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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
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 on Which
Title of Each Class Registered
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Title of Class
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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. | |
The aggregate market value of the voting Common Stock held by nonaffiliates of
the registrant at March 1, 2001 was $23,630,903 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, 2001: 1,995,493.
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 2001
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, 2000
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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...........................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.......................................................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, 2000
PART I
ITEM 1. BUSINESS
General
Atrion Corporation ("Atrion" or the "Company") is a holding company that
primarily designs, develops, manufactures, markets, sells and distributes
medical products and components. The Company's current operations are conducted
through three medical products subsidiaries, Atrion Medical Products, Inc.
("Atrion Medical Products"), Halkey-Roberts Corporation ("Halkey-Roberts") and
Quest Medical, Inc. ("Quest Medical"). The Company also owns AlaTenn Pipeline
Company, Inc. ("AlaTenn Pipeline") which operates a gaseous oxygen pipeline and
Atrion Leasing Company, Inc. ("Atrion Leasing") which is engaged in leasing
activities. These non-medical activities are small and incidental to the overall
operations of the Company.
Atrion Medical Products' business, which is the design, development,
manufacturing, marketing, sale and distribution of medical products, has been in
operation for more than 30 years. Its products are used in ophthalmic,
diagnostic and cardiovascular procedures and are sold primarily to major health
care companies which market and distribute Atrion Medical Products' products, in
conjunction with their name-brand products, to hospitals, clinics, surgical
centers, physicians and other health care providers. While soft contact lens
storage and disinfection systems are its more mature ophthalmic products, Atrion
Medical Products continues to be a leading manufacturer and supplier of such
products. A growing area of sales for Atrion Medical Products is its line of
ophthalmic surgical procedure kits that are 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 is employed to assist its OEM customers in the development of
products.
Halkey-Roberts, which has been in operation for 57 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
designed to eliminate the use of needles by health care providers in many
routine procedures. These products use a patented design and proprietary
assembly technology. Halkey-Roberts' fluid control technology has also been
applied to inflation valves used in marine and aviation
-1-
safety products. Working closely with its customers, Halkey-Roberts has
developed an innovative line of products and is a leader in each of its major
markets.
Quest Medical manufactures and sells several stable product lines, including
cardiovascular products (such as pressure control valves, filters and surgical
retracting tapes), specialized intravenous fluid delivery tubing sets and
accessories and pressure monitoring kits used primarily in labor and delivery.
Quest Medical also markets a line of name-brand aortic punches called
CleanCut(TM). These products are used in heart bypass surgeries to make a
precision opening in the heart for attachment of the bypass vessels. Quest
Medical also manufactures and sells the MPS(R) myocardial protection system
("MPS"), an innovative and sophisticated system for the delivery of solutions to
the heart during open-heart surgery. The MPS integrates key functions relating
to the delivery of solutions to the heart, such as varying the rate and ratio of
oxygenated blood, crystalloid, potassium and other additives, and controlling
temperature, pressure and other variables to allow simpler, more flexible and
cost-effective management of this process. The MPS employs advanced pump,
temperature control and microprocessor technologies and includes a line of
captive and noncaptive disposable products.
During mid-year 2000, the Company received 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 surgeries has been positive. The Company expects the conversion of
conventional open-heart surgeries to beating-heart surgeries to increase over
the next several years. While continuing to promote the use of the MPS in
conventional open-heart surgeries, the Company intends to actively promote the
use of the MPS for beating-heart surgeries.
AlaTenn Pipeline owns and operates a 22-mile high-pressure steel pipeline in
north Alabama that transports gaseous oxygen from an industrial gas producer to
two of its customers.
Marketing and Major Customers
Atrion Medical Products has historically used sales managers to market products
to other manufacturers for use in their consumer products and uses commissioned
sales agents for the marketing of LacriCATH products. Quest Medical is currently
marketing the MPS and related disposables through a direct sales force using a
sales team approach as well as through specialty distributors. Most of Quest
Medical's other products are marketed through direct contact with hospitals,
telemarketing, independent sales representatives, marketing arrangements with
certain distributors and, to a lesser extent, through direct mail. In addition,
the Company routinely attends and participates in trade shows throughout the
United States and internationally.
During 2000, Novartis, which accounted for 17 percent of the Company's revenues,
was the only customer accounting for more than 10 percent of the Company's
revenues. The loss of this customer would have a material adverse impact on the
Company's business, financial condition and results of operations.
-2-
Manufacturing
The Company's medical products 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.
Atrion Medical Products, Halkey-Roberts and Quest Medical operate under the Good
Manufacturing Practices of the FDA and are ISO 9001 certified. The Company's
products are used throughout the world and, during 2000, approximately 22
percent of sales were shipped to international markets.
Research and Development
The Company believes that a well-targeted research and development program is an
essential part of the Company's activities and is currently engaged in a number
of research and development projects. The objective of the Company's program is
to develop new products in the areas that the Company is currently engaged,
improve current products and develop new products in other areas. Recent major
development projects include, but are not limited to, a needleless valve product
designed to eliminate the use of needles by health care providers, a back-up
system for the MPS and disposable sets for use by the MPS in beating-heart
surgery. The Company expects to incur additional research and development
expenses in 2001 for various projects including further development of the MPS.
Atrion Medical Products is EN46001 certified.
The Company's consolidated research and development expenditures for the years
ended December 31, 2000, 1999 and 1998 were $2,054,000, $2,601,000 and
$2,750,000 respectively.
-3-
Availability of Supplies and Raw Materials
The Company subcontracts with various suppliers to provide it with the quantity
of component parts necessary to assemble its products. Almost all of these
components are available from a number of different suppliers, although certain
components are purchased from single sources that manufacture these components
from the Company's toolings. The Company believes that there are alternative and
satisfactory sources for single-sourced components, although a sudden disruption
in supply from one of these suppliers could adversely affect the Company's
ability to deliver the finished product on time. The Company owns its own molds
for production of a majority of the components used in specialized tubing sets
and cardiovascular products. Consequently, in the event of supply disruption,
the Company would be able to fabricate its own components or subcontract with
another supplier, albeit after a delay in the production process. Atrion Medical
Products and Halkey-Roberts purchase various types of high-grade resins and
other components for their manufacturing processes from various suppliers. The
resins are readily available materials and, while the Company is selective in
its choice of suppliers, it believes that there are no significant restrictions
or limitations on supply. AlaTenn Pipeline is under no obligation to provide a
gas supply to its customer.
Patents and License Agreements
The commercial success of the Company is dependent, in part, on its ability to
continue to develop patentable products, to preserve its trade secrets and to
operate without infringing or violating the proprietary rights of third parties.
The Company currently has 149 active patents and 15 patent applications pending
on products that are either being sold or are in development. The Company
receives royalty payments on three patents that are licensed to outside parties.
The Company has obtained licenses to the rights from outside parties to two
patents relating to the LacriCATH product line and for one patent relating to
Multiport(R). All of these patents and pending patents relate to current
products being sold by the Company or to products still in evaluation stages.
