SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
Form 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 0-10763
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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)
Registrant's telephone number, including area code: (972) 390-9800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Title of Each Class Name of Each Exchange on Which Registered
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Title of Class
Common Stock, $.10 Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting Common Stock held by nonaffiliates of
the registrant at March 1, 2000 was $20,368,639 based on the last reported sales
price of the common stock on the Nasdaq National Market on such date. |X|
Number of shares of Common Stock outstanding at March 1, 2000: 2,100,593.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information from the Company's definitive proxy statement relating to the 2000
annual meeting of stockholders, to be filed with the Commission not later than
120 days after the end of the fiscal year covered by this report.
ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1999
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TABLE OF CONTENTS
ITEM PAGE
PART I .......................................................................1
ITEM 1. BUSINESS...............................................................1
ITEM 2. PROPERTIES.............................................................9
ITEM 3. LEGAL PROCEEDINGS.....................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................10
Executive Officers of the Company.............................................10
PART II ......................................................................11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................................11
ITEM 6. SELECTED FINANCIAL DATA...............................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................12
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................36
PART III .....................................................................36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................36
ITEM 11. EXECUTIVE COMPENSATION...............................................36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...........................................................37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................37
PART IV. .....................................................................38
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8--K.........................................................38
SIGNATURES....................................................................40
EXHIBIT INDEX.................................................................42
ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1999
PART I
ITEM 1. BUSINESS
General
Atrion Corporation ("Atrion" or the "Company") is a holding company which
primarily designs, develops, manufactures, markets, sells and distributes
medical products and components. The Company's current operations are conducted
through three medical products subsidiaries, Atrion Medical Products, Inc.
("Atrion Medical Products"), Halkey-Roberts Corporation ("Halkey-Roberts") and
Quest Medical, Inc. ("Quest Medical"). The Company also owns AlaTenn Pipeline
Company, Inc. ("AlaTenn Pipeline") which operates a gaseous oxygen pipeline and
Atrion Leasing Company, Inc. ("Atrion Leasing") which is engaged in leasing
activities.
Atrion Medical Products' business, which is the design, development,
manufacturing, marketing, sale and distribution of medical products, has been in
operation for more than 30 years. Its products are used in ophthalmic,
diagnostic and cardiovascular procedures and are sold primarily to major health
care companies which market and distribute Atrion Medical Products' products, in
conjunction with their name-brand products, to hospitals, clinics, surgical
centers, physicians and other health care providers. While soft contact lens
storage and disinfection systems are its more mature ophthalmic products, Atrion
Medical Products continues to be a leading manufacturer and supplier of such
products. A new and growing area of sales for Atrion Medical Products is its
line of ophthalmic surgical procedure kits that are distributed for two of its
major customers. Products sold to other healthcare companies by Atrion Medical
Products include a line of inflation devices used primarily in percutaneous
balloon angioplasty procedures and diagnostic devices used to test blood
platelet function and to obtain blood samples for the measurement of blood
sugar. Atrion Medical Products also markets a line of name-brand products,
called LacriCATH(R), which is used in a less invasive surgical procedure for the
treatment of epiphora, or excessive tearing of the eye. These products are sold
through commissioned sales agents. Atrion Medical Products' design and
engineering team is employed to assist its OEM customers in the development of
products.
Halkey-Roberts, which has been in operation for 56 years, designs, develops,
manufactures and sells proprietary medical device components used to control the
flow of fluids and gases. Its valves and clamps are used in a wide variety of
hospital and outpatient care products, such as Foley catheters, pressure cuffs,
dialysis and blood collection sets and drug delivery systems. Halkey-Roberts has
recently introduced a new line of needleless valves designed to eliminate the
use of needles by health care providers in many routine procedures. These
products use a patented design and proprietary assembly technology.
Halkey-Roberts' fluid control technology has also been applied to inflation
valves used in marine and aviation safety products. Working closely with its
customers, Halkey-Roberts has developed an innovative line of products and is a
leader in each of its major markets.
-1-
Quest Medical manufactures and sells several stable product lines, including
cardiovascular products (such as pressure control valves, filters and surgical
retracting tapes), specialized intravenous fluid delivery tubing sets and
accessories and pressure monitoring kits used primarily in labor and delivery.
Quest Medical also markets a line of name-brand aortic punches called
CleanCut(TM), which was developed by Atrion Medical Products. These products are
used in heart bypass surgeries to make a precision opening in the heart for
attachment of the bypass vessels. Quest Medical also manufactures and sells the
MPS(R) myocardial protection system ("MPS"), an innovative and sophisticated
system for the delivery of solutions to the heart during open-heart surgery. The
MPS integrates key functions relating to the delivery of solutions to the heart,
such as varying the rate and ratio of oxygenated blood, crystalloid, potassium
and other additives, and controlling temperature, pressure and other variables
to allow simpler, more flexible and cost-effective management of this process.
The MPS employs advanced pump, temperature control and microprocessor
technologies and includes a line of captive and noncaptive disposable products.
During 1999, the Company identified another application for the MPS. Cardiac
surgeons have recently begun performing cardiac surgeries without interrupting
the heart ("beating-heart surgery") and thus eliminating the need for a
heart-lung machine. This less-invasive method of surgery is beneficial to the
patient but more challenging to the surgeon who must rely on the heart to
provide coronary and systemic circulation throughout surgery. The Company
believes that the MPS offers a distinct safety advantage during beating-heart
surgery by enhancing the coronary blood flow and infusing additives, as needed,
directly to the heart during the surgery. Initial response to the use of MPS in
beating-heart surgeries has been positive. The Company expects the number of
beating-heart surgeries to increase over the next several years. While
continuing to promote the use of the MPS in conventional open-heart surgeries,
the Company intends to actively promote the use of the MPS for beating-heart
surgeries.
AlaTenn Pipeline owns and operates a 22-mile high-pressure steel pipeline in
north Alabama that transports gaseous oxygen from an industrial gas producer to
two of its customers.
Marketing and Major Customers
Atrion Medical Products has historically used sales managers to market products
to other manufacturers for use in their consumer products and uses commissioned
sales agents for the marketing of LacriCATH products. Quest Medical is currently
marketing the MPS and related disposables through a direct sales force using a
sales team approach as well as through specialty distributors. Most of Quest
Medical's other products are marketed through direct contact with hospitals,
telemarketing, independent sales representatives, marketing arrangements with
certain distributors and, to a lesser extent, through direct mail. In addition,
the Company routinely attends and participates in trade shows throughout the
United States and internationally.
During 1999, CIBA Vision, which accounted for 17 percent of the Company's
revenues, was the only customer accounting for more than 10 percent of the
Company's revenues from continuing operations. The loss of this customer would
have a material adverse impact on the Company's business, financial condition
and results of operations.
Manufacturing
-2-
The Company's medical products are produced at plants in Arab, Alabama, St.
Petersburg, Florida, Allen, Texas and Orange County, California. The plants in
Arab and St. Petersburg both utilize plastic injection molding and specialized
assembly as their primary manufacturing processes. The Company's other
manufacturing processes consist of the assembly of standard and custom component
parts and the testing of completed products.
The Company devotes significant attention to quality control. Its quality
control measures begin at the manufacturing level where many of its components
are assembled in a "clean room" environment designed and maintained to reduce
product exposure to particulate matter. Products are tested throughout the
manufacturing process for adherence to specifications. Most finished products
are then shipped to outside processors for sterilization through radiation or
treatment with ethylene oxide gas. After sterilization, the products are
quarantined and tested before they are shipped to customers.
Skills of assembly workers required for the manufacture of medical products are
similar to those required in typical assembly operations. The Company currently
employs workers with the skills necessary for its assembly operations and
believes that additional workers with these skills are readily available in the
areas where the Company's plants are located.
Atrion Medical Products, Halkey-Roberts and Quest Medical operate under the Good
Manufacturing Practices of the Food and Drug Administration ("FDA") and are ISO
9001 certified. The Company's products are used throughout the world and, during
1999, more than 22 percent of sales were shipped to international markets.
Research and Development
The Company believes that a well-targeted research and development program is an
essential part of the Company's activities and is currently engaged in a number
of research and development projects. The objective of the Company's program is
to develop new products in the areas that the Company is currently engaged,
improve current products and develop new products in other areas. Recent major
development projects include, but are not limited to, a needleless valve product
designed to eliminate the use of needles by health care providers, a back-up
system for the MPS and disposable sets for use by the MPS in beating-heart
surgery. The Company expects to incur additional research and development
expenses in 2000 for various projects including further development of the MPS.
Atrion Medical Products is EN46001 certified.
The Company's consolidated research and development expenditures for the years
ended December 31, 1999, 1998 and 1997 were $2,601,000, $2,750,000 and
$1,147,000 respectively.
-3-
Availability of Supplies and Raw Materials
The Company subcontracts with various suppliers to provide it with the quantity
of component parts necessary to assemble its products. Almost all of these
components are available from a number of different suppliers, although certain
components are purchased from single sources that manufacture these components
from the Company's toolings. The Company believes that there are alternative and
satisfactory sources for single-sourced components, although a sudden disruption
in supply from one of these suppliers could adversely affect the Company's
ability to deliver the finished product on time. The Company owns its own molds
for production of a majority of the components used in specialized tubing sets
and cardiovascular products. Consequently, in the event of supply disruption,
the Company would be able to fabricate its own components or subcontract with
another supplier, albeit after a delay in the production process. Atrion Medical
Products and Halkey-Roberts purchase various types of high-grade resins and
other components for their manufacturing processes from various suppliers. The
resins are readily available materials and, while the Company is selective in
its choice of suppliers, it believes that there are no significant restrictions
or limitations on supply. AlaTenn Pipeline is under no obligation to provide a
gas supply to its customer.
Patents and License Agreements
The commercial success of the Company is dependent, in part, on its ability to
continue to develop patentable products, to preserve its trade secrets and to
operate without infringing or violating the proprietary rights of third parties.
The Company currently has 149 active patents and 15 patent applications pending
on products that are either being sold or are in development. The Company
receives royalty payments on three patents that are licensed to outside parties.
The Company has obtained licenses to the rights from outside parties to two
patents relating to the LacriCATH product line and for one patent relating to
Multiport(R). All of these patents and pending patents relate to current
products being sold by the Company or to products still in evaluation stages.
