================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
Commission File Number 0-10763
-----------------------
Atrion Corporation
(Exact name of Registrant as specified in its charter)
Delaware 63-0821819
(State or other jurisdiction of incorporation or (I.R.S. Employer
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 Name of Each Exchange on Which Registered
-------------- -----------------------------------------
Common Stock, $.10 Par Value NASDAQ
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. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [_]
Indicate by check mark whether the Registrant is a shell company (as defined in
Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of the voting Common Stock held by nonaffiliates of
the Registrant at February 22, 2006 was $101,408,723 based on the last reported
sales price of the common stock on the Nasdaq National Market on such date.
Shares of voting stock held by executive officers, directors and holders of more
than 10% of the outstanding voting shares have been excluded from this
calculation because such persons may be deemed to be affiliates. Exclusion of
such shares should not be construed to indicate that any of such persons
possesses the power, direct or indirect, to control the Registrant, or that such
person is controlled by or under common control of the Registrant
Number of shares of Common Stock outstanding at February 22, 2006: 1,833,807
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 2006
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, 2005
--------
TABLE OF CONTENTS
ITEM PAGE
PART I........................................................................1
ITEM 1. BUSINESS.........................................................1
ITEM 1A. RISK FACTORS.....................................................7
ITEM 1B. UNRESOLVED STAFF COMMENTS.......................................12
ITEM 2. PROPERTIES......................................................12
ITEM 3. LEGAL PROCEEDINGS...............................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............12
EXECUTIVE OFFICERS OF THE COMPANY...............................12
PART II......................................................................13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES.............13
ITEM 6. SELECTED FINANCIAL DATA.........................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.....................................................21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................41
ITEM 9A. CONTROLS AND PROCEDURES.........................................41
ITEM 9B. OTHER INFORMATION...............................................43
PART III.....................................................................43
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............43
ITEM 11. EXECUTIVE COMPENSATION..........................................43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS.....................43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................44
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................44
PART IV......................................................................44
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES......................44
SIGNATURES...................................................................47
ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2005
PART I
ITEM 1. BUSINESS
General
Atrion Corporation ("Atrion" or the "Company") designs, develops, manufactures,
sells and distributes products and components, primarily for the medical and
healthcare industry. The Company's products range from ophthalmology and
cardiovascular products to fluid delivery devices. The Company has a line of
non-medical components that are sold for use in aviation and marine safety
products. The Company also owns and maintains a gaseous oxygen pipeline that is
small and incidental to the overall operations of the Company.
The Company's fluid delivery products accounted for 28 percent, 26 percent and
24 percent of net revenues for 2005, 2004 and 2003. The Company develops,
manufactures and markets several specialized intravenous fluid delivery tubing
sets and accessories. The intravenous fluid delivery line includes more than 80
distinct models used for complex therapy procedures employed in anesthesia
administration, intravenous fluid therapy, critical care and oncology therapy.
The Company is an industry leader in the manufacturing of medical tubing clamps.
These products include clamps offering such features as six match-to-fit sizes
with compatibility to all grades of medical tubing, molding in a variety of
materials, and compatibility with different sterilization processes. The
Company's swabbable luer valve allows needleless luer connections to luer access
devices in IV applications. These valves provide an economical replacement for
needle access ports in drug delivery and IV applications and maintain a sterile,
closed IV system without the need for replacement caps. The Company has
developed a wide variety of luer syringe check valves and one-way valves
designed to fill, hold and release controlled amounts of fluids or gasses on
demand for use in various intubation, catheter and other applications.
The Company's cardiovascular products accounted for 27 percent, 25 percent and
22 percent of net revenues for 2005, 2004 and 2003, respectively. At the heart
of the Company's cardiovascular products is the MPS2(R) Myocardial Protection
System ("MPS2"), a proprietary technology that delivers essential fluids and
medications to the heart during open-heart surgery. The MPS2 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 management of this process, indicating improved patient
outcomes. New features include an expanded flow range, low volume mode and
cyclic flow mode. The MPS2 is the only device used in open-heart surgery that
allows for the mixing of drugs into the bloodstream without diluting the blood.
The MPS2 employs advanced pump, temperature control and microprocessor
technologies and includes a line of disposable products. The Company also
develops, manufactures and markets other cardiovascular products which consist
principally of the following: cardiac surgery vacuum relief valves;
Retract-O-Tape(R) silicone vessel loops for retracting and occluding vessels in
minimally invasive surgical procedures; inflation devices for balloon catheter
dilation, stent deployment and fluid dispensing; and Clean-Cut(R) rotating
aortic punch and PerfectCut(R) Aortotomy System, both of which are used in heart
bypass surgery to make a precision opening in the heart for attachment of the
bypass vessels.
-1-
The Company's ophthalmic products accounted for 20 percent, 24 percent and 30
percent of net revenues for 2005, 2004 and 2003, respectively. Atrion is a
leading manufacturer of soft contact lens storage and disinfection cases. Atrion
produces a complete line of products which are compatible with all solutions for
use with soft or rigid gas permeable lenses. The Company also works with
customers to provide customized distribution of products. As a registered
pharmaceutical reseller, Atrion provides custom packaging, including component
purchasing as well as labeling. Warehousing as well as inventory management is
included in Atrion's complete kitting services. The Company also designs,
manufactures, sells and distributes the LacriCATH(R) product line, a line of
balloon catheters that is used in the treatment of nasolacrimal duct obstruction
in children and adults. Nasolacrimal duct obstruction can cause a condition
called epiphora (chronic tearing). People affected by this condition experience
excessive and uncontrollable tearing and often encounter infection as a result
of the nasolacrimal blockage. LacriCATH balloon catheters are the only balloon
catheters with Food and Drug Administration ("FDA") approval for use in this
application.
The Company's other medical and non-medical products accounted for 25 percent,
25 percent and 24 percent of net revenues for 2005, 2004 and 2003, respectively.
Atrion is the leading manufacturer of inflation systems and valves used in
marine and aviation safety products. The Company manufactures inflation devices,
oral inflation tubes, right angle connectors, valves, and closures for life
vests, life rafts, inflatable boats, survival equipment, and other inflatable
structures. Atrion also produces many one-way and two-way "Breather" valves for
use on electronics cases, munitions cases, pressure vessels, transportation
container cases, escape slides, and many other medical and non-medical
applications requiring pressure relief. Atrion provides contract manufacturing
services for other major original equipment manufacturers of medical devices.
The Company has the ability to take a product from concept through design,
development and prototype all the way to full-scale production manufacturing.
Core competencies include engineering product design and development,
prototyping, assembly, insert and injection molding, automation, RF-welding,
ultrasonic and heat sealing, and sterile packaging.
The Company designs, manufactures, sells and distributes a line of pressure
monitoring kits for use in labor and delivery procedures and various critical
care applications. The Company's intrauterine pressure monitoring devices are
used to determine pressure within the mother's uterus primarily during high risk
labor and delivery. The Company's ACTester product line consists of
instrumentation and associated disposables used to measure the activated
clotting time of blood. The Company manufactures, sells and distributes a line
of products designed for safe needle and scalpel blade containment.
The Company owns and maintains a 22-mile high-pressure steel pipeline in north
Alabama that is leased to an industrial gas producer that transports gaseous
oxygen to one of its customers.
Marketing and Major Customers
The Company markets components to other equipment manufacturers for
incorporation in their products and sells finished devices to physicians,
hospitals, clinics and other treatment centers. Sales managers working with a
direct sales force, commissioned sales agents, and distributors handle these
sales. The Company's sales managers work closely with major customers in
designing and developing products to meet customer requirements. The Company
sponsors scientific symposia as a means of disseminating product information and
participates in industry trade shows.
Company revenues from sales to parties outside the United States totaled
approximately 27 percent, 30 percent and 26 percent of the Company's net
revenues in 2005, 2004 and 2003, respectively. These sales are made to various
manufacturers and through distributors in over 50 countries outside the United
States. Company revenues from sales to parties in Canada totaled approximately
11 percent, 14 percent and 14 percent of the Company's net revenues in 2005,
2004 and 2003, respectively.
The Company offers customer service, training and education, and technical
support such as field service, spare parts, maintenance and repair for certain
of its products. The Company periodically advertises its products in trade
journals and routinely attends and participates in trade shows throughout the
United
-2-
States and internationally. The Company provides supportive literature on the
benefits of its products.
During 2005, Novartis was the Company's only customer accounting for more than
10 percent of the Company's revenues, with various products sold to several
divisions of Novartis accounting for approximately 11 percent of the Company's
revenues. The loss of this customer would have a material adverse impact on the
Company's business, financial condition and results of operations.
Manufacturing
The Company's medical products and other components are produced at facilities
in Arab, Alabama, St. Petersburg, Florida and Allen, Texas. The facilities 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 assurance. Its quality
assurance measures begin with the suppliers which participate in the Company's
supplier quality assurance program. It continues at the manufacturing level
where many 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 by
radiation or 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.
The Company's medical device operations are ISO13485:2003 certified and are
subject to FDA jurisdiction. The Company's non-medical device operations are
ISO9001-2000 certified.
Research and Development
The Company believes that a well-targeted research and development program is an
essential part of the Company's activities, and the Company 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 Company's current product lines,
improve current products and develop new product lines. Recent major development
projects include, but are not limited to, products designed for safe needle and
scalpel blade containment, a new inflator system for use with recreational and
commercial life vests, an anti-retrograde flow check valve for medical infusion
and fluid delivery applications; inflation devices for balloon catheter
dilation, stent deployment and fluid dispensing; a system used to facilitate and
standardize aortotomy techniques in open-heart surgery; the next-generation MPS2
with new flow features; and the integration of needle-free injectable caps with
fluid delivery products. The Company expects to incur additional research and
development expenses in 2006 for various projects.
The Company's consolidated research and development expenditures for 2005, 2004
and 2003 were $2,396,000, $2,374,000, and $2,146,000, respectively.
Availability of Raw Materials
The principal raw materials that the Company uses in its products are
polyethylene, polypropylene and polyvinyl chloride resins. The Company's ability
to operate profitably is dependent, in large part, on the market for these
resins. As these resins used by us are derived from petroleum and natural gas,
prices fluctuate substantially as a result of changes in petroleum and natural
gas prices, demand and the
-3-
capacity of the companies that produce these products to meet market needs.
Instability in the world markets for petroleum and natural gas could adversely
affect the prices of the Company's raw materials and their general availability.
The Company subcontracts with various suppliers to provide the quantity of
component parts necessary to assemble the Company's 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 using the Company's toolings. The Company believes that there are
satisfactory alternative 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 finished products on time. The Company owns the
molds used for production of a majority of its components. 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.
