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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
Commission File Number 0-10763
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Atrion Corporation
(Exact name of registrant as specified in its charter)
Delaware 63-0821819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Allentown Parkway,
Allen, Texas 75002
(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (972) 390-9800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Title of Class
Common Stock, $.10 Par Value
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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]
The aggregate market value of the voting Common Stock held by nonaffiliates of
the registrant at March 1, 2002 was $45,135,272 based on the last reported sales
price of the common stock on the Nasdaq National Market on such date.
Number of shares of Common Stock outstanding at March 1, 2002: 1,695,271.
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 2002
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.
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ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2001
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TABLE OF CONTENTS
ITEM PAGE
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PART I..................................................................... 1
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 9
ITEM 3. LEGAL PROCEEDINGS............................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 9
EXECUTIVE OFFICERS OF THE COMPANY....................................... 10
PART II.................................................................... 11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................... 11
ITEM 6. SELECTED FINANCIAL DATA....................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 33
PART III................................................................... 34
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 34
ITEM 11. EXECUTIVE COMPENSATION........................................ 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 34
PART IV.................................................................... 35
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K...................................................... 35
SIGNATURES................................................................. 37
EXHIBIT INDEX.............................................................. 39
ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2001
PART I
ITEM 1. BUSINESS
General
Atrion Corporation ("Atrion" or the "Company") designs, develops, manufactures,
markets, sells and distributes products and components, primarily for the
medical and healthcare industry. The Company's current operations are conducted
through three subsidiaries, Atrion Medical Products, Inc. ("Atrion Medical
Products"), Halkey-Roberts Corporation ("Halkey-Roberts") and Quest Medical,
Inc. ("Quest Medical"). The Company also owns AlaTenn Pipeline Company LLC
("AlaTenn Pipeline") which owns and operates a gaseous oxygen pipeline and
Atrion Leasing Company LLC ("Atrion Leasing") which is engaged in leasing
activities. These two non-medical activities are small and incidental to the
overall operations of the Company. Halkey-Roberts also has a line of non-medical
components that are sold for use in aviation and marine safety products.
Atrion Medical Products' business, which is the design, development,
manufacturing, marketing, sale and distribution of medical products, has been in
operation for more than 30 years. Its products are used in ophthalmic,
diagnostic and cardiovascular procedures and are sold primarily to major health
care companies which market and distribute Atrion Medical Products' products, in
conjunction with their name-brand products, to hospitals, clinics, surgical
centers, physicians and other health care providers. While soft contact lens
storage and disinfection systems are its more mature ophthalmic products, Atrion
Medical Products continues to be a leading manufacturer and supplier of such
products. Soft lens storage and disinfection systems accounted for 18.7%, 16.4%
and 15.0% of the Company's total revenues for the years ended December 31, 2001,
2000 and 1999, respectively. A growing area of sales for Atrion Medical Products
is its line of ophthalmic surgical procedure kits that are assembled and
distributed for several of its major customers. Products sold to other
healthcare companies by Atrion Medical Products include a line of inflation
devices used primarily in percutaneous balloon angioplasty procedures and
diagnostic devices used to test blood platelet function and to obtain blood
samples for the measurement of blood sugar. Atrion Medical Products also markets
a line of name-brand products, called LacriCATH(R), which is used in a less
invasive surgical procedure for the treatment of epiphora, or excessive tearing
of the eye. These products are sold through commissioned sales agents. Atrion
Medical Products' design and engineering team assists its OEM customers in the
development of products.
Halkey-Roberts, which has been in operation for 58 years, designs, develops,
manufactures and sells proprietary medical device components used to control the
flow of fluids and gases. Its valves and clamps are used in a wide variety of
hospital and outpatient care products, such as Foley catheters, pressure cuffs,
dialysis and blood collection sets and drug delivery systems. Within the past
several years, Halkey-Roberts has introduced a line of needleless valves
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designed to eliminate the use of needles by health care providers in many
routine procedures. These products use a patented design and proprietary
assembly technology. Halkey-Robertshas also applied its fluid control technology
to inflation valves used in marine and aviation safety products. These
components are used primarily in inflatable life vests and rafts. Working
closely with its customers, Halkey-Roberts has developed an innovative line of
products and is a leader in each of its major markets.
Quest Medical manufactures and sells several medical product lines, including
cardiovascular products (such as pressure control valves, filters and surgical
retracting tapes, aortic punches and catheters), specialized intravenous fluid
delivery tubing sets and accessories and pressure monitoring kits used primarily
in labor and delivery. Quest Medical also manufactures and sells the MPS(R)
myocardial protection system ("MPS"), an innovative and sophisticated system for
the delivery of solutions to the heart during open-heart surgery. The MPS
integrates key functions relating to the delivery of solutions to the heart,
such as varying the rate and ratio of oxygenated blood, crystalloid, potassium
and other additives, and controlling temperature, pressure and other variables
to allow simpler, more flexible management of this process indicating improved
patient outcomes. The MPS employs advanced pump, temperature control and
microprocessor technologies and includes a line of disposable products.
The Company has Food and Drug Administration ("FDA") approval for the use of the
MPS in cardiac surgeries in which the beating of the heart is not interrupted
("beating-heart surgery") and no heart-lung machine is needed. This
less-invasive method of surgery is beneficial to the patient but more
challenging to the surgeon who must rely on the heart to provide coronary and
systemic circulation throughout surgery. The Company believes that the use of
the MPS offers a distinct safety advantage during beating-heart surgery by
enhancing the coronary blood flow and infusing additives, as needed, directly to
the heart during the surgery. To date, response to the use of MPS in
beating-heart surgery has been positive. The Company expects an increasing use
of beating-heart surgery in the place of conventional open-heart surgery over
the next several years. While continuing to promote the use of the MPS in
conventional open-heart surgery, the Company is actively promoting the use of
the MPS for beating-heart surgery.
AlaTenn Pipeline owns and operates a 22-mile high-pressure steel pipeline in
north Alabama that transports gaseous oxygen from an industrial gas producer to
one of its customers.
Marketing and Major Customers
Atrion Medical Products and Halkey-Roberts utilize sales managers to market
their products to other manufacturers for use as components in their consumer
products. Atrion Medical Products also uses commissioned sales agents for the
marketing of LacriCATH products. Quest Medical is currently marketing the MPS
and related disposables through a direct sales force as well as through
specialty distributors. Most of Quest Medical's other products are marketed
directly by telemarketing, independent sales representatives, marketing
arrangements with certain distributors and, to a lesser extent, through direct
mail. The Company periodically advertises its products in trade journals. In
addition, the Company routinely attends and participates in trade shows
throughout the United States and internationally.
During 2001, various products sold to several divisions of Novartis accounted
for approximately 19% of the Company's revenues, and Novartis was the only
customer accounting for more than 10 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.
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Manufacturing
The Company's medical products and other components are produced at plants in
Arab, Alabama, St. Petersburg, Florida and Allen, Texas. The plants in Arab and
St. Petersburg both utilize plastic injection molding and specialized assembly
as their primary manufacturing processes. The Company's other manufacturing
processes consist of the assembly of standard and custom component parts and the
testing of completed products.
The Company devotes significant attention to quality control. Its quality
control measures begin at the manufacturing level where many of its components
are assembled in a "clean room" environment designed and maintained to reduce
product exposure to particulate matter. Products are tested throughout the
manufacturing process for adherence to specifications. Most finished products
are then shipped to outside processors for sterilization through radiation or
treatment with ethylene oxide gas. After sterilization, the products are
quarantined and tested before they are shipped to customers.
Skills of assembly workers required for the manufacture of medical products are
similar to those required in typical assembly operations. The Company currently
employs workers with the skills necessary for its assembly operations and
believes that additional workers with these skills are readily available in the
areas where the Company's plants are located.
The Company's medical device operations are ISO9001 and EN46001 certified and
are subject to FDA jurisdiction. The Company's products are used throughout the
world and, during 2001, approximately 33 percent of the Company's total revenues
were from sales to parties outside the United States.
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, a needleless injection site product
designed to eliminate the use of needles by health care providers, a product
designed for safe needle disposal and an automatic inflation device for use on
life vests in the marine recreation industry. The Company expects to incur
additional research and development expenses in 2002 for various projects,
including further development of the MPS.
The Company's consolidated research and development expenditures for the years
ended December 31, 2001, 2000 and 1999 were $1,911,000, $2,054,000, and
$2,601,000 respectively.