The validity of any patents issued to the Company may be challenged by others,
and the Company could encounter legal and financial difficulties in enforcing
its patent rights against infringers. In addition, there can be no assurance
that other technologies cannot or will not be developed or that patents will not
be obtained by others which would render the Company's patents less valuable or
obsolete. With the possible exception of the patent relating to one of the
Company's more mature products, the loss of any one patent would not have a
material adverse effect on the Company's current revenue base. Although the
Company does not believe that patents are the sole determinant in the commercial
success of its products, the loss of a significant percentage of its patents or
its patents relating to a specific product line, particularly the MPS product
line, could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has developed technical knowledge which, although non-patentable, is
considered by the Company to be significant in enabling it to compete. However,
the proprietary nature of such knowledge may be difficult to protect. The
Company has entered into agreements with key employees prohibiting them from
disclosing any confidential information or trade secrets of the Company and
prohibiting them from engaging in any competitive business while employed by the
Company and for various periods thereafter. In addition, these agreements also
provide that any inventions or discoveries relating to the business of the
Company by these individuals will be assigned to the Company and become the
Company's sole property.
-4-
The medical device industry is characterized by extensive intellectual property
litigation, and companies in the medical products industry sometimes use
intellectual property litigation to gain a competitive advantage. Intellectual
property litigation, regardless of outcome, is often complex and expensive, and
the outcome of this litigation is generally difficult to predict. An adverse
determination in any such proceeding could subject the Company to significant
liabilities to third parties, or require the Company to seek licenses from third
parties or pay royalties that may be substantial. Furthermore, there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing or selling certain of its products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Competition
Depending on the product and the nature of the project, the Company's medical
products subsidiaries compete on the basis of their ability to provide
engineering and design expertise, quality, service, product and price. As such,
successful competitors must have technical strength, responsiveness and scale.
The Company believes that its expertise and reputation for quality medical
products have allowed it to compete favorably with respect to each such factor
and to maintain long-term relationships with its customers. However, in many of
the Company's markets, the Company competes with numerous other companies that
have substantially greater financial resources and engage in substantially more
research and development activities than the Company. Furthermore, innovations
in surgical techniques or medical practices could have the effect of reducing or
eliminating market demand for one or more of the Company's products.
Atrion Medical Products manufactures products for certain major health care
companies and is dependent on several customers for the majority of its sales.
Also, because its products are somewhat limited in number and normally are only
a component of the ultimate product sold by its customers, Atrion Medical
Products must continually be attentive to the need to manufacture such products
at competitive prices and in compliance with strict manufacturing standards.
Depending on the product and the nature of the project, Atrion Medical Products
competes on the basis of its ability to provide engineering and design expertise
as well as on the basis of product and price. Also, as Atrion Medical Products
continues to expand its product lines, adding new products and customers,
dependency on a limited number of customers will be reduced. The United States
is the principal market for the LacriCATH product. There is no direct
competition in the United States where both the product and surgical procedure
are patent-protected. LacriCATH products are marketed directly to
ophthalmologists through commissioned sales agents. Atrion Medical Products
frequently designs products for a customer or potential customer prior to
entering into long-term development and manufacturing agreements with that
customer. While certain of Atrion Medical Products' customers may internally
design and develop their own products or outsource certain aspects of the design
and development processes, the Company is unaware of any other companies that
directly compete on the same basis as Atrion Medical Products.
With respect to those products manufactured by Atrion Medical Products which are
sold to customers for use as components, Atrion Medical Products is dependent on
the ability of those customers to sell their products. Therefore, Atrion Medical
Products seeks to choose highly successful companies with which to do business.
This risk is somewhat minimized by Atrion
-5-
Medical Products' ability to obtain long-term, exclusive manufacturing rights
while its customers have long-term marketing rights. Name-brand products, such
as the LacriCATH line, are marketed to a much larger base of customers and are
not dependent on a single customer.
Halkey-Roberts competes in the medical products market and in the market for
inflation devices used in marine and aviation equipment. In the medical products
market, Halkey-Roberts is a leading competitor in the sale of check valves and
medical clamps and has only one major competitor for each of those products. In
the inflation device market, Halkey-Roberts is the dominant competitor in its
market areas. With the exception of one large company, Halkey-Roberts'
competitors in both of these markets generate less than $50 million annually in
revenues.
Numerous companies compete with Quest Medical in the sale of cardiovascular
products, specialized tubing sets and pressure monitoring kits. These markets
are dominated by established manufacturers that have broader product lines,
greater distribution capabilities, substantially greater capital resources and
larger marketing, research and development staffs and facilities than Quest
Medical. Many of these competitors offer broader product lines within the
specific product market and in the general field of medical devices and
supplies. Broad product lines give many of Quest Medical's competitors the
ability to negotiate exclusive, long-term medical device supply contracts and,
consequently, the ability to offer comprehensive pricing of their competing
products. By offering a broader product line in the general field of medical
devices and supplies, competitors may also have a significant advantage in
marketing competing products to group purchasing organizations, HMOs and other
managed care organizations that are increasingly seeking to reduce costs through
centralization of purchasing functions. In addition, Quest Medical's competitors
may use price reductions to preserve market share in their product markets.
The Company is aware of at least one cardioplegia delivery system currently
being marketed that competes with the MPS. While this product represents
improvements over cardioplegia delivery systems currently in use in that it has
partially integrated some of the cardioplegia equipment components, the Company
believes that the MPS offers a greater range of functionality, flexibility and
ease-of-use.
Government Regulation
Products
The manufacture and sale of medical products are subject to regulation by
numerous governmental authorities, principally the FDA and corresponding foreign
agencies. The research and development, manufacturing, promotion, marketing and
distribution of medical products in the United States are governed by the
Federal Food, Drug and Cosmetic Act and the regulations promulgated thereunder
("FDC Act and Regulations"). The Company and its medical device customers are
subject to inspection by the FDA for compliance with such regulations and
procedures. Atrion Medical Products' and Quest Medical's facilities are
registered with the FDA.
-6-
The FDA has traditionally pursued a rigorous enforcement program to ensure that
regulated entities comply with the FDC Act and Regulations. A company not in
compliance may face a variety of regulatory actions, including warning letters,
product detentions, device alerts, mandatory recalls or field corrections,
product seizures, total or partial suspension of production, injunctive actions
or civil penalties and criminal prosecutions of the company or responsible
employees, officers and directors. The Company and its customers are subject to
these inspections. The Company believes that it has met all FDA requirements,
and it also believes that its medical device OEM customers are in compliance;
however, if the Company or its OEM medical device customers should fail the FDA
inspections, it could have an adverse impact on the Company's business,
financial conditions and results of operations.
Under the FDA's requirements, if a manufacturer can establish that a
newly-developed device is "substantially equivalent" to a legally marketed
device, the manufacturer may seek marketing clearance from the FDA to market the
device by filing a 510(k) premarket notification with the FDA. The 510(k)
premarket notification must be supported by data establishing the claim of
substantial equivalence to the satisfaction of the FDA. The process of obtaining
a 510(k) clearance typically can take several months to a year or longer. If
substantial equivalence cannot be established or if the FDA determines that the
device requires a more rigorous review, the FDA will require that the
manufacturer submit a premarket approval ("PMA") that must be reviewed and
approved by the FDA prior to sale and marketing of the device in the United
States. The process of obtaining a PMA can be expensive, uncertain and lengthy,
frequently requiring anywhere from one to several or more years from the date of
FDA submission. Both a 510(k) and a PMA, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. FDA
enforcement policy strictly prohibits the promotion of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for failure
to comply with regulatory requirements or the occurrence of unforeseen problems
following initial marketing. The Company believes that it and all of its current
medical device OEM customers are in compliance with these rules; however, there
is no assurance that the Company or its OEM customers are now, or will continue
to be, in compliance with such rules. If the Company or its customers do not
meet these standards, the Company's financial performance could be adversely
affected. Furthermore, delays by the FDA in approving a product or a customer's
product could delay the Company's expectations for future sales of certain
products.
Certain products manufactured by Halkey-Roberts are also subject to regulation
by the Coast Guard and the Federal Aviation Administration and similar
organizations in foreign countries which regulate the safety of marine and
aviation equipment. For international sales, the Company and its OEM customers
are primarily responsible that the products meet the standards for the country
in which the product is sold. This is true for both the medical and
aviation/marine products of the Company.
Third-Party Reimbursement and Cost Containment
In the United States, health care providers, including hospitals and physicians,
that purchase medical products for treatment of their patients, generally rely
on third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or a part of the costs and fees
associated with the procedures performed using these products. The Company is
dependent, in part, upon the ability of health care providers to obtain
satisfactory reimbursement from third-party payors for medical procedures in
which the Company's products are used. Third-party payors may deny reimbursement
if they determine that a prescribed product has not received appropriate
regulatory clearances or approvals, is not
-7-
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate.
Reimbursement systems in international markets vary significantly by country and
by region within some countries, and reimbursement approvals must be obtained on
a country-by-country basis. Many international markets have government-managed
health care systems that control reimbursement for new products and procedures.
In most markets, there are private insurance systems as well as
government-managed systems. Market acceptance of the Company's products in
international markets depends, in part, on the availability and level of
reimbursement.
Medicare and Medicaid reimbursement for hospitals is based on a fixed amount for
admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals may seek to use less costly methods in treating
Medicare and Medicaid patients. Frequently, reimbursement is reduced to reflect
the availability of a new procedure or technique, and as a result hospitals are
generally willing to implement new cost saving technologies before these
downward adjustments take effect. Likewise, because the rate of reimbursement
for certain physicians who perform certain procedures has been and may in the
future be reduced, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Third party payors are
increasingly challenging the prices charged for medical products and services
and may deny reimbursement if they determine that a device was not used in
accordance with cost-effective treatment methods as determined by the payor, was
experimental or was used for an unapproved application.
Failure by hospitals and other users of the Company's products to obtain
reimbursement from third-party payors, or adverse changes in government and
private third-party payors' policies toward reimbursement for procedures
employing the Company's products, would have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
Company is unable to predict what additional legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation
would have on the Company.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. The Company anticipates
that Congress, state legislatures and the private sector will continue to review
and assess alternative health care delivery and payment systems. Potential
approaches that have been considered include mandated basic health care
benefits, controls on health care spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid spending, the
creation of large insurance purchasing groups, price controls and other
fundamental changes to the health care delivery system. Legislative debate is
expected to continue in the future, and market forces are expected to demand
reduced costs. The Company cannot predict what impact the adoption of any
federal or state health care reform measures, future private sector reform or
market forces may have on its business.
