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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
Commission File Number 0-10763
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Atrion Corporation
(Exact name of registrant as specified in its charter)
Delaware 63-0821819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Allentown Parkway,
Allen, Texas 75002
(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (972) 390-9800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Title of Class
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Common Stock, $.10 Par Value
--------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting Common Stock held by nonaffiliates of
the registrant at March 1, 2004 was $59,761,882 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, 2004: 1,705,307.
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 2004
annual meeting of stockholders, to be filed with the Commission not later than
120 days after the end of the fiscal year covered by this report.
ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2003
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TABLE OF CONTENTS
ITEM PAGE
---- ----
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...............................9
PART II.....................................................................10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................10
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....................................................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................41
ITEM 9A. CONTROLS AND PROCEDURES........................................41
PART III....................................................................41
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............41
ITEM 11. EXECUTIVE COMPENSATION.........................................41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................42
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................42
PART IV.....................................................................42
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8--K...................................................42
SIGNATURES..................................................................46
EXHIBIT INDEX...............................................................48
ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2003
PART I
ITEM 1. BUSINESS
General
Atrion Corporation ("Atrion" or the "Company") designs, develops, manufactures,
markets, sells and distributes products and components, primarily for the
medical and health care industry. The Company's products and services range from
ophthalmology and cardiovascular products to fluid delivery devices, contract
manufacturing and kitting services. The Company has a line of non-medical
components that are sold for use in aviation and marine safety products. The
Company also owns and maintains a gaseous oxygen pipeline and is engaged in
leasing activities. The pipeline and leasing activities are small and incidental
to the overall operations of the Company.
The Company's ophthalmic products accounted for 30 percent, 29 percent and 31
percent of net revenues for 2003, 2002 and 2001, respectively. Atrion is a
leading manufacturer of soft contact lens storage and disinfection cases. Atrion
produces a complete line of products which are compatible with all solutions for
use with soft or rigid gas permeable lenses. The Company also works with
customers to provide customized distribution of products. As a registered
pharmaceutical reseller, Atrion provides custom packaging, including component
purchasing as well as labeling. Warehousing as well as inventory management is
included in Atrion's complete kitting services. The Company also designs,
manufactures and markets the LacriCATH(R) product line, a line of balloon
catheters that is used in the treatment of nasolacrimal duct obstruction in
children and adults. Nasolacrimal duct obstruction can cause a condition called
epiphora (chronic tearing). Children and adults affected by this condition
experience excessive and uncontrollable tearing and often encounter infection as
a result of the nasolacrimal blockage. LacriCATH balloon catheters are the only
balloon catheters with Food and Drug Administration ("FDA") approval for use in
this application.
The Company's cardiovascular products accounted for 22 percent, 22 percent and
20 percent of net revenues for 2003, 2002 and 2001, respectively. At the heart
of the Company's cardiovascular products is the MPS(R) Myocardial Protection
System ("MPS"), a proprietary technology that delivers essential fluids and
medications to the heart during open-heart surgery. The MPS integrates key
functions relating to the delivery of solutions to the heart, such as varying
the rate and ratio of oxygenated blood, crystalloid, potassium and other
additives, and controlling temperature, pressure and other variables to allow
simpler, more flexible management of this process indicating improved patient
outcomes. The MPS is the only device used in open-heart surgery that allows for
the mixing of drugs into the bloodstream without diluting the blood. The MPS
employs advanced pump, temperature control and microprocessor technologies and
includes a line of disposable products. The Company also develops, manufactures
and markets other cardiovascular products which consist principally of the
following: cardiac surgery vacuum relief valves; Retract-O-Tape(R) silicone
vessel loops for retracting and occluding vessels in minimally invasive surgical
procedures; and Clean-Cut(R) rotating aortic punch, used in heart bypass surgery
to make a precision opening in the heart for attachment of the bypass vessels.
-1-
The Company's fluid delivery products accounted for 24 percent of net revenues
for 2003, 2002 and 2001. The Company develops, manufactures and markets several
specialized intravenous fluid delivery tubing sets and accessories. The
intravenous fluid delivery line includes more than 50 distinct models used for
complex therapy procedures employed in anesthesia administration, intravenous
feeding, intensive care and cancer therapy. The Company is an industry leader in
the manufacturing of medical tubing clamps. These products include clamps
offering such features as six match-to-fit sizes with compatibility to all
grades of medical tubing, molding in a variety of materials, and compatibility
with different sterilization processes. The Company has developed a wide variety
of luer syringe check valves and one-way valves designed to fill, hold and
release controlled amounts of fluids or gasses on demand for use in various
intubation, catheter and other applications. The Company's swabbable luer valve
was developed as a substitute for needle ports in IV applications. These valves
provide an economical replacement for needle access ports in drug delivery and
IV applications.
The Company's other medical and non-medical products and services accounted for
24 percent, 25 percent and 25 percent of net revenues for 2003, 2002 and 2001,
respectively. Atrion is the leading manufacturer of valves and inflation devices
used in marine and aviation safety products. The Company manufactures valves,
tubing flanges, right angle connectors, and closures for life vests, life rafts,
inflatable boats, inflatable toys, survival equipment, and other inflatable
structures. Atrion also produces many one-way and two-way "Breather" valves for
use on electronics cases, munitions cases, pressure vessels, lift bags, space
suits, mattresses, escape slides, and any other application requiring pressure
relief. Atrion provides contract manufacturing services for other major original
equipment manufacturers of medical devices. The Company has the ability to take
a product from concept through design, development and prototype all the way to
full-scale production manufacturing. Core competencies include engineering
product design & development, prototyping, assembly, insert & injection molding,
automation, RF-welding, ultrasonic & heat sealing, and sterile packaging.
The Company designs, manufactures and markets a line of pressure monitoring kits
for use in labor and delivery procedures and various critical care applications.
The Company's intrauterine pressure monitoring devices are used to determine
pressure within the mother's uterus primarily during high risk labor and
delivery. The Company's ACTester product line consists of instrumentation and
associated disposables used to measure the activated clotting time of blood.
The Company owns and maintains a 22-mile high-pressure steel pipeline in north
Alabama that is leased to an industrial gas producer that transports gaseous
oxygen to one of its customers.
Marketing and Major Customers
The Company markets components to other equipment manufacturers for
incorporation in their products and sells finished devices to physicians,
hospitals, clinics and other treatment centers. Sales managers working with a
direct sales force, commissioned sales agents, and distributors handle these
sales. The Company's sales managers work closely with major customers in
designing and developing products to meet customer requirements. The Company
sponsors scientific symposia as a means of disseminating product information and
participates in industry trade shows.
-2-
Company revenues from sales to parties outside the United States totaled
approximately 26, 25 and 33 percent of the Company's total revenues in 2003,
2002 and 2001, respectively. Company revenues from sales to parties in Canada
totaled approximately 14, 12 and 18 percent of the Company's total revenues in
2003, 2002 and 2001, respectively. These sales are marketed to various
manufacturers and through distributors in over fifty countries outside the
United States.
The Company offers customer service, training and education, and technical
support such as field service, spare parts, maintenance and repair for certain
of its products. The Company periodically advertises its products in trade
journals. The Company routinely attends and participates in trade shows
throughout the United States and internationally. The Company provides
supportive literature on the benefits of its business products.
During 2003, Novartis was the Company's only customer accounting for more than
10 percent of the Company's revenues, with various products sold to several
divisions of Novartis accounting for approximately 14 percent of the Company's
revenues. The loss of this customer would have a material adverse impact on the
Company's business and results of operations.
Manufacturing
The Company's medical products and other components are produced at plants in
Arab, Alabama, St. Petersburg, Florida and Allen, Texas. The plants in Arab and
St. Petersburg both utilize plastic injection molding and specialized assembly
as their primary manufacturing processes. The Company's other manufacturing
processes consist of the assembly of standard and custom component parts and the
testing of completed products.
The Company devotes significant attention to quality assurance. Its quality
assurance measures begin with the suppliers which participate in the Company's
supplier quality assurance program. It continues at the manufacturing level
where many components are assembled in a "clean room" environment designed and
maintained to reduce product exposure to particulate matter. Products are tested
throughout the manufacturing process for adherence to specifications. Most
finished products are then shipped to outside processors for sterilization by
radiation or ethylene oxide gas. After sterilization, the products are
quarantined and tested before they are shipped to customers.
Skills of assembly workers required for the manufacture of medical products are
similar to those required in typical assembly operations. The Company currently
employs workers with the skills necessary for its assembly operations and
believes that additional workers with these skills are readily available in the
areas where the Company's plants are located.
The Company's medical device operations are ISO13485 certified and are subject
to FDA jurisdiction. The Company's non-medical device operations are ISO
9001-2000 certified.
Research and Development
The Company believes that a well-targeted research and development program is an
essential part of the Company's activities, and the Company is currently engaged
in a number of research and development projects. The objective of the Company's
program is to develop new products in the Company's current product lines,
improve current products and develop new product lines. Recent major development
projects include, but are not limited to, a needleless injection site product
designed to eliminate the use of needles by health care providers, a product
designed for safe needle containment, a balloon catheter for use during balloon
incisional dacryocystorhinosotomy surgery, a new inflator system for use with
recreational and commercial life vests, an anti-retrograde flow check valve for
medical infusion and fluid delivery applications and a silicone vessel loop for
retracting and occluding vessels with improved securement capabilities. The
Company expects to incur additional research and development expenses in 2004
for various projects, including further development of features and
functionality of the MPS.
-3-
The Company's consolidated research and development expenditures for the years
ended December 31, 2003, 2002 and 2001 were $2,146,000, $2,180,000, and
$1,911,000 respectively.
Availability of Supplies and Raw Materials
The Company subcontracts with various suppliers to provide it with the quantity
of component parts necessary to assemble its products. Almost all of these
components are available from a number of different suppliers, although certain
components are purchased from single sources that manufacture these components
from the Company's toolings. The Company believes that there are satisfactory
alternative sources for single-sourced components, although a sudden disruption
in supply from one of these suppliers could adversely affect the Company's
ability to deliver finished products on time. The Company owns the molds used
for production of a majority of its components. Consequently, in the event of
supply disruption, the Company would be able to fabricate its own components or
subcontract with another supplier, albeit after a delay in the production
process. The Company purchases various types of high-grade resins and other
components for its 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.