- 3 -
Availability of Supplies and Raw Materials
The Company subcontracts with various suppliers to provide it with the quantity
of component parts necessary to assemble its products. Almost all of these
components are available from a number of different suppliers, although certain
components are purchased from single sources that manufacture these components
from the Company's toolings. The Company believes that there are 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 the components used in specialized tubing sets
and cardiovascular products. Consequently, in the event of supply disruption,
the Company would be able to fabricate its own components or subcontract with
another supplier, albeit after a delay in the production process. Atrion Medical
Products and Halkey-Roberts purchase various types of high-grade resins and
other components for their manufacturing processes from various suppliers. The
resins are readily available materials and, while the Company is selective in
its choice of suppliers, it believes that there are no significant restrictions
or limitations on supply. AlaTenn Pipeline is under no obligation to provide a
gas supply to its customer.
Patents and License Agreements
The commercial success of the Company is dependent, in part, on its ability to
continue to develop patentable products, to preserve its trade secrets and to
operate without infringing or violating the proprietary rights of third parties.
The Company currently has 184 active patents and 23 patent applications pending
on products that are either being sold or are in development. The Company
receives royalty payments on three patents that are licensed to outside parties.
The Company has obtained licenses to the rights from outside parties to two
patents relating to the LacriCATH product line. All of these patents and pending
patents relate to current products being sold by the Company or to products in
evaluation stages.
Others may challenge the validity of any patents issued to the Company, and the
Company could encounter legal and financial difficulties in enforcing its patent
rights against infringers. In addition, there can be no assurance that other
technologies cannot or will not be developed or that patents will not be
obtained by others which would render the Company's patents less valuable or
obsolete. With the possible exception of the patent relating to one of the
Company's more mature products, the loss of any one patent would not have a
material adverse effect on the Company's current revenue base. Although the
Company does not believe that patents are the sole determinant in the commercial
success of its products, the loss of a significant percentage of its patents or
its patents relating to a specific product line, particularly the MPS product
line, could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has developed technical knowledge which, although non-patentable, is
considered by the Company to be significant in enabling it to compete. However,
the proprietary nature of such knowledge may be difficult to protect. The
Company has entered into agreements with key employees prohibiting them from
disclosing any confidential information or trade secrets of the Company and
prohibiting them from engaging in any competitive business while employed by the
Company and for various periods thereafter. In addition, these agreements also
provide that any inventions or discoveries relating to the business of the
Company by these individuals will be assigned to the Company and become the
Company's sole property.
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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. While the
Company is not currently involved in any significant litigation, an adverse
determination in any such proceeding could subject the Company to significant
liabilities to third parties, or require the Company to seek licenses from third
parties or pay royalties that may be substantial. Furthermore, there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing or selling certain of its products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Competition
Depending on the product and the nature of the project, the Company's medical
products subsidiaries compete on the basis of their ability to provide
engineering and design expertise, quality, service, product and price. As such,
successful competitors must have technical strength, responsiveness and scale.
The Company believes that its expertise and reputation for quality medical
products have allowed it to compete favorably with respect to each such factor
and to maintain long-term relationships with its customers. However, in many of
the Company's markets, the Company competes with numerous other companies that
have substantially greater financial resources and engage in substantially more
research and development activities than the Company. Furthermore, innovations
in surgical techniques or medical practices could have the effect of reducing or
eliminating market demand for one or more of the Company's products.
Atrion Medical Products manufactures products for certain major health care
companies and is dependent on several customers for the majority of its sales.
Because its products are somewhat limited in number and normally are only a
component of the ultimate product sold by its customers, Atrion Medical Products
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. This risk is somewhat minimized by Atrion Medical Products' ability
to obtain long-term, exclusive manufacturing rights while its customers have
long-term marketing rights. Atrion Medical Products depends on the sales and
marketing efforts of those customers to sell their products. Therefore, Atrion
Medical Products seeks highly successful companies with which to do business.
Depending on the product and the nature of the project, Atrion Medical Products
competes on the basis of its ability to provide engineering and design expertise
as well as on the basis of product and price. As Atrion Medical Products
continues to expand its product lines, adding new products and customers,
dependency on a limited number of customers is being reduced. Atrion Medical
Products frequently designs products for a customer or potential customer prior
to entering into long-term development and manufacturing agreements with that
customer. Atrion Medical Products 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 Atrion Medical Products to
its customers.
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The United States is the principal market for the LacriCATH product. There is no
direct competition in the United States where both the product and surgical
procedure are patent-protected. LacriCATH products are marketed directly to
ophthalmologists through commissioned sales agents. The LacriCATH line is
marketed to a large base of customers and is not dependent on a single customer.
Halkey-Roberts competes in the medical products market and in the market for
inflation devices used in marine and aviation equipment. In the medical products
market, Halkey-Roberts is a leading provider of check valves and medical clamps
and has only one major competitor for each of those products. In the inflation
device market, Halkey-Roberts is the dominant provider in its market areas. With
the exception of one large company, Halkey-Roberts' competitors in both of these
markets generate less than $50 million annually in revenues.
Numerous companies compete with Quest Medical in the sale of cardiovascular
products, specialized tubing sets and pressure monitoring kits. These markets
are dominated by established manufacturers that have broader product lines,
greater distribution capabilities, substantially greater capital resources and
larger marketing, research and development staffs and facilities than Quest
Medical. Many of these competitors offer broader product lines within the
specific product market and in the general field of medical devices and
supplies. Broad product lines give many of Quest Medical's competitors the
ability to negotiate exclusive, long-term medical device supply contracts and,
consequently, the ability to offer comprehensive pricing of their competing
products. By offering a broader product line in the general field of medical
devices and supplies, competitors may also have a significant advantage in
marketing competing products to group purchasing organizations, HMOs and other
managed care organizations that are increasingly seeking to reduce costs through
centralization of purchasing functions. In addition, Quest Medical's competitors
may use price reductions to preserve market share in their product markets. The
Company is not aware of any [integrated] cardioplegia delivery system currently
being marketed that competes with the MPS.
Government Regulation
Products
The manufacture and sale of medical products are subject to regulation by
numerous governmental authorities, principally the FDA and corresponding foreign
agencies. The research and development, manufacturing, promotion, marketing and
distribution of medical products in the United States are governed by the
Federal Food, Drug and Cosmetic Act and the regulations promulgated thereunder
("FDC Act and Regulations"). The Company's medical product subsidiaries and
certain of their customers are subject to inspection by the FDA for compliance
with such regulations and procedures. Atrion Medical Products' and Quest
Medical's facilities are registered with the FDA.
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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 [, and it also believes that its
medical device OEM customers are in compliance]; however, if the Company or its
OEM medical device customers should fail the FDA inspections, it could have a
material adverse impact on the Company's business, financial condition and
results of operations.
Under the FDA's requirements, if a manufacturer can establish that a
newly-developed device is "substantially equivalent" to a legally marketed
device, the manufacturer may seek marketing clearance from the FDA to market the
device by filing a 510(k) premarket notification with the FDA. The 510(k)
premarket notification must be supported by data establishing the claim of
substantial equivalence to the satisfaction of the FDA. The process of obtaining
a 510(k) clearance typically can take several months to a year or longer. If
substantial equivalence cannot be established or if the FDA determines that the
device requires a more rigorous review, the FDA will require that the
manufacturer submit a premarket approval ("PMA") that must be reviewed and
approved by the FDA prior to 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 or more years from the date of
FDA submission. Both a 510(k) and a PMA, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. FDA
enforcement policy strictly prohibits the promotion of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for failure
to comply with regulatory requirements or the occurrence of unforeseen problems
following initial marketing. The Company believes that it [and all of its
current medical device OEM customers] is in compliance with these rules;
however, there is no assurance that the Company or its OEM customers are now, or
will continue to be, in compliance with such rules. If the Company or its
customers do not meet these standards, the Company's financial performance could
be adversely affected. Furthermore, delays by the FDA in approving a product or
a customer's product could delay the Company's expectations for future sales of
certain products.
Certain products manufactured by Halkey-Roberts are also subject to regulation
by the Coast Guard and the Federal Aviation Administration and similar
organizations in foreign countries which regulate the safety of marine and
aviation equipment.
Third-Party Reimbursement and Cost Containment
In the United States, health care providers, including hospitals and physicians,
that purchase medical products for treatment of their patients generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or a part of the costs and fees
associated with the procedures performed using these products. Accordingly, the
Company is dependent, in part, upon the ability of health care providers to
obtain satisfactory reimbursement from third-party payors for medical procedures
in which the Company's products are used. Third-party payors may deny
reimbursement if they determine that a prescribed product has not received
appropriate regulatory clearances or approvals, is
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not used in accordance with cost-effective treatment methods as determined by
the payor, or is experimental, unnecessary or inappropriate.