The validity of any patents issued to the Company may be challenged by others,
and the Company could encounter legal and financial difficulties in enforcing
its patent rights against infringers. In addition, there can be no assurance
that other technologies cannot or will not be developed or that patents will not
be obtained by others which would render the Company's patents less valuable or
obsolete. With the possible exception of the patent relating to one of the
Company's more mature products, the loss of any one patent would not have a
material adverse effect on the Company's current revenue base. Although the
Company does not believe that patents are the sole determinant in the commercial
success of its products, the loss of a significant percentage of its patents or
its patents relating to a specific product line, particularly the MPS product
line, could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has developed technical knowledge which, although non-patentable, is
considered by the Company to be significant in enabling it to compete. However,
the proprietary nature of such knowledge may be difficult to protect. The
Company has entered into agreements with key employees prohibiting them from
disclosing any confidential information or trade secrets of the Company and
prohibiting them from engaging in any competitive business while employed by the
Company and for various periods thereafter. In addition, these agreements also
provide that any inventions or discoveries relating to the
-4-
business of the Company by these individuals will be assigned to the Company and
become the Company's sole property.
The medical device industry is characterized by extensive intellectual property
litigation, and companies in the medical products industry sometimes use
intellectual property litigation to gain a competitive advantage. Intellectual
property litigation, regardless of outcome, is often complex and expensive, and
the outcome of this litigation is generally difficult to predict. An adverse
determination in any such proceeding could subject the Company to significant
liabilities to third parties, or require the Company to seek licenses from third
parties or pay royalties that may be substantial. Furthermore, there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing or selling certain of its products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Competition
Depending on the product and the nature of the project, the Company's medical
products subsidiaries compete on the basis of their ability to provide
engineering and design expertise, quality, service, product and price. As such,
successful competitors must have technical strength, responsiveness and scale.
The Company believes that its expertise and reputation for quality medical
products have allowed it to compete favorably with respect to each such factor
and to maintain long-term relationships with its customers. However, in many of
the Company's markets, the Company competes with numerous other companies that
have substantially greater financial resources and engage in substantially more
research and development activities than the Company. Furthermore, innovations
in surgical techniques or medical practices could have the effect of reducing or
eliminating market demand for one or more of the Company's products.
Atrion Medical Products manufactures products for certain major health care
companies and is dependent on several customers for the majority of its sales.
Also, because its products are somewhat limited in number and normally are only
a component of the ultimate product sold by its customers, Atrion Medical
Products must continually be attentive to the need to manufacture such products
at competitive prices and in compliance with strict manufacturing standards.
Depending on the product and the nature of the project, Atrion Medical Products
competes on the basis of its ability to provide engineering and design expertise
as well as on the basis of product and price. Also, as Atrion Medical Products
continues to expand its product lines, adding new products and customers,
dependency on a limited number of customers will be reduced. The United States
is the principal market for the LacriCATH product. There is no direct
competition in the United States where both the product and surgical procedure
are patent-protected. LacriCATH products are marketed directly to
ophthalmologists through commissioned sales agents. Atrion Medical Products
frequently designs products for a customer or potential customer prior to
entering into long-term development and manufacturing agreements with that
customer. 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.
With respect to those products manufactured by Atrion Medical Products which are
sold to customers for use as components, Atrion Medical Products is dependent on
the ability of those
-5-
customers to sell their products. Therefore, Atrion Medical Products seeks to
choose highly successful companies with which to do business. This risk is
somewhat minimized by Atrion Medical Products' ability to obtain long-term,
exclusive manufacturing rights while its customers have long-term marketing
rights. Name-brand products, such as the LacriCATH line, are marketed to a much
larger base of customers and are not dependent on a single customer.
Halkey-Roberts competes in the medical products market and in the market for
inflation devices used in marine and aviation equipment. In the medical products
market, Halkey-Roberts is a leading competitor in the sale of check valves and
medical clamps and has only one major competitor for each of those products. In
the inflation device market, Halkey-Roberts is the dominant competitor in its
market areas. With the exception of one large company, Halkey-Roberts'
competitors in both of these markets generate less than $50 million annually in
revenues.
Numerous companies compete with Quest Medical in the sale of cardiovascular
products, specialized tubing sets and pressure monitoring kits. These markets
are dominated by established manufacturers that have broader product lines,
greater distribution capabilities, substantially greater capital resources and
larger marketing, research and development staffs and facilities than Quest
Medical. Many of these competitors offer broader product lines within the
specific product market and in the general field of medical devices and
supplies. Broad product lines give many of Quest Medical's competitors the
ability to negotiate exclusive, long-term medical device supply contracts and,
consequently, the ability to offer comprehensive pricing of their competing
products. By offering a broader product line in the general field of medical
devices and supplies, competitors may also have a significant advantage in
marketing competing products to group purchasing organizations, HMOs and other
managed care organizations that are increasingly seeking to reduce costs through
centralization of purchasing functions. In addition, Quest Medical's competitors
may use price reductions to preserve market share in their product markets. The
Company is not aware of any 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 and its medical device customers are
subject to inspection by the FDA for compliance with such regulations and
procedures. Atrion Medical Products' and Quest Medical's facilities are
registered with the FDA.
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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 and its customers are subject to
these inspections. The Company believes that it has met all FDA requirements,
and it also believes that its medical device OEM customers are in compliance;
however, if the Company or its OEM medical device customers should fail the FDA
inspections, it could have a material adverse impact on the Company's business,
financial conditions and results of operations.
Under the FDA's requirements, if a manufacturer can establish that a
newly-developed device is "substantially equivalent" to a legally marketed
device, the manufacturer may seek marketing clearance from the FDA to market the
device by filing a 510(k) premarket notification with the FDA. The 510(k)
premarket notification must be supported by data establishing the claim of
substantial equivalence to the satisfaction of the FDA. The process of obtaining
a 510(k) clearance typically can take several months to a year or longer. If
substantial equivalence cannot be established or if the FDA determines that the
device requires a more rigorous review, the FDA will require that the
manufacturer submit a premarket approval ("PMA") that must be reviewed and
approved by the FDA prior to sale and marketing of the device in the United
States. The process of obtaining a PMA can be expensive, uncertain and lengthy,
frequently requiring anywhere from one to several or more years from the date of
FDA submission. Both a 510(k) and a PMA, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. FDA
enforcement policy strictly prohibits the promotion of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for failure
to comply with regulatory requirements or the occurrence of unforeseen problems
following initial marketing. The Company believes that it and all of its current
medical device OEM customers are in compliance with these rules; however, there
is no assurance that the Company or its OEM customers are now, or will continue
to be, in compliance with such rules. If the Company or its customers do not
meet these standards, the Company's financial performance could be adversely
affected. Furthermore, delays by the FDA in approving a product or a customer's
product could delay the Company's expectations for future sales of certain
products.
Certain products manufactured by Halkey-Roberts are also subject to regulation
by the Coast Guard and the Federal Aviation Administration and similar
organizations in foreign countries which regulate the safety of marine and
aviation equipment. For international sales, the Company and its OEM customers
are primarily responsible that the products meet the standards for the country
in which the product is sold. This is true for both the medical and
aviation/marine products of the Company.