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 185 active patents and 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 pays royalties to outside parties for two patents. All of these patents
and patents pending relate to current products being sold by the Company or to
products in evaluation stages.
Others may challenge the validity of any patents issued to the Company, and the
Company could encounter legal and financial difficulties in enforcing its patent
rights against infringers. In addition, there can be no assurance that other
technologies cannot or will not be developed or that patents will not be
obtained by others which would render the Company's patents less valuable or
obsolete. 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 of its patents relating to a specific major product
line could have a material adverse effect on the Company's business, financial
condition and results of operations.
-4-
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. In
addition, these agreements also provide that any inventions or discoveries
relating to the business of the Company by these individuals will be assigned to
the Company and become the Company's sole property.
The medical device industry is characterized by extensive intellectual property
litigation, and companies in the medical products industry sometimes use
intellectual property litigation to gain a competitive advantage. Intellectual
property litigation, regardless of outcome, is often complex and expensive, and
the outcome of this litigation is generally difficult to predict. While the
Company is not currently involved in any significant litigation, an adverse
determination in any such proceeding could subject the Company to significant
liabilities to third parties, or require the Company to seek licenses from third
parties or pay royalties that may be substantial. Furthermore, there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing or selling certain of its products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Competition
Depending on the product and the nature of the project, the Company competes on
the basis of its ability to provide engineering and design expertise, quality,
service, product and price. As such, successful competitors must have technical
strength, responsiveness and scale. The Company believes that its expertise and
reputation for quality medical products have allowed it to compete favorably
with respect to each such factor and to maintain long-term relationships with
its customers. However, in many of the Company's markets, the Company competes
with numerous other companies that have substantially greater financial
resources and engage in substantially more research and development activities
than the Company. Furthermore, innovations in surgical techniques or medical
practices could have the effect of reducing or eliminating market demand for one
or more of the Company's products.
Numerous companies compete with the Company in the sale of health care products.
These markets are dominated by established manufacturers that have broader
product lines, greater distribution capabilities, substantially greater capital
resources and larger marketing, research and development staffs and facilities
than the Company. Many of these competitors offer broader product lines within
the specific product market and in the general field of medical devices and
supplies. Broad product lines give many of the Company's cardiovascular and
fluid delivery competitors the ability to negotiate exclusive, long-term medical
device supply contracts and, consequently, the ability to offer comprehensive
pricing of their competing products. By offering a broader product line in the
general field of medical devices and supplies, competitors may also have a
significant advantage in marketing competing products to group purchasing
organizations, HMOs and other managed care organizations that are increasingly
seeking to reduce costs through centralization of purchasing functions. In
addition, the Company's competitors may use price reductions to preserve market
share in their product markets.
-5-
Depending on the product and the nature of the project, the Company competes in
contract manufacturing on the basis of its ability to provide engineering and
design expertise as well as on the basis of product and price. The Company
frequently designs products for a customer or potential customer prior to
entering into long-term development and manufacturing agreements with that
customer. Because these products are somewhat limited in number and normally are
only a component of the ultimate product sold by its customers, the Company is
dependent on its ability to meet the requirements of those major health care
companies and must continually be attentive to the need to manufacture such
products at competitive prices and in compliance with strict manufacturing
standards. The Company competes with a number of contract manufacturers of
medical products. Most of these competitors are small companies that do not
offer the breadth of services offered by the Company to its customers.
The Company competes in the market for inflation devices used in marine and
aviation equipment. The Company is the dominant provider in this market area.
Government Regulation
Products
- --------
The manufacture and sale of medical products are subject to regulation by
numerous governmental authorities, principally the FDA, and corresponding
foreign agencies. The research and development, manufacturing, promotion,
marketing and distribution of medical products in the United States are governed
by the Federal Food, Drug and Cosmetic Act and the regulations promulgated
thereunder ("FDC Act and Regulations"). The Company's medical product
subsidiaries and certain of their customers are subject to inspection by the FDA
for compliance with such regulations and procedures. The Company's medical
products manufacturing facilities are subject to regulation by the FDA.
The FDA has traditionally pursued a rigorous enforcement program to ensure that
regulated entities comply with the FDC Act and Regulations. A company not in
compliance may face a variety of regulatory actions, including warning letters,
product detentions, device alerts, mandatory recalls or field corrections,
product seizures, total or partial suspension of production, injunctive actions
or civil penalties and criminal prosecutions of the company or responsible
employees, officers and directors. The Company's medical products subsidiaries
and certain of their customers are subject to these inspections. The Company
believes that it has met all FDA requirements, and it also believes that its
medical device OEM customers are in compliance; however, if the Company or its
OEM medical device customers should fail the FDA inspections, it could have a
material adverse impact on the Company's business, financial condition and
results of operations.
Under the FDA's requirements, if a manufacturer can establish that a
newly-developed device is "substantially equivalent" to a legally marketed
device, the manufacturer may seek marketing clearance from the FDA to market the
device by filing a 510(k) premarket notification with the FDA. The 510(k)
premarket notification must be supported by data establishing the claim of
substantial equivalence to the satisfaction of the FDA. The process of obtaining
a 510(k) clearance typically can take several months to a year or longer. If
substantial equivalence cannot be established or if the FDA determines that the
device requires a more rigorous review, the FDA will require that the
manufacturer submit a premarket approval ("PMA") that must be reviewed and
approved by the FDA prior to marketing and sale of the device in the United
States. The process of obtaining a PMA can be expensive, uncertain and lengthy,
frequently requiring anywhere from one to several 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.
-6-
Certain aviation and marine safety products are also subject to regulation by
the Coast Guard and the Federal Aviation Administration and similar
organizations in foreign countries which regulate the safety of marine and
aviation equipment.
Third-Party Reimbursement and Cost Containment
- ----------------------------------------------
In the United States, health care providers, including hospitals and physicians,
that purchase medical products for treatment of their patients generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or a part of the costs and fees
associated with the procedures performed using these products. Accordingly, the
Company is dependent, in part, upon the ability of health care providers to
obtain satisfactory reimbursement from third-party payors for medical procedures
in which the Company's products are used. Third-party payors may deny
reimbursement if they determine that a prescribed product has not received
appropriate regulatory clearances or approvals, is not used in accordance with
cost-effective treatment methods as determined by the payor, or is experimental,
unnecessary or inappropriate.
Reimbursement systems in international markets vary significantly by country and
by region within some countries, and reimbursement approvals must be obtained on
a country-by-country basis. Many international markets have government-managed
health care systems that control reimbursement for new products and procedures.
In most markets, there are private insurance systems as well as
government-managed systems. Market acceptance of the Company's products in
international markets depends, in part, on the availability and level of
reimbursement. Implementation of health care reforms in these markets may limit
the price of, or the level at which reimbursement is provided for, the Company's
products.
Medicare and Medicaid reimbursement for hospitals is generally based on a fixed
amount for admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals may seek to use less costly methods in treating
Medicare and Medicaid patients. Frequently, reimbursement is reduced to reflect
the availability of a new procedure or technique, and as a result hospitals are
generally willing to implement new cost saving technologies before these
downward adjustments take effect. Likewise, because the rate of reimbursement
for certain physicians who perform certain procedures has been and may in the
future be reduced, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Third-party payors may
challenge the prices charged for medical products and services and may deny
reimbursement if they determine that a device was not used in accordance with
cost-effective treatment methods as determined by the payor, was experimental or
was used for an unapproved application.
-7-
Failure by hospitals and other users of the Company's products to obtain
reimbursement from third-party payors, or adverse changes in government and
private third-party payors' policies toward reimbursement for procedures
employing the Company's products, could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
Company is unable to predict what additional legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation
would have on the Company.
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. 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.
Product Liability and Insurance
The design, manufacture and marketing of products of the types the Company
produces entail an inherent risk of product liability claims. A problem with one
of the Company's products could result in product liability claims or a recall
of, or safety alert or advisory notice relating to, the product. While the
amount of product liability insurance the Company maintains has been adequate in
the past, the Company cannot assure that the amount of insurance will be
adequate to satisfy future claims or that the Company will be able to obtain
insurance in the future at satisfactory rates or in adequate amounts.
Advisory Board
Several physicians and perfusionists with substantial expertise in the field of
myocardial protection serve as Clinical Advisors for the Company. These Clinical
Advisors have assisted in the identification of the market need for MPS and its
subsequent design and development. Members of the Company's management and
scientific and technical staff from time to time 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.
-8-
People
At March 1, 2004, the Company had 427 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 Company is headquartered in Allen, Texas, and maintains operations at that
location (108,000 square feet facility on 19 acres) as well as in Arab, Alabama
(112,000 square feet on 67 acres), and St. Petersburg, Florida (72,000 square
feet on 7 acres). Each facility houses administrative, engineering,
manufacturing, and warehousing operations. The Texas and Alabama facilities are
Company owned while the Florida facility is leased on terms expiring in May
2006.
The Company owns and maintains a 22-mile high-pressure steel pipeline that
transports gaseous oxygen between Decatur and Courtland, Alabama.
ITEM 3. LEGAL PROCEEDINGS
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 March 1, 2004.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 2003, no matters were submitted to a vote of
security holders.
Executive Officers of the Company
Name Age Title
------ ----- -------
Emile A. Battat 66 Chairman, President and Chief Executive Officer of
the Company and Chairman or President of all
subsidiaries
Jeffery Strickland 45 Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company and Vice
President or Secretary-Treasurer of all subsidiaries
The persons who are identified as executive officers of the Company currently
serve as officers of the Company and all subsidiaries. The officers of the
Company and its subsidiaries are elected annually by the respective Boards of
Directors of the Company and its subsidiaries at the first meeting of such
Boards of Directors held after the annual meetings of stockholders of such
entities. Accordingly, the terms of office of the current officers of the
Company and its subsidiaries will expire at the time such meetings of the Board
of Directors of the Company and its subsidiaries are held, which is anticipated
to be in May 2004.