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 217 active patents and patent applications pending on
products that are either being sold or are in development. The Company pays
royalties to outside parties for three patents. All of these patents and patents
pending relate to current products being sold by the Company or to products in
evaluation stages.
The Company has developed technical knowledge which, although non-patentable, is
considered 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. 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.
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.
Competition
Depending on the product and the nature of the project, the Company competes on
the basis of its 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.
Numerous companies compete with the Company in the sale of healthcare products.
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 the Company. 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 the Company's cardiovascular and
fluid delivery competitors the ability to negotiate exclusive, long-term medical
device supply contracts and, consequently, the ability to offer
-4-
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, the Company's competitors may use price reductions to preserve market
share in their product markets.
Depending on the product and the nature of the project, the Company competes in
contract manufacturing on the basis of its ability to provide engineering and
design expertise as well as on the basis of product and price. The Company
frequently designs products for a customer or potential customer prior to
entering into long-term development and manufacturing agreements with that
customer. Because these products are somewhat limited in number and normally are
only a component of the ultimate product sold by its customers, the Company is
dependent on its ability to meet the requirements of those major healthcare
companies and must continually be attentive to the need to manufacture such
products at competitive prices and in compliance with strict manufacturing
standards. The Company competes with a number of contract manufacturers of
medical products. Most of these competitors are small companies that do not
offer the breadth of services offered by the Company to its customers.
The Company also competes in the market for inflation devices used in marine and
aviation equipment. The Company is the dominant provider in this market area.
Government Regulation
Products
The manufacture and sale of medical products are subject to regulation by
numerous United States 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"). All manufacturers of medical
devices must register with the FDA and list all medical devices manufactured by
them. The list must be updated annually. The Company's medical product
subsidiaries and certain of their customers are subject to inspection by the FDA
for compliance with such regulations and procedures. The Company's medical
products manufacturing facilities are subject to regulation by the FDA.
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's medical products subsidiaries
and certain of their customers are subject to these inspections. The Company
believes that it has met all FDA requirements.
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 marketing and sale 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 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.
-5-
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 is in compliance with these
rules.
Certain aviation and marine safety products are also subject to regulation by
the United States Coast Guard and the Federal Aviation Administration and
similar organizations in foreign countries which regulate the safety of marine
and aviation equipment.
Third-Party Reimbursement and Cost Containment
In the United States, healthcare 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.
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
healthcare 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 generally 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 may
challenge 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.
The Company anticipates that Congress, state legislatures and the private sector
will continue to review and assess alternative healthcare delivery and payment
systems. Potential approaches that have been considered include mandated basic
healthcare benefits, controls on healthcare 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 healthcare delivery system. The Company cannot
predict what impact the adoption of any federal or state healthcare reform
measures, future private sector reform or market forces may have on its
business.
Product Liability and Insurance
The design, manufacture and marketing of products of the types the Company
produces entail an inherent risk of product liability claims. A problem with one
of the Company's products could result in product liability claims or a recall
of, or safety alert or advisory notice relating to, the product.
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 myocardial
protection systems and the subsequent design and development of the
-6-
Company's MPS2 and its predecessor. Members of the Company's management and
scientific and technical staff from time to time 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 MPS2 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 January 31, 2006, the Company had 493 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 1A. RISK FACTORS
In addition to the other information contained in this Form 10-K, the following
risk factors should be considered carefully in evaluating our business. Our
business, financial condition or results of operations could be materially
adversely affected by any of these risks. Additional risks and uncertainties
that we do not currently know about or that we currently believe are immaterial,
or that we have not predicted, may also harm our business operations or
adversely affect us.
o Our business is dependent on the price and availability of resins and
our ability to pass on resin price increases to our customers.
The principal raw materials that we use in our products are
polyethylene, polypropylene and polyvinyl chloride resins. Our
ability to operate profitably is dependent, in large part, on the
market for these resins. The resins used by us are derived from
petroleum and natural gas; therefore; prices fluctuate
substantially as a result of changes in petroleum and natural gas
prices, demand and the capacity of the companies that produce
these products to meet market needs. Instability in the world
markets for petroleum and natural gas could adversely affect the
prices of our raw materials and their general availability.
Our ability to maintain profitability is heavily dependent upon
our ability to pass through to our customers the full amount of
any increase in raw material costs. If resin prices increase and
we are not able to fully pass on the increases to our customers,
our results of operations and our financial condition will be
adversely affected.
o The loss of a key supplier of raw materials could lead to increased
costs and lower profit margins.
The loss of a key supplier would force us to purchase raw
materials in the open market, which may be at higher prices,
until we could secure another source and such higher prices may
not allow us to remain competitive. If we are unable to obtain
raw materials in sufficient quantities, we may not be able to
manufacture our products. Even if we were able to replace one of
our raw material suppliers through another supply arrangement,
there is no assurance that the terms that we enter into with such
alternate supplier will be as favorable as the supply
arrangements that we currently have.
-7-
o A substantial portion of our customer relationships are open
short-term purchase commitments and, as a result, many of our
customers may unilaterally reduce the purchase of our products.
A substantial portion of our customer relationships are based on
open short-term purchase commitments. As a result, many of our
customers may unilaterally reduce the purchase of our products
or, in certain cases, terminate existing orders for which we may
have incurred significant production costs. A loss of a major
customer or a number of our smaller customers could materially
adversely affect our operations and financial condition.
o Product liability claims could adversely affect our financial
condition and results of operations.
We may be subject to product liability claims involving claims of
personal injury or property damage. Our product liability
insurance coverage may not be adequate to cover the cost of
defense and the potential award in the event of a claim. Also, a
well-publicized actual or perceived problem could adversely
affect our reputation and reduce the demand for our products.
o Our success is dependent on our ability to develop patentable
products, to preserve our trade secrets and operate without infringing
or violating the proprietary rights of third parties.
Others may challenge the validity of any patents issued to us,
and we could encounter legal and financial difficulties in
enforcing our 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 our patents less valuable or obsolete.
Although we do not believe that patents are the sole determinant
in the commercial success of our products, the loss of a
significant percentage of our patents or of our patents relating
to a specific major product line could have a material adverse
effect on our business, financial condition and results of
operations.
We have developed technical knowledge which, although
non-patentable, we consider to be significant in enabling us to
compete. However, the proprietary nature of such knowledge may be
difficult to protect.
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 us
to significant liabilities to third parties or require us 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 us on satisfactory terms
or at all. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses
could prevent us from manufacturing or selling certain of our
products, which could have a material adverse effect on our
business, financial condition and results of operations.
o New lines of business or new products and services may subject us to
additional risks.
From time to time, we may implement new lines of business or
offer new products and services within existing lines of
business. There are substantial risks and uncertainties
associated with these efforts, particularly in instances where
the markets are not fully developed. In developing and marketing
new lines of business or new products and services, we may invest
significant time and resources. Initial timetables for the
introduction and development of new lines of business and new
products or services may not be
-8-
achieved and price and profitability targets may not prove
feasible. External factors, such as compliance with regulations,
competitive alternatives, and shifting market preferences, may
also impact the successful implementation of a new line of
business or a new product or service. Furthermore, any new line
of business or new product or service could have a significant
impact on the effectiveness of our system of internal controls.
Failure to successfully manage these risks in the development and
implementation of new lines of business or new products or
services could have a material adverse effect on our business,
results of operations and financial condition.
o Our competitors have significantly greater resources than we do, and
it may be difficult for us to compete against them.
In many of our markets, we compete with numerous other companies
that have substantially greater financial resources and engage in
substantially more research and development activities than we
do. Furthermore, innovations in surgical techniques or medical
practices could have the effect of reducing or eliminating market
demand for one or more of our products.
Some of the markets in which we compete are dominated by
established manufacturers that have broader product lines,
greater distribution capabilities, substantially larger
marketing, research and development staffs and facilities than we
do. 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 our
cardiovascular and fluid delivery 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. In addition, our
competitors may use price reductions to preserve market share in
their product markets.
o We are subject to substantial governmental regulation and our failure
to comply with applicable governmental regulations could subject us to
numerous penalties, any of which could adversely affect our business.
We are subject to numerous governmental regulations relating to,
among other things, our ability to sell our products, third-party
reimbursement and fraud and abuse of Medicare or Medicaid. If we
do not comply with applicable governmental regulations,
governmental authorities could do any of the following:
o impose fines and penalties on us;
o prevent us from manufacturing our products;
o bring civil or criminal charges against us;
o delay the introduction of our new products into the
market;
o recall or seize our products;
o disrupt the manufacture or distribution of our
products; or
o withdraw or deny approvals for our products.
Any one of these results could materially adversely affect our
revenues and profitability and harm our reputation.
-9-
o We will be unable to sell our products if we fail to comply with
manufacturing regulations.
To commercially manufacture our products, we must comply with
government manufacturing regulations that govern design controls,
quality systems and documentation policies and procedures. The
FDA and equivalent foreign governmental authorities periodically
inspect our manufacturing facilities and the manufacturing
facilities of our OEM medical device customers. If we or our OEM
medical device customers fail to comply with these manufacturing
regulations or fail any FDA inspections our marketing or
distribution of our products may be prevented or delayed, which
would negatively impact our business.
o Our products are subject to product recalls even after receiving
regulatory clearance or approval, and any such recalls would
negatively affect our financial performance and could harm our
reputation.
Any of our products may be found to have significant deficiencies
or defects in design or manufacture. The FDA and similar
governmental authorities in other countries have the authority to
require the recall of any such defective product. A
government-mandated or voluntary recall could occur as a result
of component failures, manufacturing errors or design defects. We
do not maintain insurance to cover losses incurred as a result of
product recalls. Any product recall would divert managerial and
financial resources and negatively affect our financial
performance, and could harm our reputation with customers and
end-users.
o We may not receive regulatory approvals for new product candidates or
approvals may be delayed.
Regulation by government authorities in the United States and
foreign countries is a significant factor in the development,
manufacture and marketing of our proposed products and in our
ongoing research and product development activities. Any failure
to receive the regulatory approvals necessary to commercialize
our product candidates, or the subsequent withdrawal of any such
approvals, would harm our business. The process of obtaining
these approvals and the subsequent compliance with federal and
state statutes and regulations require spending substantial time
and financial resources. If we fail to obtain or maintain, or
encounter delays in obtaining or maintaining, regulatory
approvals, it could adversely affect the marketing of any
products we develop, our ability to receive product revenues, and
our liquidity and capital resources.
o We rely on technology to operate our business and any failure of these
systems could harm our business.
