929 8,316 7,085
-------- -------- -------- -------
Operating income 913 706 1,519 1,285
-------- -------- -------- -------
Other income (expense):
Interest income (expense), net (78) 137 (72) 330
Other income -- 12 10 40
-------- -------- -------- -------
(78) 149 (62) 370
-------- -------- -------- -------
Income from continuing operations before
provision for income taxes 835 855 1,457 1,655
Provision for income taxes 215 318 444 620
-------- -------- -------- -------
Income from continuing operations 620 537 1,013 1,035
Gain on disposal of discontinued operations,
net of income taxes 165 -- 165 --
-------- -------- -------- -------
Net income $ 785 $ 537 $ 1,178 $ 1,035
======== ======== ======== =======
Earnings per basic share:
Continuing operations $ 0.24 $ 0.17 $ 0.37 $ 0.32
Gain on disposal of discontinued operations 0.06 -- 0.06 --
-------- -------- -------- -------
$ 0.30 $ 0.17 $ 0.43 $ 0.32
======== ======== ======== =======
Weighted average basic shares outstanding 2,582 3,202 2,750 3,218
======== ======== ======== =======
Earnings per diluted share:
Continuing operations $ 0.23 $ 0.17 $ 0.36 $ 0.32
Gain on disposal of discontinued operations 0.06 -- 0.06 --
-------- -------- -------- -------
$ 0.29 $ 0.17 $ 0.42 $ 0.32
======== ======== ======== =======
Weighted average diluted shares outstanding 2,640 3,203 2,787 3,220
======== ======== ======== =======
The accompanying notes are an integral part of these consolidated statements.
3
5
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
- ------ -------- ------------
(In thousands)
Current assets:
Cash and cash equivalents $ 101 $ 5,635
Accounts receivable 8,645 7,278
Inventories 9,960 8,568
Prepaid expenses and other 1,186 1,358
-------- ------------
19,892 22,839
-------- ------------
Property, plant and equipment:
Original cost 31,838 22,315
Less accumulated depreciation and amortization 6,340 4,921
-------- ------------
25,498 17,394
-------- ------------
Deferred charges:
Patents 3,468 3,620
Goodwill 13,687 13,986
Other 2,810 2,576
-------- ------------
19,965 20,182
-------- ------------
$ 65,355 $ 60,415
======== ============
(Continued)
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
4
6
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------ -------- ------------
(In thousands)
Current liabilities:
Current maturities of long-term debt $ -- $ 203
Accounts payable and accrued liabilities 6,139 3,929
-------- ------------
6,139 4,132
-------- ------------
Long-term debt, less current maturities 6,225 --
-------- ------------
Other noncurrent liabilities 7,048 6,914
-------- ------------
Stockholders' 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 6,394
Retained earnings 47,999 46,821
Treasury shares, at cost (8,801) (4,188)
-------- ------------
Total stockholders' equity 45,943 49,369
-------- ------------
$ 65,355 $ 60,415
======== ============
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
5
7
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
-----------------------
1999 1998
-------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 1,178 $ 1,035
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on disposal of discontinued operations (165) --
Depreciation and amortization 1,869 1,572
Deferred income taxes 146 242
Other (235) 107
-------- --------
2,793 2,956
Change in current assets and liabilities:
(Increase) in accounts receivable (1,367) (1,710)
(Increase) in other current assets (1,220) (931)
Increase in accounts payable 1,980 760
Increase (decrease) in other current liabilities 229 (526)
-------- --------
Net cash provided by continuing operations 2,415 549
Net cash provided by (used in) discontinued operations 165 (168)
-------- --------
2,580 381
-------- --------
Cash flows from investing activities:
Property, plant and equipment additions (9,523) (692)
Acquisition of subsidiary -- (23,198)
-------- --------
(9,523) (23,890)
-------- --------
Cash flows from financing activities:
Increase (decrease) in long-term indebtedness 6,022 (352)
Issuance of common stock -- 20
Repurchase of common stock (4,613) (485)
-------- --------
1,409 (817)
Net change in cash and cash equivalents (5,534) (24,326)
Cash and cash equivalents at beginning of period 5,635 32,172
-------- --------
Cash and cash equivalents at end of period $ 101 $ 7,846
======== ========
Cash paid for:
Interest (net of capitalized amounts) $ 60 $ 15
Income taxes (net of refunds) $ 132 $ 44
The accompanying notes are an integral part of these consolidated statements.