-9-
There are no arrangements or understandings between any officer and any other
person pursuant to which the officer was elected. There are no family
relationships between any of the executive officers or directors.
There have been no events under any bankruptcy act, no criminal proceedings and
no judgments or injunctions material to the evaluation of the ability and
integrity of any executive officers during the past five years.
Brief Account of Business Experience During the Past Five Years
Mr. Battat has been a director of the Company since 1987 and has served as
Chairman of the Board of the Company since January 1998. Mr. Battat has served
as President and Chief Executive Officer of the Company and as Chairman or
President of all subsidiaries since October 1998.
Mr. Strickland has served as Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company since February 1, 1997 and has served as
Vice President or Secretary-Treasurer for all the Company's subsidiaries since
January 1997.
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 8, 2004, the Company had approximately 1,200 stockholders,
including beneficial owners holding shares in nominee or "street" name. The high
and low closing prices as reported by Nasdaq for each quarter of 2002 and 2003
are shown below.
Year Ended
December 31, 2002: High Low
- ------------------ ---- ---
First Quarter $ 38.14 $ 26.91
Second Quarter $ 32.51 $ 26.82
Third Quarter $ 28.09 $ 18.31
Fourth Quarter $ 23.90 $ 17.31
Year Ended
December 31, 2003: High Low
- ------------------ ---- ---
First Quarter $ 22.85 $ 17.95
Second Quarter $ 30.80 $ 22.75
Third Quarter $ 45.20 $ 26.80
Fourth Quarter $ 50.00 $ 40.00
In September 2003, the Company announced that its Board of Directors had
approved a policy for the payment of regular quarterly cash dividends on the
Company's common stock. The Company paid quarterly dividends of $.12 per share
in September 2003 and $.12 per share in December 2003 totaling $406,000 to its
stockholders.
-10-
The following table provides certain information about securities authorized for
issuance under the Company's equity compensation plan as of December 31, 2003:
Number of securities
Number of remaining available for
securities to be future issuance under
issued upon Weighted -average equity
exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
- -----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 275,000 $17.61 72,534(1)
Equity compensation plans not
approved by security holders 12,600(2) $12.25 -
---------------------------------------------------------------------------------------
Total 287,600 $17.38 72,534
---------------------------------------------------------------------------------------
(1) Consists of shares of the Company's common stock authorized for issuance
under the Company's 1997 Stock Incentive Plan, which provides for the grant of
Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights,
Restricted Stock and Performance Shares. The number of shares available for
issuance under the 1997 Stock Incentive Plan increases by the number of shares
subject to options granted under the Company's 1990 Stock Option Plan and 1994
Key Employee Stock Incentive Plan that lapse, expire, terminate or are canceled.
The number of shares available for issuance under the 1997 Stock Incentive Plan
is also subject to equitable adjustment by the Compensation Committee of the
Board of Directors in the event of any change in the Company's capitalization,
including, without limitation, a stock dividend or stock split.
(2) Consists of shares of the Company's common stock authorized for issuance
upon exercise of nonqualified options granted to certain of the Company's
clinical advisors on February 10, 1998. Such options vest as follows: one-third
one year from the grant date, one-third three years from the grant date, and
one-third five years from the grant date. All options so granted expire ten
years from the grant date. The exercise price of the options is the closing
price on the Nasdaq National Market of the Company's common stock on the grant
date.
For information regarding shares of the Company's common stock repurchased by
the Company during the fourth quarter of 2003, see Management's Discussion and
Analysis of Financial Condition and Results of Operations below.
-11-
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
(In thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Revenues $ 62,803 $ 59,533 $ 57,605 $ 51,447 $ 49,917
Income from continuing
operations 4,892 4,065 4,262 2,663 2,128
Net income 5,057 2,589(b) 9,754(c) 2,792 2,293
Total assets 60,050 60,807 65,555 63,690 64,640
Long-term debt 4,287 10,337 17,125 7,400 10,417
Income from continuing
operations, per diluted share 2.66 2.18 1.88 1.25 .81
Net income per diluted share 2.75 1.39(b) 4.30(c) 1.31 .87
Cash dividends per common share .24(a) -- -- -- --
Average diluted shares outstanding 1,839 1,863 2,272 2,135 2,631
- ----------------------------------------------------------------------------------------------------------------
(a) Dividends on outstanding common shares paid in the 3rd and 4th quarter at
$.12 per share (see Note 6)
(b) Includes a $1.6 million after-tax goodwill impairment charge ($ .88 per
diluted share) (see Note 2)
(c) Includes a $5.5 million after-tax gain ($ 2.42 per diluted share) from
discontinued operations (see Note 3)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of
operations should be read together with the other financial information and
consolidated financial statements included in this Form 10-K. This discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from the results anticipated in
the forward-looking statements as a result of a variety of factors, including
those discussed in "Forward Looking Statements" and elsewhere in this Form 10-K.
Overview
The Company designs, develops, manufactures, markets, sells and distributes
products and components, primarily for the medical and health care industry. The
Company markets components to other equipment manufacturers for incorporation in
their products and sells finished devices to physicians, hospitals, clinics and
other treatment centers. The Company's products and services primarily range
from ophthalmology and cardiovascular products to fluid delivery devices,
contract manufacturing and kitting services. In 2003 approximately 26 percent of
the Company's sales were outside the U.S.
-12-
The Company's products are used in a wide variety of applications by numerous
customers, the largest of which accounted for approximately 14 percent of net
sales in 2003. The Company encounters competition in all of its markets and
competes primarily on the basis of product quality, price, engineering, customer
service and delivery time.
The Company's strategy is to provide a broad selection of products and a high
level of service in the areas in which it competes. The Company focuses its
research and development efforts to improve current products and develop
highly-engineered products that meet customer needs and have the potential for
broad market applications and significant sales. Proposed new products may be
subject to regulatory clearance or approval prior to commercialization and the
time period for introducing a new product to the marketplace can be
unpredictable. The Company is also focused on controlling costs. The Company
does this by investing in modern manufacturing technologies and controlling
purchasing processes. Over the past three years, the Company has continued to be
faced with increasing costs associated with all lines of insurance, including
group health benefits. The Company has been successful in consistently
generating cash from operations and uses that cash to reduce indebtedness, to
fund capital expenditures, to repurchase stock and, starting in 2003, to pay
dividends. During 2003, the Company reduced debt by approximately $6.0 million.
The Company's strategic objective is to further enhance its position in its
served markets by:
o Focusing on customer needs
o Expanding existing product lines and developing new products
o Maintaining a culture of controlling cost
o Preserving and fostering a collaborative, entrepreneurial management
structure
For the year ended December 31, 2003, the Company reported revenues of $62.8
million, income from continuing operations of $4.9 million and net income of
$5.1 million, up 5 percent, 20 percent and 95 percent, respectively, from 2002.
Results of Operations
The Company's income from continuing operations was $4.9 million, or $2.86 per
basic and $2.66 per diluted share, in 2003, compared to income from continuing
operations of $4.1 million, or $2.37 per basic and $2.18 per diluted share, in
2002 and $4.3 million, or $2.10 per basic and $1.88 per diluted share, in 2001.
Net income, including discontinued operations and cumulative effect of
accounting change, totaled $5.1 million, or $2.96 per basic and $2.75 per
diluted share, in 2003, compared with $2.6 million, or $1.51 per basic and $1.39
per diluted share, in 2002 and $9.8 million, or $4.80 per basic and $4.30 per
diluted share, in 2001. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142 effective January 1, 2002. The required adoption of
SFAS No. 142 as discussed in Note 2 to the Company's Consolidated Financial
Statements included herein is considered a change in accounting principle and
the cumulative effect of adopting this standard resulted in a $1.6 million, or
$.96 per basic and $.88 per diluted share, non-cash, after-tax charge in 2002.
Operating revenues were $62.8 million in 2003, compared with $59.5 million in
2002 and $57.6 million in 2001. These revenue increases are generally
attributable to higher sales volumes. The 5 percent revenue increase in 2003
over the prior year is primarily attributable to an 8 percent increase in the
revenues of the Company's ophthalmic products, an 8 percent increase in the
revenues of the Company's cardiovascular products, a 3 percent increase in the
Company's fluid delivery products and a 2 percent increase in the Company's
other medical and non-medical products and services. The 3 percent revenue
increase in 2002 over the prior year is primarily attributable to an 8 percent
increase in the revenues of the Company's cardiovascular products, a 4 percent
increase in the Company's fluid delivery products and a 4 percent increase in
the Company's other medical and non-medical products and services.
-13-
The Company's cost of goods sold was $40.6 million in 2003, compared with $39.2
million in 2002 and $35.8 million in 2001. The increase in cost of goods sold
for 2003 over 2002 was primarily related to the increase in revenues discussed
above and increased insurance costs partially offset by an improvement in
manufacturing variances resulting from increased production volumes. The
increase in cost of goods sold for 2002 over 2001 was primarily related to a
shift in product mix, which resulted in lower gross margins, and the increase in
revenues discussed above.
Gross profit was $22.2 million in 2003, compared with $20.3 million in 2002 and
$21.8 million in 2001. The Company's gross profit in 2003 was 35 percent of
revenues compared with 34 percent of revenues in 2002 and 38 percent of revenues
in 2001. The increase in gross profit percentage in 2003 from the prior year was
primarily due to the above-mentioned improvement in manufacturing variances. The
decline in gross profit percentage in 2002 from the prior year was primarily due
to the unfavorable shift in product mix.
Operating expenses were $15.3 million in 2003, compared with $14.5 million in
2002 and $16.0 million in 2001. The increase in operating expenses in 2003 from
2002 was primarily attributable to increased general and administrative ("G&A")
and selling ("Selling") expenses. G&A expenses consist primarily of salaries and
other related expenses of administrative, executive and financial personnel and
outside professional fees. The increase in G&A expenses in 2003 is primarily
attributable to increased insurance costs, compensation and other taxes. The
Company anticipates that G&A expenses are likely to increase in the foreseeable
future but at a rate less than the anticipated rate of increase in revenues.