Advisory Board
Several physicians and perfusionists with substantial expertise in the field of
myocardial protection serve as Clinical Advisors for the Company. These Clinical
Advisors have assisted in the identification of the market need for MPS and its
subsequent design and development. Members of the Company's management and
scientific and technical staff from time to time
-8-
consult with these Clinical Advisors to better understand the technical and
clinical requirements of the cardiovascular surgical team and product
functionality needed to meet those requirements. The Company anticipates that
these Clinical Advisors will play a similar role with respect to other products
and may assist the Company in educating other physicians in the use of the MPS
and related products.
Certain of the Clinical Advisors are employed by academic institutions and may
have commitments to or consulting or advisory agreements with other entities
that may limit their availability to the Company. The Clinical Advisors may also
serve as consultants to other medical device companies. The Clinical Advisors
are not expected to devote more than a small portion of their time to the
Company.
People
At February 29, 2000, the Company had 443 full-time employees. Employee
relations are good and there has been no work stoppage due to labor
disagreements. None of the Company's employees is represented by any labor
union.
ITEM 2. PROPERTIES
The headquarters of the Company are located in Allen, Texas in its Quest Medical
facility. Atrion Medical Products owns three office buildings and a
manufacturing facility in Arab, Alabama and leases office space in Birmingham,
Alabama. Halkey-Roberts leases a manufacturing facility in St. Petersburg,
Florida under a ten-year operating lease that commenced in May 1996.
Atrion Medical Products' three office buildings and manufacturing facilities are
located on a 67-acre site in Arab, Alabama. The three office buildings house
administrative, engineering and design operations, and the manufacturing
facility contains approximately 112,000 square feet of manufacturing space.
Halkey-Roberts has a long-term lease on a manufacturing and administrative
facility located on a 7-acre site in St. Petersburg, Florida. The facility
consists of approximately 72,000 total square feet.
On January 30, 1998, the Company executed a one-year lease on the facility
occupied by Quest Medical in Allen, Texas. The Company also obtained an option
to buy the facility for $6.5 million. On February 1, 1999, the Company purchased
that facility pursuant to the option agreement (see Note 2 of the "Notes to
Consolidated Financial Statements" in Item 8). During the lease term, and since
the purchase was completed, the facility has been used by Quest Medical, and
since June 1998, by the Company as its headquarters office. The facility
consists of a 108,000-square-foot office, manufacturing and warehouse building
situated on approximately 14.8 acres and 4.3 acres adjacent to such property,
which are unimproved.
The Company also currently leases approximately 4,600 square feet of office and
manufacturing space in Orange County, California on a yearly basis. The Company
plans to discontinue manufacturing certain cardiovascular surgery products at
this facility at lease expiration (during the second quarter of 2000) and
transfer that manufacturing to the Allen, Texas operations.
AlaTenn Pipeline owns and operates a 22-mile high-pressure steel pipeline that
transports gaseous oxygen between Decatur and Courtland, Alabama.
ITEM 3. LEGAL PROCEEDINGS
-9-
There were no material pending legal proceedings to which the Company or any of
its subsidiaries was a party or of which any of their property was the subject
as of February 28, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Company
Name Age Title
Emile A. Battat 62 Chairman, President and Chief Executive Officer of
the Company and Chairman of the Board or President
of all subsidiaries
Jeffery Strickland 41 Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company and Vice
President or Secretary-Treasurer of all subsidiaries
Charles Gamble 59 President of Halkey-Roberts Corporation
The persons who are identified as executive officers of the Company currently
serve as officers of the Company, or Halkey-Roberts or of both the Company and
certain subsidiaries. The officers of the Company and its subsidiaries are
elected annually by the respective Boards of Directors of the Company and its
subsidiaries at the first meeting of such Boards of Directors held after the
annual meetings of stockholders of such entities. Accordingly, the terms of
office of the current officers of the Company and its subsidiaries will expire
at the time such meetings of the Board of Directors of the Company and its
subsidiaries are held, which is anticipated to be in April 2000.
There are no arrangements or understandings between any officer and any other
person pursuant to which the officer was elected. There are no family
relationships between any of the executive officers or directors.
There have been no events under any bankruptcy act, no criminal proceedings and
no judgments or injunctions material to the evaluation of the ability and
integrity of any executive officers during the past five years.
Brief Account of the Business Experience During the Past Five Years
Mr. Battat has been a director of the Company since 1987 and has served as
Chairman of the Board of the Company since January 1998. Mr. Battat has served
as President and Chief Executive Officer of the Company and as Chairman or
President of all subsidiaries since October 1998. From March 1994 to October
1998, Mr. Battat served as President and Chief Executive Officer of Piedmont
Enterprises, Inc., a privately held consulting firm.
Mr. Strickland has served as Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company since February 1, 1997. He has served as
Vice President of Atrion Medical Products and of Halkey-Roberts since January
1997 and as Vice President of Quest Medical
-10-
since December 1997. Mr. Strickland served as Vice President-Corporate
Development of the Company from May 1992 to February 1997 and as Assistant
Secretary and Assistant Treasurer of the Company from May 1990 until February
1997. Mr. Strickland also served as Vice President-Planning of Alabama-Tennessee
Natural Gas Company from May 1992 until February 1997 and as Vice President and
Chief Financial Officer and Secretary-Treasurer of Alabama-Tennessee Natural Gas
Company from February 1997 until May 1997.
Mr. Gamble has served as President of Halkey-Roberts since May 1989.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market (Symbol
ATRI). As of March 15, 2000, the Company had approximately 2,000 stockholders,
including beneficial owners holding shares in "nominee" or "street" name. The
high and low closing prices as reported by Nasdaq for each quarter of 1999 and
1998 are shown below.
Year Ended
December 31, 1998: High Low
------------------ ---- ---
First Quarter $ 13.75 $ 10.88
Second Quarter $ 11.44 $ 8.81
Third Quarter $ 9.44 $ 7.63
Fourth Quarter $ 9.00 $ 6.25
Year Ended
December 31, 1999: High Low
------------------ ---- ---
First Quarter $ 9.63 $ 7.38
Second Quarter $ 10.13 $ 8.81
Third Quarter $ 11.00 $ 8.50
Fourth Quarter $ 11.94 $ 8.75
No dividends were declared or paid during 1998 or 1999, and the Company
presently has no plans to pay cash dividends. See Item 7: "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
-11-
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
(In thousands, except per share amounts)
- ----------------------------------------- --------------- -------------- -------------- --------------- -------------
1999 1998 1997 1996 1995
- ----------------------------------------- --------------- -------------- -------------- --------------- -------------
Revenues $ 49,917 $ 43,397 $ 30,277 $ 22,121 $ 11,719
Income (loss) from continuing
operations 2,128 1,478 (2,045)a 853 986
Net income 2,293 2,140 17,170a 6,476 5,340
Total assets 64,640 60,415 60,942 45,433 34,317
Long-term debt 10,417 -- 203 6,313 1,609
Income (loss) from continuing
operations, per basic share 0.82 0.46 (0.63) 0.27 0.31
Net income per basic share 0.88 0.67 5.33 2.03 1.68
Dividends per share -- -- 0.60 0.80 0.80
Average basic shares outstanding 2,593 3,203 3,224 3,189 3,175
Book value per share 20.30 16.66 15.42 10.71 9.43
- ----------------------------------------- --------------- -------------- -------------- --------------- -------------
a The 1997 amounts include an impairment loss of $3.0 million after tax and a
charge for a product replacement program of $.7 million after tax.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Atrion Corporation is a holding company primarily engaged in the design,
development, manufacturing, marketing, sale and distribution of proprietary
products and components for the medical and healthcare industry. The Company's
operations are conducted primarily by Atrion Medical Products, Halkey-Roberts
and Quest Medical, all of which are wholly owned subsidiaries of the Company.
Atrion Medical Products and Quest Medical design, develop, manufacture, market,
sell and distribute proprietary products for the medical and healthcare
industry. Halkey-Roberts designs, develops, manufactures and sells proprietary
medical device components and related components, all of which are used to
control the flow of fluids and gases.
Results of Operations
The Company's 1999 income from continuing operations was $2.1 million or $.82
per basic and $.81 per diluted share compared to income from continuing
operations in 1998 of $1.5 million or $.46 per basic and diluted share compared
to a loss from continuing operations in 1997 of $2.0 million or $.63 per basic
and diluted share. The loss in 1997 included an impairment loss on patents and
goodwill of approximately $4.8 million before income taxes or $3.0 million or
$.95 per basic and diluted share after taxes (see Note 3 in Notes to
Consolidated Financial Statements). The loss in 1997 also included a charge
related to a product replacement program of approximately $1.1 million before
income taxes or $.7 million or $.21 per basic and diluted share after taxes.
Income from continuing operations for 1997, excluding the adjustment for the
impairment loss and the product replacement program charges, totaled $1.7
million or $.53 per
-12-
basic and diluted share. Income from continuing operations in 1998 was less than
1997 income from continuing operations, excluding the 1997 one-time charges
mentioned above, primarily because of the inclusion of Quest Medical operations
for the 11 months subsequent to the January 1998 asset purchase, partially
offset by improvements at Halkey-Roberts. Net income, including discontinued
operations, for 1999 totaled $2.3 million or $.88 per basic and $.87 per diluted
share compared with $2.1 million or $.67 per basic and diluted share in 1998 and
$17.2 million or $5.33 per basic and diluted share in 1997.
Operating revenues were $49.9 million in 1999 compared with $43.4 million in
1998 and $30.3 million in 1997. The $6.5 million increase in revenues from 1998
to 1999 was the result of improved sales at all operations. The $13.1 million
increase in revenues from 1997 to 1998 was attributable primarily to the
inclusion of Quest Medical's sales for 11 months in 1998. This acquisition was
recorded using the purchase method of accounting. Accordingly, only results from
operations subsequent to the acquisition date are reflected in the Company's
financial statements, and results for prior periods are not included.