Reimbursement systems in international markets vary significantly by country and
by region within some countries, and reimbursement approvals must be obtained on
a country-by-country basis. Many international markets have government-managed
health care systems that control reimbursement for new products and procedures.
In most markets, there are private insurance systems as well as
government-managed systems. Market acceptance of the Company's products in
international markets depends, in part, on the availability and level of
reimbursement.
Medicare and Medicaid reimbursement for hospitals is based on a fixed amount for
admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals may seek to use less costly methods in treating
Medicare and Medicaid patients. Frequently, reimbursement is reduced to reflect
the availability of a new procedure or technique, and as a result hospitals are
generally willing to implement new cost saving technologies before these
downward adjustments take effect. Likewise, because the rate of reimbursement
for certain physicians who perform certain procedures has been and may in the
future be reduced, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Third party payors 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.
Failure by hospitals and other users of the Company's products to obtain
reimbursement from third-party payors, or adverse changes in government and
private third-party payors' policies toward reimbursement for procedures
employing the Company's products, could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
Company is unable to predict what additional legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation
would have on the Company.
Political, economic and regulatory influences are continuing to subject the
health care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls and
other fundamental changes to the health care delivery system. Legislative debate
is expected to continue in the future, and market forces are expected to
continue demanding reduced costs. The Company cannot predict what impact the
adoption of any federal or state health care reform measures, future private
sector reform or market forces may have on its business.
Advisory Board
Several physicians and perfusionists with substantial expertise in the field of
myocardial protection serve as Clinical Advisors for the Company. These Clinical
Advisors have assisted in the identification of the market need for MPS and its
subsequent design and development.
- 8 -
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 MPS
and related products.
Certain of the Clinical Advisors are employed by academic institutions and may
have commitments to, or consulting or advisory agreements with, other entities
that may limit their availability to the Company. The Clinical Advisors may also
serve as consultants to other medical device companies. The Clinical Advisors
are not expected to devote more than a small portion of their time to the
Company.
People
At February 28, 2002, the Company had 443 full-time employees. Employee
relations are good and there has been no work stoppage due to labor
disagreements. None of the Company's employees is represented by any labor
union.
ITEM 2. PROPERTIES
The headquarters of the Company are located in Allen, Texas in a Company-owned
facility. Quest Medical's office, manufacturing and warehouse activities are
located at the Company's headquarters facility in Allen, Texas. This facility
consists of a 108,000-square-foot office, manufacturing and warehouse building
situated on approximately 14.8 acres and 4.3 acres adjacent to such property
which are unimproved. Atrion Medical Products owns three office buildings and a
manufacturing facility that are located on a 67-acre site in Arab, Alabama. The
three office buildings house administrative, engineering and design operations,
and the manufacturing facility contains approximately 112,000 square feet of
manufacturing space. Halkey-Roberts has a ten-year operating lease that
commenced in May 1996 on a manufacturing and administrative facility located on
a 7-acre site in St. Petersburg, Florida. The facility consists of approximately
72,000 square feet.
AlaTenn Pipeline owns and operates a 22-mile high-pressure steel pipeline that
transports gaseous oxygen between Decatur and Courtland, Alabama.
ITEM 3. LEGAL PROCEEDINGS
There were no material pending legal proceedings to which the Company or any of
its subsidiaries was a party or of which any of their property was the subject
as of February 28, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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Executive Officers of the Company
Name Age Title
---- --- -----
Emile A. Battat 64 Chairman, President and Chief Executive
Officer of the Company and Chairman or
President of all subsidiaries
Jeffery Strickland 43 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 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 2002.
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. From March 1994 to October
1998, Mr. Battat served as President and Chief Executive Officer of Piedmont
Enterprises, Inc., a privately held consulting firm.
Mr. Strickland has served as Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company since February 1, 1997. He has served as
Vice President of Atrion Medical Products and of Halkey-Roberts since January
1997 and as Vice President of Quest Medical since December 1997. Mr. Strickland
served as Vice President-Corporate Development of the Company from May 1992 to
February 1997 and as Assistant Secretary and Assistant Treasurer of the Company
from May 1990 until February 1997. Mr. Strickland also served as Vice
President-Planning of Alabama-Tennessee Natural Gas Company from May 1992 until
February 1997 and as Vice President and Chief Financial Officer and
Secretary-Treasurer of Alabama-Tennessee Natural Gas Company from February 1997
until May 1997.
- 10 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market (Symbol
ATRI). As of March 7, 2002, the Company had approximately 1,500 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 2000 and
2001 are shown below.
Year Ended
December 31, 2000: High Low
------------------ ---- ---
First Quarter $ 12.38 $ 10.00
Second Quarter $ 12.94 $ 10.75
Third Quarter $ 12.94 $ 12.06
Fourth Quarter $ 15.00 $ 10.63
Year Ended
December 31, 2001: High Low
------------------ ---- ---
First Quarter $ 15.88 $ 13.75
Second Quarter $ 25.74 $ 15.19
Third Quarter $ 25.70 $ 19.51
Fourth Quarter $ 38.05 $ 23.39
No dividends were declared or paid during 2001, and the Company presently has no
plans to pay cash dividends. See Item 7: "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
(In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Revenues $57,605 $51,447 $49,917 $43,397 $30,277
Income (loss) from continuing
operations 4,262 2,663 2,128 1,478 (2,045)(a)
Net income 9,754(b) 2,792 2,293 2,140 17,170(a)
Total assets 64,287 63,690 64,640 60,415 60,942
Long-term debt 17,125 7,400 10,417 -- 203
Income (loss) from continuing
operations, per basic share 2.10 1.30 0.82 0.46 (0.63)
Net income per basic share 4.80(b) 1.36 0.88 0.67 5.33
Dividends per share -- -- -- -- 0.60
Average basic shares outstanding 2,033 2,047 2,593 3,203 3,224
- ---------------------------------------------------------------------------------------------------------------------
- 11 -
a The 1997 amounts include an impairment loss of $3.0 million after tax and a
charge for a product replacement program of $.7 million after tax.
b Includes a $5.5 million after-tax gain ($ 2.70 per share) from discontinued
operations (See Note 2)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The Company's income from continuing operations was $4.3 million or $2.10 per
basic and $1.88 per diluted share in 2001 compared to income from continuing
operations of $2.7 million or $1.30 per basic and $1.25 per diluted share in
2000 and $2.1 million or $.82 per basic and $.81 per diluted share in 1999. Net
income, including discontinued operations, totaled $9.8 million or $4.80 per
basic and $4.30 per diluted share in 2001 compared with $2.8 million or $1.36
per basic and $1.31 per diluted share in 2000 and $2.3 million or $.88 per basic
and $.87 per diluted share in 1999.
Operating revenues were $57.6 million in 2001 compared with $51.4 million in
2000 and $49.9 million in 1999. The 12% revenue increase in 2001 over the prior
year reflected increases in revenues in most of the Company's major product
lines. The areas which realized the greatest percentage increases included the
Company's ophthalmology products, kitting operations and the MPS product line.
The 3% revenue growth experienced in 2000 was led by these same product lines.
However, unusually large product shipments in late 1999 to some of the Company's
significant customers that were building up inventory levels of some of its
other products negatively impacted 2000 revenues and significantly reduced
revenue growth between those years.
The Company's cost of sales was $35.8 million in 2001 compared with $31.6
million in 2000 and $30.3 million in 1999. The increase in cost of sales for
2001 over 2000 and for 2000 over 1999 was primarily related to the increased
sales mentioned above and the impact of increased manufacturing volumes.
Gross profits were $21.8 million in 2001 compared with $19.9 million in 2000 and
$19.6 million in 1999. The increase in gross profit in 2001 over 2000 and in
2000 over 1999 was primarily the result of the above mentioned revenue
increases. The Company's gross profit in 2001 was 38 percent of revenues
compared with 39 percent of revenues in 2000 and in 1999. The decline in gross
profit percentage in 2001 from the prior years was primarily due to increased
costs of a specialty resin used in one of the Company's major products. This
increase was caused by a temporary shortage of supply of the resin caused by an
explosion at the supplier's plant. This problem was resolved at the end of 2001
and prices for this resin have since returned to normal.