Selling expenses consist primarily of salaries, commissions and other related
expenses for sales and marketing personnel, marketing, advertising and
promotional expenses. The increase in Selling expenses in 2003 is primarily
related to increased compensation costs and travel related expenses. The Company
anticipates that Selling expenses are likely to increase in the foreseeable
future but at a rate less than the anticipated rate of increase in revenues.
Research and development ("R&D") expenses consist primarily of salaries and
other related expenses of the research and development personnel as well as
costs associated with regulatory expenses. The Company anticipates that R&D
expenses will continue at the current level for the foreseeable future. The
decrease in operating expenses in 2002 from 2001 was primarily attributable to
decreased G&A and Selling expenses partially offset by increased R&D expenses.
G&A expenses for 2002 were $857,000 lower than G&A expenses for 2001, primarily
due to a decrease in amortization expense as a result of a reduction in goodwill
amortization in 2002 due to the adoption of SFAS No. 142 as discussed in Note 2
to the Company's Consolidated Financial Statements included herein.
Additionally, G&A expenses were lower in 2002 compared to 2001 primarily as a
result of reduced depreciation and cost containment programs related to
supplies, communication costs and professional fees. The decrease in Selling
expenses of $905,000 in 2002 from 2001 was primarily related to reduced outside
services (primarily related to clinical studies), reduced compensation costs and
continuing cost reduction efforts. R&D expenses were $269,000 higher for 2002
compared with 2001. This increase was primarily related to increased product
development activities.
The Company's operating income for 2003 was $6.9 million, compared with $5.8
million in 2002 and $5.8 million in 2001. Revenue growth, manufacturing
efficiency improvements, cost containment and cost reduction activities were the
major contributors to the operating income improvements during 2003. Revenue
growth, cost containment and cost reduction activities during 2002 were offset
by lower gross margins compared with 2001, which combined to cause relatively
flat operating results.
-14-
Interest expense was $195,000 in 2003 compared to $432,000 in 2002 and $300,000
in 2001. The decrease in 2003 is primarily related to lower average borrowings
during 2003 as compared with 2002. The increase in 2002 is primarily related to
higher average borrowings during 2002 as compared with 2001 partially offset by
a significant reduction in interest rates in 2002. The higher average borrowings
during 2002 is primarily related to borrowing of funds under the Company's
credit facility in late December 2001 in connection with its repurchase of
outstanding common stock of the Company under a tender offer. The other income
in 2001 was primarily related to the Company's one-time pre-tax gain of $428,000
on the sale of a patent.
Income tax expense in 2003 totaled $1.9 million, compared with $1.4 million in
2002 and $1.8 million in 2001. The effective tax rates for 2003, 2002 and 2001
were 27.8 percent, 25.7 percent and 29.7 percent, respectively. Benefits from
tax incentives for exports and R&D expenditures totaled $350,000 in 2003,
$408,000 in 2002 and $404,000 in 2001. The higher effective tax rate in 2003 is
primarily a result of benefits from tax incentives for exports and R&D
expenditures being a lesser percentage of taxable income in 2003 than in 2002.
The lower effective tax rate in 2002 is primarily a result of benefits from tax
incentives for exports and R&D expenditures being a larger percentage of taxable
income in 2002 than in 2001 and the utilization of capital loss carryforwards in
2002.
The Company believes that 2004 revenues will be higher than 2003 revenues and
that the cost of goods sold, gross profit, operating income and income from
continuing operations will each be higher in 2004 than in 2003. The Company
further believes that it will have continuing volume growth in most of its
product lines in 2004, complemented by the introduction of new products, and
that it will achieve a double-digit annual rate of growth in earnings per share
from continuing operations for the next several years.
Discontinued Operations
During 1997, the Company sold all of its natural gas operations. The financial
statements presented herein reflect the Company's natural gas operations as
discontinued operations for all periods presented. The financial statements also
reflect an after-tax gain on disposal of these discontinued operations of $0.2
million, or $.10 per basic and $.09 per diluted share, in both 2003 and 2002,
and $5.5 million, or $2.70 per basic and $2.42 per diluted share, in 2001.
In addition to the initial consideration received in 1997 upon the sale of the
natural gas operations, certain annual contingent deferred payments of up to
$250,000 per year were to be paid to the Company over an eight-year period which
began in 1999, with the amount paid each year to be dependent upon revenues
received by the purchaser from certain gas transportation contracts. The Company
received deferred payments of $250,000 each, before tax, from the purchaser in
April 2003, 2002 and 2001 which are reflected in each year as a gain from
discontinued operations of $165,000, net of tax. The 2001 gain also includes a
$5,327,000 non-cash gain from reversal of a reserve established when the Company
disposed of its natural gas operations in 1997. This reversal in the third
quarter of 2001 followed the resolution of an outstanding contingency related to
the sale of those assets.
-15-
Liquidity and Capital Resources
The Company has a $25 million revolving credit facility (the "Credit Facility")
with a regional bank to be utilized for the funding of operations and for major
capital projects or acquisitions subject to certain limitations and restrictions
(see Note 4 of Notes to Consolidated Financial Statements). Borrowings under the
Credit Facility bear interest that is payable monthly at 30-day, 60-day or
90-day LIBOR, as selected by the Company, plus one percent. At December 31,
2003, the Company had outstanding borrowings of $4.3 million under the Credit
Facility. At December 31, 2003, the Company was in compliance with all financial
covenants. The Credit Facility, which expires November 12, 2006, and may be
extended under certain circumstances, contains various restrictive covenants,
none of which is expected to impact the Company's liquidity or capital
resources.
As of December 31, 2003, the Company had cash and cash equivalents of $298,000,
compared with $353,000 at December 31, 2002. The Company had an outstanding
balance under the Credit Facility as of December 31, 2003, of $4.3 million
compared with $10.3 million as of December 31, 2002. The $6.0 million decrease
in the Credit Facility balance in 2003 from 2002 is primarily attributable to
the Company's use of cash flows from continuing operations to reduce its
borrowing level. Cash provided by continuing operations increased to $12.7
million in 2003, compared to $9.9 million in 2002 and $8.7 million in 2001. Cash
provided by continuing operations consists primarily of net income adjusted for
certain non-cash items and changes in working capital items. Non-cash items
include depreciation and amortization and deferred income taxes. Working capital
items consist primarily of accounts receivable, accounts payable, inventories
and other current assets and other current liabilities. Working capital at
December 31, 2003 decreased primarily because of reduced accounts receivable,
which is primarily related to the timing of revenues during the fourth quarter
of 2003 as compared to the timing of revenues during the fourth quarter of 2002.
Capital expenditures for property, plant and equipment totaled $4.2 million in
2003, compared with $3.3 million in 2002 and $2.8 million in 2001. The Company
expects capital expenditures in 2004 to continue at approximately the same level
as 2003.
During 2003, the Company expended $4.9 million for the purchase of the Company's
common stock. Included in this amount was $4.1 million in April 2003 for the
completion of a tender offer in which a total of 173,614 shares of common stock
were repurchased at a price of $23.00 per share. During the fourth quarter of
2003, the Company repurchased the following shares of the Company's common
stock:
October November
2003 2003 Total
Total number of shares purchased 8,400 11,800 20,200
------- ------- -------
Average price paid per share $ 42.42 $ 41.02 $ 41.60
------- ------- -------
Total number of shares purchased as part
of publicly announced plan or program 8,400 11,800 20,200
------- ------- -------
Maximum number of shares that may yet
be purchased under Plan or Program (a) 105,800 94,000 94,000
------- ------- -------
(a) This program was announced in April 2000 and initially provided for 200,000
shares to be repurchased.
-16-
The Company received net proceeds of $2.7 million for the exercise of employee
stock options during 2003.
In September 2003, the Company announced that its Board of Directors had
approved a policy for the payment of regular quarterly cash dividends on the
Company's common stock. During 2003 the Company paid dividends totaling $406,000
to its stockholders.
The table below summarizes debt, lease and other minimum contractual obligations
outstanding at December 31, 2003:
Payments due by period
--------------------------------------------------------------------------
2009 and
Contractual Obligations Total 2004 2005 - 2006 2007 - 2008 thereafter
-------------- -------------- -------------- -------------- --------------
(In thousands)
Credit Facility $ 4,287 -- $ 32 $ 4,255 --
Operating Leases $ 997 $ 409 $ 588 -- --
Purchase Obligations
$ 4,586 $ 4,574 $ 12 -- --
--------------------------------------------------------------------------
Total $ 9,870 $ 4,983 $ 632 $ 4,255 --
==========================================================================
The payment schedule for the Credit Facility assumes at maturity, November 2006,
the Company would convert this outstanding debt to a two year term note as
allowed by the terms of the agreement. The payment schedule for the operating
lease assumes the lease expires in May 2006 (see Note 12 of Notes to
Consolidated Financial Statements).
The Company adopted SFAS No. 142 effective January 1, 2002. The required
adoption of SFAS No. 142 is considered a change in accounting principle and the
cumulative effect of adopting this standard resulted in a $1.6 million non-cash,
after-tax charge in 2002. This charge had no effect on the Company's cash
position or the balance of its outstanding indebtedness, and it did not have any
impact on earnings from continuing operations in 2002. As previously discussed,
the Company recorded a non-cash gain from discontinued operations during 2001
related to the reversal of a reserve established when the Company disposed of
its natural gas operations in 1997. This gain had no effect on the Company's
cash position or the balance of its outstanding indebtedness, and it did not
have any impact on earnings from continuing operations in 2001.
The Company believes that its existing cash and cash equivalents, cash flows
from operations and borrowings available under the Company's Credit Facility,
supplemented, if necessary, with equity or debt financing, which the Company
believes would be available, will be sufficient to fund the Company's cash
requirements for at least the foreseeable future.
-17-
Companies sometimes establish legal entities for a specific business transaction
or activity in the form of a Variable Interest Entity ("VIE"). VIEs may be used
to facilitate off-balance sheet financing, acquire financial assets, raise cash
from owned assets and similar transactions. The Company has no VIEs, no
off-balance sheet financing arrangements or any derivative financial
instruments.