6
8
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 1998 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 the
cardiovascular and intravenous fluid products division of Advanced
Neuromodulation Systems, Inc. (formerly known as Quest Medical, Inc.
and herein referred to as "ANS") and all rights to the name "Quest
Medical, Inc." The Company paid $22,922,000 (after taking into account
certain postclosing adjustments and excluding $276,000 of related
acquisition costs) in cash for the net assets acquired from ANS. As
part of the transaction, the Company also obtained a one-year lease on
ANS's facility in Allen, Texas, along with an option to buy the
facility. This acquisition was accounted for using the purchase method
of accounting. Accordingly, the purchase price was allocated to the
assets and liabilities acquired based on their estimated fair value at
the date of acquisition. The excess of the consideration paid over the
estimated fair value of the net assets acquired of $9.7 million was
recorded as goodwill and is being amortized over 25 years. The Company
changed the name of QMI Medical, Inc. to "Quest Medical, Inc." in June
1998, and that subsidiary is herein referred to as "Quest Medical." On
February 1, 1999, the Company purchased the Allen, Texas facility for
$6.5 million pursuant to the option mentioned above.
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, 1998. 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.
SIX MONTHS ENDED
June 30, 1998
--------------------------------------
(in thousands, except per share data)
Revenues $ 22,658
Income from continuing operations $ 1,058
Net income $ 1,058
Net income per basic and diluted share $ 0.33
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.
7
9
ATRION CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999
The Company's consolidated net income for the quarter ended June 30,
1999 was $785,000 or $.30 per basic and $.29 per diluted share,
compared with $537,000, or $.17 per basic and diluted share, for the
second quarter of 1998. Income from continuing operations for the
second quarter of 1999 was $620,000, or $.24 per basic and $.23 per
diluted share, compared with $537,000, or $.17 per basic and diluted
share, for the second quarter of 1998. The earnings per basic share
computations are based on weighted average basic shares outstanding of
2,582,342 in 1999 and 3,201,645 in 1998. The earnings per diluted share
computations are based on weighted average diluted shares outstanding
of 2,639,815 in 1999 and 3,202,623 in 1998.
Consolidated revenues of $12.7 million for the second quarter of 1999
were $1.4 million or 12 percent higher than revenues for the second
quarter of 1998. The increase in revenues in the second quarter of 1999
was a result of improved sales at all operations, including increased
placements by the Company of its Myocardial Protection System ("MPS")
units and higher sales of related disposables. Gross profit of $5.2
million in the second quarter of 1999 was $575,000 or 12 percent higher
than that in the comparable 1998 period. The previously mentioned
increased revenues were the primary contributors to this increase.
The Company's second quarter 1999 operating expenses of $4.3 million
were $368,000 higher than the operating expenses for the second quarter
of 1998. This increase is primarily the result of increased costs
associated with the development and marketing of the Company's MPS
during the current year partially offset by lower spending at the
parent company level in the 1999 period compared to the same period in
1998. Operating income in the second quarter of 1999 totaled $913,000
compared with $706,000 in the second quarter of 1998.
Net interest expense for the second quarter of 1999 was $78,000
compared with net interest income of $137,000 for the same period in
1998. This change is primarily attributable to the Company's use of
cash and cash equivalents in late 1998 to fund repurchases of
outstanding common stock of the Company and in February 1999 to fund
the purchase of its Allen, Texas facility and borrowings by the Company
to fund its repurchase of outstanding common stock of the Company and
purchases of automation equipment during the first six months of 1999.
Tax credits attributable to the Company's research and development
activities resulted in a lower effective income tax rate, and
contributed to improved earnings, in the second quarter of 1999 as
compared to the same period in 1998.
The Company recorded a gain on the disposal of discontinued operations
relating to the sale of its natural gas operations of $165,000, after
tax, or $.06 per basic and diluted share, for the three months ended
June 30,1999. Under the terms of the sale of its natural gas operations
in 1997, certain annual contingent payments of up to $250,000 per year
may be paid to the Company over an eight-year period beginning in 1999.