Operating expenses were $16.0 million in 2001 compared with $15.6 million in
2000 and $16.5 million in 1999. The increase in operating expenses from 2000 to
2001 was primarily attributable to increased General and Administrative (G&A)
expenses offset partially by reductions of Selling expenses and, to a lesser
extent, Research and Development (R&D) expenses. G&A expenses for 2001 were $1.3
million higher than G&A expenses for 2000 primarily as a result of higher
spending on outside services, compensation and benefit programs. The decrease in
Selling expenses in 2001 from 2000 of $762,000 was primarily related to
reductions in compensation
- 12 -
and benefit programs and travel-related expenses. R&D expenses were $143,000
lower for 2001 compared with 2000 primarily as a result of reduced spending on
outside services and qualification materials. The decrease in operating expenses
from 1999 to 2000 was primarily attributable to reduced G&A expenses and reduced
R&D expenses partially offset by increased Selling expenses. G&A expenses for
2000 were $446,000 less than the prior year primarily as a result of reduced
spending on outside services and compensation and benefit programs. R&D expenses
were $547,000 lower for 2000 as compared with 1999. This reduction resulted
primarily from the Company's reduced R&D efforts on non-core products with
limited market potential.
The Company's operating income for 2001 was $5.8 million compared with $4.2
million in 2000 and $3.1 million in 1999. Revenue growth, cost containment and
cost reduction activities were the major contributors to the operating income
improvements during the three-year period.
Net interest expense was $223,000 in 2001 compared to $654,000 in 2000 and
$257,000 in 1999. The reduction in 2001 from 2000 was primarily related to lower
interest rates and the Company's lower average borrowing level in 2001. The
Company's borrowing of funds under its revolving credit facility in late
December 2001 in connection with its repurchase of outstanding common stock of
the Company under a tender offer is expected to result in increased interest
expense in 2002. The increase in interest expense from 1999 to 2000 was
primarily attributable to the higher average borrowing level in 2000 caused by
additional borrowings under the Company's revolving credit facility to fund its
repurchases of outstanding common stock of the Company during 1999 and 2000. The
increase in other income in 2001 is primarily related to the Company's one-time
pre-tax gain of $428,000 on the sale of a patent.
Income tax expense in 2001 totaled $1,803,000 compared with $923,000 in 2000 and
$741,000 in 1999. The differences between years reflect changes in pre-tax
income between the respective years.
The Company believes that 2002 revenues at all operations will be higher than
2001 revenues at those operations and that the cost of goods sold, gross profit,
operating income, net interest expense and income from continuing operations
will each be higher in 2002 than in 2001.
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 $5.5
million or $2.70 per basic and $2.42 per diluted share in 2001, $.1 million or
$.06 per basic and diluted share in 2000 and $.2 million or $.06 per basic and
diluted share in 1999.
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 1999, 2000 and 2001 which are reflected in each year as a gain from
discontinued operations of $165,000, net of tax. The 2001 gain also includes a
$5,326,000 non-cash gain from reversal of a reserve established when the Company
- 13 -
disposed of its natural gas operations in 1997. This reversal in the third
quarter of 2001 followed the resolution of an outstanding contingency related to
the sale of those assets. The 2000 gain reflected above is net of a $36,000 loss
related to the sale of certain residual properties associated with the Company's
natural gas operations.
Liquidity and Capital Resources
The Company has a $25 million revolving credit facility (the "Credit Facility")
with a regional bank to be utilized for the funding of operations and for major
capital projects or acquisitions subject to certain limitations and restrictions
(see Note 3 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, 2001
the Company had outstanding borrowings of $17.1 million under the Credit
Facility. The Credit Facility, which expires November 12, 2004 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.
As of December 31, 2001, the Company had cash and cash equivalents of $542,000
compared with $159,000 at December 31, 2000. The Company had long-term debt as
of December 31, 2001 of $17.1 million compared with $7.4 million as of December
31, 2000. The increase in cash and cash equivalents from December 31, 2000 to
December 31, 2001 was primarily funded by net cash from operating activities and
borrowings under the Company's Credit Facility remaining after repurchases of
outstanding common stock of the Company and purchases of new machinery. The
increase in long-term debt from December 31, 2000 to December 31, 2001 was
primarily related to a $17.4 million repurchase of outstanding common stock of
the Company under a tender offer in December 2001. Cash provided by continuing
operations increased to $8.7 million in 2001 compared to $7.4 million in 2000
and $5.3 million in 1999. Capital expenditures for property, plant and equipment
for continuing operations totaled $2.8 million in 2001 compared with $3.3
million in 2000 and $12.1 million in 1999. Included in the 1999 capital
expenditure amount was $6.5 million for the purchase of the Company's Allen,
Texas facility.
As previously discussed, the Company recorded a non-cash gain from discontinued
operations during 2001. The gain had no effect on the Company's cash position or
the balance of its outstanding indebtedness and it will not have any impact on
earnings from continuing operations in future periods.
The Company believes that its existing cash and cash equivalents, cash flows
from operations, 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.
Companies sometimes establish legal entities for a specific business transaction
or activity in the form of a Special Purpose Entity (SPE). SPEs may be used to
facilitate off-balance sheet financing, acquiring financial assets, raising cash
from owned assets and similar transactions. The Company has no SPEs, no
off-balance sheet financing arrangements or any derivative financial
instruments.
In January 1998, the Board of Directors discontinued the payment of quarterly
cash dividends. Such action was taken to facilitate the Company's growth
strategy as well as to bring the
- 14 -
Company's dividend policy more in line with other companies in the medical
products industry.
Impact of Inflation
The Company experiences the effects of inflation primarily in the prices it pays
for labor, materials and services. Over the last three years, the Company has
experienced the effects of moderate inflation in these costs. At times, the
Company has been able to offset a portion of these increased costs by increasing
the sales prices of its products. However, competitive pressures have not
allowed for full recovery of these cost increases.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 141, SFAS
No. 142, SFAS No. 143 and SFAS No.144. The impact to the Company for these items
is described in Note 1 of our Notes to Consolidated Financial Statements.
Critical Accounting Policies
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of results of operations and financial
condition in the preparation of its financial statements in conformity with
accounting principles generally accepted in the United States of America. The
Company believes that the following discussion addresses the Company's most
critical accounting policies, 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.
Inventories are stated at the lower of cost or market value. The Company records
provisions for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. The physical
condition (e.g., age and quality) of the inventories is also considered in
establishing its valuations.
The Company assesses the impairment of long-lived assets, identifiable
intangibles and related goodwill 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.
Forward-looking Statements
The statements in this Management's Discussion and Analysis and elsewhere in
this Annual Report that are forward looking are based upon current expectations,
and actual results may differ materially. Therefore, the 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
- 15 -
regarding future revenues, cost of sales, gross profit, operating income, net
interest expense, income from continuing operations, cash flows from operations,
and availability of equity and debt financing. Words such as "anticipates,"
"believes," "intends," "expects" and variations of such words and similar
expressions are intended to identify such forward-looking statements.
Forward-looking statements contained herein involve numerous risks and
uncertainties, and there are a number of factors that could cause actual results
to differ materially, including, but not limited to, the following: changing
economic, market and business conditions; 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; 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
The Company has an $25.0 million credit facility with a regional bank.
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, 2001, the Company had borrowings under the Credit
Facility of $17.1 million. A one percent increase in the market interest rate
would reduce the Company's annual pretax income by approximately $171,000 at the
current borrowing level.