Impact of Inflation
The Company experiences the effects of inflation primarily in the prices it pays
for labor, materials and services. Over the last three years, the Company has
experienced the effects of moderate inflation in these costs. At times, the
Company has been able to offset a portion of these increased costs by increasing
the sales prices of its products. However, competitive pressures have not
allowed for full recovery of these cost increases.
New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB") issued a
revised SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The impact to the Company for this item is described
in Note 1 of Notes to the Consolidated Financial Statements.
Critical Accounting Policies
In the ordinary course of business, the Company makes estimates and assumptions
relating to the reporting of results of operations and financial condition in
the preparation of its financial statements in conformity with accounting
principles generally accepted in the United States of America. The Company
believes the following discussion addresses the Company's most critical
accounting policies, which are those that are most important to the portrayal of
the Company's financial condition and results and require management's most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Actual
results could differ significantly from those estimates under different
assumptions and conditions.
The Company assesses the impairment of its long-lived identifiable assets,
excluding goodwill which is tested for impairment pursuant to SFAS No. 142 as
explained below, whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. This review is based upon projections of
anticipated future cash flows. While the Company believes that its estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows or future changes in the Company's business plan could materially affect
its evaluations. No such changes are anticipated at this time.
The Company assesses goodwill for impairment pursuant to SFAS No. 142 which
requires that goodwill be assessed whenever events or changes in circumstances
indicate that the carrying value may not be recoverable, or, at a minimum, on an
annual basis by applying a fair value test.
-18-
Forward-looking Statements
The statements in this Management's Discussion and Analysis and elsewhere in
this annual report on Form 10-K that are forward-looking are based upon current
expectations, and actual results may differ materially. Therefore, the inclusion
of such forward-looking information should not be regarded as a representation
by the Company that the objectives or plans of the Company will be achieved.
Such statements include, but are not limited to, the Company's expectations
regarding future revenues, cost of goods sold, gross profit, operating income,
income from continuing operations, cash flows from operations, growth in product
lines, annual growth in earnings per share from continuing operations, and
availability of equity and debt financing. Words such as "anticipates,"
"believes," "intends," "expects" and variations of such words and similar
expressions are intended to identify such forward-looking statements.
Forward-looking statements contained herein involve numerous risks and
uncertainties, and there are a number of factors that could cause actual results
to differ materially, including, but not limited to, the following: changing
economic, market and business conditions; acts of war or terrorism; the effects
of governmental regulation; the impact of competition and new technologies;
slower-than-anticipated introduction of new products or implementation of
marketing strategies; implementation of new manufacturing processes or
implementation of new information systems; the Company's ability to protect its
intellectual property; changes in the prices of raw materials; changes in
product mix; product liability claims and product recalls; the ability to
attract and retain qualified personnel and the loss of any significant
customers. In addition, assumptions relating to budgeting, marketing, product
development and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic review which may cause the
Company to alter its marketing, capital expenditures or other budgets, which in
turn may affect the Company's results of operations and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates
- --------------
The Company has a $25.0 million credit facility with a regional bank. Borrowings
under the Credit Facility bear interest at 30-day, 60-day or 90-day LIBOR, as
selected by the Company, plus one percent. The Company is subject to interest
rate risk based on an adverse change in the 30-day, 60-day or the 90-day LIBOR.
At December 31, 2003, the Company had borrowings under the Credit Facility of
$4.3 million. A one percent increase in the market interest rate would reduce
the Company's annual pretax income by approximately $43,000 at the current
borrowing level.
-19-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED 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, 2003
and 2002, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years then ended. 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 audit. The financial statements of Atrion Corporation and Subsidiaries as of
and for the year in the period ended December 31, 2001, were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those financial statements in their report dated February 25, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial position of Atrion Corporation
and Subsidiaries as of December 31, 2003 and 2002, and the consolidated results
of their operations and their consolidated cash flows for the years then ended
in conformity with accounting principles generally accepted in the United States
of America.
As discussed above, the financial statements of Atrion Corporation and
Subsidiaries as of December 31, 2001, and for the year then ended were audited
by other auditors who have ceased operations. As described in Note 2, these
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, which was adopted by the Company as of January 1, 2002.
Our audit procedures with respect to the disclosures in Note 2 with respect to
2001 included agreeing the previously reported net income to the previously
issued financial statements and the adjustments to reported net income
representing amortization expense (including any related tax effects) recognized
in those periods related to goodwill to the Company's underlying records
obtained from management. We also tested the mathematical accuracy of the
reconciliation of adjusted net income to reported net income, and the related
income-per-share amounts. In our opinion, the disclosures for 2001 in Note 2 are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 financial statements of the Company other than with
respect to such disclosures and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 financial statements taken as a whole.
/s/ Grant Thornton LLP
Dallas, Texas
February 13, 2004
-20-
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with Atrion Corporation and Subsidiaries Annual Report on Form 10-K
for the year ended December 31, 2001. This audit report has not been reissued by
Arthur Andersen LLP in connection with this filing on Form 10-K. The
consolidated balance sheets as of December 31, 2001 and 2000 and the
consolidated statements of income and cash flows for the years ended December
31, 2000 and 1999 referred to in this report have not been included in the
accompanying financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Atrion Corporation:
We have audited the accompanying consolidated balance sheets of Atrion
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000 and the related consolidated statements of income and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atrion Corporation and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Arthur Andersen LLP
Atlanta, Georgia
February 25, 2002
-21-
CONSOLIDATED STATEMENTS OF INCOME
(For the year ended December 31, 2003, 2002 and 2001)
- ----------------------------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues $ 62,803 $ 59,533 $ 57,605
Cost of Goods Sold 40,564 39,236 35,777
- ----------------------------------------------------------------------------------------------------
Gross Profit 22,239 20,297 21,828
- ----------------------------------------------------------------------------------------------------
Operating Expenses:
Selling 5,594 5,343 6,248
General and administrative 7,576 6,992 7,849
Research and development 2,146 2,180 1,911
- ----------------------------------------------------------------------------------------------------
15,316 14,515 16,008
- ----------------------------------------------------------------------------------------------------
Operating Income 6,923 5,782 5,820
Interest Income 69 78 77
Interest Expense (195) (432) (300)
Other Income (Expense), net (26) 40 468
- ----------------------------------------------------------------------------------------------------
Income from Continuing Operations before Provision
for Income Taxes 6,771 5,468 6,065
Income Tax Provision (1,879) (1,403) (1,803)
- ----------------------------------------------------------------------------------------------------
Income from Continuing Operations 4,892 4,065 4,262
Gain on Disposal of Discontinued Operations,
net of tax 165 165 5,492
Cumulative Effect of Accounting Change, net of tax -- (1,641) --
- ----------------------------------------------------------------------------------------------------
Net Income $ 5,057 $ 2,589 $ 9,754
====================================================================================================
Income Per Basic Share:
Continuing operations $ 2.86 $ 2.37 $ 2.10
Discontinued operations .10 .10 2.70
Cumulative effect of accounting change -- (.96) --
- ----------------------------------------------------------------------------------------------------
Net Income Per Basic Share $ 2.96 $ 1.51 $ 4.80
====================================================================================================
Weighted Average Basic Shares Outstanding 1,711 1,711 2,033
====================================================================================================
Income Per Diluted Share:
Continuing operations $ 2.66 $ 2.18 $ 1.88
Discontinued operations .09 .09 2.42
Cumulative effect of accounting change -- (.88) --
- ----------------------------------------------------------------------------------------------------
Net Income Per Diluted Share $ 2.75 $ 1.39 $ 4.30
====================================================================================================
Weighted Average Diluted Shares Outstanding 1,839 1,863 2,272
====================================================================================================
The accompanying notes are an integral part of these statements.
-22-
CONSOLIDATED BALANCE SHEETS
As of December 31, 2003 and 2002
- --------------------------------------------------------------------------------
Assets: 2003 2002
- --------------------------------------------------------------------------------
(In thousands)
Current Assets:
Cash and cash equivalents $ 298 $ 353
Accounts receivable, net of allowance for doubtful
accounts of $103 and $151 in 2003 and 2002, respectively 6,226 6,721
Inventories 11,314 10,311
Prepaid expenses 1,894 2,273
Deferred income taxes 760 1,018
- --------------------------------------------------------------------------------
20,492 20,676
- --------------------------------------------------------------------------------
Property, Plant and Equipment 45,767 42,661
Less accumulated depreciation and amortization 21,578 18,211
- --------------------------------------------------------------------------------
24,189 24,450
- --------------------------------------------------------------------------------
Other Assets and Deferred Charges:
Patents, net of accumulated amortization of
$7,151 and $6,847 in 2003 and 2002, respectively 2,099 2,403
Goodwill 9,730 9,730
Other 3,540 3,548
- --------------------------------------------------------------------------------
15,369 15,681
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 60,050 $ 60,807
================================================================================
The accompanying notes are an integral part of these statements.
-23-
CONSOLIDATED BALANCE SHEETS
As of December 31, 2003 and 2002
- ----------------------------------------------------------------------
Liabilities and Stockholders' Equity: 2003 2002
- ----------------------------------------------------------------------
(In thousands)
Current Liabilities:
Accounts payable and accrued liabilities $ 6,038 $ 5,030
Accrued income and other taxes 651 859
- ----------------------------------------------------------------------
6,689 5,889
- ----------------------------------------------------------------------
Line of Credit 4,287 10,337
- ----------------------------------------------------------------------
Other Liabilities and Deferred Credits:
Deferred income taxes 3,496 2,115
Other 974 775
- ----------------------------------------------------------------------
4,470 2,890
- ----------------------------------------------------------------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock, par value $.10 per share,
authorized 10,000 shares, issued 3,420 shares 342 342
Additional paid-in capital 9,673 8,222
Retained earnings 68,900 64,249
Treasury shares, 1,720 shares in 2003 and
1,714 shares in 2002, at cost (34,311) (31,122)
- ----------------------------------------------------------------------
44,604 41,691
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
$ 60,050 $ 60,807
======================================================================
The accompanying notes are an integral part of these statements.