We rely heavily on communications and information systems to
conduct our business, enhance customer service and increase
employee productivity. Any failure, interruption or breach in
security of these systems could result in failures or disruptions
in our customer relationship management, general ledger,
inventory, manufacturing and other systems. There is no assurance
that any such failures, interruptions or security breaches will
not occur or, if they do occur, that they will be adequately
addressed by our policies and procedures that are intended to
safeguard our systems. The occurrence of any failures,
interruptions or security breaches of our information systems
could damage our reputation, result in a loss of customer
business, subject us to additional regulatory scrutiny, or expose
us to civil litigation and possible financial liability, any of
which could have a material adverse effect on our financial
condition and results of operations.
-10-
o We sell many of our products to healthcare providers that rely on
Medicare, Medicaid and private health insurance plans to reimburse the
costs associated with the procedures performed using our products and
these third party payors may deny reimbursement for use of our
products.
We are dependent, in part, upon the ability of healthcare
providers to obtain satisfactory reimbursement from third-party
payors for medical procedures in which our 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 used in accordance with
cost-effective treatment methods as determined by the payor, or
is experimental, unnecessary or inappropriate. Failure by
hospitals and other users of our products to obtain reimbursement
from third-party payors, or adverse changes in government and
private third-party payors' policies toward reimbursement for
procedures employing our products, could have a material adverse
effect on the Company's business, financial condition and results
of operations. Major third party payors for medical services in
the United States and other countries continue to work to contain
healthcare costs. The introduction of cost containment
incentives, combined with closer scrutiny of healthcare
expenditures by both private health insurers and employers, has
resulted in increased discounts and contractual adjustments to
charges for services performed. Further implementation of
legislative or administrative reforms to the United States or
international reimbursement systems in a manner that
significantly reduces reimbursement for procedures using our
products or denies coverage for such procedures would have an
adverse effect on our business, financial condition and results
of operations. Hospitals or physicians may respond to these
cost-containment pressures by substituting lower cost products or
other therapies for our products.
o We may not be able to attract and retain skilled people
Our success depends, in large part, on our ability to attract and
retain key people. Competition for the best people in most
activities we engage in can be intense and we may not be able to
hire people or to retain them. The unexpected loss of services of
one or more of our key personnel could have a material adverse
impact on our business because of their skills, knowledge of our
market, years of industry experience and the difficulty of
promptly finding qualified replacement personnel.
o Severe weather, natural disasters, acts of war or terrorism or other
external events could significantly impact our business.
We currently conduct all our development, manufacturing and
management at three locations. Severe weather, natural disasters,
acts of war or terrorism and other adverse external events at any
one or more of these locations could have a significant impact on
our ability to conduct business. Our disaster recovery policies
and procedures may not be effective and the occurrence of any
such event could have a material adverse effect on our business,
which, in turn, could have a material adverse effect on our
financial condition and results of operations. The insurance we
maintain may not be adequate to cover our losses.
o Our stock price can be volatile.
Stock price volatility may make it more difficult for you to sell
your common stock when you want and at prices you find
attractive. Our stock price can fluctuate significantly in
response to a variety of factors including, among other things:
o Actual or anticipated variations in quarterly results of
operations.
o Recommendations by securities analysts
o Operating and stock price performance of other companies
that investors deem comparable to the Company.
o Perceptions in the marketplace regarding the Company and our
competitors
o New technology used, or services offered, by competitors.
-11-
o Significant acquisitions or business combinations, strategic
partnerships, joint ventures or capital commitments by or
involving the Company or our competitors.
o Failure to integrate acquisitions or realize anticipated
benefits from acquisitions
o Changes in government regulations
o Geopolitical conditions such as acts or threats of terrorism
or military conflicts.
General market fluctuations, industry factors and general
economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes or credit loss
trends, could also cause our stock price to decrease regardless
of operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company is headquartered in Allen, Texas, and maintains operations at that
location (108,000 square feet facility on 19 acres) as well as in Arab, Alabama
(112,000 square feet on 67 acres), and St. Petersburg, Florida (72,000 square
feet on 6 acres). Each facility houses administrative, engineering,
manufacturing, and warehousing operations. The Texas and Alabama facilities are
Company owned while the Florida facility is occupied under a lease expiring in
September 2006. The Company is currently constructing a new facility in St.
Petersburg, Florida (165,000 square feet on 10 acres) on land purchased in 2005.
The Company expects to complete the construction of this facility around
mid-year 2006 and promptly thereafter move its St. Petersburg operations to that
new facility.
The Company owns and maintains a 22-mile high-pressure steel pipeline that
transports gaseous oxygen between Decatur and Courtland, Alabama.
ITEM 3. LEGAL PROCEEDINGS
The Company has no pending legal proceedings of the type described in Item 103
of Regulation S-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2005, no matters were submitted to a vote of
security holders.
Executive Officers of the Company
Name Age Title
---- --- -----
Emile A. Battat 67 Chairman, President and Chief Executive
Officer of the Company and Chairman or
President of all subsidiaries
Jeffery Strickland 47 Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company and
Vice President or Secretary-Treasurer of
all subsidiaries
The persons who are identified as executive officers of the Company currently
serve as officers of the Company and all 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
-12-
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 May 2006.
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 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.
Mr. Strickland has served as Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company since February 1, 1997 and has served as
Vice President or Secretary-Treasurer for all the Company's subsidiaries since
January 1997. Mr. Strickland was employed by the Company or its subsidiaries in
various other positions from September 1983 through January 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER REPURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the Nasdaq National Market (Symbol
ATRI). As of February 7, 2006, the Company had approximately 1,200 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 2004 and 2005
are shown below.
Year Ended
December 31, 2004: High Low
------------------ ---- ---
First Quarter $ 46.82 $38.51
Second Quarter $ 50.82 $40.50
Third Quarter $ 48.77 $43.51
Fourth Quarter $ 48.20 $41.69
Year Ended
December 31, 2005: High Low
------------------ ---- ---
First Quarter $ 53.56 $45.27
Second Quarter $ 74.55 $47.52
Third Quarter $ 81.28 $64.33
Fourth Quarter $ 69.43 $61.02
In September 2003, the Company announced that its Board of Directors had
approved a policy for the payment of regular quarterly cash dividends on the
Company's common stock. The Company began paying a quarterly cash dividend of
$.12 per share starting in September of 2003. The quarterly dividend was
increased to $.14 per share in September of 2004 and was increased to $.17 per
share in November 2005. The Company paid quarterly dividends totaling $1.1
million to its stockholders in 2005.
The following table provides certain information about securities authorized for
issuance under the Company's equity compensation plans as of December 31, 2005:
-13-
Number of
securities to be Number of securities
issued upon Weighted-average remaining available for
exercise of exercise price of future issuance under
outstanding outstanding equity compensation plans
options, warrants options, warrants (excluding securities
Plan Category and rights and rights reflected in column (a))
(a) (b) (c)
------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holder 216,800 $25.34 1,034(1)
Equity compensation plans not
approved by security holders 8,300(2) $12.25 --
---------------------------------------------------------------------
Total 225,100 $24.86 1,034
=====================================================================
(1) Consists of shares of the Company's common stock authorized for
issuance under the Company's 1997 Stock Incentive Plan, which provides for
the grant of nonqualified stock options, incentive stock options, stock
appreciation rights, restricted stock and performance shares. The number of
shares available for issuance under the 1997 Stock Incentive Plan is also
subject to equitable adjustment by the Compensation Committee of the Board
of Directors in the event of any change in the Company's capitalization,
including, without limitation, a stock dividend or stock split.
(2) Consists of shares of the Company's common stock authorized for
issuance upon exercise of nonqualified options granted to certain of the
Company's clinical advisors on February 10, 1998. All such options are now
vested and expire ten years from the grant date. The exercise price of the
options is the closing price on the Nasdaq National Market of the Company's
common stock on the grant date.
The Company's Common Share Purchase Rights Plan, which was adopted by the
Company in 1990, and all rights thereunder expired on February 1, 2005.
During the year ended December 31, 2005, the Company did not sell any equity
securities that were not registered under the Securities Act of 1933, and during
the fourth quarter of 2005 did not repurchase any of its equity securities.
-14-
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
(In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Operating Results for the Year ended December 31,:
Revenues $72,089 $66,081 $62,803 $59,533 $57,605
Operating Income 12,698 8,596 6,923 5,782 5,820
Income from continuing operations 8,793 6,305 4,892 4,065 4,262
Net income 8,958 6,470 5,057 2,589(b) 9,754(c)
Depreciation and amortization 5,389 4,830 4,783 4,418 4,603
Per Share Data:
Income from continuing
operations, per diluted share 4.57 3.41 2.66 2.18 1.88
Net income per diluted share 4.66 3.50 2.75 1.39(b) 4.30(c)
Cash dividends per common share .62 .52 .24(a) -- --
Average diluted shares outstanding 1,924 1,850 1,839 1,863 2,272
Financial Position at December 31,:
Total assets 78,470 67,408 60,050 60,807 65,555
Long-term debt 2,529 2,936 4,287 10,337 17,125
- ---------------------------------------------------------------------------------------------------------
(a) Dividends on outstanding common shares paid in the 3rd and 4th quarters at
$.12 per share
(b) Includes a $1.6 million after-tax goodwill impairment charge ($ .88 per
diluted share)
(c) Includes a $5.5 million after-tax gain ($ 2.42 per diluted share) from
discontinued operations
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company designs, develops, manufactures, sells and distributes products and
components, primarily for the medical and healthcare industry. The Company
markets components to other equipment manufacturers for incorporation in their
products and sells finished devices to physicians, hospitals, clinics and other
treatment centers. The Company's medical products primarily serve the fluid
delivery, cardiovascular, and ophthalmology markets. The Company's other medical
and non-medical products include obstetrics products, instrumentation and
disposables used in dialysis, contract manufacturing and valves and inflation
devices used in marine and aviation safety products. In 2005 approximately 27
percent of the Company's sales were outside the United States.
The Company's products are used in a wide variety of applications by numerous
customers, the largest of which accounted for approximately 10.8 percent of net
sales in 2005. The Company encounters
-15-
competition in all of its markets and competes primarily on the basis of product
quality, price, engineering, customer service and delivery time.
The Company's strategy is to provide a broad selection of products in the areas
of its expertise. Research and development efforts are focused on improving
current products and developing highly-engineered products that meet customer
needs and have the potential for broad market applications and significant
sales. Proposed new products may be subject to regulatory clearance or approval
prior to commercialization and the time period for introducing a new product to
the marketplace can be unpredictable. The Company also focuses on controlling
costs by investing in modern manufacturing technologies and controlling
purchasing processes. The Company has been successful in consistently generating
cash from operations and has used that cash to reduce indebtedness, to fund
capital expenditures, to repurchase stock and, starting in 2003, to pay
dividends.