The Company's cost of sales was $30.3 million in 1999 compared with $26.9
million in 1998 and $20.8 million in 1997. The increase in cost of sales for
1999 over 1998 was primarily related to the increased sales mentioned above. The
increase in cost of sales from 1997 to 1998 was primarily related to the
inclusion of Quest Medical for 11 months in 1998. The cost of sales in 1997
included a charge of $.8 million for the cost of replacing certain components
that were manufactured and sold by the Company. These components were used in
marine inflation devices and were replaced because of a potential reliability
problem. The Company recorded a charge totaling $1.1 million in the fourth
quarter of 1997 for this product replacement program with $.8 million being
charged to cost of sales and $.3 million being charged to selling, general and
administrative expenses.
Gross profits were $19.6 million in 1999 compared with $16.5 million in 1998 and
$9.5 million in 1997. The increase in gross profit in 1999 over 1998 was
primarily the result of the above mentioned revenue increases. The increase in
gross profit from 1997 to 1998 was primarily the result of the inclusion in 1998
of 11 months of operations of Quest Medical and the inclusion in 1997 of the
one-time charge mentioned above.
The Company's gross profit in 1999 was 39 percent of sales, which was higher
than the gross profit percentage in 1998 of 38 percent and was significantly
higher than the gross profit percentage of 31 percent in 1997. The increase in
gross profit percentage in 1999 was primarily attributable to improved sales in
certain higher margin products. The increase in gross profit percentage in 1998
over 1997 was partially attributable to the inclusion of 11 months of Quest
Medical operations in 1998. Quest Medical generally has a higher gross profit
percentage of sales than the Company's other operations. The additional gross
profit percentage improvement in 1998 compared to 1997 was attributable to the
inclusion in 1997 of Halkey-Roberts' one-time charges mentioned above.
Operating expenses were $16.5 million in 1999 compared with $14.9 million in
1998 and $13.9 million in 1997. The increase in operating expenses from 1998 to
1999 was primarily attributable to the expansion of marketing efforts and
programs plus additional research and development activities associated with the
MPS product line. The increase in operating expenses for 1999 over 1998 was also
a result of the inclusion of the operations of Quest Medical for twelve months
in the current year period compared with the inclusion of Quest Medical
operations in the prior year period for the 11 months subsequent to its
acquisition in late January 1998. With the inclusion of $6.5 million of Quest
Medical's operating expenses for the 11 months in 1998, the
-13-
increase in operating expenses from 1997 to 1998 would have been even larger
than reported had there not been included in 1997 the $5.1 million in one-time
charges discussed above.
The Company's operating income for 1999 was $3.1 million compared with $1.6
million in 1998 and an operating loss of $4.4 million in 1997. The 1997
operating loss included the charges for the impairment loss and the product
replacement program. Excluding these charges, the Company had operating income
in 1997 of $1.5 million.
Net interest expense in 1999 was $257,000 compared with net interest income of
$577,000 in 1998 and net interest income in 1997 of $818,000. The change from
1998 to 1999 was 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 the Company's borrowings to fund its repurchases of outstanding common stock
of the Company during 1999. Net interest income in 1998 was primarily
attributable to interest earned on the proceeds of the sale of the Company's
natural gas subsidiaries in May 1997 remaining after the late January 1998
purchase of the Quest Medical operation. Net interest income in the 1997 period
reflects interest earned on the proceeds from the sale of the Company's natural
gas subsidiaries in May 1997. The cash received on this sale was used to retire
most of the Company's outstanding debt, and the balance was invested in money
market accounts and other short-term government and corporate interest-bearing
investments.
Income tax expense in 1999 totaled $741,000 compared with $735,000 in 1998
compared to income tax benefits in 1997 of $1.3 million. An increase in our
foreign sales corporation benefit and an expected increase in the Company's
research and development tax credit resulted in a lower effective income tax
rate for 1999 compared with 1998. The 1997 tax benefits include $2.1 million
related to the impairment loss and product replacement program charges described
above. Excluding these adjustments, income tax expense was $.8 million in 1997.
The differences between years reflect changes in pretax income between the
respective years.
The Company believes that 2000 revenues at all operations will be higher than
1999 revenues at those operations and that the cost of goods sold, gross profit,
operating income and income from continuing operations will be higher in 2000
than in 1999. The Company also anticipates that 2000 earnings per share from
continuing operations will significantly exceed earnings per share from
continuing operations for 1999.
Discontinued Operations
As discussed in Note 2 in the Notes to Consolidated Financial Statements, on May
30, 1997, the Company completed the sale of all of the issued and outstanding
shares of common stock of Alabama-Tennessee Natural Gas Company, Tennessee River
Intrastate Gas Company, Inc. and AlaTenn Energy Marketing Company, Inc. for
approximately $38.2 million. In the fourth quarter of 1997, the Company's two
small remaining natural gas subsidiaries, Central Gas Company and Tennessee
River Development Company, sold their assets for $470,000.
The financial statements presented herein reflect the Company's natural gas
operations as discontinued operations for all periods presented. The financial
statements also reflect an after-tax gain on disposal of discontinued operations
of $.2 million or $.06 per basic and diluted share in 1999, $.7 million or $.21
per basic and diluted share in 1998 and $17.3 million or $5.36 per basic and
diluted share in 1997 based upon the sale of the natural gas operations as
described above.
-14-
The after-tax income from discontinued operations, excluding the gain on
disposal mentioned above, totaled $1.9 million or $.60 per basic and diluted
share in 1997. This amount reflects the operation of the major portion of these
discontinued operations for only the first five months in 1997.
Liquidity and Capital Resources
The Company maintained a $20 million revolving loan facility with a regional
bank during 1997, 1998, and through October 1999. In November of 1999, the
Company replaced the $20 million revolving loan facility with a new $18.5
million revolving credit facility (the "Credit Facility") with a different
regional bank 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). Borrowings under the
Credit Facility bear interest that is payable monthly at 30-day LIBOR plus one
percent, 60-day LIBOR plus one percent or 90-day LIBOR plus one percent, at the
Company's discretion. At December 31, 1999 the Company had $10.4 million of
long-term debt under the Credit Facility. At the Company's option, and subject
to certain conditions, the amount that can be borrowed under the Credit Facility
may be increased to $25.0 million upon the lender's determination that it has
adequate security or upon the Company's grant of such additional security as the
lender deems reasonably necessary. The term of the Credit Facility expires
November 11, 2002 and may be extended under certain circumstances. The Company
had no indebtedness under the prior loan facility at December 31, 1998.
As of December 31, 1999, the Company had cash and cash equivalents of $70,000
compared with $5.6 million at December 31, 1998. The Company had long-term debt
as of December 31, 1999 of $10.4 million compared with $.2 million as of
December 31, 1998. The decrease in cash and cash equivalents from December 31,
1998 to December 31, 1999 was primarily attributable to the purchase of the
Allen, Texas facility. The increase in long-term debt from December 31, 1998 to
December 31, 1999 was primarily attributable to the above-mentioned facility
purchase, repurchases of outstanding common stock of the Company and purchases
of new machinery and equipment. Cash provided by continuing operations increased
to $5.3 million in 1999 compared to $3.5 million in 1998 and $3.0 million in
1997. Capital expenditures for property, plant and equipment for continuing
operations totaled $12.1 million in 1999 compared with $2.0 million in 1998 and
$1.7 million in 1997. Included in the 1999 capital expenditure amount is $6.5
million for the purchase of the Allen, Texas facility.
The Company believes that its existing cash and cash equivalents, cash flows
from operations, borrowings available under the Company's Credit 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.
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.
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
-15-
moderate inflation in these costs. At times, the Company has been able to offset
a portion of these increased costs by increasing the sales prices of its
products. However, competitive pressures have not allowed for full recovery of
these cost increases.
New Accounting Pronouncements
See Note 1 in Notes to Consolidated Financial Statements.
Year 2000 Initiative
In 1998, the Company began its assessment of its information systems, products,
facilities and equipment to determine if they were Year 2000 ready. As a part of
its assessment of its internal information systems, the Company installed new
computer systems in one of its units and took steps to determine whether its new
and existing computer systems were Year 2000 compliant. The Company contacted
its major suppliers, as well as certain other suppliers and utilities, to
determine whether they were Year 2000 compliant. In addition, the Company
reviewed its products that process information that may be date-sensitive and
concluded that those products were not Year 2000 sensitive products. The
Company's facilities and equipment were also examined to determine whether they
were Year 2000 compliant. The Company completed its assessment of its
information systems, facilities and equipment prior to the end of 1999 and
concluded that they were Year 2000 compliant. However, the Company had no means
of ensuring that all of its suppliers were Year 2000 compliant or that there
would be no failure of communication, financial or transportation systems or
local utilities. Since December 31, 1999, the Company has not experienced any
significant disruption in business due to Year 2000 issues. Although the Company
does not believe that it has continued Year 2000 exposure, there is no assurance
that it will not detect unanticipated Year 2000 compliance issues in the future.
To date, the Company has incurred costs of approximately $140,000, including the
cost and time for Company employees, to address Year 2000 issues.
Forward-looking Statements
The statements in this Management's Discussion and Analysis and elsewhere in
this Annual Report that are forward-looking are based upon current expectations,
and actual results may differ materially. Therefore, the inclusions of such
forward-looking information should not be regarded as a representation by the
Company that the objectives or plans of the Company will be achieved. Such
statements include, but are not limited to, the Company's expectations regarding
future revenues, future cost of sales and gross profit, future expenses, future
production, future earnings from continuing operations, future cash flows from
operations, future borrowings available, liquidity, markets for our products and
long-term profitability. Words such as "anticipates," "believes," "intends,"
"expects" 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, implementation of 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 customers. 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
-16-
marketing, capital expenditures or other budgets, which in turn may affect the
Company's results of operations and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates
The Company has an $18.5 million credit facility with a regional bank.
Borrowings under the Credit Facility bear interest at 30-day LIBOR plus one
percent, 60-day LIBOR plus one percent or 90-day LIBOR plus one percent, at the
Company's discretion. The Company is subject to interest rate risk based on an
adverse change in the 30-day LIBOR, 60-day LIBOR or the 90-day LIBOR. At
December 31, 1999, the Company had borrowings under the Credit Facility of $10.4
million. A one percent increase in the market interest rate would reduce the
Company's pretax income by approximately $100,000 at the current borrowing
level.