-24-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the year ended December 31, 2003, 2002 and 2001)
- ----------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------
(In thousands)
Cash Flows From Operating Activities:
Net income $ 5,057 $ 2,589 $ 9,754
Adjustments to reconcile net income to
net cash
provided by operating activities:
Cumulative effect of accounting
change, net of tax -- 1,641 --
Gain on disposal of discontinued
operations (165) (165) (5,492)
Depreciation and amortization 4,746 4,384 4,569
Deferred income taxes 1,639 366 316
Tax benefit related to stock plans 515 82 1,238
Other 34 127 (428)
- ----------------------------------------------------------------------
11,826 9,024 9,957
Changes in operating assets and
liabilities:
Accounts receivable 495 838 (384)
Inventories (1,003) 803 (1,004)
Prepaid expenses 379 (810) (888)
Other non-current assets 8 (240) 301
Accounts payable and accrued
liabilities 1,008 (307) 934
Accrued income and other taxes (208) 750 (78)
Other non-current liabilities 199 (190) (135)
- ----------------------------------------------------------------------
Net cash provided by continuing
operations 12,704 9,868 8,703
Net cash provided by discontinued
operations 165 165 165
- ----------------------------------------------------------------------
12,869 10,033 8,868
- ----------------------------------------------------------------------
Cash Flows From Investing Activities:
Property, plant and equipment additions (4,215) (3,279) (2,808)
Patent sale -- -- 428
- ----------------------------------------------------------------------
(4,215) (3,279) (2,380)
- ----------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in line of credit (6,050) (6,788) 9,725
Issuance of treasury stock 2,656 409 1,778
Purchase of treasury stock (4,909) (564) (17,608)
Dividends paid (406) -- --
- ----------------------------------------------------------------------
(8,709) (6,943) (6,105)
- ----------------------------------------------------------------------
Net change in cash and cash equivalents (55) (189) 383
Cash and cash equivalents, beginning of year 353 542 159
- ----------------------------------------------------------------------
Cash and cash equivalents, end of year $ 298 $ 353 $ 542
======================================================================
Cash paid for:
Interest $ 207 $ 418 $ 272
Income taxes (net of refunds) 554 (340) 1,217
- ----------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
-25-
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(For the year ended December 31, 2003, 2002 and 2001)
(In thousands)
Common Stock Treasury Stock
-------------------------------------------------
Additional
Shares Paid-in Retained
Outstanding Amount Shares Amount Capital Earnings Total
- ------------------------------------------------------------------------------------------------------------
Balance, January 1, 2001 1,992 $ 342 1,428 $ (14,653) $ 6,418 $51,906 $ 44,013
Net income 9,754 9,754
Tax benefit from exercise
of stock options 1,238 1,238
Exercise of stock options 235 (235) 2,077 335 2,412
Shares surrendered in
option exercises (27) 27 (634) (634)
Purchase of treasury stock (512) 512 (17,608) (17,608)
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 1,688 342 1,732 (30,818) 7,991 61,660 39,175
Net income 2,589 2,589
Tax benefit from exercise
of stock options 82 82
Exercise of stock options 53 (53) 443 149 592
Shares surrendered in
option exercises (9) 9 (183) (183)
Purchase of treasury stock (26) 26 (564) (564)
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 1,706 342 1,714 (31,122) 8,222 64,249 41,691
Net income 5,057 5,057
Tax benefit from exercise
of stock options 515 515
Exercise of stock options 187 (187) 1,720 936 2,656
Purchase of treasury stock (193) 193 (4,909) (4,909)
Dividends (406) (406)
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 1,700 $ 342 1,720 $ (34,311) $ 9,673 $68,900 $ 44,604
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-26-
Atrion Corporation
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Atrion Corporation designs, develops, manufactures and markets products
primarily for the medical and health care industry. The Company markets
its products throughout the United States and internationally. The
Company's customers include hospitals, distributors, and other
manufacturers. As of December 31, 2003, the principal subsidiaries of the
Company through which it conducted its operations were Atrion Medical
Products, Inc. ("Atrion Medical Products"), Halkey-Roberts Corporation
("Halkey-Roberts") and Quest Medical, Inc. ("Quest Medical").
Principles of Consolidation
The consolidated financial statements include the accounts of Atrion
Corporation and its subsidiaries (the "Company"). All significant
intercompany transactions and balances have been eliminated in
consolidation.
Fair Value
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term nature of
these items. The carrying amount of debt approximates fair value as the
interest rate is tied to market rates.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the dates of the financial statements and the reported
amount of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Financial Presentation
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
Cash and Cash Equivalents
Cash equivalents are securities with original maturities of 90 days or
less.
Trade Receivables
Trade accounts receivable are recorded at the original sales price to the
customer. The Company maintains an allowance for doubtful accounts to
reflect estimated losses resulting from the inability of customers to make
required payments. On an ongoing basis, the collectibility of accounts
receivable is assessed based upon historical collection trends, current
economic factors and the assessment of the collectibility of specific
accounts. The Company evaluates the collectibility of specific accounts
using a combination of factors, including the age of the outstanding
balances, evaluation of customers' current and past financial condition,
recent payment history, current economic environment, and discussions with
appropriate Company personnel and with the customers directly. Accounts
are written off when it is determined the receivable will not be
collected.
-27-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
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,
2003 2002
- ----------------------------------------------------------------------------
Raw materials $ 5,641 $ 6,082
Finished goods 4,044 2,818
Work in process 1,629 1,411
- ----------------------------------------------------------------------------
Total inventories $ 11,314 $ 10,311
- ----------------------------------------------------------------------------
Income Taxes
The Company utilizes the asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
reporting basis and the tax basis of the Company's other assets and
liabilities. These amounts are based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets. Expenditures for repairs and maintenance are charged to expense as
incurred. The following table represents a summary of property, plant and
equipment at original cost (in thousands):
December 31,
------------------------------- Useful
2003 2002 Lives
- -------------------------------------------------------------------------------
Land $ 1,506 $ 1,506 --
Buildings 8,981 8,683 30-40 yrs
Machinery and equipment 35,280 32,472 3-10 yrs
- -------------------------------------------------------------------------------
Total property, plant and equipment $ 45,767 $ 42,661
- -------------------------------------------------------------------------------
Depreciation expense of $4,442,000, $4,080,000 and $3,743,000 was recorded
for the years ended December 31, 2003, 2002 and 2001, respectively.
Patents
Cost for patents acquired is determined at acquisition date. Patents are
amortized over the remaining lives of the individual patents, which are
four to 14 years. Patents are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset
may not be recoverable.
Goodwill
Goodwill represents the excess of cost over the fair value of tangible and
identifiable intangible net assets acquired. Through December 31, 2001,
goodwill was being amortized over 25 years. Beginning January 1, 2002,
accounting for goodwill was changed to conform to Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" as outlined in Note 2. Annual impairment testing for goodwill is
done in accordance with SFAS No. 142 using a fair value-based test.
Goodwill is also reviewed periodically for impairment whenever events or
changes in circumstances indicate a change in value may have occurred.
-28-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
Revenues
The Company recognizes revenue when its products are shipped to its
customers and distributors, provided an arrangement exists, the fee is
fixed and determinable and collectibility is reasonably assured. Net sales
represent gross sales invoiced to customers, less certain related charges,
including discounts, returns and other allowances. Returns, discounts and
other allowances have been insignificant historically.
Shipping and Handling Policy
Shipping and handling fees charged to customers are reported as revenue
and all shipping and handling costs incurred related to products sold are
reported as cost of goods sold.
Research and Development Costs
Research and development costs relating to the development of new products
and improvements of existing products are expensed as incurred.
Stock-Based Compensation
At December 31, 2003, the Company had three stock-based employee
compensation plans, which are described more fully in Note 8. The Company
accounts for those plans under the recognition and measurement principles
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. No stock-based
employee compensation cost is reflected in net income, as all options
granted under those plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and income per share if the Company
had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation:
Year ended December 31,
-------------------------------
2003 2002 2001
--------- ------- ---------
(In thousands, except per share amounts)
Net income, as reported $ 5,057 $ 2,589 $ 9,754
Deduct: Total stock-based employee
compensation expense determined under
fair value-based methods for all awards,
net of tax effects (526) (691) (275)
--------- ------- ---------
Pro forma net income $ 4,531 $ 1,898 $ 9,479
========= ======= =========
Income per share:
Basic - as reported $ 2.96 $ 1.51 $ 4.80
========= ======= =========
Basic - pro forma $ 2.65 $ 1.11 $ 4.66
========= ======= =========
Diluted - as reported $ 2.75 $ 1.39 $ 4.30
========= ======= =========
Diluted - pro forma $ 2.46 $ 1.02 $ 4.17
========= ======= =========
-29-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board issued a
revised SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS No. 132 (as revised) revises employers'
disclosures about pension plans and other postretirement benefit plans. It
does not change the measurement or recognition of those plans required by
SFAS Nos. 87, 88 and 106. SFAS No. 132 (as revised) requires additional
disclosures to those in the original SFAS No. 132 and it also amends APB
Opinion 28, "Interim Financial Reporting," to require certain disclosures
about pension and other postretirement benefit plans in interim financial
statements. SFAS No. 132 (as revised) is generally effective for financial
statements with fiscal years ending after December 15, 2003. The Company
has revised its disclosures in Note 11 to conform to this new
pronouncement.
(2) Goodwill and Intangible Assets
The Company adopted SFAS No. 142 effective January 1, 2002, and has
identified three reporting units where goodwill was recorded for purposes
of testing goodwill impairment: (1) Atrion Medical Products (2)
Halkey-Roberts and (3) Quest Medical. The Company completed an impairment
analysis that revealed that the Quest Medical reporting unit was impaired,
resulting in a write-down of goodwill in the first quarter of 2002 of $1.6
million, net of an income tax benefit of $845,000. The charge reflected a
$2.5 million reduction in the goodwill resulting from the acquisition of
Quest Medical in February 1998. The remaining goodwill asset balance for
the Company totaled $9.7 million at December 31, 2003. The impairment loss
was recorded as a cumulative effect of a change in accounting principle.