The Company's strategic objective is to further enhance its position in its
served markets by:
o Focusing on customer needs;
o Expanding existing product lines and developing new products;
o Maintaining a culture of controlling cost; and
o Preserving and fostering a collaborative, entrepreneurial management
structure.
For the year ended December 31, 2005, the Company reported revenues of $72.1
million, income from continuing operations of $8.8 million and net income of
$9.0 million, up 9 percent, 39 percent and 38 percent, respectively, from 2004.
Results of Operations
The Company's net income was $9.0 million, or $4.99 per basic and $4.66 per
diluted share, in 2005, compared to net income of $6.5 million, or $3.78 per
basic and $3.50 per diluted share, in 2004 and $5.1 million, or $2.96 per basic
and $2.75 per diluted share, in 2003. Revenues were $72.1 million in 2005,
compared with $66.1 million in 2004 and $62.8 million in 2003. The 9 percent
revenue increase in 2005 over the prior year was primarily attributable to a 19
percent increase in the revenues from the Company's fluid delivery products, a
16 percent increase from the Company's cardiovascular products, and a 7 percent
increase from the Company's other medical and non-medical products. These
revenue increases were generally attributable to higher sales volumes. These
increases were partially offset by a 7 percent decrease from the Company's
ophthalmic products. The 5 percent revenue increase in 2004 over the prior year
was primarily attributable to a 22 percent increase in the revenues from the
Company's cardiovascular products, a 17 percent increase from the Company's
fluid delivery products and a 7 percent increase from the Company's other
medical and non-medical products. These revenue increases were generally
attributable to higher sales volumes and were partially offset by an 18 percent
decrease in the revenues from the Company's ophthalmic products following the
completion of a contract in 2003.
The Company's cost of goods sold was $43.1 million in 2005, compared with $40.8
million in 2004 and $40.6 million in 2003. The 6 percent increase in cost of
goods sold for 2005 over 2004 was primarily related to the revenue increase
discussed above, an improved mix of product sales toward products with lower
costs and favorable manufacturing efficiencies brought on by increased volumes
and continued manufacturing cost improvement projects. The one percent increase
in cost of goods sold for 2004 over 2003 was primarily related to the revenue
increases discussed above, offset by favorable manufacturing efficiencies
brought on by increased volumes and manufacturing productivity improvements. The
shift in product mix had a favorable effect on cost of goods sold as the
products with increased revenues had lower costs than the products with lower
revenues.
Gross profit was $29.0 million in 2005, compared with $25.3 million in 2004 and
$22.2 million in 2003. The Company's gross profit in 2005 was 40 percent of
revenues compared with 38 percent of revenues in 2004 and 35 percent of revenues
in 2003. The increase in gross profit percentage in 2005 from the prior year was
primarily due to the favorable shift in product mix mentioned above,
productivity improvements and
-16-
improved manufacturing efficiencies. The increase in gross profit percentage in
2004 from the prior year was primarily due to the above-mentioned improvement in
manufacturing variances.
Operating expenses were $16.3 million in 2005, compared with $16.7 million in
2004 and $15.3 million in 2003. The decrease in operating expenses in 2005 from
2004 was primarily related to decreased general and administrative ("G&A")
expenses. G&A expenses consist primarily of salaries and other related expenses
of administrative, executive and financial personnel and outside professional
fees. The decrease in G&A is primarily attributable to reduced legal costs
partially offset by increases in compensation and costs related to information
technology enhancements. The increase in operating expenses in 2004 from 2003
was primarily attributable to increased G&A and research and development ("R&D")
expenses. The increase in G&A expenses in 2004 was primarily attributable to
increased legal costs and compensation. R&D expenses consist primarily of
salaries and other related expenses of the research and development personnel as
well as costs associated with regulatory expenses. The increase in R&D expenses
in 2004 was primarily related to increased legal costs related to patents. The
Company anticipates that G&A expenses are likely to increase in the foreseeable
future but at a rate less than the anticipated rate of increase in revenues. The
Company anticipates that R&D expenses will continue at approximately the current
level for the foreseeable future. Selling ("Selling") expenses consist primarily
of salaries, commissions and other related expenses for sales and marketing
personnel, marketing, advertising and promotional expenses. The Company
anticipates that Selling expenses are likely to increase in the foreseeable
future but at a rate less than the anticipated rate of increase in revenues.
The Company's operating income for 2005 was $12.7 million, compared with $8.6
million in 2004 and $6.9 million in 2003. The previously mentioned increase in
gross profit along with the decrease in operating expenses were the major
contributors to the operating income improvement in 2005. The previously
mentioned increase in gross profit along with cost containment and cost
reduction activities were the major contributors to the operating income
improvements in 2004.
Interest expense was $61,000 in 2005 compared to $93,000 in 2004 and $195,000 in
2003. The decrease in 2005 was primarily related to lower average borrowings
partially offset by increased interest rates during 2005 as compared with 2004.
The decrease in 2004 was primarily related to lower average borrowings during
2004 as compared with 2003. The Company's other income for 2004 was primarily
related to the sale of non-operational assets.
Income tax expense in 2005 totaled $3.9 million, compared with $2.3 million in
2004 and $1.9 million in 2003. The effective tax rates for 2005, 2004 and 2003
were 30.7 percent, 26.6 percent and 27.8 percent, respectively. Benefits from
tax incentives for exports and R&D expenditures totaled $534,000 in 2005,
$516,000 in 2004 and $350,000 in 2003. The higher effective tax rate in 2005 is
primarily a result of benefits from tax incentives for exports and R&D
expenditures being a lesser percentage of taxable income in 2005 than in
2004.The lower effective tax rate in 2004 is primarily a result of benefits from
tax incentives for exports and R&D expenditures being a larger percentage of
taxable income in 2004 than in 2003.
The Company believes that 2006 revenues will be higher than 2005 revenues and
that the cost of goods sold, gross profit, operating income and income from
continuing operations will each be higher in 2006 than in 2005. In 2006, the
Company further believes that it will have continuing volume growth in most of
its product lines, complemented by the introduction of new products, and that it
will achieve continued growth in operating income.
Discontinued Operations
During 1997, the Company sold all of its natural gas operations. 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 these discontinued operations of $0.2
million, or $.09 per basic share in 2005 and $.10 per basic share, in each of
2004 and 2003, and $.09 per
-17-
diluted share, in each of 2005, 2004 and 2003.
In addition to the initial consideration received in 1997 upon the sale of the
natural gas operations, certain annual contingent deferred payments of up to
$250,000 per year were to be paid 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 the purchaser from certain gas transportation contracts. The Company
received deferred payments of $250,000 each, before tax, from the purchaser in
April 2005, 2004 and 2003 which are reflected in each year as a gain from
discontinued operations of $165,000, net of tax.
Liquidity and Capital Resources
The Company has a $25.0 million revolving credit facility (the "Credit
Facility") with a money center 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, 60-day or 90-day LIBOR, as selected by the Company, plus one percent. At
December 31, 2005, the Company had $22.5 million available to borrow under the
Credit Facility.
At December 31, 2005, the Company had cash and cash equivalents of $525,000
compared with $255,000 at December 31, 2004. The Company had outstanding
borrowings of $2.5 million under its Credit Facility at December 31, 2005 and
$2.9 million at December 31, 2004. The Credit Facility, which expires November
11, 2009, and may be extended under certain circumstances, contains various
restrictive covenants, none of which is expected to impact the Company's
liquidity or capital resources. At December 31, 2005, the Company was in
compliance with all financial covenants.
Cash flows from continuing operations generated $9.9 million in 2005 as compared
to $11.0 million in 2004. The primary contributor to this decrease was an
increase in inventories. Cash provided by operating activities consists
primarily of net income adjusted for certain non-cash items and changes in
working capital items. Non-cash items include depreciation and amortization and
deferred income taxes. Working capital items consist primarily of accounts
receivable, accounts payable, inventories and other current assets and other
current liabilities. The $541,000 increase in working capital during 2005 was
primarily related to increases in inventories partially offset by a decrease in
land deposit. The increase in inventories was primarily attributable to a
program to purchase critical raw materials in larger volumes to take advantage
of quantity discounts and to hedge against future price increases. In addition,
the Company began to increase its inventory of finished goods to reflect
increasing sales and to assure uninterrupted deliveries to the Company's
customers when the Florida facility is relocated to a new facility in St.
Petersburg, Florida in mid-year 2006. The decrease in land deposits is related
to the completion of the purchase of ten acres of land for the new St.
Petersburg facility for which the Company had made a $3.75 million deposit.
Capital expenditures for property, plant and equipment totaled $10.6 million in
2005, compared with $5.6 million in 2004 and $4.2 million in 2003. Of the $10.6
million expended for the addition of property, plant and equipment during 2005,
the Company expended $4.6 million toward the construction of its new St.
Petersburg facility for its Halkey-Roberts operation. In 2004, the Company
expended $3.75 million for the purchase of ten acres of land being used for this
construction. The Company anticipates spending an additional $12.0 million in
2006 to complete the construction of the new facility. The Company is planning
to complete the construction of this facility and move the Halkey-Roberts
operation into the facility around mid-year 2006 (See Note 12).
During 2005 the Company reduced its outstanding borrowings under the Credit
Facility by $407,000. During 2004, the Company expended $84,000 for the purchase
of the Company's common stock. During 2003, the Company expended $4.9 million
for the purchase of the Company's common stock. Included in this amount was $4.1
million used in April 2004 for the completion of a tender offer in which a total
of
-18-
173,614 shares of common stock were repurchased at a price of $23.00 per share.
In September 2003, the Company announced that its Board of Directors had
approved a policy for the payment of regular quarterly cash dividends on the
Company's common stock. During 2005 the Company paid dividends totaling $1.1
million to its stockholders and received $2.3 million from the exercise of stock
options.
The table below summarizes debt, lease and other contractual obligations
outstanding at December 31, 2005:
Payments due by period
------------------------------------------
2007- 2009- 2011 and
Contractual Obligations Total 2006 2008 2010 thereafter
------------------------------------------
(In thousands)
Credit Facility $2,529 -- -- $ 212 $ 2,317
Operating Leases $ 321 $ 321 -- -- --
Purchase Obligations $5,845 $5,799 $ 46 -- --
------------------------------------------
Total $8,695 $6,120 $ 46 $ 212 $ 2,317
==========================================
The payment schedule for the Credit Facility assumes at maturity, November 2009,
the Company will convert this outstanding debt to a two-year term note as
permitted by the terms of the agreement. The payment schedule for the operating
lease assumes the lease expires in September 2006 (see Note 12 of Notes to
Consolidated Financial Statements).
The Company believes that its existing cash and cash equivalents, cash flows
from operations and borrowings available under the Company's Credit Facility,
supplemented, if necessary, with 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 foreseeable future.