- 16 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Atrion Corporation:
We have audited the accompanying consolidated balance sheets of Atrion
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000 and the related consolidated statements of income and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atrion Corporation and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 25, 2002
- 17 -
CONSOLIDATED STATEMENTS OF INCOME
(For the years ended December 31, 2001, 2000 and 1999)
- -------------------------------------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues $ 57,605 $ 51,447 $ 49,917
Cost of Goods Sold 35,777 31,561 30,337
- -------------------------------------------------------------------------------------------------------------
Gross Profit 21,828 19,886 19,580
- -------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling 6,248 7,010 6,841
General and administrative 7,849 6,576 7,022
Research and development 1,911 2,054 2,601
- -------------------------------------------------------------------------------------------------------------
16,008 15,640 16,464
- -------------------------------------------------------------------------------------------------------------
Operating Income 5,820 4,246 3,116
Interest Expense, net (223) (654) (257)
Other Income (Expense), net 468 (6) 10
- -------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Provision
for Income Taxes 6,065 3,586 2,869
Income Tax Provision (Note 4) (1,803) (923) (741)
- -------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 4,262 2,663 2,128
Gain on Disposal of Discontinued Operations,
net of tax (Note 2) 5,492 129 165
- -------------------------------------------------------------------------------------------------------------
Net Income $ 9,754 $ 2,792 $ 2,293
=============================================================================================================
Earnings Per Basic Share:
Continuing operations $ 2.10 $ 1.30 $ 0.82
Discontinued operations 2.70 0.06 0.06
- -------------------------------------------------------------------------------------------------------------
Net Income Per Basic Share $ 4.80 $ 1.36 $ 0.88
=============================================================================================================
Weighted Average Basic Shares Outstanding 2,033 2,047 2,593
=============================================================================================================
Earnings Per Diluted Share:
Continuing Operations $ 1.88 $ 1.25 $ 0.81
Discontinued operations 2.42 0.06 0.06
- -------------------------------------------------------------------------------------------------------------
Net Income Per Diluted Share $ 4.30 $ 1.31 $ 0.87
=============================================================================================================
Weighted Average Diluted Shares Outstanding 2,272 2,135 2,631
=============================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- 18 -
CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2000
- --------------------------------------------------------------------------------------------------
Assets: 2001 2000
- --------------------------------------------------------------------------------------------------
(In thousands)
Current Assets:
Cash and cash equivalents $ 542 $ 159
Accounts receivable, net 7,559 7,175
Inventories, net (Note 1) 11,114 10,110
Prepaid expenses 1,463 575
- --------------------------------------------------------------------------------------------------
20,678 18,019
- --------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Original cost (Note 1) 39,866 37,472
Less accumulated depreciation and amortization 14,488 11,225
- --------------------------------------------------------------------------------------------------
25,378 26,247
- --------------------------------------------------------------------------------------------------
Other Assets and Deferred Charges:
Patents, net of accumulated amortization of $6,543 and $6,238 in
2001 and 2000, respectively (Note 1) 2,707 3,012
Goodwill, net of accumulated amortization of $4,114 and $3,511 in
2001 and 2000, respectively (Note 1) 12,216 12,803
Other 3,308 3,609
- --------------------------------------------------------------------------------------------------
18,231 19,424
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
$64,287 $63,690
==================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
- 19 -
- ------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity: 2001 2000
- ------------------------------------------------------------------------------------------------------
(In thousands)
Current Liabilities:
Accounts payable and accrued liabilities $ 5,337 $ 4,518
Accrued income and other taxes 109 187
- ------------------------------------------------------------------------------------------------------
5,446 4,705
- ------------------------------------------------------------------------------------------------------
Long-term Debt (Note 3) 17,125 7,400
- ------------------------------------------------------------------------------------------------------
Other Liabilities and Deferred Credits:
Deferred income taxes (Note 4) 1,576 6,470
Other 965 1,101
- ------------------------------------------------------------------------------------------------------
2,541 7,571
- ------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Common stock, par value $0.10 per share, authorized
10,000,000 shares, issued 3,419,953 shares in 2001 and 2000 (Note 5) 342 342
Paid-in capital 7,991 6,419
Retained earnings (Note 8) 61,660 51,906
Treasury shares, 1,732,032 shares in 2001 and 1,427,660 shares
in 2000, at cost (Note 5) (30,818) (14,653)
- ------------------------------------------------------------------------------------------------------
39,175 44,014
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
$ 64,287 $ 63,690
======================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
- 20 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the years ended December 31, 2001, 2000 and 1999)
- ---------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
Cash Flows From Operating Activities:
Net income $ 9,754 $ 2,792 $ 2,293
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of discontinued operations (Note 2) (5,492) (129) (165)
Depreciation and amortization 4,569 4,119 3,975
Deferred income taxes 316 77 593
Tax benefit related to stock plans 1,238 -- --
Other (262) (242) (744)
- ---------------------------------------------------------------------------------------------------------------
10,123 6,617 5,952
- ---------------------------------------------------------------------------------------------------------------
Changes in current assets and liabilities:
Decrease (increase) in accounts receivable (384) 592 (489)
Increase in other current assets (1,893) (575) (184)
Increase (decrease) in accounts payable 253 170 (35)
Increase in other current liabilities 605 578 13
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 8,704 7,382 5,257
Net cash provided by discontinued operations
(Note 2) 165 165 165
- ---------------------------------------------------------------------------------------------------------------
8,869 7,547 5,422
- ---------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Property, plant and equipment additions, net (2,808) (3,289) (12,102)
Patent Sale 428 -- --
Proceeds from disposal of discontinued operations -- 199 --
- ---------------------------------------------------------------------------------------------------------------
(2,380) (3,090) (12,102)
- ---------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase (decrease) in long-term indebtedness 9,725 (3,017) 10,214
Issuance of treasury stock 1,778 85 --
Purchase of treasury stock (17,609) (1,436) (9,099)
- ---------------------------------------------------------------------------------------------------------------
(6,106) (4,368) 1,115
- ---------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 383 89 (5,565)
Cash and cash equivalents, beginning of year 159 70 5,635
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 542 $ 159 $ 70
===============================================================================================================
Cash paid for:
Interest (net of capitalized amounts) $ 272 $ 746 $ 283
Income taxes (net of refunds) 1,217 4 186
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- 21 -
Atrion Corporation
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Atrion Corporation designs, develops, manufactures and markets products
primarily for the medical and healthcare industry. As of December 31, 2001
the principal subsidiaries of the Company through which it conducted its
operations were Quest Medical, Inc., Atrion Medical Products, Inc. and
Halkey-Roberts Corporation.
Principles of Consolidation
The consolidated financial statements include the accounts of Atrion
Corporation and its subsidiaries (the "Company"). All significant
intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash equivalents are securities with original maturities of 90 days or
less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by using the first-in, first-out method. The following table details the
major components of inventory (in thousands):
December 31,
2001 2000
--------------------------------------------------------------
Raw materials $ 6,188 $ 5,483
Finished goods 4,189 3,778
Work in process 888 980
Reserve for obsolescence (151) (131)
--------------------------------------------------------------
Net inventory $ 11,114 $ 10,110
==============================================================
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets, ranging from three to 30 years. Expenditures for repairs and
maintenance are charged to expense as incurred. The following table
represents a summary of property, plant and equipment at original cost as
of December 31, 2001 and 2000 (in thousands):
December 31,
2001 2000
---------------------------------------------------------------
Land $ 1,506 $ 1,506
Buildings 10,834 10,578
Machinery and equipment 27,526 25,388
---------------------------------------------------------------
Total property, plant and equipment $ 39,866 $ 37,472
===============================================================
Depreciation expense of $3,743,000, $3,225,000 and $3,079,000 was recorded
for the years ended December 31, 2001, 2000 and 1999, respectively.
Goodwill and Patents
Goodwill represents the excess of cost over the fair market value of
tangible and identifiable intangible net assets acquired. Values assigned
to patents were agreed to at
- 22 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
the time of the acquisition between selling and acquiring parties. Through
December 31, 2001, goodwill was being amortized over 25 years. Patents are
being amortized over the remaining lives of the individual patents, which
are 5 to 15 years. Goodwill and patents, as well as other long-lived
assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable, as determined based on the undiscounted cash flows of the
operations acquired over the remaining amortization period. There were no
impairments recorded in the periods presented. Management of the Company
will continue to evaluate the realizability of its intangible and other
long-lived assets as changes in the medical and healthcare industry take
place.
Research and Development Costs
Research and development costs relating to the development of new products
and improvements of existing products are expensed as incurred.
Revenues
For the majority of its products, the Company recognizes revenue from
sales when products are shipped to customers. For certain other products
revenue is recognized based on usage or time under defined leasing
agreements. Revenue is recognized only when all of the following criteria
are met: 1) persuasive evidence that an arrangement exists, 2) delivery
and performance, 3) fixed or determinable sales price and 4)
collectibility is reasonably assured. Provisions are made for bad debts
where appropriate and are reviewed periodically. The allowance for bad
debts was $113,000 and $44,000 at December 31, 2001 and 2000,
respectively.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting
for Income Taxes." The asset and liability approach used under SFAS No.
109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the
financial reporting basis and the tax basis of the Company's other assets
and liabilities (see Note 4).
New Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141 ("SFAS 141"), "Business
Combinations," and Statement No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." SFAS 141 eliminates pooling of interest accounting and
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. SFAS 142 eliminates the
amortization of goodwill and certain other intangible assets and requires
the Company to evaluate goodwill for impairment on an annual basis by
applying a fair value test. SFAS 142 also requires that an identifiable
intangible asset which is determined to have an indefinite useful economic
life not be amortized, but separately tested for impairment using a fair
value-based approach. As of December 31, 2001, the Company had not
recorded any identifiable intangible assets that have an indefinite useful
life.