Net income from continuing operations for the year 2001 adjusted as though
the non-amortization provisions of SFAS No. 142 had been in effect at
January 1, 2001, are as follows:
Year ended December 31,
------------------------------------
2003 2002 2001
----------- ----------- ----------
(In thousands, except per share amounts)
Income from continuing operations $ 4,892 $ 4,065 $ 4,262
Add back: Goodwill amortization, net of tax -- -- 425
----------- ----------- ----------
Adjusted income from continuing operations $ 4,892 $ 4,065 $ 4,687
=========== =========== ==========
Adjusted income per basic share:
Income from continuing operations $ 2.86 $ 2.37 $ 2.10
Add back: Goodwill amortization, net of tax -- -- .21
----------- ----------- ----------
Adjusted income from continuing operations $ 2.86 $ 2.37 $ 2.31
=========== =========== ==========
Adjusted income per diluted share:
Income from continuing operations $ 2.66 $ 2.18 $ 1.88
Add back: Goodwill amortization, net of tax -- -- .19
----------- ---------- ----------
Adjusted income from continuing operations $ 2.66 $ 2.18 $ 2.07
=========== ========== ==========
Intangible assets consist of the following (dollars in thousands):
-30-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 2003 December 31, 2002
---------------------------------------- ---------------------------
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(years) Amount Amortization Amount Amortization
------------- ------------- ------------ ------------ --------------
Amortizable intangible
assets:
Patents 12.85 $ 9,250 $ 7,151 $ 9,250 $ 6,847
Intangible assets
not subject to amortization:
Goodwill $ 9,730 -- $ 9,730 --
Aggregate amortization expense for patents and goodwill was $304,000,
$304,000 and $907,000 for 2003, 2002 and 2001, respectively.
Estimated future amortization expense for each of the years set below
ending December 31, is as follows (in thousands):
2004 $ 304
2005 $ 271
2006 $ 169
2007 $ 144
2008 $ 144
There was no change in the carrying amounts of goodwill for 2003.
(3) Discontinued Operations
During 1997, the Company sold all of its natural gas operations. The
consolidated financial statements presented herein reflect the Company's
natural gas operations as discontinued operations for all periods
presented. The consolidated financial statements reflect a gain on
disposal of these discontinued operations of $165,000 in 2003 and 2002,
and $5.5 million in 2001. These amounts are net of income tax expense of
$85,000 in 2003 and 2002, and include an income tax benefit of $5.1
million in 2001.
In addition to the initial consideration received in 1997 upon the sale of
the natural gas operations, certain annual contingent deferred payments of
up to $250,000 per year were to be paid to the Company over an eight-year
period which began in 1999, with the amount paid each year to be dependent
upon revenues received by the purchaser from certain gas transportation
contracts. The Company received deferred payments of $250,000 each, before
tax, from the purchaser in April 2003, 2002 and 2001 which are reflected
in each year as a gain from discontinued operations of $165,000, net of
tax. The 2001 gain also includes a $5.3 million non-cash gain from
reversal of a reserve established when the Company disposed of its natural
gas operations in 1997. This reversal in the third quarter of 2001
followed the resolution of an outstanding contingency related to the sale
of those assets.
-31-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
(4) Line of Credit
The Company has a revolving credit facility ("Credit Facility") with a
regional bank. In December 2001, the Credit Facility arrangement was
amended to increase the credit line under the Credit Facility from $18.5
million to $25.0 million. Under the Credit Facility, the Company and
certain of its subsidiaries have a line of credit which is secured by
substantially all inventory, equipment and accounts receivable of the
Company. Interest under the Credit Facility is assessed at 30-day, 60-day
or 90-day LIBOR, as selected by the Company, plus one percent (2.17
percent at December 31, 2003) and is payable monthly. At December 31,
2003, and 2002, $4.3 million and $10.3 million, respectively, was
outstanding under the line of credit. The Credit Facility expires November
12, 2006, and may be extended under certain circumstances. At any time
during the term, the Company may convert any or all outstanding amounts
under the Credit Facility to a term loan with a maturity of two years. The
Company's ability to borrow funds under the Credit Facility from time to
time is contingent on meeting certain covenants in the loan agreement, the
most restrictive of which is the ratio of total debt to earnings before
interest, income tax, depreciation and amortization. At December 31, 2003,
the Company was in compliance with all financial covenants.
(5) Income Taxes
The items comprising income tax expense for continuing operations are as
follows (in thousands):
Year ended December 31,
----------------------------------------------------
2003 2002 2001
- --------------------------- ----------------- ---------------- -----------------
Current -- Federal $ 914 $ 1,081 $ 1,520
-- State 32 (44) 188
- --------------------------- ----------------- ---------------- -----------------
946 1,037 1,708
- --------------------------- ----------------- ---------------- -----------------
Deferred-- Federal 912 327 74
-- State 21 39 21
- --------------------------- ----------------- ---------------- -----------------
933 366 95
- --------------------------- ----------------- ---------------- -----------------
Total income tax expense $ 1,879 $ 1,403 $ 1,803
- --------------------------- ----------------- ---------------- -----------------
-32-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
Temporary differences and carryforwards which have given rise to deferred
income tax assets and liabilities as of December 31, 2003 and 2002 are as
follows (in thousands):
2003 2002
------------- ------------
Deferred tax assets:
Patents and goodwill $ 654 $ 1,041
Benefit plans 492 639
Inventories 374 342
Tax credits 169 451
Other 39 60
------------- ------------
Total deferred tax assets $ 1,728 $ 2,533
============= ============
Deferred tax liabilities:
Property, plant and equipment $ 3,838 $ 3,253
Pensions 626 362
Other -- 15
------------- ------------
Total deferred tax liabilities $ 4,464 $ 3,630
============= ============
Net deferred tax liability $ 2,736 $ 1,097
============= ============
Balance Sheet classification:
Non-current deferred income tax liability $ 3,496 $ 2,115
Current deferred income tax asset 760 1,018
------------- ------------
Net deferred tax liability $ 2,736 $ 1,097
============= ============
Total income tax expense for continuing operations differs from the amount
that would be provided by applying the statutory federal income tax rate
to pretax earnings as illustrated below (in thousands):
Year ended December 31,
--------------------------------------
2003 2002 2001
- ------------------------------------- ------------ ------------ ------------
Income tax expense at the statutory
federal income tax rate $ 2,298 $ 1,858 $ 2,062
Increase (decrease) resulting from:
State income taxes 34 80 220
Decrease in valuation allowance -- -- (68)
R&D credit (100) (164) (52)
Foreign sales benefit (250) (244) (352)
Other, net (103) (127) (7)
- ------------------------------------- ------------ ------------ ------------
Total income tax expense $ 1,879 $ 1,403 $ 1,803
- ------------------------------------- ------------ ------------ ------------
-33-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
(6) Stockholders' Equity
The Board of Directors of the Company has at various times authorized
repurchases of Company stock in open-market or negotiated transactions at
such times and at such prices as management may from time to time decide.
The Company has effected a number of open-market or negotiated
transactions to purchase its stock during the past three years. These
repurchases totaled 20,200, 26,000 and 10,300 shares during the years
2003, 2002 and 2001, respectively, at per share prices ranging from $14.02
to $42.42. As of December 31, 2003, authorization for the repurchase of
94,000 additional shares remained. The Company purchased 173,614 shares of
its common stock at $23.00 per share in April 2003 pursuant to a tender
offer. The Company purchased 502,229 shares of its common stock at $34.50
per share in December 2001 pursuant to a tender offer. All shares
purchased in the tender offers and in the open-market or negotiated
transactions became treasury shares upon repurchase by the Company.
In September 2003, the Company announced that it had adopted a policy for
the payment of regular quarterly cash dividends on the Company's common
stock. The Company subsequently paid a quarterly cash dividend of $.12 per
common share in both September and December of 2003.
The Company has a Common Share Purchase Rights Plan, which is intended to
protect the interests of stockholders in the event of a hostile attempt to
take over the Company. The rights, which are not presently exercisable and
do not have any voting powers, represent the right of the Company's
stockholders to purchase at a substantial discount, upon the occurrence of
certain events, shares of common stock of the Company or of an acquiring
company involved in a business combination with the Company. In January
2000, this plan, which was adopted in February 1990, was extended until
February 2005.
(7) Income Per Share
The following is the computation for basic and diluted income per share
from continuing operations:
Year ended December 31,
-------------------------------
2003 2002 2001
-------------------------------
(In thousands, except per share amounts)
Income from continuing operations $ 4,892 $ 4,065 $ 4,262
- -----------------------------------------------------------------------------
Weighted average basic shares outstanding 1,711 1,711 2,033
Add: Effect of dilutive securities (options) 128 152 239
- -----------------------------------------------------------------------------
Weighted average diluted shares outstanding 1,839 1,863 2,272
- -----------------------------------------------------------------------------
Income per share from continuing operations:
Basic $ 2.86 $ 2.37 $ 2.10
Diluted $ 2.66 $ 2.18 $ 1.88
- -----------------------------------------------------------------------------
For the years ended December 31, 2003, 2002 and 2001, options to purchase
approximately 25,250, 40,625 and 7,800 shares of common stock,
respectively, were not included in the computation of diluted income per
share because their effect would have been antidilutive.
-34-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
(8) Stock Option Plans
The Company's 1997 Stock Incentive Plan provides for the grant to key
employees of incentive and nonqualified stock options, stock appreciation
rights, restricted stock and performance shares. In addition, under the
1997 Stock Incentive Plan, outside directors (directors who are not
employees of the Company or any subsidiary) receive automatic annual
grants of nonqualified stock options to purchase 2,000 shares of common
stock. Under the 1997 Stock Incentive Plan, 624,425 shares in the
aggregate of common stock were reserved for grants. The purchase price of
shares issued on the exercise of incentive options must be at least equal
to the fair market value of such shares on the date of grant. The purchase
price for shares issued on the exercise of nonqualified options and
restricted and performance shares is fixed by the Compensation Committee
of the Board of Directors. The options granted become exercisable as
determined by the Compensation Committee and expire no later than 10 years
after the date of grant.
During 1994, the stockholders of the Company approved the adoption of the
Company's 1994 Key Employee Stock Incentive Plan, 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 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.