Off Balance Sheet Arrangements
Companies sometimes establish legal entities for a specific business transaction
or activity in the form of a Variable Interest Entity ("VIE"). VIEs may be used
to facilitate off-balance sheet financing, acquire financial assets, raise cash
from owned assets and similar transactions. The Company has no VIEs, no
off-balance sheet financing arrangements and no derivative financial
instruments.
Impact of Inflation
The Company experiences the effects of inflation primarily in the prices it pays
for labor, materials and services. Over the last three years, the Company has
experienced the effects of moderate inflation in these costs. At times, the
Company has been able to offset a portion of these increased costs by increasing
the sales prices of its products. However, competitive pressures have not
allowed for full recovery of these cost increases.
-19-
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123R"). In addition to SFAS No. 123R the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs," which amends
Accounting Review Bulletin 43, Chapter 4, "Inventory Pricing." The impact to the
Company for these items is described in Note 1 of Notes to the Consolidated
Financial Statements.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of
operations are based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. In the preparation of these financial
statements, the Company makes estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. The Company believes the following
discussion addresses the Company's most critical accounting policies and
estimates, which are those that are most important to the portrayal of the
Company's financial condition and results and require management's most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Actual
results could differ significantly from those estimates under different
assumptions and conditions.
During 2005, the Company accrued for legal costs associated with certain
litigation. The Company believes these accruals are adequate to cover the legal
fees and expenses associated with litigating these matters. However, the time
and cost required to litigate these matters as well as the outcomes of the
proceedings may vary from what the Company has projected.
The Company assesses the impairment of its long-lived identifiable assets,
excluding goodwill which is tested for impairment pursuant to SFAS No. 142 as
explained below, whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. This review is based upon projections of
anticipated future cash flows. While the Company believes that its estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows or future changes in the Company's business plan could materially affect
its evaluations. No such changes are anticipated at this time.
The Company assesses goodwill for impairment pursuant to SFAS No. 142 which
requires that goodwill be assessed whenever events or changes in circumstances
indicate that the carrying value may not be recoverable, or, at a minimum, on an
annual basis by applying a fair value test.
Forward-looking Statements
The statements in this Management's Discussion and Analysis and elsewhere in
this annual report on Form 10-K that are forward-looking are based upon current
expectations, and actual results or future events may differ materially.
Therefore, the inclusion of such forward-looking information should not be
regarded as a representation by the Company that the objectives or plans of the
Company will be achieved. Such statements include, but are not limited to, the
Company's expectations regarding future revenues, cost of goods sold, gross
profit, operating income, income from continuing operations, cash flows from
operations, growth in product lines, and availability of equity and debt
financing. Words such as "anticipates," "believes," "intends," "expects,"
"should" 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 or future events to differ materially,
including, but not limited to, the following: changing economic, market
-20-
and business conditions; acts of war or terrorism; 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; the Company's ability to protect its
intellectual property; changes in the prices of raw materials; changes in
product mix; intellectual property and product liability claims and 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 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
Borrowings under the Credit Facility bear interest at 30-day, 60-day or 90-day
LIBOR, as selected by the Company, plus one percent. The Company is subject to
interest rate risk based on an adverse change in the 30-day, 60-day or the
90-day LIBOR. At December 31, 2005, the Company had borrowings under the Credit
Facility of $2.5 million. A one percent increase in the market interest rate
would reduce the Company's annual pretax income by approximately $25,000 at the
current borrowing level.
-21-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Board of Directors and
Stockholders of Atrion Corporation
We have audited the accompanying consolidated balance sheets of Atrion
Corporation and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Atrion
Corporation and subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Atrion
Corporation and subsidiaries' internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 13, 2006 expressed an unqualified
opinion on management's assessment that Atrion Corporation and subsidiaries'
internal control over financial reporting as of December 31, 2005, was effective
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organization of the Treadway Commission (COSO) and
an unqualified opinion on the effectiveness of Atrion Corporation and
subsidiaries' internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organization of the Treadway Commission (COSO).
/s/ Grant Thornton LLP
Dallas, Texas
March 13, 2006
-22-
CONSOLIDATED STATEMENTS OF INCOME
(For the year ended December 31, 2005, 2004 and 2003)
- -------------------------------------------------------------------------------
2005 2004 2003
- -------------------------------------------------------------------------------
(In thousands, except
per share amounts)
Revenues $ 72,089 $ 66,081 $ 62,803
Cost of Goods Sold 43,119 40,804 40,564
- -------------------------------------------------------------------------------
Gross Profit 28,970 25,277 22,239
- -------------------------------------------------------------------------------
Operating Expenses:
Selling 5,637 5,676 5,594
General and administrative 8,239 8,631 7,576
Research and development 2,396 2,374 2,146
- -------------------------------------------------------------------------------
16,272 16,681 15,316
- -------------------------------------------------------------------------------
Operating Income 12,698 8,596 6,923
Interest Income 37 45 69
Interest Expense (61) (93) (195)
Other Income (Expense), net 10 46 (26)
- -------------------------------------------------------------------------------
Income from Continuing Operations before
Provision for Income Taxes 12,684 8,594 6,771
Income Tax Provision (3,891) (2,289) (1,879)
- -------------------------------------------------------------------------------
Income from Continuing Operations 8,793 6,305 4,892
Gain on Disposal of Discontinued Operations,
net of tax 165 165 165
- -------------------------------------------------------------------------------
Net Income $ 8,958 $ 6,470 $ 5,057
===============================================================================
Income Per Basic Share:
Continuing operations $ 4.90 $ 3.68 $ 2.86
Discontinued operations .09 .10 .10
- -------------------------------------------------------------------------------
Net Income Per Basic Share $ 4.99 $ 3.78 $ 2.96
===============================================================================
Weighted Average Basic Shares Outstanding 1,794 1,711 1,711
===============================================================================
Income Per Diluted Share:
Continuing operations $ 4.57 $ 3.41 $ 2.66
Discontinued operations .09 .09 .09
- -------------------------------------------------------------------------------
Net Income Per Diluted Share $ 4.66 $ 3.50 $ 2.75
===============================================================================
Weighted Average Diluted Shares Outstanding 1,924 1,850 1,839
===============================================================================
The accompanying notes are an integral part of these statements.
-23-
CONSOLIDATED BALANCE SHEETS
As of December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Assets: 2005 2004
- --------------------------------------------------------------------------------
(In thousands)
Current Assets:
Cash and cash equivalents $ 525 $ 255
Accounts receivable, net of allowance for doubtful
accounts of $65 and $118 in 2005 and 2004, respectively 8,291 7,588
Inventories 17,705 14,013
Prepaid expenses 832 1,028
Land deposit -- 3,750
Deferred income taxes 620 1,039
- --------------------------------------------------------------------------------
27,973 27,673
- --------------------------------------------------------------------------------
Property, Plant and Equipment 63,041 50,402
Less accumulated depreciation and amortization 27,787 25,071
- --------------------------------------------------------------------------------
35,254 25,331
- --------------------------------------------------------------------------------
Other Assets and Deferred Charges:
Patents and licenses, net of accumulated
amortization of $8,877 and 7,853 in 2005
and 2004, respectively 2,331 1,895
Goodwill 9,730 9,730
Other 3,182 2,779
- --------------------------------------------------------------------------------
15,243 14,404
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$78,470 $67,408
================================================================================
The accompanying notes are an integral part of these statements.
-24-
CONSOLIDATED BALANCE SHEETS
As of December 31, 2005 and 2004
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity: 2005 2004
- -------------------------------------------------------------------------------
(In thousands)
Current Liabilities:
Accounts payable $ 4,501 $ 3,788
Accrued liabilities 2,627 3,358
Accrued income and other taxes 1,098 1,321
- -------------------------------------------------------------------------------
8,226 8,467
- -------------------------------------------------------------------------------
Line of Credit 2,529 2,936
- -------------------------------------------------------------------------------
Other Liabilities and Deferred Credits:
Deferred income taxes 4,344 4,263
Other 1,476 1,139
- -------------------------------------------------------------------------------
5,820 5,402
- -------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.10 per share, authorized
10,000 shares, issued 3,420 shares 342 342
Additional paid-in capital 12,508 10,013
Retained earnings 82,318 74,479
Treasury shares, 1,586 shares in 2005 and 1,701 shares
in 2004, at cost (33,273) (34,231)
- -------------------------------------------------------------------------------
61,895 50,603
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$ 78,470 $ 67,408
===============================================================================
The accompanying notes are an integral part of these statements.
-25-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the year ended December 31, 2005, 2004 and 2003)
- ----------------------------------------------------------------------------------------
2005 2004 2003
- ----------------------------------------------------------------------------------------
(In thousands)
Cash Flows From Operating Activities:
Net income $ 8,958 $ 6,470 $ 5,057
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of discontinued operations (165) (165) (165)
Depreciation and amortization 5,389 4,830 4,783
Deferred income taxes 500 487 1,639
Tax benefit related to stock options 1,168 90 515
Other 10 20 34
- ----------------------------------------------------------------------------------------
15,860 11,732 11,863
Changes in operating assets and liabilities:
Accounts receivable (703) (1,362) 495
Inventories (3,692) (2,698) (1,003)
Prepaid expenses 196 866 379
Other non-current assets (1,863) 542 (29)
Accounts payable and accrued liabilities (18) 1,109 1,008
Accrued income and other taxes (223) 670 (208)
Other non-current liabilities 337 165 199
- ----------------------------------------------------------------------------------------
Net cash provided by continuing operations 9,894 11,024 12,704
Net cash provided by discontinued operations (Note 3) 165 165 165
- ----------------------------------------------------------------------------------------
10,059 11,189 12,869
- ----------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Property, plant and equipment additions (10,569) (5,570) (4,215)
Deposit on land purchase -- (3,750) --
Property, plant and equipment sales 21 -- --
- ----------------------------------------------------------------------------------------
(10,548) (9,320) (4,215)
- ----------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in line of credit (407) (1,351) (6,050)
Exercise of stock options 2,285 414 2,656
Purchase of treasury stock -- (84) (4,909)
Dividends paid (1,119) (891) (406)
- ----------------------------------------------------------------------------------------
759 (1,912) (8,709)
- ----------------------------------------------------------------------------------------
Net change in cash and cash equivalents 270 (43) (55)
Cash and cash equivalents, beginning of year 255 298 353
- ----------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 525 $ 255 $ 298
========================================================================================
Cash paid for:
Interest (net of capitalization) $ 62 $ 96 $ 207
Income taxes 2,508 716 554
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
-26-
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(For the year ended December 31, 2005, 2004 and 2003)
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock Treasury Stock
----------------------------------------------------
Additional
Shares Paid-in Retained
Outstanding Amount Shares Amount Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2003 1,706 $ 342 1,714 $ (31,122) $ 8,222 $ 64,249 $ 41,691
Net income 5,057 5,057
Tax benefit from exercise
of stock options 515 515
Exercise of stock options 187 (187) 1,720 936 2,656
Purchase of treasury stock (193) 193 (4,909) (4,909)
Dividends (406) (406)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 1,700 342 1,720 (34,311) 9,673 68,900 44,604
Net income 6,470 6,470
Tax benefit from exercise
of stock options 90 90
Exercise of stock options 21 (21) 164 250 414
Purchase of treasury stock (2) 2 (84) (84)
Dividends (891) (891)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 1,719 342 1,701 (34,231) 10,013 74,479 50,603
Net income 8,958 8,958
Tax benefit from exercise
of stock options 1,168 1,168
Exercise of stock options 115 (115) 958 1,327 2,285
Dividends (1,119) (1,119)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 1,834 $ 342 1,586 $ (33,273) $ 12,508 $ 82,318 $ 61,895
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-27-
Atrion Corporation
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Atrion Corporation ("Atrion") and its subsidiaries (collectively, the
"Company") design, develop, manufacture, sell and distribute products
primarily for the medical and healthcare industry. The Company markets its
products throughout the United States and internationally. The Company's
customers include hospitals, distributors, and other manufacturers. The
principal subsidiaries of Atrion through which these operations are
conducted are Atrion Medical Products, Inc. ("Atrion Medical Products"),
Halkey-Roberts Corporation ("Halkey-Roberts") and Quest Medical, Inc.