-17-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Atrion Corporation:
We have audited the accompanying consolidated balance sheets of Atrion
Corporation and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of income and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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 financial position of Atrion Corporation and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 18, 2000
-18-
CONSOLIDATED STATEMENTS OF INCOME
(For the years ended December 31, 1999, 1998 and 1997)
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues $ 49,917 $ 43,397 $ 30,277
Cost of Goods Sold 30,337 26,937 20,755
- ---------------------------------------------------------------------------------------------------------------------
Gross Profit 19,580 16,460 9,522
- ---------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling 6,841 5,368 2,413
General and administrative 7,022 6,763 5,552
Research and development 2,601 2,750 1,147
Impairment loss (Note 3) -- -- 4,797
- ---------------------------------------------------------------------------------------------------------------------
16,464 14,881 13,909
- ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 3,116 1,579 (4,387)
Interest (Expense) Income, net (257) 577 818
Other Income, net 10 57 241
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations Before Provision
for Income Taxes 2,869 2,213 (3,328)
Income Tax (Provision) Benefit (Note 5) (741) (735) 1,283
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 2,128 1,478 (2,045)
Income From Discontinued Operations, net of tax (Note 2) -- -- 1,923
Gain on Disposal of Discontinued Operations,
net of tax (Note 2) 165 662 17,292
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 2,293 $ 2,140 $ 17,170
=====================================================================================================================
Earnings (Loss) Per Basic Share:
Continuing operations $ 0.82 $ 0.46 $ (0.63)
Discontinued operations -- -- 0.60
Gain on disposal of discontinued operations 0.06 0.21 5.36
- ---------------------------------------------------------------------------------------------------------------------
Net Income Per Basic Share $ 0.88 $ 0.67 $ 5.33
=====================================================================================================================
Weighted Average Basic Shares Outstanding 2,593 3,203 3,224
=====================================================================================================================
Earnings (Loss) Per Diluted Share:
Continuing Operations $ 0.81 $ 0.46 $ (0.63)
Discontinued Operations -- -- 0.60
Gain on disposal of discontinued operations 0.06 0.21 5.36
- ---------------------------------------------------------------------------------------------------------------------
Net Income Per Diluted Share $ 0.87 $ 0.67 $ 5.33
=====================================================================================================================
Weighted Average Diluted Shares Outstanding 2,631 3,210 3,224
=====================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-19-
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 1998
- ---------------------------------------------------------------------------------------------------------------------
Assets: 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(In thousands)
Current Assets:
Cash and cash equivalents $ 70 $ 5,635
Accounts receivables, net 8,522 7,278
Inventories, net (Note 1) 9,106 8,568
Prepaid expenses 1,004 1,358
- ---------------------------------------------------------------------------------------------------------------------
18,702 22,839
- ---------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Original cost (Note 1) 34,417 22,315
Less accumulated depreciation and amortization 7,999 4,921
- ---------------------------------------------------------------------------------------------------------------------
26,418 17,394
- ---------------------------------------------------------------------------------------------------------------------
Other Assets and Deferred Charges:
Patents, net of accumulated amortization of $5,934 and $5,630 in
1999 and 1998, respectively (Notes 1 and 3) 3,316 3,620
Goodwill, net of accumulated amortization of $2,897 and $2,304 in
1999 and 1998, respectively (Notes 1 and 3) 13,393 13,986
Other 2,811 2,576
- ---------------------------------------------------------------------------------------------------------------------
19,520 20,182
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
$ 64,640 $ 60,415
=====================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
-20-
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 1998
- ---------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity: 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(In thousands)
Current Liabilities:
Current maturities of long-term debt (Note 4) $ -- $ 203
Accounts payable and accrued liabilities 3,936 3,925
Accrued income and other taxes 21 4
- ---------------------------------------------------------------------------------------------------------------------
3,957 4,132
- ---------------------------------------------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 4) 10,417 --
- ---------------------------------------------------------------------------------------------------------------------
Other Liabilities and Deferred Credits:
Accumulated deferred income taxes (Note 5) 6,393 5,800
Other 1,300 1,114
- ---------------------------------------------------------------------------------------------------------------------
7,693 6,914
- ---------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 13)
Stockholders' Equity:
Common stock, par value $0.10 per share, authorized
10,000,000 shares, issued 3,419,953 shares in 1999 and 1998 (Note 1) 342 342
Paid-in capital 6,403 6,394
Retained earnings (Note 9) 49,114 46,821
Treasury shares, 1,322,360 shares in 1999 and 457,400 shares
in 1998, at cost (Note 6) (13,286) (4,188)
- ---------------------------------------------------------------------------------------------------------------------
42,573 49,369
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
$ 64,640 $ 60,415
=====================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
-21-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the years ended December 31, 1999, 1998 and 1997)
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 2,293 $ 2,140 $ 17,170
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations -- -- (1,923)
Gain on disposal of discontinued operations (Note 2) (165) (662) (17,292)
Depreciation and amortization 3,975 3,304 1,948
Deferred income taxes 593 1,511 (1,928)
Impairment loss (Note 3) -- -- 4,797
Other (39) 154 (548)
- ---------------------------------------------------------------------------------------------------------------------
6,657 6,447 2,224
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (1,244) (2,337) 761
(Increase) in other current assets (184) (1,690) (34)
(Decrease) increase in accounts payable (35) 771 (205)
Increase in other current liabilities 62 284 280
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 5,256 3,475 3,026
Net cash provided by (used in) discontinued
operations
(Note 2) 165 (1,614) 310
- ---------------------------------------------------------------------------------------------------------------------
5,421 1,861 3,336
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchase of subsidiary companies (Note 2) -- (23,198) --
Proceeds from disposal of discontinued operations -- -- 38,448
Property, plant and equipment additions (12,102) (1,998) (1,695)
Discontinued operations property, plant and
equipment additions -- -- (78)
- ---------------------------------------------------------------------------------------------------------------------
(12,102) (25,196) 36,675
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase (decrease) in long-term indebtedness 10,214 (453) (6,341)
Issuance of treasury stock -- 20 424
Purchase of treasury stock (9,098) (2,769) (126)
Cash dividends paid -- -- (1,940)
- ---------------------------------------------------------------------------------------------------------------------
1,116 (3,202) (7,983)
- ---------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (5,565) (26,537) 32,028
Cash and cash equivalents, beginning of year 5,635 32,172 144
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 70 $ 5,635 $ 32,172
=====================================================================================================================
Cash paid for:
Interest (net of capitalized amounts) $ 283 $ 22 $ 285
Income taxes (net of refunds) 186 340 2,938
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-22-
Atrion Corporation
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Atrion Corporation is a holding company that primarily designs, develops,
manufactures and markets products for the medical and healthcare industry.
As of December 31, 1999 the principal subsidiaries of the Company were
Quest Medical, Inc., Atrion Medical Products, Inc. and Halkey-Roberts
Corporation.
Principles of Consolidation
The consolidated financial statements include the accounts of Atrion
Corporation and its subsidiaries (the "Company"). All significant
intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash equivalents are securities with original maturities of 90 days or
less.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined
by using the first-in, first-out method. The following table details the
major components of inventory (in thousands):
December 31,
1999 1998
- --------------------------------------------------------------------------
Raw materials $ 5,461 $ 4,983
Finished goods 3,138 3,109
Work in process 1,080 1,022
Reserve for obsolescence (573) (546)
- --------------------------------------------------------------------------
Net inventory $ 9,106 $ 8,568
- --------------------------------------------------------------------------
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets, ranging from three to 30 years. Expenditures for repairs and
maintenance are charged to expense as incurred. The following table
represents a summary of property, plant and equipment at original cost as
of December 31, 1999 and 1998 (in thousands):
December 31,
1999 1998
- ---------------------------------------------------------------------------
Land $ 1,759 $ 413
Buildings 10,500 3,056
Machinery and equipment 22,158 18,846
- ---------------------------------------------------------------------------
Total property, plant and equipment $ 34,417 $ 22,315
- ---------------------------------------------------------------------------
Depreciation expense of $3,079,000, $2,446,000 and $1,223,000 was recorded
for the years ended December 31, 1999, 1998 and 1997, respectively.
Goodwill and Patents
Goodwill represents the excess of cost over the fair market value of
tangible and identifiable intangible net assets acquired. Values assigned
to patents were agreed to at the time of the acquisition between selling
and acquiring parties. Goodwill is being amortized over 25 years and
patents are being amortized over the remaining lives of the
-23-
individual patents, which are 7 to 19 years. Carrying values of patents
and goodwill are periodically evaluated in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 121 (see Note 3).
Research and Development Costs
Research and development costs relating to the development of new products
and improvements of existing products are expensed as incurred.
Revenues
For the majority of its products, the Company recognizes revenue from
sales when products are shipped to customers. For certain other products,
revenue is recognized based on usage or time under defined leasing
agreements. Allowances are made for bad debts where appropriate and are
reviewed periodically. The allowances for bad debts were not material for
the periods presented.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes." The asset and liability
approach used under SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the financial reporting basis and the tax
basis of the Company's other assets and liabilities (see Note 5).
New Accounting Pronouncements
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distribution
to owners, for any period presented. The Company did not have any
components of comprehensive income other than net income.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires companies to record all derivatives on
the balance sheet at fair value and establish "special accounting" for the
three different types of hedges. During 1999, SFAS No. 137 was issued
which defers the effective date of SFAS No. 133 until fiscal quarters of
all fiscal years beginning after June 15, 2000. Currently, the Company has
no derivative investments and does not expect SFAS No. 133 to have a
significant impact on the Company's financial statements.
In December 1999, the SEC staff released Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition" to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No.
101 explains the SEC staff's general framework for revenue recognition
which includes certain criteria to be met in order to recognize revenues.
This pronouncement is effective immediately. The recognition of the
pronouncement did not impact the Company's financial statements for all
periods presented.
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.
-24-
Financial Presentation
Certain prior-year amounts have been reclassified to conform with
current-year presentation.
(2) Acquisitions and Dispositions of Assets and Subsidiaries
Acquisition of Quest Medical, Inc.
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. 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."
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.
On February 1, 1999, the Company purchased the Allen, Texas facility for
$6.5 million pursuant to this option.
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 and 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 periods presented, or of
future results.