The Company received the maximum amount of $250,000 for its first
contingent payment in April 1999. There was no similar transaction
during the same period of 1998.
8
10
The Company believes that based on recent trends and certain standing
orders, revenues, cost of goods sold and gross profit for the third and
fourth quarters of 1999, will be higher than comparable 1998 periods.
The Company also anticipates that its effective income tax rate for the
third and fourth quarters of 1999 will be lower than in the comparable
1998 periods and that 1999 earnings per share from continuing
operations will significantly exceed the 1998 level.
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999
The Company's consolidated net income for the six-month period ended
June 30, 1999 was $1.2 million, or $.43 per basic and $.42 per diluted
share, compared with $1.0 million, or $.32 per basic and diluted share,
for the first six months of 1998. Income from continuing operations for
the first six months of 1999 was $1.0 million, or $.37 per basic and
$.36 per diluted share, compared with $1.0 million, or $.32 per basic
and diluted share. The earnings per basic share computations are based
on weighted average basic shares outstanding of 2,750,266 in 1999 and
3,217,939 in 1998. The earnings per diluted share computations are
based on weighted average diluted shares outstanding of 2,787,270 in
1999 and 3,220,152 in 1998.
Consolidated revenues of $24.3 million for the six months ended June
30, 1999 were $2.8 million or 13 percent higher than revenues for the
six months ended June 30, 1998. All operations realized increased
revenues for the first six months of 1999, compared with the same
period in the prior year. Increased placements by the Company of its
MPS units and higher sales of related disposables added to the 1999
revenue increase. The increase in revenues for the first six months of
1999, compared to the same period in the prior year, was also a result
of the inclusion of the operations of Quest Medical for six full months
in the current-year period compared with the inclusion of the Quest
Medical operations in the prior year period for the five months
subsequent to its acquisition in January 1998.
Gross profit of $9.8 million for the first six months of 1999 was $1.5
million or 18 percent higher than that in the comparable period of
1998. This increase is the result of increased revenues at all
operations and the inclusion of the operations of Quest Medical for a
full six-month period in 1999 compared to five months in the 1998
period. The gross profit percentage for the first six months of 1999 of
40.4 percent is higher than the gross profit percentage in the same
period of 1998 of 38.9 percent due to the inclusion of Quest Medical
for the full six months in 1999 compared to five months in the 1998
period. Quest Medical generally has a higher gross profit percentage
than the Company's other operations.
The Company's operating expenses of $8.3 million for the first six
months of 1999 were $1.2 million higher than operating expenses for the
first six months of 1998. This increase is the result of increased
costs associated with the development and marketing of the MPS during
the current year partially offset by reduced spending at the parent
company level for the 1999 period compared to the same period in 1998.
The increase in operating expenses for the first six months of 1999,
compared to the same period in the prior year, was also a result of the
inclusion of the operations of Quest Medical for six full months in the
current year period compared with the inclusion of the Quest Medical
operations in the prior year period for the five months subsequent to
its acquisition in January 1998. Operating income in the six months
ended June 30, 1999 totaled $1.5 million compared with $1.3 million in
the same period of 1998.
9
11
Net interest expense for the six months ended June 30, 1999 was $72,000
compared with net interest income of $330,000 for the same period in
1998. This change is primarily attributable to the Company's use of
cash and cash equivalents in late 1998 to fund repurchases of
outstanding common stock of the Company and in February 1999 to fund
the purchase of its Allen, Texas facility and borrowings by the Company
to fund its repurchase of outstanding common stock of the Company and
purchases of automation equipment during the first six months of 1999.
Tax credits attributable to the Company's research and development
activities resulted in a lower effective income tax rate, and
contributed to improved earnings, in the first six months of 1999 as
compared to the six months ended June 30, 1998.