("Quest Medical").
Principles of Consolidation
The consolidated financial statements include the accounts of Atrion and
its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
Fair Value
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term nature of
these items. The carrying amount of debt approximates fair value as the
interest rate is tied to market rates.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the dates of the financial statements and the reported
amount of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are securities with original maturities of 90 days or
less.
Trade Receivables
Trade accounts receivable are recorded at the original sales price to the
customer. The Company maintains an allowance for doubtful accounts to
reflect estimated losses resulting from the inability of customers to make
required payments. On an ongoing basis, the collectibility of accounts
receivable is assessed based upon historical collection trends, current
economic factors and the assessment of the collectibility of specific
accounts. The Company evaluates the collectibility of specific accounts and
determines when to grant credit to its customers using a combination of
factors, including the age of the outstanding balances, evaluation of
customers' current and past financial condition, recent payment history,
current economic environment, and discussions with appropriate Company
personnel and with the customers directly. Accounts are written off when it
is determined the receivable will not be collected.
-28-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
Inventories
Inventories are stated at the lower of cost (including materials, direct
labor and applicable overhead) 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,
2005 2004
------------------------------------------------------------
Raw materials $ 6,898 $ 5,665
Work in process 4,291 3,753
Finished goods 6,516 4,595
------------------------------------------------------------
Total inventories $17,705 $14,013
------------------------------------------------------------
Income Taxes
The Company utilizes the asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
reporting basis and the tax basis of the Company's other assets and
liabilities. These amounts are based on tax laws and rates applicable to
the periods in which the differences are expected to affect taxable income.
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.
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 (in thousands):
December 31,
---------------- Useful
2005 2004 Lives
----------------------------------------------------------------
Land $ 5,284 $ 1,506 --
Buildings 13,982 9,147 30-40 yrs
Machinery and equipment 43,775 39,749 3-10 yrs
----------------------------------------------------------------
Total property, plant and equipment $63,041 $50,402
----------------------------------------------------------------
Depreciation expense of $4,365,005, $4,408,000 and $4,442,000 was recorded
for the years ended December 31, 2005, 2004 and 2003, respectively.
Capitalized interest related to the construction of a new facility at
Halkey-Roberts in the amount of $26,850 was recorded during 2005.
-29-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
Patents and Licenses
Cost for patents and licenses acquired is determined at acquisition date.
Patents and licenses are amortized over the useful lives of the individual
patents and licenses, which are from 7 to 19 years. Patents and licenses
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Goodwill
Goodwill represents the excess of cost over the fair value of tangible and
identifiable intangible net assets acquired. Annual impairment testing for
goodwill is done using a fair value-based test. Goodwill is also reviewed
periodically for impairment whenever events or changes in circumstances
indicate a change in value may have occurred. The Company has identified
three reporting units where goodwill was recorded for purposes of testing
goodwill impairment annually: (1) Atrion Medical Products (2)
Halkey-Roberts and (3) Quest Medical. The carrying amount for goodwill in
each of the three years ended December 31, 2005, 2004 and 2003 was
$9,730,000.
Current Accrued Liabilities
The items comprising current accrued liabilities are as follows (in
thousands):
December 31,
2005 2004
--------------------------------------------------------
Accrued payroll and related expenses $1,277 $1,106
Accrued vacation 261 517
Accrued professional fees 427 1,255
Other accrued liabilities 662 480
--------------------------------------------------------
Total accrued liabilities $2,627 $3,358
========================================================
Revenues
The Company recognizes revenue when its products are shipped to its
customers and distributors, provided an arrangement exists, the fee is
fixed and determinable and collectibility is reasonably assured. All risks
and rewards of ownership pass to the customer upon shipment. Net sales
represent gross sales invoiced to customers, less certain related charges,
including discounts, returns and other allowances. Returns, discounts and
other allowances have been insignificant historically.
Shipping and Handling Policy
Shipping and handling fees charged to customers are reported as revenue and
all shipping and handling costs incurred related to products sold are
reported as cost of goods sold.
Research and Development Costs
Research and development costs relating to the development of new products
and improvements of existing products are expensed as incurred.
Advertising
Advertising production costs are expensed as incurred. Media for print
placement costs are expensed in the period the advertising appears. Total
advertising expenses were approximately $219,000, $161,000 and $146,000 for
the years ended December 31, 2005, 2004 and 2003, respectively.
-30-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
Stock-Based Compensation
At December 31, 2005, the Company had two stock-based employee compensation
plans, which are described more fully in Note 8. The Company accounts for
those plans under the recognition and measurement principles of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
a revision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123R"). SFAS No. 123R supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees" and requires a public entity
to measure the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award, and
recognize that cost over the vesting period. SFAS No. 123R is effective for
the Company's first annual period beginning after June 15, 2005. The
Company will begin recognizing option expense starting January 1, 2006.
Since most of the Company's outstanding options will have vested prior to
January 1, 2006, the amount of expense to be recognized for options
starting in the first quarter of 2006 is not expected to be significant.
The following table illustrates the effect on net income and income per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123R to stock-based employee compensation:
Year ended December 31,
-------------------------
2005 2004 2003
------- ------- -------
(In thousands, except
per share amounts)
Net income, as reported $ 8,958 $ 6,470 $ 5,057
Deduct: Total stock-based employee
compensation expense determined under
fair value-based methods for all awards,
net of tax effects (129) (658) (526)
------- ------- -------
Pro forma net income $ 8,829 $ 5,812 $ 4,531
======= ======= =======
Income per share:
Basic - as reported $ 4.99 $ 3.78 $ 2.96
======= ======= =======
Basic - pro forma $ 4.92 $ 3.40 $ 2.65
======= ======= =======
Diluted - as reported $ 4.66 $ 3.50 $ 2.75
======= ======= =======
Diluted - pro forma $ 4.59 $ 3.14 $ 2.46
======= ======= =======
-31-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
New Accounting Pronouncements
In addition to SFAS No. 123R more fully discussed above, the FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory
Costs," which amends Accounting Research Bulletin 43, Chapter 4, "Inventory
Pricing," to clarify that abnormal amounts of idle facility expense,
freight, handling costs and spoilage should be recognized as current period
expenses. Also, the statement requires fixed overhead costs to be allocated
to inventory based on normal production capacity. SFAS No. 151 is effective
for inventory costs incurred in fiscal years beginning after June 15, 2005.
The Company does not expect the adoption of this pronouncement to have a
material impact on its financial statements.
(2) Patents and Licenses
Purchased patents and licenses paid for the use of other entities' patents
are amortized over the useful life of the patent or license. Patents and
licenses are as follows (dollars in thousands):
December 31, 2005 December 31, 2004
- ------------------------------------------------ ----------------------------------------------
Weighted Average Gross Weighted Average Gross
Original Life Carrying Accumulated Original Life Carrying Accumulated
(years) Amount Amortization (years) Amount Amortization
- ------------------ ------------ -------------- ------------------ ---------- --------------
14.74 $ 11,208 $ 8,877 15.15 $ 9,748 $ 7,853
Aggregate amortization expense for patents and licenses was $1,024,000 for
2005, $422,000 for 2004 and $341,000 for 2003. Estimated future
amortization expense for each of the years set forth below ending December
31, is as follows (in thousands):
2006 $ 305
2007 $ 294
2008 $ 277
2009 $ 258
2010 $ 244
(3) Discontinued Operations
During 1997, the Company sold all of its natural gas operations. The
consolidated financial statements presented herein reflect the Company's
natural gas operations as discontinued operations for all periods
presented. The consolidated financial statements reflect a gain on disposal
of these discontinued operations of $165,000 in each of 2005, 2004 and
2003. These amounts are net of income tax expense of $85,000 in each of the
three years.
In addition to the initial consideration received in 1997 upon the sale of
the natural gas operations, certain annual contingent deferred payments of
up to $250,000 per year were to be paid 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 the purchaser from certain gas transportation
contracts. The Company received deferred payments of $250,000 each, before
tax, from the purchaser in April 2005, 2004 and 2003 which are reflected in
each year as a gain from discontinued operations of $165,000, net of tax.
-32-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
(4) Line of Credit
The Company has a revolving credit facility ("Credit Facility") with a
money center bank. Under the Credit Facility, the Company and certain of
its subsidiaries have a line of credit of $25 million which is secured by
substantially all inventories, equipment and accounts receivable of the
Company. Interest under the Credit Facility is assessed at 30-day, 60-day
or 90-day LIBOR, as selected by the Company, plus one percent (5.25 percent
at December 31, 2005) and is payable monthly. At December 31, 2005 and
2004, $2.5 million and $2.9 million, respectively, was outstanding under
the line of credit. The Credit Facility expires November 12, 2009 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, the most restrictive of
which is the ratio of total debt to earnings before interest, income tax,
depreciation and amortization. At December 31, 2005, the Company was in
compliance with all financial covenants.