Third-Party Reimbursement and Cost Containment
In the United States, health care providers, including hospitals and physicians,
that purchase medical products for treatment of their patients generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or a part of the costs and fees
associated with the procedures performed using these products. The Company is
dependent, in part, upon the ability of health care providers to obtain
satisfactory reimbursement from third-party payors for medical procedures in
which the Company's products are used. Third-party payors may deny reimbursement
if they determine that a prescribed product has not received appropriate
regulatory clearances or approvals, is not
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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, would have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
Company is unable to predict what additional legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation
would have on the Company.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. The Company anticipates
that Congress, state legislatures and the private sector will continue to review
and assess alternative health care delivery and payment systems. Potential
approaches that have been considered include mandated basic health care
benefits, controls on health care spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid spending, the
creation of large insurance purchasing groups, price controls and other
fundamental changes to the health care delivery system. Legislative debate is
expected to continue in the future, and market forces are expected to 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, 2001, the Company had 441 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. Atrion Medical
Products owns three office buildings and a manufacturing facility in Arab,
Alabama and leases office space in Birmingham, Alabama. Halkey-Roberts leases a
manufacturing facility in St. Petersburg, Florida under a ten-year operating
lease that commenced in May 1996.
Atrion Medical Products' three office buildings and manufacturing facilities are
located on a 67-acre site in Arab, Alabama. The three office buildings house
administrative, engineering and design operations, and the manufacturing
facility contains approximately 112,000 square feet of manufacturing space.
Halkey-Roberts has a long-term lease on a manufacturing and administrative
facility located on a 7-acre site in St. Petersburg, Florida. The facility
consists of approximately 72,000 total square feet. Quest Medical's 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.
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, 2001.
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 63 Chairman, President and Chief Executive
Officer of the Company and Chairman of
the Board or President of all
subsidiaries
Jeffery Strickland 42 Vice President and Chief Financial
Officer, Secretary and Treasurer of the
Company and Vice President or
Secretary-Treasurer of all subsidiaries
Charles Gamble 60 President of Halkey-Roberts Corporation
Vandy Cruise 49 President of Atrion Medical Products
The persons who are identified as executive officers of the Company currently
serve as officers of the Company, Atrion Medical Products or Halkey-Roberts or
of both the Company and certain subsidiaries. The officers of the Company and
its subsidiaries are elected annually by the respective Boards of Directors of
the Company and its subsidiaries at the first meeting of such Boards of
Directors held after the annual meetings of stockholders of such entities.
Accordingly, the terms of office of the current officers of the Company and its
subsidiaries will expire at the time such meetings of the Board of Directors of
the Company and its subsidiaries are held, which is anticipated to be in May
2001.
There are no arrangements or understandings between any officer and any other
person pursuant to which the officer was elected. There are no family
relationships between any of the executive officers or directors.
There have been no events under any bankruptcy act, no criminal proceedings and
no judgments or injunctions material to the evaluation of the ability and
integrity of any executive officers during the past five years.
Brief Account of the Business Experience During the Past Five Years
Mr. Battat has been a director of the Company since 1987 and has served as
Chairman of the Board of the Company since January 1998. Mr. Battat has served
as President and Chief Executive Officer of the Company and as Chairman or
President of all subsidiaries since October 1998. From March 1994 to October
1998, Mr. Battat served as President and Chief Executive Officer of Piedmont
Enterprises, Inc., a privately held consulting firm.
Mr. Strickland has served as Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company since February 1, 1997. He has served as
Vice President of Atrion Medical Products and of Halkey-Roberts since January
1997 and as Vice President of Quest Medical 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
-10-
1997 and as Vice President and Chief Financial Officer and Secretary-Treasurer
of Alabama-Tennessee Natural Gas Company from February 1997 until May 1997.
Mr. Gamble has served as President of Halkey-Roberts since May 1989.
Mr. Cruise has served as President of Atrion Medical Products since November
2000. From April 1994 to November 2000, Mr. Cruise served as Vice President of
Operations for Atrion Medical Products.
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, 2001, the Company had approximately 1,700 stockholders,
including beneficial owners holding shares in "nominee" or "street" name. The
high and low closing prices as reported by Nasdaq for each quarter of 1999 and
2000 are shown below.
Year Ended
December 31, 1999: High Low
------------------ ---- ---
First Quarter $ 9.63 $ 7.38
Second Quarter $ 10.13 $ 8.81
Third Quarter $ 11.00 $ 8.50
Fourth Quarter $ 11.94 $ 8.75
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
No dividends were declared or paid during 2000, and the Company presently has no
plans to pay cash dividends. See Item 7: "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
-11-
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
(In thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Revenues $ 51,447 $ 49,917 $ 43,397 $ 30,277 $ 22,121
Income (loss) from continuing
operations 2,663 2,128 1,478 (2,045)(a) 853
Net income 2,792 2,293 2,140 17,170(a) 6,476
Total assets 63,690 64,640 60,415 60,942 45,433
Long-term debt 7,400 10,417 -- 203 6,313
Income (loss) from continuing
operations, per basic share 1.30 0.82 0.46 (0.63) 0.27
Net income per basic share 1.36 0.88 0.67 5.33 2.03
Dividends per share -- -- -- 0.60 0.80
Average basic shares outstanding 2,047 2,593 3,203 3,224 3,189
Book value per share 22.10 20.30 16.66 15.42 10.71
- ----------------------------------------------------------------------------------------------------------------
(a) The 1997 amounts include an impairment loss of $3.0 million after tax and
a charge for a product replacement program of $.7 million after tax.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Atrion Corporation is a holding company primarily engaged in the design,
development, manufacturing, marketing, sale and distribution of proprietary
products and components for the medical and healthcare industry. The Company's
operations are conducted primarily by Atrion Medical Products, Halkey-Roberts
and Quest Medical, all of which are wholly owned subsidiaries of the Company.
Atrion Medical Products and Quest Medical design, develop, manufacture, market,
sell and distribute proprietary products for the medical and healthcare
industry. Halkey-Roberts designs, develops, manufactures and sells proprietary
medical device components and related components, all of which are used to
control the flow of fluids and gases. The Company also owns two other
subsidiaries which are small and incidental to the Company's overall operations.
Results of Operations
The Company's 2000 income from continuing operations was $2.7 million or $1.30
per basic and $1.25 per diluted share compared to income from continuing
operations in 1999 of $2.1 million or $.82 per basic and $.81 per diluted share
and $1.5 million or $.46 per basic and diluted share in 1998. Net income,
including discontinued operations, for 2000 totaled $2.8 million or $1.36 per
basic and $1.31 per diluted share compared with $2.3 million or $.88 per basic
and $.87 per diluted share in 1999 and $2.1 million or $.67 per basic and
diluted share in 1998.