As was discussed above, the Company recorded a gain on the disposal of
discontinued operations relating to the sale of its natural gas
operations of $165,000, after tax, or $.06 per basic and diluted share,
for the six months ended June 30,1999. There was no similar transaction
during the same period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents of
$101,000 compared with $5.6 million at December 31, 1998. The decrease
in cash and cash equivalents from December 31, 1998 to June 30, 1999
was primarily attributable to the Company's February 1, 1999 purchase
of its Allen, Texas facility for $6.5 million. The Company had $6.2
million of long-term debt, borrowed under its $20 million revolving
loan facility, at June 30, 1999 compared with no long-term debt at
December 31, 1998. This increase in long-term debt from December 31,
1998 to June 30, 1999 was primarily attributable to the above
mentioned facility purchase, the repurchase of outstanding common
stock of the Company and purchases of automation equipment. The term
of the $20 million revolving loan facility has been extended until
May 20, 2001.
The Company believes that its existing cash and cash equivalents, cash
flows from operations, borrowings available under the Company's
revolving loan facility and other equity or debt financing, which the
Company believes would be available, will be sufficient to fund the
Company's cash requirements for at least the next two years.
YEAR 2000 ISSUES
In 1998, the Company began its assessment of its information systems,
products, facilities and equipment to determine if they are Year 2000
ready. At that time, the Company's operating units were using several
different information systems. As a part of the Company's ongoing
efforts to achieve operating synergies, as well as to assure Year 2000
compliance, the Company has purchased and has installed new computer
systems in one of its units and has taken steps to determine whether
its new and existing systems are Year 2000 compliant. The Company has
contacted its major suppliers, as well as certain other suppliers, to
determine whether they are Year 2000 compliant and, where not, would
monitoring their progress. 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 have also been examined to determine
whether they are Year 2000 ready. The Company has substantially
completed its assessment of its information systems, facilities and
equipment and believes that they
10
12
are Year 2000 compliant. The Company has no means of ensuring that all
of its suppliers are or will be Year 2000 compliant. The failure of
certain of these suppliers to be Year 2000 compliant could materially
impact the Company. As a result, where appropriate and feasible, the
Company will consider new business relationships with alternate
providers. The Company has incurred costs of approximately $140,000,
including the cost and time for Company employees, to address Year 2000
issues, and believes that any additional 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 is in the process of completing a contingency plan to address
failures that may occur.
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, cost of sales, gross profit, effective tax
rate for the third and fourth quarters of 1999 and 1999 earnings per
share from continuing operations, as well as 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, implementation of marketing strategies or
new manufacturing processes or implementation of new information
systems; changes in the prices of raw materials; changes in product
mix; product recalls; 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.
11
13
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 1999 Annual Meeting of Stockholders ("Annual
Meeting") on June 14, 1999 at the offices of Halkey-Roberts
Corporation, a Company subsidiary. At such meeting, the Company's
stockholders ratified the Board of Director's appointment of
Arthur Andersen LLP as independent accountants with 2,284,502
shares voted for ratification, 25,941 voted against and 8,852
abstentions. The voting with respect to the nominees for election
as directors was as follows:
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
Emile A. Battat 2,263,858 55,437
John H. P. Maley 2,263,858 55,437
The terms of the following directors continued after the
meeting: Roger F. Stebbing, John P. Stupp, Jr., Richard O.
Jacobson, Jerome J. McGrath and Hugh J. Morgan, Jr.
For information relating to the settlement between the Company and
The Atrion Stockholder Committee which resulted in termination of
a proxy contest in connection with the Annual Meeting, see the
Company's Schedule 14A Information, Definitive Additional
Materials, filed with the Securities and Exchange Commission on
May 17, 1999.
12
14
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10i* Atrion Corporation 1998 Outside Directors
Stock Option Plan (As Amended and Restated
Effective August 12, 1999) (1)
10k* Amendments to Atrion Corporation 1997 Stock
Incentive Plan (1)
27 Financial Data Schedules (filed
electronically only)
(b) No reports on Form 8-K have been filed during the quarter
ended June 30, 1999.
- ---------------------
(1) Filed herewith
13
15
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 13, 1999 /s/ Emile A. Battat
-----------------------------------
Emile A. Battat
Chairman, President and
Chief Executive Officer
Date: August 13, 1999 /s/ Jeffery Strickland
-----------------------------------
Jeffery Strickland
Vice President and
Chief Financial Officer
14