Twelve months ended
December 31,
1998 1997
---------------------------------------------------------------------
(In thousands)
Revenues $ 44,531 $ 44,583
Income (loss) from continuing
operations $ 1,613 $ (4,222)
Net income $ 2,163 $ 16,438
Net income per basic share $ 0.68 $ 5.10
---------------------------------------------------------------------
Disposal of Natural Gas Operations
During 1997, the Company disposed of all of its natural gas operations.
During the second quarter of 1997, the Company sold all the issued and
outstanding shares of common stock of Alabama-Tennessee Natural Gas
Company, Tennessee River Intrastate Gas Company Inc. and AlaTenn Energy
Marketing Company, Inc. to Midcoast Energy Resources, Inc. ("Midcoast")
for $38,178,000 in cash. In addition, certain annual contingent deferred
payments of up to $250,000 per year are to be paid by Midcoast to the
Company over an eight-year period which began in 1999, with the amount
paid each year to be dependent upon revenues received by Midcoast from
certain gas
-25-
transportation contracts. The Company received a deferred payment of
$250,000 from Midcoast in April 1999.
During the fourth quarter of 1997, the Company also sold the assets of two
other small natural gas subsidiaries, Central Gas Company and Tennessee
River Development Company, to the City of Florence, Alabama for $470,000,
consisting of $270,000 in cash and a note in the amount of $200,000.
During 1997, Central Gas Company and Tennessee River Development Company,
after the sale of their assets as described above, were merged into
AlaTenn Pipeline Company, Inc., which was the surviving corporation (see
Note 11).
The consolidated financial statements presented herein reflect the
Company's natural gas operations as discontinued operations for all
periods presented. Income from discontinued operations was $1,923,000 for
the year ended December 31, 1997, net of income tax expense of $1,099,000.
The consolidated financial statements also reflect a gain on disposal of
discontinued operations of $165,000, $662,000 and $17,292,000, net of
income tax expense of $85,000, $340,000 and $7,340,000, in 1999, 1998 and
1997, respectively, based upon the sale of the natural gas operations as
described above.
(3) Impairment Loss
Effective January 1, 1996, the Company adopted SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles held by an entity
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Accordingly, the Company periodically analyzes the recoverability of
certain of its long-lived assets (including patents and related goodwill).
In the fourth quarter of 1997, the Company determined that an impairment
had occurred with respect to certain of its patents. This determination
was made by estimating the net future cash flows expected from its
identifiable patents. With respect to any identified patent, if the sum of
the undiscounted net future cash flows was less than the net book value of
the patent and related goodwill, an impairment loss was recognized and
measured based on discounted net cash flows. As a result of this review,
the Company recognized an impairment loss in the amount of $4,797,000 in
the fourth quarter of 1997. The impairment loss is reflected as an
increase in accumulated amortization in the consolidated balance sheets.
-26-
(4) Long-term Debt and Other Borrowings
Long-term debt as of December 31 consisted of the following (in
thousands):
1999 1998
- -------------------------------------------------------------------------
Revolving credit facility $10,417 $ --
Industrial revenue bonds -- 203
- -------------------------------------------------------------------------
10,417 203
Less amounts due in one year -- 203
- -------------------------------------------------------------------------
$10,417 $ --
- -------------------------------------------------------------------------
The Company had a $20 million revolving credit agreement with a regional
bank through October 1999. In November 1999, the Company replaced the $20
million revolving credit agreement with a new $18.5 million revolving
credit facility ("Credit Facility") with a different regional bank. Under
the Credit Facility, the Company and certain of its subsidiaries have a
line of credit which is secured by inventory, equipment and accounts
receivables of the Company. At the Company's option, and subject to
certain conditions, the amount that can be borrowed under the Credit
Facility may be increased to $25.0 million upon the lender's determination
that it has adequate security or upon the Company's grant of such
additional security as the lender deems reasonably necessary. Interest
under the Credit Facility is assessed at 30-day LIBOR plus one percent,
60-day LIBOR plus one percent or 90-day LIBOR plus one percent, at the
Company's discretion (7.16% at December 31, 1999) and is payable monthy.
The term of the agreement expires November 11, 2002 and may be extended
under certain circumstances. At any time during the term, the Company may
convert any or all outstanding amounts under the Credit Facility to a term
loan with a maturity of two years. The Company's ability to borrow funds
under the Credit Facility from time to time is contingent on meeting
certain covenants in the loan agreement. At December 31, 1999, the Company
was in compliance with all covenants.
The industrial revenue bonds were assumed with the acquisition of the
Atrion Medical Products, Inc. ("Atrion Medical Products") facility in
April 1994 and were payable in semiannual installments of $101,500. The
last payment on these bonds was made in January 1999. In April 1994,
Atrion Medical Products executed a promissory note for $1.0 million to the
former owner of its business. The last payment on this note was made on
April 1, 1998.
On December 31, 1999, the estimated fair value of long-term debt described
above was approximately the same as the carrying amount of such debt on
the consolidated balance sheet. The fair value was calculated in
accordance with the requirements of SFAS No. 107, "Disclosures About the
Fair Value of Financial Instruments," and was estimated by discounting the
future cash flows using rates currently available to the Company for debt
instruments with similar terms and remaining maturities.
-27-
(5) Income Taxes
The items comprising income tax expense (benefit) for continuing
operations are as follows:
1999 1998 1997
(In thousands)
- ----------------------------------------------- ----------------------------------------------------
Current -- Federal $ 181 $ (71) $ (42)
-- State 93 33 2
- ----------------------------------------------- ----------------- ---------------- -----------------
274 (38) (40)
Deferred -- Federal 424 673 (1,134)
-- State 43 100 (109)
- ----------------------------------------------- ----------------- ---------------- -----------------
467 773 (1,243)
- ----------------------------------------------- ----------------- ---------------- -----------------
Total income tax expense (benefit) $ 741 $ 735 $ (1,283)
- ----------------------------------------------- ----------------- ---------------- -----------------
Temporary differences and carryforwards which gave rise to a significant
portion of deferred tax assets and liabilities as of December 31, 1999 and
1998 are as follows:
1999 1998
(In thousands)
- -------------------------------------------------------------------------------
Deferred tax assets:
Benefit plans $ 516 $ 476
Tax credits 131 --
Other, net 1,439 1,714
- -------------------------------------------------------------------------------
Subtotal 2,086 2,190
Valuation allowance (131) --
- -------------------------------------------------------------------------------
Total deferred tax assets $ 1,955 $ 2,190
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and property basis differences $ 1,973 $ 1,674
Pensions 418 440
Other, net 5,957 5,876
- -------------------------------------------------------------------------------
Total deferred tax liabilities $ 8,348 $ 7,990
- -------------------------------------------------------------------------------
Management believes that except as it relates to certain tax credits, a
valuation allowance is not necessary based on the Company's earnings
history, the projections for future taxable income and other relevant
considerations over the periods during which the deferred tax assets
become deductible.
-28-
Total income tax expense (benefit) for continuing operations differs from
the amount which would be provided by applying the statutory federal
income tax rate to pretax earnings as illustrated below:
1999 1998 1997
(In thousands)
- ----------------------------------------------------------------------------------------------------
Income tax expense (benefit) at the statutory
federal income tax rate $ 975 $ 752 $ (1,132)
Increase (decrease) resulting from:
State income taxes 136 133 (106)
Tax exempt interest -- (4) (38)
Research and development credit (101) (50) --
Other, net (269) (96) (7)
- ----------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $ 741 $ 735 $ (1,283)
- ----------------------------------------------------------------------------------------------------
(6) Common Stock
The Company utilized 1,641 and 37,050 treasury shares in 1998 and 1997,
respectively, to make distributions under its 1997 Stock Incentive Plan
and its Restricted Shares Compensation Plan for Nonemployee Directors and
in connection with the exercise of options under its 1994 Key Employee
Stock Incentive Plan and 1990 Stock Option Plan (see Note 8). The Company
made two tender offers during 1999 and one tender offer during 1998
purchasing a total of 883,152 shares of its common stock. Pursuant to
these tender offers, the Company purchased 342,536 shares of its common
stock at $12.00 per share in December 1999, 301,524 shares of its common
stock at $10.00 per share in April 1999, and 239,092 shares of its common
stock at $9.00 per share in December 1998. The Company also purchased
220,900 shares of its common stock in open market or negotiated
transactions during 1999 at prices ranging from $7.75 per share to $10.00
per share. In 1998 and 1997, the Company purchased 42,000 and 9,700
shares, respectively, of its common stock in open market or negotiated
transactions. All shares purchased in the tender offers and in the open
market or negotiated transactions became treasury shares upon repurchase
by the Company. On May 4, 1995, the Board of Directors of the Company
authorized a stock repurchase program under which the Company may
repurchase up to 150,000 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. Through December 31, 1999 a total of 87,100
shares of common stock had been repurchased pursuant to the stock
repurchase program. At December 31, 1999 and 1998, there were 1,322,360
and 457,400 shares, respectively, of common stock being held in treasury.
The cost of these shares is shown as a reduction in stockholders' equity
in the consolidated balance sheets.
The Company has a Common Share Purchase Rights Plan which is intended to
protect the interests of stockholders 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
stockholders to purchase at a substantial discount, upon the occurrence of
certain events, shares of common stock of the Company or of an acquiring
company involved in a business combination with the Company. In January
2000 this plan was extended until February 2005.
-29-
(7) Earnings Per Share
The following is a reconciliation of the weighted average shares
outstanding used in calculating basic and diluted earnings (loss) per
share as presented in the consolidated statements of income:
1999 1998 1997
(In thousands)
- -----------------------------------------------------------------------------------------------------
Weighted average basic shares outstanding 2,593 3,203 3,224
Add: Effect of dilutive securities (options) 38 7 --
- -----------------------------------------------------------------------------------------------------
Weighted average diluted shares outstanding 2,631 3,210 3,224
- -----------------------------------------------------------------------------------------------------
For the year ended December 31, 1997, there was no difference between
basic and diluted weighted average shares outstanding as potential shares
of common stock would have had an antidilutive effect on the resulting net
loss per share from continuing operations.