-12-
Operating revenues were $51.4 million in 2000 compared with $49.9 million in
1999 and $43.4 million in 1998. Revenues increased in 2000 at all operations
with one exception where unusually large product shipments in 1999 to a
significant customer that was building up its inventory levels of our products
impacted 2000 revenues. The $6.5 million increase in revenues from 1998 to 1999
was the result of improved sales at all operations and the inclusion of revenues
of Quest Medical for twelve months in 1999 compared with the inclusion of Quest
Medical revenues in 1998 for the eleven months subsequent to its acquisition in
late January 1998.
The Company's cost of sales was $31.6 million in 2000 compared with $30.3
million in 1999 and $26.9 million in 1998. The increase in cost of sales for
2000 over 1999 and for 1999 over 1998 was primarily related to the increased
sales mentioned above and the impact of manufacturing volumes.
Gross profits were $19.9 million in 2000 compared with $19.6 million in 1999 and
$16.5 million in 1998. The increase in gross profit in 1999 over 1998 was
primarily the result of the above mentioned revenue increases. The Company's
gross profit in 2000 was 39 percent of revenues compared with 39 percent of
revenues in 1999 and 38 percent of revenues in 1998. The increase in gross
profit percentage in 1999 was primarily attributable to improved sales in
certain higher margin products.
Operating expenses were $15.6 million in 2000 compared with $16.5 million in
1999 and $14.9 million in 1998. The decrease in operating expenses from 1999 to
2000 was primarily attributable to reduced General and Administrative (G&A)
expenses and reduced Research and Development (R&D) expenses. G&A expenses for
2000 were $446,000 lower than G&A expenses for 1999 primarily as a result of
lower spending on outside services, compensation and benefit programs. R&D
expenses were $547,000 lower for 2000 as compared with 1999. This reduction is
primarily the result of the Company's reduced R&D efforts on non-core products
with limited market potential. The increase in operating expenses from 1998 to
1999 was primarily attributable to the expansion of marketing efforts associated
with the MPS product line. The increase in operating expenses for 1999 over 1998
was also the result of the inclusion of the operation of Quest Medical for
twelve months in 1999 compared with the inclusion of the Quest Medical operation
in 1998 for the eleven months subsequent to its acquisition in late January
1998.
The Company's operating income for 2000 was $4.2 million compared with $3.1
million in 1999 and $1.6 million in 1998. Revenue growth during the three-year
period and cost containment and cost reduction activities, primarily in 2000,
contributed to the operating income improvements during the three-year period.
Net interest expense in 2000 was $654,000 compared with net interest expense of
$257,000 in 1999 and net interest income in 1998 of $577,000. The change from
1999 to 2000 was primarily attributable to 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 change from 1998 to 1999
was primarily attributable to the Company's use of cash and cash equivalents in
late 1998 to fund repurchases of outstanding common stock of the Company and in
February 1999 to fund the purchase of its Allen, Texas facility and an increase
in the Company's borrowings to fund its repurchases of outstanding common stock
of the Company during 1999. Net interest income in 1998 was primarily
attributable to interest earned on the proceeds of the sale of the Company's
natural gas subsidiaries in May 1997 remaining after the late January
-13-
1998 purchase of the Quest Medical operation.
Income tax expense in 2000 totaled $923,000 compared with $741,000 in 1999 and
$735,000 in 1998. An increase in the Company's foreign sales corporation benefit
and an increase in the Company's research and development tax credit resulted in
a lower effective income tax rate for 2000 and 1999 compared with 1998.
Otherwise, the difference between years reflect changes in pretax income between
the respective years.
The Company believes that 2001 revenues at all operations will be higher than
2000 revenues at those operations and that the cost of goods sold, gross profit,
operating income and income from continuing operations will be higher in 2001
than in 2000. The Company is optimistic that its earnings per share from
continuing operations will grow more than 15% per year for the next three years.
Discontinued Operations
As discussed in Note 2 in the Notes to Consolidated Financial Statements, on May
30, 1997, the Company completed the sale of all of the issued and outstanding
shares of common stock of Alabama-Tennessee Natural Gas Company, Tennessee River
Intrastate Gas Company, Inc. and AlaTenn Energy Marketing Company, Inc. for
approximately $38.2 million. In the fourth quarter of 1997, the Company's two
small remaining natural gas subsidiaries, Central Gas Company and Tennessee
River Development Company, sold their assets for $470,000.
The financial statements presented herein reflect the Company's natural gas
operations as discontinued operations for all periods presented. The financial
statements also reflect an after-tax gain on disposal of discontinued operations
of $.1 million or $.06 per basic and diluted share in 2000, $.2 million or .06
per basic and diluted share in 1999 and $.7 million or $.21 per basic and
diluted share in 1998 based upon the sale of the natural gas operations as
described above.
Liquidity and Capital Resources
The Company has an $18.5 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 LIBOR, 60-day LIBOR or 90-day LIBOR, as selected by the Company, plus one
percent. At December 31, 2000 the Company had $7.4 million of outstanding
borrowings under the Credit Facility. At the Company's option, and subject to
certain conditions, the amount that can be borrowed under the Credit Facility
may be increased to $25.0 million upon the lender's determination that it has
adequate security or upon the Company's grant of such additional security as the
lender deems reasonably necessary. The term of the Credit Facility expires
November 11, 2002 and may be extended under certain circumstances.
As of December 31, 2000, the Company had cash and cash equivalents of $159,000
compared with $70,000 at December 31, 1999. The Company had long-term debt as of
December 31, 2000 of $7.4 million compared with $10.4 million as of December 31,
1999. The increase in cash and cash equivalents from December 31, 1999 to
December 31, 2000 and the decrease in long-term debt from December 31, 1999 to
December 31, 2000 was primarily funded by net cash
-14-
from operating activities remaining after repurchases of outstanding common
stock of the Company and purchases of new machinery and equipment. Cash provided
by continuing operations increased to $7.2 million in 2000 compared to $5.3
million in 1999 and $3.5 million in 1998. Capital expenditures for property,
plant and equipment for continuing operations totaled $3.1 million in 2000
compared with $12.1 million in 1999 and $2.0 million in 1998. Included in the
1999 capital expenditure amount is $6.5 million for the purchase of the Allen,
Texas facility.
The Company believes that its existing cash and cash equivalents, cash flows
from operations, borrowings available under the Company's Credit Facility and
other equity or debt financing, which the Company believes would be available,
will be sufficient to fund the Company's cash requirements for at least the
foreseeable future.
In January 1998, the Board of Directors discontinued the payment of quarterly
cash dividends. Such action was taken to facilitate the Company's growth
strategy as well as to bring the Company's dividend policy more in line with
other companies in the medical products industry.
Impact of Inflation
The Company experiences the effects of inflation primarily in the prices it pays
for labor, materials and services. Over the last three years, the Company has
experienced the effects of moderate inflation in these costs. At times, the
Company has been able to offset a portion of these increased costs by increasing
the sales prices of its products. However, competitive pressures have not
allowed for full recovery of these cost increases.
New Accounting Pronouncements
See Note 1 in Notes to Consolidated Financial Statements.