(5) Income Taxes
The items comprising income tax expense for continuing operations are as
follows (in thousands):
Year ended December 31,
----------------------------------
2005 2004 2003
- --------------------------------------------------------------------------------
Current -- Federal $3,189 $1,807 $ 914
-- State 257 91 32
- --------------------------------------------------------------------------------
3,446 1,898 946
- --------------------------------------------------------------------------------
Deferred -- Federal 408 380 912
-- State 37 11 21
- --------------------------------------------------------------------------------
445 391 933
- --------------------------------------------------------------------------------
Total income tax expense $3,891 $2,289 $1,879
================================================================================
-33-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
Temporary differences and carryforwards which have given rise to deferred
income tax assets and liabilities as of December 31, 2005 and 2004 are as
follows (in thousands):
2005 2004
------------------
Deferred tax assets:
Benefit plans $ 471 $ 517
Inventories 448 413
Patents and goodwill -- 187
Other 63 443
------------------
Total deferred tax assets $ 982 $ 1,560
==================
Deferred tax liabilities:
Property, plant and equipment $ 3,930 $ 4,222
Pensions 488 562
Patents and goodwill 288 --
------------------
Total deferred tax liabilities $ 4,706 $ 4,784
==================
Net deferred tax liability $ 3,724 $ 3,224
==================
Balance Sheet classification:
Non-current deferred income tax liability $ 4,344 $ 4,263
Current deferred income tax asset 620 1,039
------------------
Net deferred tax liability $ 3,724 $ 3,224
==================
Total income tax expense for continuing operations differs from the amount
that would be provided by applying the statutory federal income tax rate
to pretax earnings as illustrated below (in thousands):
Year ended December 31,
---------------------------
2005 2004 2003
- -------------------------------------------------------------------------------
Income tax expense at the statutory
federal income tax rate $ 4,313 $ 2,922 $ 2,298
Increase (decrease) resulting from:
State income taxes 210 67 34
R&D credit (100) (75) (100)
Foreign sales benefit (434) (441) (250)
Other, net (98) (184) (103)
- -------------------------------------------------------------------------------
Total income tax expense $ 3,891 $ 2,289 $ 1,879
===============================================================================
(6) Stockholders' Equity
The Board of Directors of the Company has at various times authorized
repurchases of Company stock in open-market or negotiated transactions at
such times and at such prices as management may from time to time decide.
There were no repurchases made in 2005, but the Company has effected a
number of open-market or negotiated transactions to purchase its stock
during the previous years. These repurchases totaled 1,900 and 20,200
shares during the years 2004 and 2003, respectively, at per share prices
ranging from $23.43 to $44.16. As of December 31, 2005, authorization for
the repurchase of up to 92,100 additional shares remained. The Company
-34-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
purchased 173,614 shares of its common stock at $23.00 per share in April
2003 pursuant to a tender offer. All shares purchased in the tender offer
and in the open-market or negotiated transactions became treasury shares
upon repurchase by the Company.
In September 2003, the Company announced that it had adopted a policy for
the payment of regular quarterly cash dividends on the Company's common
stock. The Company began paying a quarterly cash dividend of $.12 per share
starting in September of 2003. The quarterly dividend was increased to $.14
per share in September of 2004 and to $.17 per share in September of 2005.
(7) Income Per Share
The following is the computation for basic and diluted income per share
from continuing operations:
Year ended December 31,
------------------------
2005 2004 2003
- --------------------------------------------------------------------------------
(In thousands, except
per share amounts)
Income from continuing operations $8,793 $6,305 $4,892
- --------------------------------------------------------------------------------
Weighted average basic shares outstanding 1,794 1,711 1,711
Add: Effect of dilutive securities (options) 130 139 128
- --------------------------------------------------------------------------------
Weighted average diluted shares outstanding 1,924 1,850 1,839
- --------------------------------------------------------------------------------
Income per share from continuing operations:
Basic $ 4.90 $ 3.68 $ 2.86
Diluted $ 4.57 $ 3.41 $ 2.66
- --------------------------------------------------------------------------------
For the years ended December 31, 2004 and 2003, options to purchase
approximately 26,000 and 25,250 shares of common stock, respectively, were
not included in the computation of diluted income per share because their
effect would have been antidilutive.
(8) Stock Option Plans
The Company's 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) received automatic annual
grants of nonqualified stock options to purchase 2,000 shares of common
stock. The 1997 Stock Incentive Plan was amended in 2005 to provide that
no additional stock options may be granted to outside directors
thereunder. Under the 1997 Stock Incentive Plan, 624,425 shares, in the
aggregate, of common stock were reserved for grants. The purchase price of
shares issued on the exercise 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 shares issued on the exercise of nonqualified options and
restricted and performance shares is fixed by the Compensation Committee
of the Board of Directors. The options granted become exercisable as
determined by the Compensation Committee and expire no later than 10 years
after the date of grant.
During 1998, the Company's stockholders approved the adoption of the
Company's 1998 Outside Directors Stock Option Plan which, as amended,
provided for the automatic grant on February 1, 1998 and February 1, 1999
of nonqualified stock options to the Company's outside directors. Although
no additional options may be granted under the 1998 Outside Directors
Stock Option Plan, all outstanding options under this plan continue to be
governed by the terms and conditions of the plan and the existing option
agreements for those grants.
-35-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
Option transactions for the three years in the period ended December 31,
2005 are as follows:
Weighted Average
Shares Exercise Price
---------------------------------------------------------------------------
Options outstanding at January 1, 2003 467,350 $ 15.82
Granted in 2003 12,000 $ 29.30
Expired in 2003 (4,550) $ 20.18
Exercised in 2003 (187,200) $ 14.19
---------------------------------------------------------------------------
Options outstanding at December 31, 2003 287,600 $ 17.38
Granted in 2004 62,000 $ 44.39
Exercised in 2004 (21,100) $ 19.63
---------------------------------------------------------------------------
Options outstanding at December 31, 2004 328,500 $ 22.33
Granted in 2005 12,500 $ 46.05
Expired in 2005 (1,000) $ 31.39
Exercised in 2005 (114,900) $ 19.88
---------------------------------------------------------------------------
Options outstanding at December 31, 2005 225,100 $ 24.86
---------------------------------------------------------------------------
Exercisable options at December 31, 2003 217,000 $ 15.41
Exercisable options at December 31, 2004 287,250 $ 22.32
Exercisable options at December 31, 2005 206,350 $ 24.26
---------------------------------------------------------------------------
As of December 31, 2005, there remained 1,034 shares for which options may
be granted in the future under the 1997 Stock Incentive Plan. The following
table summarizes information about stock options outstanding at December
31, 2005:
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life price exercisable price
--------------------------------------------------------------------------
$6.875-$14.063 106,800 3.2 years $ 11.17 106,800 $ 11.17
$14.875-$22.50 10,000 4.7 years $ 20.98 10,000 $ 20.98
$26.13-$31.39 43,900 3.5 years $ 30.05 25,150 $ 29.05
$43.75-$46.28 64,400 3.9 years $ 44.62 64,400 $ 44.62
----------- -----------
225,100 206,350
=========== ===========
Pro forma information regarding net income and income per share as required
by SFAS No. 123 has been determined as if the Company had accounted for its
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
2005, 2004 and 2003:
2005 2004 2003
----------------------------------------------------------------------
Risk-free interest ra 3.4% 2.1% 3.2%
Dividend yield 1.3% 1.1% 0.0%
Volatility factor 31.3% 47.7% 39.1%
Expected life 3 years 2.8 years 7 years
======================================================================
-36-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
The resulting estimated weighted average fair values of the options granted
in 2005, 2004 and 2003 were $10.51, $13.45 and $13.51, respectively.
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. The option grants in 2003 occurred prior to the declaration of
dividends by the Company.
(9) Revenues From Major Customers
The Company had one major customer which represented approximately $7.8
million (10.8 percent), $9.6 million (14.5 percent) and $9.1 million (14.4
percent) of the Company's operating revenues during the years 2005, 2004
and 2003, respectively.
(10) Industry Segment and Geographic Information
The Company operates in one reportable industry segment: designing,
developing, manufacturing, selling and distributing products for the
medical and healthcare industry and has no foreign operating subsidiaries.
The Company has other product lines which include pressure relief valves
and inflation systems, which are sold primarily to the aviation and marine
industries. Due to the similarities in product technologies and
manufacturing processes, these products are managed as part of the medical
products segment. The Company recorded incidental revenues from its oxygen
pipeline, which totaled approximately $955,000 in each of the years of
2005, 2004 and 2003. Pipeline net assets totaled $2.4 and $2.5 million at
December 31, 2005 and 2004, respectively. Company revenues from sales to
parties outside the United States totaled approximately 27 percent, 30
percent and 26 percent of the Company's total revenues in 2005, 2004 and
2003, respectively. No Company assets are located outside the United
States. A summary of revenues by geographic territory, based on shipping
destination, for the three years 2005, 2004 and 2003 is as follows (in
thousands):
Year ended December 31,
-------------------------
2005 2004 2003
---------------------------------------------------------------------------
United States $52,283 $46,375 $46,721
Canada 8,232 9,113 8,620
United Kingdom 1,984 1,883 1,547
Japan 1,824 1,739 902
Other 7,766 6,971 5,013
---------------------------------------------------------------------------
Total $72,089 $66,081 $62,803
===========================================================================
(11) Employee Retirement and Benefit Plans
A noncontributory cash balance defined benefit retirement plan is
maintained for all regular employees of the Company except those of Quest
Medical. This plan was amended effective May 1, 2005 to discontinue the
addition of newly-hired employees to the plan after that date. The
Company's funding policy is to make the annual contributions required by
applicable regulations and recommended by its actuary. The Company uses a
December 31 measurement date for the plan.
-37-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
The changes in the plan's projected benefit obligation ("PBO") as of
December 31, 2005 and 2004 are as follows (in thousands):
2005 2004
--------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, January 1 $ 5,539 $ 4,878
Service cost 267 241
Interest cost 322 311
Actuarial (gain)/loss (61) 423
Benefits paid (412) (314)
--------------------------------------------------------------------------
Benefit obligation, December 31 $ 5,655 $ 5,539
==========================================================================
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, 2005 and 2004 are as
follows (in thousands):
2005 2004
------- -------
Change in Plan Assets:
Fair value of plan assets, January 1 $ 5,661 $ 5,413
Actual return on plan assets 227 562
Employer contributions 200 --
Benefits paid (412) (314)
--------------------------------------------------------------------------
Fair value of plan assets, December 31 $ 5,676 $ 5,661
==========================================================================
Funded status of plan $ 21 $ 122
Unrecognized actuarial loss 2,182 2,122
Unrecognized prior service cost (427) (465)
Unrecognized net transition obligation -- (44)
--------------------------------------------------------------------------
Net amount recognized as other assets $ 1,776 $ 1,735
==========================================================================
The accumulated benefit obligation for the pension plan was $5,571,000 and
$5,447,000 at December 31, 2005 and 2004, respectively. The components of
net periodic pension cost for 2005, 2004 and 2003 were as follows (in
thousands):
Year ended December 31,
--------------------------
2005 2004 2003
--------------------------------------------------------------------------
Components of Net Periodic
Pension Cost:
Service cost $ 267 $ 241 $ 214
Interest cost 322 311 298
Expected return on assets (456) (423) (349)
Prior service cost amortization (37) (37) (37)
Actuarial loss 107 103 128
Transition amount amortization (44) (44) (44)
--------------------------------------------------------------------------
Net periodic pension cost $ 159 $ 151 $ 210
==========================================================================
-38-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
Actuarial assumptions used to determine benefit obligations at December 31
were as follows:
2005 2004
--------- ---------
Discount rate 6.00% 6.00%
Rate of compensation increase 5.00% 5.00%
Actuarial assumptions used to determine net periodic pension cost were as
follows:
Year ended December 31,
-------------------------------
2005 2004 2003
--------- --------- ---------
Discount rate 6.00% 6.50% 7.00%
Expected long-term return on assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00%
The Company's expected long-term rate of return assumption is based upon
the plan's actual long-term investment results as well as the long-term
outlook for investment returns in the marketplace at the time the
assumption is made.