The Company adopted SFAS 142 effective January 1, 2002. As a result, the
amortization of existing goodwill ceased on December 31, 2001, which will
result in a decrease in amortization expense from the 2001 level of
approximately $603,000 before tax, $428,000 after tax, in 2002. However,
the Company will be required to test its goodwill for impairment under the
new standard effective for the first quarter of 2002,
- 23 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
which could have an adverse effect on the Company's future results of
operations if these assets are deemed impaired. The Company has not
determined if a goodwill asset write-down will occur upon adoption. The
Company plans to engage an independent firm to assist in the evaluation of
its major goodwill assets. The remaining goodwill asset balance totaled
$12.2 million at December 31, 2001.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting standards for
the recognition and measurement of legal obligations associated with the
retirement of tangible long-lived assets. This statement is effective for
the fiscal year beginning January 1, 2003. The Company does not anticipate
that the adoption of this statement will have an impact on the Company's
results of operations or financial position.
In July 2001, the FASB issued SFAS No. 144 "Impairment or Disposal of
Long-Lived Assets," which is effective for the fiscal year that began
January 1, 2002. The provisions of this statement provide a single
accounting model for impairment of long-lived assets, including
discontinued operations. The Company does not anticipate that the adoption
of this statement will have an impact on the Company's results of
operations or financial position.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Financial Presentation
Certain prior-year amounts have been reclassified to conform with
current-year presentation.
(2) 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 $5,492,000, $129,000 and
$165,000 in 2001, 2000 and 1999, respectively. These amounts include an
income tax benefit of $5,126,000 in 2001 and are net of income tax expense
of $67,000 and $85,000 in 2000 and 1999, respectively.
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 1999, 2000 and 2001 which are reflected in
each year as a gain from discontinued operations of $165,000, net of tax.
The 2001 gain also includes a $5,326,000 non-cash gain from reversal of a
reserve established when the Company disposed of its natural gas
operations in 1997. This
- 24 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
reversal in the third quarter of 2001 followed the resolution of an
outstanding contingency related to the sale of those assets. The 2000 gain
reflected above is net of a $36,000 loss related to the sale of certain
residual properties associated with the Company's natural gas operations.
(3) Long-term Debt and Other Borrowings
Long-term debt as of December 31, 2001 and 2000 consisted of the following
(in thousands):
2001 2000
----------------------------------------------------------------
Revolving credit facility $17,125 $ 7,400
Less amounts due in one year -- --
----------------------------------------------------------------
$17,125 $ 7,400
================================================================
The Company has a revolving credit facility ("Credit Facility") with a
regional bank. In December 2001 the Credit Facility arrangement was
amended to increase the credit line under the Credit Facility from $18.5
million to $25.0 million. Under the Credit Facility, the Company and
certain of its subsidiaries have a line of credit which is secured by
substantially all inventory, 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 (3.081% at
December 31, 2001) and is payable monthly. The term of the Credit Facility
expires November 12, 2004 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, 2001, the Company was in compliance with
all financial covenants.
On December 31, 2001, the estimated fair value of long-term debt described
above was approximately the same as the carrying amount of such debt on
the consolidated balance sheet. The fair value was calculated in
accordance with the requirements of SFAS No. 107, "Disclosures About the
Fair Value of Financial Instruments," and was estimated by discounting the
future cash flows using rates currently available to the Company for debt
instruments with similar terms and remaining maturities.
- 25 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
(4) Income Taxes
The items comprising income tax expense for continuing operations are as
follows:
2001 2000 1999
(In thousands)
------------------------------------------------------------------
Current -- Federal $ 1,520 $ 579 $ 181
-- State 188 85 93
------------------------------------------------------------------
1,708 664 274
Deferred -- Federal 74 225 424
-- State 21 34 43
------------------------------------------------------------------
95 259 467
------------------------------------------------------------------
Total income tax expense $ 1,803 $ 923 $ 741
==================================================================
Temporary differences and carryforwards which gave rise to a significant
portion of deferred tax assets and liabilities as of December 31, 2001 and
2000 are as follows:
2001 2000
(In thousands)
-------------------------------------------------------------------
Deferred tax assets:
Benefit plans $ 603 $ 569
Tax credits 816 934
Other, net 922 1,159
-------------------------------------------------------------------
Subtotal 2,341 2,662
Valuation allowance -- (68)
-------------------------------------------------------------------
Total deferred tax assets $2,341 $2,594
===================================================================
Deferred tax liabilities:
Depreciation and property basis
differences $2,654 $2,516
Pensions 333 384
Other, net 930 6,164
-------------------------------------------------------------------
Total deferred tax liabilities $3,917 $9,064
===================================================================
The deferred tax assets as of December 31, 2001 reflected in the table
above include alternative minimum tax credit carryforwards of $423,000 and
research and development (R&D) tax credit carryforwards of $393,000. The
R&D tax credit carryforwards expire from 2018 to 2021. Management believes
that a valuation allowance is not necessary based on the Company's
earnings history, the projections for future taxable income and other
relevant considerations over the periods during which the deferred tax
assets become deductible.
- 26 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
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:
2001 2000 1999
(In thousands)
- --------------------------------------------------------------------------------
Income tax expense at the statutory
federal income tax rate $ 2,062 $ 1,219 $ 975
Increase (decrease) resulting from:
State income taxes 220 141 136
Decrease in valuation allowance (68) (63) --
Research and development credit (52) (130) (101)
Foreign Sales Corporation benefit (352) (265) (269)
Other, net (7) 21 --
- --------------------------------------------------------------------------------
Total income tax expense $ 1,803 $ 923 $ 741
================================================================================
(5) Common Stock
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.
The Company has effected a number of open-market or negotiated
transactions to purchase its stock during the past three years. These
repurchases totaled 10,300, 114,500 and 220,900 shares during the years
2001, 2000 and 1999, respectively, at per share prices ranging from $7.77
to $21.75. As of December 31, 2001, there remained authorization for the
repurchase of 140,200 additional shares. The Company made one tender offer
during 2001 and two tender offers during 1999 purchasing a total of
1,146,289 shares of its common stock. Pursuant to these tender offers, the
Company purchased 502,229 shares of its common stock at $34.50 per share
in December 2001, 342,536 shares of its common stock at $12.00 per share
in December 1999, and 301,524 shares of its common stock at $10.00 per
share in April 1999. All shares purchased in the tender offers and in the
open-market or negotiated transactions became treasury shares upon
repurchase by the Company. The Company utilized 234,900 treasury shares in
2001 in connection with the exercise of options under its various stock
option plans (see note 9). Employees tendered to the Company 26,743 shares
of common stock in connection with the exercise of these stock options
which also became treasury shares. At December 31, 2001 and 2000, there
were 1,732,032 and 1,427,660 shares, respectively, of common stock held in
treasury. The cost of these shares is shown as a reduction in
stockholders' equity in the consolidated balance sheets.
The Company has a Common Share Purchase Rights Plan, which is intended to
protect the interests of stockholders in the event of a hostile attempt to
take over the Company. The rights, which are not presently exercisable and
do not have any voting powers, represent the right of the Company's
stockholders to purchase at a substantial discount, upon the occurrence of
certain events, shares of common stock of the Company or of an acquiring
company involved in a business combination with the Company. In January
2000, this plan, which was adopted in February 1990, was extended until
February 2005.
- 27 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
(6) Earnings Per Share
The following is the computation for basic and diluted earnings per share
from continuing operations:
2001 2000 1999
(In thousands, except
per share amounts)
- --------------------------------------------------------------------------------
Income from continuing operations $4,262 $2,663 $2,128
Weighted average basic shares outstanding 2,033 2,047 2,593
Add: Effect of dilutive securities (options) 239 88 38
- --------------------------------------------------------------------------------
Weighted average diluted shares outstanding 2,272 2,135 2,631
================================================================================
Earnings per share from continuing operations:
Basic $ 2.10 $ 1.30 $ 0.82
Diluted $ 1.88 $ 1.25 $ 0.81
================================================================================
(7) 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) receive automatic annual
grants of nonqualified stock options to purchase 2,000 shares of common
stock. The aggregate number of shares of common stock reserved for grants
under the 1997 Stock Incentive Plan is the sum of 500,000 shares and the
number of shares reserved for issuance under prior plans in excess of the
number of shares as to which options have been granted, including any
shares subject to previously granted options that lapse, expire, terminate
or are canceled. The purchase price of 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 1990 and 1994, the stockholders of the Company approved the
adoption of the Company's 1990 Stock Option Plan and 1994 Key Employee
Stock Incentive Plan, respectively, which provided for the grant to key
employees of incentive and nonqualified options to purchase shares of
common stock of the Company. 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
1990 Stock Option Plan, the 1994 Key Employee Stock Incentive Plan or the
1998 Outside Directors Stock Option Plan, all outstanding options under
those plans continue to be governed by the terms and conditions of those
plans and the existing option agreements for those grants.