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 regarding
future revenues, cost of sales, gross profit, operating income, income from
continuing operations, earnings per share 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, the effects of governmental
regulation, the impact of competition and new technologies,
slower-than-anticipated introduction of new products or implementation of
marketing strategies, implementation of new manufacturing processes or
implementation of new information systems, changes in the prices of raw
materials, changes in product mix, product recalls, the ability to attract and
retain qualified personnel and the loss of any significant customers. In
addition, assumptions relating to budgeting, marketing, product development and
-15-
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 $18.5 million credit facility with a regional bank.
Borrowings under the Credit Facility bear interest at 30-day LIBOR, 60-day LIBOR
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 LIBOR,
60-day LIBOR or the 90-day LIBOR. At December 31, 2000, the Company had
borrowings under the Credit Facility of $7.4 million. A one percent increase in
the market interest rate would reduce the Company's annual pretax income by
approximately $74,000 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, 2000
and 1999 and the related consolidated statements of income and cash flows for
each of the three years in the period ended December 31, 2000. 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, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 16, 2001
-17-
CONSOLIDATED STATEMENTS OF INCOME
(For the years ended December 31, 2000, 1999 and 1998)
- -------------------------------------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues $ 51,447 $ 49,917 $ 43,397
Cost of Goods Sold 31,561 30,337 26,937
- -------------------------------------------------------------------------------------------------------------
Gross Profit 19,886 19,580 16,460
- -------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling 7,010 6,841 5,368
General and administrative 6,576 7,022 6,763
Research and development 2,054 2,601 2,750
- -------------------------------------------------------------------------------------------------------------
15,640 16,464 14,881
- -------------------------------------------------------------------------------------------------------------
Operating Income 4,246 3,116 1,579
Interest (Expense) Income, net (654) (257) 577
Other (Expense) Income, net (6) 10 57
- -------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Provision
for Income Taxes 3,586 2,869 2,213
Income Tax Provision (Note 4) (923) (741) (735)
- -------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 2,663 2,128 1,478
Gain on Disposal of Discontinued Operations,
net of tax (Note 2) 129 165 662
- -------------------------------------------------------------------------------------------------------------
Net Income $ 2,792 $ 2,293 $ 2,140
=============================================================================================================
Earnings Per Basic Share:
Continuing operations $ 1.30 $ 0.82 $ 0.46
Gain on disposal of discontinued operations 0.06 0.06 0.21
- -------------------------------------------------------------------------------------------------------------
Net Income Per Basic Share $ 1.36 $ 0.88 $ 0.67
=============================================================================================================
Weighted Average Basic Shares Outstanding 2,047 2,593 3,203
=============================================================================================================
Earnings Per Diluted Share:
Continuing Operations $ 1.25 $ 0.81 $ 0.46
Gain on disposal of discontinued operations 0.06 0.06 0.21
- -------------------------------------------------------------------------------------------------------------
Net Income Per Diluted Share $ 1.31 $ 0.87 $ 0.67
=============================================================================================================
Weighted Average Diluted Shares Outstanding 2,135 2,631 3,210
=============================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-18-
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 1999
- ------------------------------------------------------------------------------------------------
Assets: 2000 1999
- ------------------------------------------------------------------------------------------------
(In thousands)
Current Assets:
Cash and cash equivalents $ 159 $ 70
Accounts receivables, net 7,175 7,767
Inventories, net (Note 1) 10,110 9,106
Prepaid expenses 752 1,004
- ------------------------------------------------------------------------------------------------
18,196 17,947
- ------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Original cost (Note 1) 37,295 34,417
Less accumulated depreciation and amortization 11,225 7,999
- ------------------------------------------------------------------------------------------------
26,070 26,418
- ------------------------------------------------------------------------------------------------
Other Assets and Deferred Charges:
Patents, net of accumulated amortization of $6,238 and $5,934 in
2000 and 1999, respectively (Note 1) 3,012 3,316
Goodwill, net of accumulated amortization of $3,511 and $2,909 in
2000 and 1999, respectively (Note 1) 12,803 13,393
Other 3,609 3,566
- ------------------------------------------------------------------------------------------------
19,424 20,275
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
$ 63,690 $ 64,640
================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
-19-
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 1999
- --------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity: 2000 1999
- --------------------------------------------------------------------------------------------------
(In thousands)
Current Liabilities:
Accounts payable and accrued liabilities $ 4,518 3,936
Accrued income and other taxes 187 21
- -------------------------------------------------------------------------------------------------
4,705 3,957
- -------------------------------------------------------------------------------------------------
Long-term Debt (Note 3) 7,400 10,417
- -------------------------------------------------------------------------------------------------
Other Liabilities and Deferred Credits:
Accumulated deferred income taxes (Note 4) 6,470 6,393
Other 1,101 1,300
- -------------------------------------------------------------------------------------------------
7,571 7,693
- -------------------------------------------------------------------------------------------------
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 2000 and 1999 (Note 5) 342 342
Paid-in capital 6,419 6,403
Retained earnings (Note 8) 51,906 49,114
Treasury shares, 1,427,660 shares in 2000 and 1,322,360 shares
in 1999, at cost (Note 5) (14,653) (13,286)
- -------------------------------------------------------------------------------------------------
44,014 42,573
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
$ 63,690 $ 64,640
==================================================================================================
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, 2000, 1999 and 1998)
- -------------------------------------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 2,792 $ 2,293 $ 2,140
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of discontinued operations (Note 2) (129) (165) (662)
Depreciation and amortization 4,119 3,975 3,304
Deferred income taxes 77 593 1,511
Other (242) (744) 154
- -------------------------------------------------------------------------------------------------------------
6,617 5,952 6,447
Changes in current assets and liabilities:
Decrease (increase) in accounts receivable 592 (489) (2,337)
Increase in other current assets (752) (184) (1,690)
Increase (decrease) in accounts payable 170 (35) 771
Increase in other current liabilities 578 13 284
- -------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 7,205 5,257 3,475
Net cash provided by (used in) discontinued operations
(Note 2) 165 165 (1,614)
- -------------------------------------------------------------------------------------------------------------
7,370 5,422 1,861
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchase of subsidiary companies (Note 2) -- -- (23,198)
Proceeds from disposal of discontinued operations 199 -- --
Property, plant and equipment additions, net (3,112) (12,102) (1,998)
- -------------------------------------------------------------------------------------------------------------
(2,913) (12,102) (25,196)
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase (decrease) in long-term indebtedness (3,017) 10,214 (453)
Issuance of treasury stock 85 -- 20
Purchase of treasury stock (1,436) (9,099) (2,769)
- -------------------------------------------------------------------------------------------------------------
(4,368) 1,115 (3,202)
- -------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 89 (5,565) (26,537)
Cash and cash equivalents, beginning of year 70 5,635 32,172
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 159 $ 70 $ 5,635
=============================================================================================================
Cash paid for:
Interest (net of capitalized amounts) $ 746 $ 283 $ 22
Income taxes (net of refunds) 4 186 340
- -------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-21-
(1) Summary of Significant Accounting Policies
Atrion Corporation is a holding company whose subsidiaries design,
develop, manufacture and market products for the medical and healthcare
industry. As of December 31, 2000 the principal subsidiaries of the
Company were Quest Medical, Inc., Atrion Medical Products, Inc. and
Halkey-Roberts Corporation.