The Company's pension plan assets at December 31, 2005 and 2004 were
invested in the following asset categories:
2005 2004
-------- --------
Asset Category:
Equity securities 70% 74%
Debt securities 29% 25%
Other 1% 1%
-------------------------------------------------
Total 100% 100%
=================================================
It is the Company's investment policy to maintain 66 percent to 79 percent
of the plan's assets in equity securities and 21 percent to 31 percent of
the plan's assets in debt securities with the balance invested in a money
market account to meet liquidity requirements for distributions. The asset
allocation at December 31, 2005 represents the targeted asset allocation.
Based upon the plan's current funded position, the Company expects to make
$250,000 in contributions to its pension plan in 2006, and the Company's
estimated future benefit payments under the plan are as follows (in
thousands):
2006 $ 254
2007 $ 485
2008 $ 279
2009 $ 284
2010 $ 282
2011-2015 $ 1,716
The Company also sponsors a defined contribution plan for all employees.
Each participant may contribute certain amounts of eligible compensation.
The Company makes a matching contribution to the plan. The Company's
contribution under this plan was $223,000, $214,000 and $202,000 in 2005,
2004 and 2003, respectively.
(12) Commitments and Contingencies
The Company is subject to legal proceedings, third-party claims and other
contingencies related to patent infringement, product liability,
regulatory, employee and other matters that arise in the ordinary course of
business. As of December 31, 2005, the Company had accrued $250,000 for
-39-
Atrion Corporation
Notes to Consolidated Financial Statements - (Continued)
legal fees and expenses that it expected to incur in connection with the
litigation or arbitration of two such matters.
The Company has arrangements with its executive officers (the "Executives")
pursuant to which the termination of their employment under certain
circumstances would result in lump sum payments to the Executives.
Termination under such circumstances in 2006 could result in payments
aggregating $800,000, excluding any excise tax that may be reimbursable by
the Company.
In May 1996, 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. This lease
has been extended until September 30, 2006 at the rent payment in effect on
May 1, 2006. 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, 2005, 2004 and 2003 was $422,000, $409,000 and $396,000, respectively.
Future minimum rental commitment under this lease is $321,000 in 2006.
During 2004, the Company began planning for the construction of a new
facility for its Halkey-Roberts operation to be located approximately four
miles from its current facility. In 2004, the Company made a $3.75 million
deposit required in connection with a proposed purchase of ten acres of
land to be used for the construction of this new facility. During 2005,
this property was acquired and construction of the new facility commenced.
The Company is planning to complete the construction of this new facility
and move the Halkey-Roberts operation into the new facility around mid-year
2006.
(13) Quarterly Financial Data (Unaudited)
The following table shows selected unaudited quarterly financial data for
2005 and 2004:
Quarter Operating Operating Income Income
Ended Revenue Income Net Income Per Basic Share Per Diluted Share
------------------------------------------------------------------------------
(In thousands, except per share amounts)
03/31/05 $ 18,645 $ 3,418 $ 2,294 $ 1.33 $ 1.23
06/30/05 18,102 3,131 2,272 1.27 1.18
09/30/05 18,338 3,111 2,241 1.23 1.15
12/31/05 17,003 3,037 2,149 1.17 1.10
------------------------------------------------------------------------------
03/31/04 $ 16,789 $ 1,901 $ 1,287 $ .76 $ .70
06/30/04 16,417 2,064 1,608 .94 .87
09/30/04 16,704 2,217 1,756 1.02 .95
12/31/04 16,171 2,414 1,819 1.06 .98
------------------------------------------------------------------------------
The quarterly information presented above reflects, in the opinion of
management, all adjustments necessary for a fair presentation of the results for
the interim periods presented.
-40-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and its Chief Financial Officer, evaluated the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of December 31, 2005. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective. There were no changes in our
internal control over financial reporting for the fourth fiscal quarter ended
December 31, 2005 that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended. Our internal control system is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. All internal control
systems, no matter how well designed, have inherent limitations. A system of
internal control may become inadequate over time because of changes in
conditions or deterioration in the degree of compliance with the policies or
procedures. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and
presentation.
Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2005 using the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on this assessment, our management concluded
that, as of December 31, 2005, our internal control over financial reporting was
effective.
Report of Independent Registered Public Accounting Firm
Board of Directors and
Stockholders of Atrion Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Atrion
Corporation and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Atrion Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight
-41-
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Atrion Corporation and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by COSO. Also in
our opinion, Atrion Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control--Integrated Framework
issued by COSO.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Atrion Corporation and subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2005,
and our report dated March 13, 2006, expressed an unqualified opinion on those
financial statements.
/s/ Grant Thornton LLP
Dallas, Texas
March 13, 2006
-42-
ITEM 9B. OTHER INFORMATION
There was no information required to be disclosed in a report on Form 8-K during
the three months ended December 31, 2005 that was not reported.
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
2006 annual meeting of stockholders.
Executive Officers
The information for this item relating to executive officers of the Company is
set forth on pages 12 and 13 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 2006 annual
meeting of stockholders.
The Company has adopted a Code of Ethics and Business Conduct that applies to
all of the Company's directors, officers and employees. The Code of Ethics and
Business Conduct will be provided to any person, without charge, upon request
addressed to: Corporate Secretary, Atrion Corporation, One Allentown Parkway,
Allen, Texas 75002.
ITEM 11. EXECUTIVE COMPENSATION
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2006 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2006 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 2006 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.
-43-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information for this item is incorporated by reference form the Company's
definitive proxy statement for its 2006 annual meeting of stockholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report on Form 10-K:
1. Financial Statements of the Company:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statement of Changes in Stockholders Equity
2. Financial Statement Schedules:
Schedule II - Consolidated Valuation and Qualifying Accounts
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Stockholders of Atrion Corporation
We have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated financial
statements of Atrion Corporation and subsidiaries referred to in our report
dated March 13, 2006, which is included in this Annual Report on Form 10-K.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for the
purpose of additional analysis and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ Grant Thornton LLP
Dallas, Texas
March 13, 2006
-44-
Schedule II - Consolidated Valuation and Qualifying Accounts
Allowance for Doubtful Receivables
December 31,
-----------------------------------
2005 2004 2003
---- ---- ----
(in thousands)
Beginning balance $ 118 $ 104 $ 151
Additions charged to expense (34) 41 75
Deductions from reserve (19) (27) (122)
- --------------------------------------------------------------------------------
Ending balance $ 65 $ 118 $ 104
================================================================================
All other 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. Reference as made to Item 15(b) of this report on Form 10-K.
(b) Exhibits
Exhibit
Numbers Description
- ------- -----------
2a Asset Purchase Agreement, dated March 19, 1997, between Atrion
Corporation and Midcoast Energy Resources, Inc. (1)
3a Certificate of Incorporation of Atrion Corporation, dated December
30, 1996(2)
3b Amended and Restated Bylaws of Atrion Corporation (3)
10a* Atrion Corporation 1997 Stock Incentive Plan (4)
10b* Form of Award Agreement for Incentive Stock Option (5)
10c* Form of Award Agreement for Nonqualified Stock Option for Key
Employee (6)
10d* Form of Award Agreement for Nonqualified Stock Option for Director
(7)
10e* Atrion Corporation 1998 Outside Directors Stock Option Plan (8)
10f* Form of Stock Option Agreement (9)
10g* Severance Plan for Chief Financial Officer (1(0))
10h* Atrion Corporation Incentive Compensation Plan for Chief Financial
Officer (1(1))
10i* Chief Executive Officer Employment Agreement (1(2))
10j* Amendment to Chief Executive Officer Employment Agreement (1(3))
21 Subsidiaries of Atrion Corporation as of December 31, 2005 (1(4))
23 Consent of Grant Thornton LLP (1(4))
31.1 Sarbanes-Oxley Act Section 302 Certification of Chief Executive
Officer (1(4))
31.2 Sarbanes-Oxley Act Section 302 Certification of Chief Financial
Officer (1(4))
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes - Oxley Act Of 2002 (1(4))
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes - Oxley Act Of 2002 (1(4))
-45-
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 Appendix B to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(3) Incorporated by reference to Appendix C to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(4) Incorporated by reference to Exhibit 4.4(b) to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(5) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(6) Incorporated by reference to Exhibit 4.6 to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(7) Incorporated by reference to Exhibit 4.7 to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(8) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(9) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(10) Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion
Corporation dated May 12, 2000.
(11) Incorporated by reference to Exhibit 10k to Form 10-K of Atrion
Corporation dated March 30, 2001.
(12) Incorporated by reference to Exhibit 10m to Form 10-K of Atrion
Corporation dated March 26, 2002.
(13) Incorporated by reference to Exhibit 10q to Form 10-K of Atrion
Corporation dated March 13, 2003.
(14) Filed herewith.
* Management Contract or Compensatory Plan or Arrangement
-46-
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 13, 2006
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 13, 2006
---------------------------- Officer (Principal Executive Officer)
Emile A. Battat
/s/ Jeffery Strickland Vice President, Chief Financial Officer and March 13, 2006
---------------------------- Secretary-Treasurer (Principal Financial
Jeffery Strickland and Accounting Officer)
Director
----------------------------
Richard O. Jacobson
/s/ Hugh J. Morgan, Jr. Director March 13, 2006
----------------------------
Hugh J. Morgan, Jr.
/s/ Roger F. Stebbing Director March 13, 2006
----------------------------
Roger F. Stebbing
/s/ John P. Stupp, Jr. Director March 13, 2006
----------------------------
John P. Stupp, Jr.
Director
----------------------------
Ronald N. Spaulding
-47-