(8) Stock Option Plans
During 1998, the Company's stockholders approved the adoption of the
Company's 1998 Outside Directors Stock Option Plan ("1998 Directors Option
Plan"). The 1998 Directors Option Plan provides for the automatic grant on
each of February 1, 1998, February 1, 1999 and February 1, 2000 of
nonqualified stock options to purchase 10,000 shares of common stock to
each director, other than the Chairman of the Board, who is not an
employee of the Company or any subsidiary and of nonqualified stock
options to purchase 20,000 shares of common stock to the Chairman of the
Board if he is not an employee of the Company or any subsidiary. The
aggregate number of shares of common stock reserved for grants under the
1998 Directors Option Plan is 270,000 shares. The purchase price of the
shares of common stock on exercise of the options is the fair market value
of such shares on the date of grant. The options become exercisable in
four equal quarterly installments on the May 1, August 1, November 1 and
February 1 next succeeding the date of grant and expire no later than 10
years after the date of grant. In 1999 the Board of Directors amended the
1998 Directors Option Plan to eliminate the grant of any options
thereunder after February 1, 1999.
During 1997, the stockholders of the Company approved the adoption of the
Company's 1997 Stock Incentive Plan. The 1997 Stock Incentive Plan
provides for the grant to key employees of incentive and nonqualified
stock options, stock appreciation rights, restricted stock and performance
shares. In addition, under the 1997 Stock Incentive Plan, outside
directors (directors who are not employees of the Company or any
subsidiary) receive automatic annual grants of nonqualified stock options
to purchase 2,000 shares of common stock. In 1999, the Board of Directors
suspended the grant of options to outside directors under the 1997 Stock
Incentive Plan until the year 2000. The aggregate number of shares of
common stock reserved for grants under the 1997 Stock Incentive Plan,
after giving effect to the amendments approved by the Company's
stockholders in 1998, is the sum of 500,000 shares and the number of
shares reserved for issuance under prior plans in excess of the number of
shares as to which options have been granted, including any shares subject
to previously granted options that lapse, expire, terminate or are
canceled. The purchase price of incentive options must be at least equal
to the fair market value of such shares on the date of grant. The purchase
price for nonqualified options and restricted and performance shares is
fixed by the
-30-
Compensation Committee. The options granted become exercisable as
determined by the Compensation Committee and expire no later than 10 years
after the date of grant. During 1994 and 1990, the stockholders of the
Company approved the adoption of the Company's 1994 Key Employee Stock
Incentive Plan and 1990 Stock Option Plan, respectively, which provided
for the grant to key employees of incentive and nonqualified options to
purchase shares of common stock of the Company.
Option transactions for the years 1997, 1998 and 1999 are as follows:
Shares Price Per Share
- --------------------------------------------------------- ----------------- --------------------------------
Options outstanding at December 31, 1996 225,750 $ 6.75 -- 17.00
Granted in 1997 113,200 $ 13.25 -- 14.88
Expired in 1997 (41,100) $ 11.67 -- 15.17
Exercised in 1997 (33,850) $ 6.75 -- 15.17
- --------------------------------------------------------- ----------------- --------------------------------
Options outstanding at December 31, 1997 264,000 $ 9.92 -- 17.00
Granted in 1998 422,100 $ 6.88 -- 13.25
Expired in 1998 (21,800) $ 12.25 -- 13.25
Exercised in 1998 -- $ 0.00 -- 0.00
- --------------------------------------------------------- ----------------- --------------------------------
Options outstanding at December 31, 1998 664,300 $ 6.88 -- 17.00
Granted in 1999 99,000 $ 7.63 -- 7.63
Expired in 1999 (271,750) $ 6.88 -- 17.00
Exercised in 1999 -- $ 0.00 -- 0.00
- --------------------------------------------------------- ----------------- --------------------------------
Options outstanding at December 31, 1999 491,550 $ 6.88 -- 15.17
- --------------------------------------------------------- ----------------- --------------------------------
As of December 31, 1999, options for 274,550 of the above-listed shares
were exercisable and there remained 367,884 shares for which options may
be granted in the future under the 1997 Stock Incentive Plan.
The Company accounts for stock options under Accounting Principles Board
("APB") Opinion No. 25, which requires compensation costs to be recognized
only when the option price differs from the market price at the grant
date. SFAS No. 123, "Accounting for Stock-Based Compensation," allows a
company to follow APB Opinion No. 25 with an additional disclosure that
shows what the Company's pro forma net income would have been using SFAS
No. 123.
Pro forma information regarding net income and earnings per share as
required by SFAS No. 123 has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1999, 1998 and 1997:
1999 1998 1997
- ------------------------------------------------------------------------------
Risk-free interest rate 4.9% 5.3% 6.7%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 30.0% 28.0% 25.0%
Weighted average expected life 7 years 7 years 7 years
- ------------------------------------------------------------------------------
-31-
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net income and earnings per basic share were as
follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Net income - as reported $2,293 $2,140 $17,170
Net income - pro forma $1,839 $1,487 $17,020
Earnings per basic share - as reported $ 0.88 $ 0.67 $ 5.33
Earnings per basic share - pro forma $ 0.71 $ 0.46 $ 5.28
Weighted average fair value of options
granted during the year $ 3.29 $ 4.64 $ 6.10
- --------------------------------------------------------------------------------
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the model used for the
above disclosure does not necessarily provide a reliable single measure of
the fair value of its employee stock options.
(9) Retained Earnings
The following is a recap of changes in consolidated retained earnings for
the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
(In thousands)
- ------------------------------------------------------------- ----------------------------------------------------
Balance, beginning of year $ 46,821 $ 44,681 $ 29,451
Add: Net income for the year 2,293 2,140 17,170
Deduct: Cash dividends, $0.60 per share in
1997 -- -- (1,940)
- ------------------------------------------------------------- ----------------- ---------------- -----------------
Balance, end of year $ 49,114 $ 46,821 $ 44,681
- ------------------------------------------------------------- ----------------- ---------------- -----------------
(10) Revenues From Major Customers
In 1999, approximately $8.3 million (16.6 percent) of the Company's
operating revenues were attributable to one customer.
In 1998, approximately $5.3 million (12.2 percent) of the Company's
operating revenues were attributable to one customer.
In 1997, approximately $4.9 million (16.3 percent) of the Company's
operating revenues were attributable to one customer.
(11) Industry Segment and Geographic Information
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting information about operating segments in annual
financial statements and requires
-32-
reporting selected information about operating segments in interim
financial reports issued to stockholders.
The Company operates in one reportable industry segment: designing,
developing, manufacturing and marketing products for the medical and
healthcare industry with no foreign operating subsidiaries. The Company
recorded incidental revenues from its oxygen pipeline, which totaled
$947,000 in each of the years 1999, 1998 and 1997. Pipeline net assets
totaled $2,260,000 at December 31, 1999. Company revenues from sales
outside the United States totaled approximately 22 percent, 22 percent and
21 percent of the Company's total revenues in 1999, 1998 and 1997,
respectively. No Company assets are located outside the United States.
(12) Employee Retirement and Benefit Plans
A noncontributory defined benefit retirement plan is maintained for all
regular employees of the Company except those of Quest Medical. This plan
was amended effective January 1, 1998 to become a cash balance pension
plan. The Company's funding policy is to make the annual contributions
required by applicable regulations and recommended by its actuary.
SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits," was implemented by the Company effective January
1, 1998. SFAS No. 132 revises employers' disclosures about pension and
other postretirement benefit plans. This revision requires additional
information on changes in the benefit obligations and the fair value of
plan assets.
The changes in the plan's projected benefit obligation ("PBO") as of
December 31, 1999 and 1998 are as follows (in thousands):
1999 1998
--------------- ----------------
Change in Benefit Obligation
Benefit obligation, January 1 $ 3,297 $ 2,806
Service cost 315 297
Interest cost 226 235
Plan amendments -- 175
Actuarial loss 255 90
Benefits paid (664) (306)
- ----------------------------------------------------- --- ----------------
Benefit obligation, December 31 $ 3,429 $ 3,297
- ----------------------------------------------------- --- ----------------
The changes in the fair value of plan assets, funded status of the plan
and the status of the prepaid pension benefit recognized, which is
included in the Company's balance sheets as of December 31, 1999 and 1998,
are as follows (in thousands):
-33-
1999 1998
------------------ ------------------
Change in Plan Assets
Fair value of plan assets, January 1 $ 5,696 $ 5,499
Actual return on plan assets 840 503
Benefits paid (664) (306)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Fair value of plan assets, December 31 $ 5,872 $ 5,696
- ------------------------------------------------------------------------------
Funded status of plan $ 2,443 $ 2,399
Unrecognized actuarial gain (1,046) (888)
Unrecognized prior service cost 96 102
Unrecognized net transition obligation (263) (307)
- ------------------------------------------------------------------------------
Net amount recognized $ 1,230 $ 1,306
- ------------------------------------------------------------------------------
The components of net periodic pension benefit cost (income) for 1999,
1998 and 1997 were as follows (in thousands):
1999 1998 1997
------------- ------------ ------------
Components of Net Periodic
Benefit Cost
Service cost $ 315 $ 297 $ 124
Interest cost 226 235 248
Expected return on assets (421) (430) (423)
Prior service cost amortization 6 6 1
Actuarial (gain) loss (7) (17) --
Transition amount amortization (43) (49) (55)
Curtailment gain -- -- (663)
Settlement gain -- -- (144)
- ------------------------------------------------------------------------------
Net periodic benefit cost (income) $ 76 $ 42 $ (912)
- ------------------------------------------------------------------------------
As reflected in the 1997 pension income table above, the Company
recognized curtailment and settlement gains totaling $807,000 in
connection with the sale of Alabama-Tennessee Natural Gas Company. In
accordance with SFAS No. 88, "Employer Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans," these gains are reflected
as a component of the gain on disposal of discontinued operations (see
Note 2).
Actuarial assumptions used to determine the values of the PBO at December
31, 1999 and 1998 and the benefits cost for 1999, 1998 and 1997 included a
discount rate of 7.75 percent for 1999 and a discount rate of 7.25 percent
for 1998 and 1997, and an estimated long-term rate of return on plan
assets of 8 percent and an estimated weighted average rate of compensation
increase of 6 percent in all periods. As of December 31, 1999, the plan's
assets were invested in mutual funds as follows: equity, 76 percent; fixed
income, 22 percent; and money market, 2 percent.