Principles of Consolidation The consolidated financial statements include
the accounts of Atrion Corporation and its subsidiaries (the "Company").
All significant intercompany transactions and balances have been
eliminated in consolidation.
Cash and Cash Equivalents Cash equivalents are securities with original
maturities of 90 days or less.
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,
2000 1999
----------------------------------------------------------------
Raw materials $ 5,483 $ 5,461
Finished goods 3,778 3,138
Work in process 980 1,080
Reserve for obsolescence (131) (573)
----------------------------------------------------------------
Net inventory $ 10,110 $ 9,106
================================================================
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, 2000 and 1999 (in thousands):
December 31,
2000 1999
---------------------------------------------------------------
Land $ 1,506 $ 1,759
Buildings 10,578 10,500
Machinery and equipment 25,211 22,158
---------------------------------------------------------------
Total property, plant and equipment $37,295 $34,417
===============================================================
Depreciation expense of $3,225,000, $3,079,000 and $2,446,000 was recorded
for the years ended December 31, 2000, 1999 and 1998, 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.
Goodwill is being amortized over 25 years and patents are being amortized
over the remaining lives of the individual patents, which are 6 to 19
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. 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. Allowances are made for bad debts
where appropriate and are reviewed periodically. The allowances for bad
debts were not material for the periods presented.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
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 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distribution
to owners, for any period presented. The Company did not have any
components of comprehensive income other than net income for all periods
presented.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires companies to record all derivatives on
the balance sheet at fair value and establish "special accounting" for the
three different types of hedges. During 1999, SFAS No. 137 was issued
which deferred the effective date of SFAS No. 133 until fiscal quarters of
all fiscal years beginning after June 15, 2000. Currently, the Company has
no derivative investments.
In December 1999, the staff of the Securities and Exchange Commission
("SEC") released Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition" to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 explains the
SEC staff's general framework for revenue
-23-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
recognition, which includes certain criteria to be met in order to
recognize revenues. This pronouncement did not impact the Company's
financial statements for any period presented.
In April 2000, the FASB issued Interpretation No. (FIN) 44, "Accounting
for Certain Transactions Involving Stock Compensation." This
interpretation seeks to better interpret and clarify certain accounting
issues related to executive compensation arrangements and employee stock
ownership plans and modifications to the terms of the awards (options)
granted to executives, employees and directors of the Company. This
interpretation became effective on a prospective basis on July 1, 2000.
The recognition of this interpretation did not impact the Company's
financial statements for the year ended December 31, 2000.
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 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) Acquisitions and Dispositions of Assets and Subsidiaries
Acquisition of Quest Medical, Inc.
On January 30, 1998, the Company, through a wholly owned Texas subsidiary
then known as "QMI Medical, Inc.," acquired the cardiovascular and
intravenous fluid products division of Advanced Neuromodulation Systems,
Inc. (formerly known as Quest Medical, Inc. and herein referred to as
"ANS") and all rights to the name "Quest Medical, Inc." The Company paid
$22,922,000 (after taking into account certain postclosing adjustments and
excluding $276,000 of related acquisition costs) in cash for the net
assets acquired from ANS. This acquisition was accounted for using the
purchase method of accounting. Accordingly, the purchase price was
allocated to the assets and liabilities acquired based on their estimated
fair value at the date of acquisition. The excess of the consideration
paid over the estimated fair value of the net assets acquired of $9.7
million was recorded as goodwill and is being amortized over 25 years. The
Company changed the name of QMI Medical, Inc. to "Quest Medical, Inc." in
June 1998, and that subsidiary is herein referred to as "Quest Medical."
As part of the transaction, the Company also obtained a one-year lease on
ANS's facility in Allen, Texas, along with an option to buy the facility.
On February 1, 1999, the Company purchased the Allen, Texas facility for
$6.5 million pursuant to this option.
The following table presents unaudited consolidated selected financial
data on a pro forma basis assuming the purchase of these assets had
occurred as of January 1, 1998. The unaudited consolidated pro forma data
reflect certain assumptions, which are based on estimates. The unaudited
consolidated pro forma combined results presented have been prepared for
comparative purposes only and are not necessarily indicative of actual
results that would have been achieved had the acquisition occurred at the
beginning of the periods presented, or of future results.
-24-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
Twelve months ended
December 31, 1998
(In thousands)
-------------------------------------------------------------
Revenues $ 44,531
Income from continuing operations $ 1,613
Net income $ 2,163
Net income per basic share $ 0.68
-------------------------------------------------------------
Disposal of Natural Gas Operations
During 1997, the Company disposed of all of its natural gas operations. In
addition to the consideration received in 1997, certain annual contingent
deferred payments of up to $250,000 per year are 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 from the purchaser in April 1999 and in April 2000.
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 discontinued operations of $129,000, $165,000 and $662,000,
net of income tax expense of $67,000, $85,000, $340,000, in 2000, 1999 and
1998, respectively, based upon the sale of the natural gas operations as
described above. The 2000 gain reflected above is net of a $36,000 loss
related to the sale of certain residual properties of the Company's
natural gas operations.
(3) Long-term Debt and Other Borrowings
Long-term debt as of December 31, 2000 and 1999 consisted of the following
(in thousands):
2000 1999
-------------------------------------------------------------
Revolving credit facility $ 7,400 $10,417
Less amounts due in one year -- --
=============================================================
$ 7,400 $10,417
=============================================================
The Company has an $18.5 million revolving credit facility ("Credit
Facility") with a regional bank. Under the Credit Facility, the Company
and certain of its subsidiaries have a line of credit, which is secured by
inventory, equipment and accounts receivable of the Company. At the
Company's option, and subject to certain conditions, the amount that can
be borrowed under the Credit Facility may be increased to $25.0 million
upon the lender's determination that it has adequate security or upon the
Company's grant of such additional security as the lender deems reasonably
necessary. Interest under the Credit Facility is assessed at 30-day LIBOR,
60-day LIBOR or 90-day LIBOR, as selected by the Company, plus one percent
(7.63% at December 31, 2000) and is payable monthly. The term of the
Credit Facility expires November 11, 2002 and may be extended under
certain circumstances. At any time during the term, the Company may
convert any or all outstanding amounts under the Credit Facility to a term
loan with a maturity of two years. The Company's ability to borrow funds
under the Credit Facility from time to time is contingent on meeting
certain covenants in the loan agreement. At December 31, 2000, the Company
was in compliance with all financial covenants.
-25-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
On December 31, 2000, 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.