- 28 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
Option transactions for the years 1999, 2000 and 2001 are as follows:
Shares Price Per Share
- ------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1998 664,300 $ 6.88 -- 17.00
Granted in 1999 99,000 $ 7.63 -- 7.63
Expired in 1999 (271,750) $ 6.88 -- 17.00
Exercised in 1999 -- $ 0.00 -- 0.00
- ------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1999 491,550 $ 6.88 -- 15.17
Granted in 2000 48,300 $ 11.56 -- 12.31
Expired in 2000 (38,300) $ 6.88 -- 12.25
Exercised in 2000 (9,200) $ 6.88 -- 9.00
- ------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2000 492,350 $ 6.88 -- 15.17
Granted in 2001 81,000 $ 14.06 -- 22.50
Expired in 2001 (13,600) $ 6.88 -- 12.25
Exercised in 2001 (234,900) $ 6.88 -- 22.50
- ------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2001 324,850 $ 6.88 -- 22.50
================================================================================================
As of December 31, 2001, options for 174,350 of the above-listed shares
were exercisable and there remained 280,484 shares for which options may
be granted in the future under the 1997 Stock Incentive Plan. For the
324,850 options outstanding at December 31, 2001, the weighted average
exercise price was $11.62 and the weighted average remaining life was 7.2
years.
The Company accounts for stock options under Accounting Principles Board
("APB") Opinion No. 25, which requires compensation costs to be recognized
only when the option exercise price is below the market price at the grant
date. SFAS No. 123, "Accounting for Stock-Based Compensation," allows a
company to follow APB Opinion No. 25 with an additional disclosure that
shows what the company's pro forma net income would have been using SFAS
No. 123.
Pro forma information regarding net income and earnings per share as
required by SFAS No. 123 has been determined as if the Company had
accounted for its 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 2001, 2000 and 1999:
2001 2000 1999
--------------------------------------------------------------------------
Risk-free interest rate 5.2% 6.6% 4.9%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 33.0% 30.0% 30.0%
Weighted average expected life 7 years 7 years 7 years
==========================================================================
- 29 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma net income and earnings per basic share were as
follows:
2001 2000 1999
(In thousands except per share amounts)
- --------------------------------------------------------------------------------
Net income - as reported $9,754 $2,792 $2,293
Net income - pro forma $9,479 $2,274 $1,839
Earnings per basic share - as reported $4.80 $1.36 $0.88
Earnings per basic share - pro forma $4.66 $1.11 $0.71
Weighted average fair value of options
granted during the year $7.06 $5.57 $3.29
================================================================================
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the model used for the above disclosure
does not provide a reliable measure of the fair value of its stock
options.
(8) Retained Earnings
The following table reflects changes in consolidated retained earnings for
the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
(In thousands)
- --------------------------------------------------------------------------------
Balance, beginning of year $ 51,906 $ 49,114 $ 46,821
Add: Net income for the year 9,754 2,792 2,293
- --------------------------------------------------------------------------------
Balance, end of year $ 61,660 $ 51,906 $ 49,114
================================================================================
(9) Revenues From Major Customers
The Company had one major customer which represented approximately $11.0
million (19.1 percent), $8.9 million (17.3 percent), and $8.3 million
(16.6 percent) of the Company's operating revenues during the years 2001,
2000 and 1999, respectively.
(10) Industry Segment and Geographic Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" establishes standards for reporting information about
operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports
issued to stockholders. The Company operates in one reportable industry
segment: designing, developing, manufacturing and marketing products for
the medical and healthcare industry and has no foreign operating
subsidiaries. The Company's product lines include pressure relief valves
and inflation
- 30 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
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 $950,000 in each of the years of
2001, 2000 and 1999. Pipeline net assets totaled $2,737,000 at December
31, 2001. Company revenues from sales to parties outside the United States
totaled approximately 33 percent of the Company's total revenues in 2001
and 22 percent of the Company's total revenues in 2000 and 1999. No
Company assets are located outside the United States.
(11) Employee Retirement and Benefit Plans
A noncontributory defined benefit retirement plan is maintained for all
regular employees of the Company except those of Quest Medical. This plan
was amended effective January 1, 1998 to become a cash balance pension
plan. The Company's funding policy is to make the annual contributions
required by applicable regulations and recommended by its actuary.
The changes in the plan's projected benefit obligation ("PBO") as of
December 31, 2001 and 2000 are as follows (in thousands):
2001 2000
---- ----
Change in Benefit Obligation
Benefit obligation, January 1 $ 4,268 $ 3,429
Service cost 369 383
Interest cost 296 271
Actuarial loss 12 522
Benefits paid (346) (337)
------------------------------------------------------------------------
Benefit obligation, December 31 $ 4,599 $ 4,268
========================================================================
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, 2001 and 2000,
are as follows (in thousands):
- 31 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
2001 2000
---- ----
Change in Plan Assets
Fair value of plan assets, January 1 $ 5,497 $ 5,872
Actual return on plan assets (601) (38)
Benefits paid (346) (337)
- --------------------------------------------------------------------------------
Fair value of plan assets, December 31 $ 4,550 $ 5,497
================================================================================
Funded status of plan $ (49) $ 1,229
Unrecognized actuarial loss 1,118 28
Unrecognized prior service cost 84 89
Unrecognized net transition obligation (175) (219)
- --------------------------------------------------------------------------------
Net amount recognized as other assets $ 978 $ 1,127
================================================================================
The components of net periodic pension cost for 2001, 2000 and 1999 were
as follows (in thousands):
2001 2000 1999
---- ---- ----
Components of Net Periodic
Pension Cost
Service cost $ 369 $ 383 $ 315
Interest cost 296 271 226
Expected return on assets (477) (506) (421)
Prior service cost amortization 6 6 6
Actuarial gain -- (9) (7)
Transition amount amortization (44) (44) (43)
--------------------------------------------------------------------------
Net periodic pension cost $ 150 $ 101 $ 76
==========================================================================
Actuarial assumptions used to determine the values of the PBO at December
31, 2001 and 2000 and the benefits cost for 2001, 2000 and 1999 included
the following: a discount rate of 7.25 percent for 2001 and 2000, and a
discount rate of 7.75 percent for 1999; an estimated long-term rate of
return on plan assets of 9 percent in 2001 and 2000, and 8 percent in
1999; and an estimated weighted average rate of compensation increase of 5
percent in 2001 and 2000, and 6 percent in 1999. As of December 31, 2001,
the plan's assets were invested in mutual funds as follows: equity, 76
percent; fixed income, 22 percent; and money market, 2 percent.
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 $258,000 in 2001, $272,000 in 2000, and
$250,000 in 1999.
- 32 -
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
(12) Commitments and Contingencies
The Company is subject to legal proceedings, third-party claims and other
contingencies related to product liability, regulatory, employee and other
matters that arise in the ordinary course of business. In the opinion of
management, the amount of potential liability with respect to these
actions will not materially affect the Company's financial position,
results of operations or liquidity.
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 2002 could result in payments
aggregating $4.9 million, excluding any excise tax that may be
reimbursable by the Company.
In May 1996, Halkey-Roberts Corporation ("Halkey-Roberts") began leasing
the land, building and building improvements in St. Petersburg, Florida,
which serve as Halkey-Roberts' headquarters and manufacturing facility,
under a 10-year lease. The lease provides for monthly payments, including
certain lease payment escalators, and provides for certain sublease and
assignment rights. The lease also provides the right of either the
landlord or Halkey-Roberts to terminate the lease on 12 months notice
effective at any time after May 21, 2002. 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, 2001, 2000 and 1999 was $372,000,
$361,000 and $351,000 respectively. Future minimum rental commitment under
this lease is $384,000 in 2002.
(13) Quarterly Financial Data (Unaudited)
Quarterly financial data for 2001 and 2000 are as follows:
Quarter Operating Operating Earnings Per Basic
Ended Revenue Income Net Income Share
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------
03/31/01 $ 14,803 $ 1,413 $ 905 $ 0.45
06/30/01 14,776 1,513 1,433 0.71
09/30/01 15,418 1,733 6,503 (a) 3.17 (a)
12/31/01 12,608 1,161 913 0.44
- -----------------------------------------------------------------------------------------------------------------
03/31/00 $ 12,985 $ 864 $ 532 $ 0.25
06/30/00 13,042 1,044 738 0.36
09/30/00 12,459 1,056 728 0.36
12/31/00 12,961 1,282 794 0.39
- -----------------------------------------------------------------------------------------------------------------
(a) Includes a $5.3 million after-tax gain ($ 2.60 per share) from discontinued
operations (See Note 2)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
- 33 -
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
2002 annual meeting of stockholders.