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. The Company
recognized income of $4,000 in connection with
-34-
the SERP in 1998 and recorded expense of $100,000 in 1997. The SERP was
terminated December 31, 1998.
The Company also sponsors defined contribution plans for all employees.
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 $250,000 in 1999, $264,000 in 1998 and
$352,000 in 1997. Included in these amounts are contributions to the
Company's Supplemental Executive Thrift Plan, which was terminated
December 31, 1998.
The Company previously provided certain postretirement health care and
life insurance benefits to full-time employees of its natural gas
operations. After the disposal of the natural gas operations in 1997, the
Company no longer has any obligations for such postretirement benefits.
(13) Commitments and Contingencies
The Company is subject to legal proceedings and third-party claims which
arise in the ordinary course of business. In the opinion of management,
the amount of potential liability with respect to these actions will not
materially affect the Company's financial position or results of
operations.
In May 1996, Halkey-Roberts Corporation ("Halkey-Roberts") began leasing
the land, building and building improvements in St. Petersburg, Florida,
which serve as Halkey-Roberts' headquarters and manufacturing facility,
under a 10-year lease. The lease provides for monthly payments, including
certain lease payment escalators, and provides for certain termination,
sublease and assignment rights. The Company has guaranteed Halkey-Roberts'
payment and performance obligations under the lease. The lease is being
accounted for as an operating lease, and the rental expense for the years
ended December 31, 1999, 1998 and 1997 was $351,000, $342,000 and $332,000
respectively. Future minimum rental commitments under this lease are
$337,000, $347,000 and $137,000, respectively, over each of the next three
years.
-35-
(14) Quarterly Financial Data (Unaudited)
Quarterly financial data for 1999 and 1998 are as follows:
Quarter Operating Operating Earnings Per Basic
Ended Revenue Income Net Income Share
- ------------------------ ---------------------- ---------------------- ---------------------- ---------------------
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------
03/31/99 $ 11,581 $ 607 $ 393 $ 0.13
06/30/99 12,737 914 785 0.30
09/30/99 13,441 947 654 0.26
12/31/99 12,158 648 461 0.19
- ------------------------ ---------------------- ---------------------- ---------------------- ---------------------
03/31/98 $ 10,162 $ 579 $ 498 $ 0.15
06/30/98 11,375 706 537 0.17
09/30/98 11,570 217 226 0.07
12/31/98 10,290 77 879 0.28
- ------------------------ ---------------------- ---------------------- ---------------------- ---------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information for this item relating to directors of the Company is
incorporated by reference from the Company's definitive proxy statement for its
2000 annual meeting of stockholders.
Executive Officers
The information for this item relating to executive officers of the Company is
set forth on pages 10 through 11 of this report.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the Company's definitive proxy statement for its 2000 annual
meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2000 annual meeting of stockholders.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2000 annual meeting of stockholders.
Security Ownership of Management
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2000 annual meeting of stockholders.
Changes in Control
The Company knows of no arrangements that may at a subsequent date result in a
change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8--K
(a) 1. Financial Statements:
See Item 8: "Financial Statements and Supplementary Data" and financial
statement pages attached hereto.
2. Financial Statement Schedules:
All financial statement schedules have been omitted since the required
information is included in the consolidated financial statements or the
notes thereto or is not applicable or required.
3. Exhibits: (Numbered in accordance with Item 601 of Regulation S-K)
The exhibits listed below are filed as part of this 1999 Form 10-K
Report. Those exhibits previously filed and incorporated herein by
reference are identified by a note reference to the previous filing.
(b) Reports on Form 8-K:
None
Exhibit
Numbers Description
2a Asset Purchase Agreement, dated March 19, 1997, between Atrion
Corporation and Midcoast Energy Resources, Inc.(1)
2b Asset Purchase Agreement, dated as of December 29, 1997, by and
among Quest Medical, Inc., QMI Acquisition Corp. and
Atrion Corporation(2)
3a Certificate of Incorporation of Atrion Corporation, dated
December 30, 1996(3)
3b Bylaws of Atrion Corporation (4)
4a Rights Agreement, dated as of February 1, 1990, between AlaTenn
Resources, Inc. and American Stock Transfer & Trust Company which
includes the form of Right Certificate as Exhibit A and the
Summary of Rights to Purchase Common Shares as Exhibit B(5)
4b Second Amendment to Rights Agreement(6)
10a* 1990 Stock Option Plan(7)
10b* Form of Incentive Stock Option Agreement(8)
10c* 1994 Key Employee Stock Incentive Plan(9)
10d* Form of Incentive Stock Option Agreement(10)
10e* Atrion Corporation 1997 Stock Incentive Plan(11)
10f* Atrion Corporation 1998 Outside Directors Stock Option Plan(12)
10g* Form of Stock Option Agreement(13)
10h* Atrion Corporation Incentive Compensation Plan for Chief Executive
Officer(14)
10i* Atrion Corporation Incentive Compensation Plan for Chief Financial
Officer(15)
10j Option Agreement for the purchase and sale of real property(16)
21 Subsidiaries of Atrion Corporation as of December 31, 1999
23 Consent of Arthur Andersen LLP
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27 Financial Data Schedules (filed electronically only)
Notes
(1) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 23, 1997.
(2) Incorporated by reference to Exhibit 2 to the Form 8-K of Atrion
Corporation dated February 17, 1998.
(3) Incorporated by reference to Appendix B to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(4) Incorporated by reference to Appendix C to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(5) Incorporated by reference to Exhibit 1 to Registration Statement on Form
8-A of AlaTenn Resources, Inc. dated February 15, 1990.
(6) Filed herewith
(7) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 6, 1990.
(8) Incorporated by reference to Exhibit 4(d) to the Registration Statement
on Form S-8 of AlaTenn Resources, Inc., filed May 17, 1991 (File No.
33-40639).
(9) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated March 28, 1994.
(10) Incorporated by reference to Exhibit 4(d) to the Form S-8 of AlaTenn
Resources, Inc., filed July 26, 1995 (File No. 33-61309).
(11) Incorporated by reference to Exhibit 10(j) to Form 10-K of Atrion
Corporation dated March 31, 1998.
(12) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(13) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(14) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion
Corporation dated November 15, 1999.
(15) Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion
Corporation dated November 15, 1999.
(16) Filed herewith
* Management Contract or Compensatory Plan or Arrangement
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Atrion Corporation
By: /s/Emile A. Battat
------------------------
Emile A. Battat
Chairman,
President and Chief
Executive Officer
Dated: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Emile A. Battat Chairman, President and Chief Executive March 29, 2000
---------------------------------
Emile A. Battat Officer (Principal Executive Officer)
/s/Jeffery Strickland Vice President, Chief Financial Officer and March 29, 2000
---------------------------------
Jeffery Strickland Secretary-Treasurer (Principal Financial
and Accounting Officer)
/s/Richard O. Jacobson Director March 29, 2000
---------------------------------
Richard O. Jacobson
/s/John H. P. Maley Director March 29, 2000
---------------------------------
John H. P. Maley
-40-
Signature Title Date
/s/Jerome J. McGrath Director March 29, 2000
---------------------------------
Jerome J. McGrath
/s/Hugh J. Morgan, Jr. Director March 29, 2000
---------------------------------
Hugh J. Morgan, Jr.
/s/Roger F. Stebbing Director March 29, 2000
---------------------------------
Roger F. Stebbing
/s/John P. Stupp, Jr. Director March 29, 2000
---------------------------------
John P. Stupp, Jr.
-41-
EXHIBIT INDEX
Exhibit
Numbers Description Page
2a Asset Purchase Agreement, dated March 19, 1997, between Atrion
Corporation and Midcoast Energy Resources, Inc.(1)
2b Asset Purchase Agreement, dated as of December 29, 1997, by and among
Quest Medical, Inc., QMI Acquisition Corp. and
Atrion Corporation(2)
3a Certificate of Incorporation of Atrion Corporation, dated
December 30, 1996(3)
3b Bylaws of Atrion Corporation (4)
4a Rights Agreement, dated as of February 1, 1990, between AlaTenn
Resources, Inc. and American Stock Transfer & Trust Company which
includes the form of Right Certificate as Exhibit A and the
Summary of Rights to Purchase Common Shares as Exhibit B(5)
4b Second Amendment to Rights Agreement(6) 44
10a* 1990 Stock Option Plan(7)
10b* Form of Incentive Stock Option Agreement(8)
10c* 1994 Key Employee Stock Incentive Plan(9)
10d* Form of Incentive Stock Option Agreement(10)
10e* Atrion Corporation 1997 Stock Incentive Plan(11)
10f* Atrion Corporation 1998 Outside Directors Stock Option Plan(12)
10g* Form of Stock Option Agreement(13)
10h* Atrion Corporation Incentive Compensation Plan for Chief Executive
Officer(14)
10i* Atrion Corporation Incentive Compensation Plan for Chief Financial
Officer(15)
10j Option Agreement for the purchase and sale of real property(16) 45
21 Subsidiaries of Atrion Corporation as of December 31, 1998 52
23 Consent of Arthur Andersen LLP 53
27 Financial Data Schedules (filed electronically only)
Notes
(1) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 23, 1997. (
(2) Incorporated by reference to Exhibit 2 to the Form 8-K of Atrion
Corporation dated February 17, 1998.
(3) Incorporated by reference to Appendix B to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(4) Incorporated by reference to Appendix C to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(5) Incorporated by reference to Exhibit 1 to Registration Statement on Form
8-A of AlaTenn Resources, Inc. dated February 15, 1990. (6) Filed
herewith
(7) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 6, 1990.
(8) Incorporated by reference to Exhibit 4(d) to the Registration Statement
on Form S-8 of AlaTenn Resources, Inc., filed May 17, 1991 (File No.
33-40639).
(9) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated March 28, 1994.
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(10) Incorporated by reference to Exhibit 4(d) to the Form S-8 of AlaTenn
Resources, Inc., filed July 26, 1995 (File No. 33-61309).
(11) Incorporated by reference to Exhibit 10(j) to Form 10-K of Atrion
Corporation dated March 31, 1998.
(12) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(13) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(14) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion
Corporation dated November 15, 1999.
(15) Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion
Corporation dated November 15, 1999.
(16) Filed herewith
* Management Contract or Compensatory Plan or Arrangement
-43-