(4) Income Taxes
The items comprising income tax expense for continuing operations are as
follows:
2000 1999 1998
(In thousands)
-----------------------------------------------------------------
Current -- Federal $ 579 $ 181 $ (71)
-- State 85 93 33
-----------------------------------------------------------------
664 274 (38)
Deferred -- Federal 225 424 673
-- State 34 43 100
-----------------------------------------------------------------
259 467 773
-----------------------------------------------------------------
Total income tax expense $ 923 $ 741 $ 735
=================================================================
Temporary differences and carryforwards which gave rise to a significant
portion of deferred tax assets and liabilities as of December 31, 2000 and
1999 are as follows:
2000 1999
(In thousands)
------------------------------------------------------------------
Deferred tax assets:
Benefit plans $ 569 $ 516
Tax credits 934 510
Other, net 1,159 1,439
------------------------------------------------------------------
Subtotal 2,662 2,465
Valuation allowance (68) (131)
------------------------------------------------------------------
Total deferred tax assets $ 2,594 $ 2,334
==================================================================
Deferred tax liabilities:
Depreciation and property basis differences $ 2,516 $ 1,973
Pensions 384 418
Other, net 6,164 6,336
------------------------------------------------------------------
Total deferred tax liabilities $ 9,064 $ 8,727
==================================================================
-26-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
The deferred tax assets as of December 31, 2000 reflected in the table
above include alternative minimum tax credit carryforwards of $532,000 and
research and development tax credit carryforwards of $402,000. Management
believes that, except as it relates to certain tax credits, a valuation
allowance is not necessary based on the Company's earnings history, the
projections for future taxable income and other relevant considerations
over the periods during which the deferred tax assets become deductible.
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:
2000 1999 1998
(In thousands)
- --------------------------------------------------------------------------------
Income tax expense at the statutory
federal income tax rate $ 1,219 $ 975 $ 752
Increase (decrease) resulting from:
State income taxes 141 136 133
Decrease in valuation allowance (63) -- --
Research and development credit (130) (101) (50)
FSC benefit (265) (269) (100)
Other, net 21 -- --
- --------------------------------------------------------------------------------
Total income tax expense $ 923 $ 741 $ 735
================================================================================
(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 114,500, 220,900 and 42,000 shares during the years
2000, 1999 and 1998, respectively at per share prices ranging from $7.77
to $13.52. As of December 31, 2000, there remained authorization for the
repurchase of 150,500 additional shares. The Company made two tender
offers during 1999 and one tender offer during 1998 purchasing a total of
883,152 shares of its common stock. Pursuant to these tender offers, the
Company purchased 342,536 shares of its common stock at $12.00 per share
in December 1999, 301,524 shares of its common stock at $10.00 per share
in April 1999, and 239,092 shares of its common stock at $9.00 per share
in December 1998. 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 9,200 treasury shares in
2000 in connection with the exercise of options under its 1997 Stock
Incentive Plan and its 1998 Outside Directors Stock Option Plan (see Note
7). At December 31, 2000 and 1999, there were 1,427,660 and 1,322,360
shares, respectively, of common stock being held in treasury. The cost of
these shares is shown as a reduction in stockholders' equity in the
consolidated balance sheets.
The Company has a Common Share Purchase Rights Plan, which is intended to
protect the interests of stockholders in the event of a hostile attempt to
take over the Company. The rights, which are not presently exercisable and
do not have any voting powers, represent the right of the Company's
stockholders to purchase at a substantial discount,
-27-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
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.
(6) Earnings Per Share
The following is a reconciliation of the weighted average shares
outstanding used in calculating basic and diluted earnings per share as
presented in the consolidated statements of income:
2000 1999 1998
(In thousands)
- --------------------------------------------------------------------------------
Weighted average basic shares outstanding 2,047 2,593 3,203
Add: Effect of dilutive securities (options) 88 38 7
- --------------------------------------------------------------------------------
Weighted average diluted shares outstanding 2,135 2,631 3,210
================================================================================
(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. 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 1998, 1999 and 2000 are as follows:
Shares Price Per Share
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1997 264,000 $ 9.92 -- 17.00
Granted in 1998 422,100 $ 6.88 -- 13.25
Expired in 1998 (21,800) $ 12.25 -- 13.25
Exercised in 1998 -- $ 0.00 -- 0.00
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1998 664,300 $ 6.88 -- 17.00
Granted in 1999 99,000 $ 7.63 -- 7.63
Expired in 1999 (271,750) $ 6.88 -- 17.00
Exercised in 1999 -- $ 0.00 -- 0.00
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1999 491,550 $ 6.88 -- 15.17
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
================================================================================
As of December 31, 2000, options for 356,100 of the above-listed shares
were exercisable and there remained 347,884 shares for which options may
be granted in the future under the 1997 Stock Incentive Plan.
The Company accounts for stock options under Accounting Principles Board
("APB") Opinion No. 25, which requires compensation costs to be recognized
only when the option price differs from the market price at the grant
date. SFAS No. 123, "Accounting for Stock-Based Compensation," allows a
company to follow APB Opinion No. 25 with an additional disclosure that
shows what the company's pro forma net income would have been using SFAS
No. 123.
Pro forma information regarding net income and earnings per share as
required by SFAS No. 123 has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 2000, 1999 and 1998:
2000 1999 1998
--------------------------------------------------------------------------
Risk-free interest rate 6.6% 4.9% 5.3%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 30.0% 30.0% 28.0%
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:
2000 1999 1998
- --------------------------------------------------------------------------------
Net income - as reported $2,792 $2,293 $2,140
Net income - pro forma $2,274 $1,839 $1,487
Earnings per basic share - as reported $ 1.36 $ 0.88 $ 0.67
Earnings per basic share - pro forma $ 1.11 $ 0.71 $ 0.46
Weighted average fair value of options
granted during the year $ 5.57 $ 3.29 $ 4.64
- --------------------------------------------------------------------------------
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the model used for the
above disclosure does not necessarily provide a reliable single measure of
the fair value of its employee stock options.
(8) Retained Earnings
The following table reflects changes in consolidated retained earnings for
the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
(In thousands)
- --------------------------------------------------------------------------------
Balance, beginning of year $49,114 $46,821 $44,681
Add: Net income for the year 2,792 2,293 2,140
- --------------------------------------------------------------------------------
Balance, end of year $51,906 $49,114 $46,821
================================================================================
(9) Revenues From Major Customers
The Company had one major customer which represented approximately $8.9
million (17.3 percent), $8.3 million (16.6 percent), and $5.3 million
(12.2 percent) of the Company's operating revenues during the years 2000,
1999 and 1998, respectively.
(10) Industry Segment and Geographic Information
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting information about operating segments in annual
financial statements and requires reporting selected information about
operating segments in interim financial reports issued to stockholders.
-30-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
The Company operates in one reportable industry segment: designing,
developing, manufacturing and marketing products for the medical and
healthcare industry with no foreign operating subsidiaries. The Company
recorded incidental revenues from its oxygen pipeline, which totaled
approximately $950,000 in each of the years of 2000, 1999 and 1998.