Executive Officers
The information for this item relating to executive officers of the Company is
set forth on pages 10 through 11 of this report.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the Company's definitive proxy statement for its 2002 annual
meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2002 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2002 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 2002 annual meeting of stockholders.
Changes in Control
The Company knows of no arrangements that may at a subsequent date result in a
change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
- 34 -
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8--K
(a) 1. Financial Statements:
See Item 8: "Financial Statements and Supplementary Data" and
financial statement pages attached hereto.
2. Financial Statement Schedules:
All financial statement schedules have been omitted since the required
information is included in the consolidated financial statements or
the notes thereto or is not applicable or required.
3. Exhibits: (Numbered in accordance with Item 601 of Regulation S-K)
The exhibits listed below are filed as part of this 2001 Form 10-K
Report. Those exhibits previously filed and incorporated herein by
reference are identified by a note reference to the previous filing.
(b) Reports on Form 8-K:
None
Exhibit
Numbers Description
- ------- -----------
2a Asset Purchase Agreement, dated March 19, 1997, between Atrion
Corporation and Midcoast Energy Resources, Inc. (1)
2b Asset Purchase Agreement, dated as of December 29, 1997, by and among
Quest Medical, Inc., QMI Acquisition Corp. and Atrion Corporation (2)
3a Certificate of Incorporation of Atrion Corporation, dated December 30,
1996(3)
3b Amended and Restated Bylaws of Atrion Corporation (18)
4a Rights Agreement, dated as of February 1, 1990, between AlaTenn
Resources, Inc. and American Stock Transfer & Trust Company which
includes the form of Right Certificate as Exhibit A and the Summary of
Rights to Purchase Common Shares as Exhibit B (5)
4b Second Amendment to Rights Agreement (6)
10a* 1990 Stock Option Plan (7)
10b* Form of Incentive Stock Option Agreement (8)
10c* 1994 Key Employee Stock Incentive Plan (9)
10d* Form of Incentive Stock Option Agreement (10)
10e* Atrion Corporation 1997 Stock Incentive Plan (11)
10f* Atrion Corporation 1998 Outside Directors Stock Option Plan (12)
10g* Form of Stock Option Agreement (13)
10h* Atrion Corporation Incentive Compensation Plan for Chief Executive
Officer (14)
10i* Atrion Corporation Incentive Compensation Plan for Chief Financial
Officer (15)
10j* Severance Plan for Chief Financial Officer (16)
10k* Atrion Corporation Incentive Compensation Plan for Chief Financial
Officer (17)
- 35 -
10l* Agreement regarding the nullification of Incentive Compensation Plan
for Chief Executive Officer (18)
10m* Chief Executive Officer Employment Agreement (18)
21 Subsidiaries of Atrion Corporation as of December 31, 2001(18)
23 Consent of Arthur Andersen LLP(18)
99.1 Auditor Assurance Letter(18)
Notes
-----
(1) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 23, 1997.
(2) Incorporated by reference to Exhibit 2 to the Form 8-K of Atrion
Corporation dated February 17, 1998.
(3) Incorporated by reference to Appendix B to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(4) Incorporated by reference to Appendix C to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(5) Incorporated by reference to Exhibit 1 to Registration Statement on
Form 8-A of AlaTenn Resources, Inc. dated February 15, 1990.
(6) Incorporated by reference to Exhibit 4(b) to Form 10-K of Atrion
Corporation dated March 29, 2000.
(7) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 6, 1990.
(8) Incorporated by reference to Exhibit 4(d) to the Registration
Statement on Form S-8 of AlaTenn Resources, Inc., filed May 17, 1991
(File No. 33-40639).
(9) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated March 28, 1994.
(10) Incorporated by reference to Exhibit 4(d) to the Form S-8 of AlaTenn
Resources, Inc., filed July 26, 1995 (File No. 33-61309).
(11) Incorporated by reference to Exhibit 10j to Form 10-K of Atrion
Corporation dated March 31, 1998.
(12) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(13) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(14) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion
Corporation dated November 15, 1999.
(15) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion
Corporation dated May 12, 2000.
(16) Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion
Corporation dated May 12, 2000.
(17) Incorporated by reference to Exhibit 10k to Form 10-K of Atrion
Corporation dated March 30, 2001.
(18) Filed herewith
* Management Contract or Compensatory Plan or Arrangement
- 36 -
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 26, 2002
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 26, 2002
---------------------------- Officer (Principal Executive Officer)
Emile A. Battat
/s/Jeffery Strickland Vice President, Chief Financial Officer and March 26, 2002
---------------------------- Secretary-Treasurer (Principal Financial
Jeffery Strickland and Accounting Officer)
/s/Richard O. Jacobson Director March 26, 2002
----------------------------
Richard O. Jacobson
/s/John H. P. Maley Director March 26, 2002
----------------------------
John H. P. Maley
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Signature Title Date
--------- ----- ----
/s/Jerome J. McGrath Director March 26, 2002
----------------------------
Jerome J. McGrath
/s/Hugh J. Morgan, Jr. Director March 26, 2002
----------------------------
Hugh J. Morgan, Jr.
/s/Roger F. Stebbing Director March 26, 2002
----------------------------
Roger F. Stebbing
/s/John P. Stupp, Jr. Director March 26, 2002
----------------------------
John P. Stupp, Jr.
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EXHIBIT INDEX
Exhibit
Numbers Description Page
- ------- ----------- ----
2a Asset Purchase Agreement, dated March 19, 1997, between
Atrion Corporation and Midcoast Energy Resources, Inc. (1)
2b Asset Purchase Agreement, dated as of December 29, 1997, by
and among Quest Medical, Inc., QMI Acquisition Corp. and
Atrion Corporation (2)
3a Certificate of Incorporation of Atrion Corporation, dated
December 30, 1996(3)
3b Amended and Restated Bylaws of Atrion Corporation (18) 41
4a Rights Agreement, dated as of February 1, 1990, between
AlaTenn Resources, Inc. and American Stock Transfer & Trust
Company which includes the form of Right Certificate as
Exhibit A and the Summary of Rights to Purchase Common
Shares as Exhibit B (5)
4b Second Amendment to Rights Agreement (6)
10a* 1990 Stock Option Plan (7)
10b* Form of Incentive Stock Option Agreement (8)
10c* 1994 Key Employee Stock Incentive Plan (9)
10d* Form of Incentive Stock Option Agreement (10)
10e* Atrion Corporation 1997 Stock Incentive Plan (11)
10f* Atrion Corporation 1998 Outside Directors Stock Option Plan
(12)
10g* Form of Stock Option Agreement (13)
10h* Atrion Corporation Incentive Compensation Plan for Chief
Executive Officer (14)
10i* Atrion Corporation Incentive Compensation Plan for Chief
Financial Officer (15)
10j* Severance Plan for Chief Financial Officer (16)
10k* Atrion Corporation Incentive Compensation Plan for Chief
Financial Officer (17)
10l* Agreement regarding the nullification of Incentive
Compensation Plan for Chief Executive Officer (18) 58
10m* Chief Executive Officer Employment Agreement (18) 60
21 Subsidiaries of Atrion Corporation as of December 31, 2002
(18) 72
23 Consent of Arthur Andersen LLP (18) 73
99.1 Auditor Assurance Letter (18) 74
Notes
(1) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 23, 1997.
(2) Incorporated by reference to Exhibit 2 to the Form 8-K of Atrion
Corporation dated February 17, 1998.
(3) Incorporated by reference to Appendix B to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(4) Incorporated by reference to Appendix C to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(5) Incorporated by reference to Exhibit 1 to Registration Statement on
Form 8-A of AlaTenn Resources, Inc. dated February 15, 1990.
(6) Incorporated by reference to Exhibit 4(b) to Form 10-K of Atrion
Corporation dated March 29, 2000.
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(7) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 6, 1990.
(8) Incorporated by reference to Exhibit 4(d) to the Registration
Statement on Form S-8 of AlaTenn Resources, Inc., filed May 17, 1991
(File No. 33-40639).
(9) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated March 28, 1994.
(10) Incorporated by reference to Exhibit 4(d) to the Form S-8 of AlaTenn
Resources, Inc., filed July 26, 1995 (File No. 33-61309).
(11) Incorporated by reference to Exhibit 10j to Form 10-K of Atrion
Corporation dated March 31, 1998.
(12) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(13) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(14) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion
Corporation dated November 15, 1999.
(15) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion
Corporation dated May 12, 2000.
(16) Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion
Corporation dated May 12, 2000.
(17) Incorporated by reference to Exhibit 10k to Form 10-K of Atrion
Corporation dated March 30, 2001.
(18) Filed herewith
* Management Contract or Compensatory Plan or Arrangement
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