Pipeline net assets totaled $2,867,000 at December 31, 2000. Company
revenues from sales outside the United States totaled approximately 22
percent of the Company's total revenues in 2000, 1999 and 1998. 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, 2000 and 1999 are as follows (in thousands):
2000 1999
------- -------
Change in Benefit Obligation
Benefit obligation, January 1 $ 3,429 $ 3,297
Service cost 383 315
Interest cost 271 226
Actuarial loss 522 255
Benefits paid (337) (664)
---------------------------------------------------------------------
Benefit obligation, December 31 $ 4,268 $ 3,429
=====================================================================
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, 2000 and 1999,
are as follows (in thousands):
2000 1999
------- -------
Change in Plan Assets
Fair value of plan assets, January 1 $ 5,872 $ 5,696
Actual return on plan assets (38) 840
Benefits paid (337) (664)
---------------------------------------------------------------------
Fair value of plan assets, December 31 $ 5,497 $ 5,872
======================================================================
Funded status of plan $ 1,229 $ 2,443
Unrecognized actuarial loss (gain) 28 (1,046)
Unrecognized prior service cost 89 96
Unrecognized net transition obligation (219) (263)
---------------------------------------------------------------------
Net amount recognized $ 1,127 $ 1,230
======================================================================
-31-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
The components of net periodic pension benefit cost for 2000, 1999 and
1998 were as follows (in thousands):
2000 1999 1998
----- ----- -----
Components of Net Periodic
Benefit Cost
Service cost $ 383 $ 315 $ 297
Interest cost 271 226 235
Expected return on assets (506) (421) (430)
Prior service cost amortization 6 6 6
Actuarial gain (9) (7) (17)
Transition amount amortization (44) (43) (49)
---------------------------------------------------------------------
Net periodic benefit cost $ 101 $ 76 $ 42
=====================================================================
Actuarial assumptions used to determine the values of the PBO at December
31, 2000 and 1999 and the benefits cost for 2000, 1999 and 1998 included
the following: a discount rate of 7.25 percent for 2000, a discount rate
of 7.75 percent for 1999, and a discount rate of 7.25 percent for 1998; an
estimated long-term rate of return on plan assets of 9 percent in 2000 and
8 percent in 1999 and 1998; and an estimated weighted average rate of
compensation increase of 5 percent in 2000, and 6 percent in 1999 and
1998. As of December 31, 2000, the plan's assets were invested in mutual
funds as follows: equity, 77 percent; fixed income, 22 percent; and money
market, 1 percent.
The Company also sponsors defined contribution plans for all employees.
Each participant may contribute certain amounts of eligible compensation.
The Company makes a matching contribution to the plans. The Company's
contribution under these plans was $272,000 in 2000, $250,000 in 1999, and
$264,000 in 1998. The 1998 amount includes contributions to the Company's
Supplemental Executive Thrift Plan, which was terminated December 31,
1998.
The Company previously provided certain postretirement health care and
life insurance benefits to full-time employees of its natural gas
operations. After the disposal of its natural gas operations in 1997, the
Company no longer has any obligations for such postretirement benefits.
(12) Commitments and Contingencies
The Company is subject to legal proceedings, third-party claims and other
contingencies related to product liability, regulatory 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.
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
-32-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
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, 2000, 1999 and 1998 was $361,000,
$351,000 and $342,000 respectively. Future minimum rental commitments
under this lease are $347,000 in 2001and $137,000 in 2002.
(13) Quarterly Financial Data (Unaudited)
Quarterly financial data for 2000 and 1999 are as follows:
Quarter Operating Operating Earnings Per Basic
Ended Revenue Income Net Income Share
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
03/31/99 $ 11,581 $ 607 $ 393 $ 0.13
06/30/99 12,737 914 785 0.30
09/30/99 13,441 947 654 0.26
12/31/99 12,158 648 461 0.19
- --------------------------------------------------------------------------------
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
2001 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 2001 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 2001 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 2001 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 2001 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 Bylaws of Atrion Corporation (4)
4a Rights Agreement, dated as of February 1, 1990, between AlaTenn
Resources, Inc. and American Stock Transfer & Trust Company which
includes the form of Right Certificate as Exhibit A and the Summary of
Rights to Purchase Common Shares as Exhibit B (5)
4b Second Amendment to Rights Agreement (6)
10a* 1990 Stock Option Plan (7)
10b* Form of Incentive Stock Option Agreement (8)
10c* 1994 Key Employee Stock Incentive Plan (9)
10d* Form of Incentive Stock Option Agreement (10)
10e* Atrion Corporation 1997 Stock Incentive Plan (11)
10f* Atrion Corporation 1998 Outside Directors Stock Option Plan (12)
10g* Form of Stock Option Agreement (13)
10h* Atrion Corporation Incentive Compensation Plan for Chief Executive
Officer ( 14)
10i* Atrion Corporation Incentive Compensation Plan for Chief Financial
Officer (15)
10j* Severance Plan for Chief Financial Officer (16)
10k* Atrion Corporation Incentive Compensation Plan for Chief Financial
Officer (17)
-35-
21 Subsidiaries of Atrion Corporation as of December 31, 2000
23 Consent of Arthur Andersen LLP
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) 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 30, 2001
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 March 30, 2001
- ------------------------- Chief Executive Officer
Emile A. Battat (Principal Executive Officer)
/s/Jeffery Strickland Vice President, Chief Financial March 30, 2001
- ------------------------- Officer and Secretary-Treasurer
Jeffery Strickland (Principal Financial and
Accounting Officer)
/s/Richard O. Jacobson Director March 30, 2001
- -------------------------
Richard O. Jacobson
/s/John H. P. Maley Director March 30, 2001
- -------------------------
John H. P. Maley
-37-
Signature Title Date
--------- ----- ----
/s/Jerome J. McGrath Director March 30, 2001
- -------------------------
Jerome J. McGrath
/s/Hugh J. Morgan, Jr. Director March 30, 2001
- -------------------------
Hugh J. Morgan, Jr.
/s/Roger F. Stebbing Director March 30, 2001
- -------------------------
Roger F. Stebbing
/s/John P. Stupp, Jr. Director March 30, 2001
- -------------------------
John P. Stupp, Jr.
-38-
EXHIBIT INDEX
Exhibit
Numbers Description Page
- ------- ----------- ----
2a Asset Purchase Agreement, dated March 19, 1997,
between Atrion Corporation and Midcoast Energy
Resources, Inc. (1)
2b Asset Purchase Agreement, dated as of December 29,
1997, by and among Quest Medical, Inc., QMI
Acquisition Corp. and Atrion Corporation (2)
3a Certificate of Incorporation of Atrion
Corporation, dated December 30, 1996(3)
3b Bylaws of Atrion Corporation (4)
4a Rights Agreement, dated as of February 1, 1990,
between AlaTenn Resources, Inc. and American Stock
Transfer & Trust Company which includes the form
of Right Certificate as Exhibit A and the Summary
of Rights to Purchase Common Shares as Exhibit B
(5)
4b Second Amendment to Rights Agreement (6)
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) 41
21 Subsidiaries of Atrion Corporation as of December
31, 2000 42
23 Consent of Arthur Andersen LLP 43
Notes
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(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.
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(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) Filed herewith
* Management Contract or Compensatory Plan or Arrangement
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