Option transactions for the three years in the period ended December 31,
2003 are as follows:
Shares Weighted Average
Exercise Price
- ------------------------------------------------------------------------------
Options outstanding at January 1, 2001 492,350 $10.50
Granted in 2001 81,000 $15.31
Expired in 2001 (13,600) $10.84
Exercised in 2001 (234,900) $10.46
- ------------------------------------------------------------------------------
Options outstanding at December 31, 2001 324,850 $11.62
Granted in 2002 201,500 $21.05
Expired in 2002 (5,500) $ 8.34
Exercised in 2002 (53,500) $11.06
- ------------------------------------------------------------------------------
Options outstanding at December 31, 2002 467,350 $15.82
Granted in 2003 12,000 $29.30
Expired in 2003 (4,550) $ 20.18
Exercised in 2003 (187,200) $14.19
- ------------------------------------------------------------------------------
Options outstanding at December 31, 2003 287,600 $17.38
- ------------------------------------------------------------------------------
-35-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
Exercisable options at December 31, 2001 174,350 $11.89
Exercisable options at December 31, 2002 261,100 $13.81
Exercisable options at December 31, 2003 217,000 $15.41
- ------------------------------------------------------------------------------
As of December 31, 2003, there remained 72,534 shares for which options
may be granted in the future under the 1997 Stock Incentive Plan. The
following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life price exercisable price
- ------------------------------------------------------------------------- ---------------------------
$6.875-$14.063 143,100 5.3 years $11.53 112,000 $11.04
$14.875-$22.50 85,000 4.2 years $18.28 85,000 $18.28
$26.13-$31.39 59,500 5.3 years $30.15 20,000 $27.72
-------- --------
287,600 217,000
======= =======
Pro forma information regarding net income and income per share as
required by SFAS No. 123 has been determined as if the Company had
accounted for its stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 2003, 2002 and 2001:
2003 2002 2001
- ------------------------- ------------------ ------------------ ---------------
Risk-free interest rate 3.2% 2.7% 5.2%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 39.1% 50.3% 33.0%
Expected life 7 years 2.7 years 7 years
- ------------------------- ------------------ ------------------ ---------------
The resulting estimated weighted average fair values of the options
granted in 2003, 2002 and 2001 were $13.51, $7.25 and $7.06, respectively.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including expected stock price
volatility. All options grants in 2003, 2002 and 2001 occurred prior to
the declaration of dividends by the Company.
(9) Revenues From Major Customers
The Company had one major customer which represented approximately $9.1
million (14.4 percent), $7.4 million (12.4 percent) and $11.0 million
(19.1 percent) of the Company's operating revenues during the years 2003,
2002 and 2001, respectively.
-36-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
(10) Industry Segment and Geographic Information
The Company operates in one reportable industry segment: designing,
developing, manufacturing and marketing products for the medical and
health care industry and has no foreign operating subsidiaries. The
Company's product lines include pressure relief valves and inflation
systems, which are sold primarily to the aviation and marine industries.
Due to the similarities in product technologies and manufacturing
processes, these products are managed as part of the medical products
segment. The Company recorded incidental revenues from its oxygen
pipeline, which totaled approximately $950,000 in each of the years of
2003, 2002 and 2001. Pipeline net assets totaled $2.6 million at December
31, 2003 and 2002. Company revenues from sales to parties outside the
United States totaled approximately 26, 25 and 33 percent of the Company's
total revenues in 2003, 2002 and 2001, respectively. No Company assets are
located outside the United States. A summary of revenues by geographic
territory for the three years 2003, 2002 and 2001 is as follows (in
thousands):
Year ended December 31,
-------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
United States $ 46,721 $ 44,454 $ 38,805
Canada 8,620 6,938 10,635
United Kingdom 1,547 1,693 2,182
Other 5,915 6,448 5,983
- -------------------------------------------------------------------------------
Total $ 62,803 $ 59,533 $ 57,605
- -------------------------------------------------------------------------------
(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
Company uses a December 31 measurement date for the plan.
The changes in the plan's projected benefit obligation ("PBO") as of
December 31, 2003 and 2002 are as follows (in thousands):
2003 2002
---------------- ----------------
Change in Benefit Obligation:
Benefit obligation, January 1 $ 4,170 $ 4,599
Service cost 214 320
Interest cost 298 307
Amendments -- (616)
Actuarial (gain)/loss 529 (93)
Benefits paid (333) (347)
- ------------------------------------- ---------------- ----------------
Benefit obligation, December 31 $ 4,878 $ 4,170
- ------------------------------------- ---------------- ----------------
In December 2002, the plan was amended to reduce benefit accruals for
future service by plan participants by approximately 50 percent. This
amendment caused a reduction in the PBO of approximately $616,000, and is
reflected as a reduction in pension expense over the estimated employee
service lives.
-37-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
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, 2003 and 2002
are as follows (in thousands):
2003 2002
-------------------------------------
Change in Plan Assets:
Fair value of plan assets, January 1 $ 4,383 $ 4,550
Actual return on plan assets 963 (750)
Employer contributions 400 930
Benefits paid (333) (347)
- ----------------------------------------------------------------------------
Fair value of plan assets, December 31 $ 5,413 $ 4,383
- ----------------------------------------------------------------------------
Funded status of plan $ 535 $ 213
Unrecognized actuarial loss 1,941 2,154
Unrecognized prior service cost (502) (539)
Unrecognized net transition obligation (88) (132)
- ----------------------------------------------------------------------------
Net amount recognized as other assets $ 1,886 $ 1,696
- ----------------------------------------------------------------------------
The accumulated benefit obligation for the pension plan was $4,801,000 and
$4,170,000 at December 31, 2003 and 2002, respectively. The components of
net periodic pension cost for 2003, 2002 and 2001 were as follows (in
thousands):
Year ended December 31,
------------------------
2003 2002 2001
------ ------ ------
Components of Net Periodic
Pension Cost:
Service cost $ 214 $ 320 $ 369
Interest cost 298 307 296
Expected return on assets (349) (405) (477)
Prior service cost amortization (37) 7 6
Actuarial loss 128 28 --
Transition amount amortization (44) (44) (44)
- ----------------------------------------------------------------------
Net periodic pension cost $ 210 $ 213 $ 150
- ----------------------------------------------------------------------
Actuarial assumptions used to determine benefit obligations at December 31
were as follows:
2003 2002
---------------- ----------------
Discount rate 6.50% 7.00%
Rate of compensation increase 5.00% 5.00%
-38-
Atrion Corporation
Notes to Consolidated Financial Statements--(Continued)
Actuarial assumptions used to determine net periodic pension cost were as
follows:
Year ended December 31,
---------------------------------------
2003 2002 2001
------------------------- -------------
Discount rate 7.00% 7.25% 7.25%
Expected long-term return on assets 8.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 5.00%
The Company's expected long-term rate of return assumption is based upon
the plan's actual long-term investment results as well as the long-term
outlook for investment returns in the marketplace at the time the
assumption is made. The reduction in the Company's assumption for this
expected return rate in the beginning of 2003 to 8 percent from 9 percent
reflected the major downturn in returns on debt and equity investments
that occurred in the investment markets in 2001 and 2002.
The Company's pension plan assets at December 31, 2003 and 2002 were
invested in the following asset categories:
2003 2002
---------------- ----------------
Asset Category:
Equity securities 73% 64%
Debt securities 25% 28%
Other 2% 8%
- ----------------------------------------------------------------------------
Total 100% 100%
- ----------------------------------------------------------------------------
It is the Company's investment policy to maintain 66 percent to 79 percent
of the plan's assets in equity securities and 21 percent to 31 percent of
its assets in debt securities with the balance invested in a money market
account to meet liquidity requirements for distributions. The asset
allocation at December 31, 2003 represents the targeted asset allocation
at that time. Based upon the plan's current over-funded position, the
Company expects to make no contributions to its pension plan in 2004.
The Company also sponsors a defined contribution plan for all employees.
Each participant may contribute certain amounts of eligible compensation.
The Company makes a matching contribution to the plan. The Company's
contribution under this plan was $202,000 in 2003, $302,000 in 2002 and
$258,000 in 2001.
(12) Commitments and Contingencies
The Company is subject to legal proceedings, third-party claims and other
contingencies related to product liability, regulatory, employee and other
matters that arise in the ordinary course of business. In the opinion of
management, the amount of potential liability with respect to these
actions will not materially affect the Company's financial position,
results of operations or liquidity.
The Company has arrangements with its executive officers (the
"Executives") pursuant to which the termination of their employment under
certain circumstances would result in lump sum payments to the Executives.
Termination under such circumstances in 2004 could result in payments
aggregating $2.0 million, excluding any excise tax that may be
reimbursable by the Company.
-39-
In May 1996, Halkey-Roberts began leasing the land, building and building
improvements in St. Petersburg, Florida, which serve as Halkey-Roberts'
headquarters and manufacturing facility, under a 10-year lease. The lease
provides for monthly payments, including certain lease payment escalators,
and provides for certain sublease and assignment rights. The lease also
provides the right of either the landlord or Halkey-Roberts to terminate
the lease on 12 months notice effective at any time after May 21, 2003.
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,
2003, 2002 and 2001 was $396,000, $384,000 and $372,000, respectively.
Future minimum rental commitments under this lease are $409,000, $422,000
and $166,000 in 2004, 2005 and 2006, respectively.
(13) Quarterly Financial Data (Unaudited)
Quarterly financial data for 2003 and 2002 are as follows:
Quarter Operating Operating Income/(Loss) Per
Ended Revenue Income Net Income/(Loss) Basic Share
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
03/31/03 $ 15,721 $ 1,724 $ 1,150 $ .65
06/30/03 16,175 1,705 1,313 .77
09/30/03 16,117 1,855 1,330 .79
12/31/03 14,790 1,639 1,264 .74
- ------------------ ---------------------- ---------------------- ---------------------- ---------------------
03/31/02 $ 14,825 $ 1,554 $ (634) (a) $ (.37) (a)
06/30/02 14,775 1,401 1,095 .64
09/30/02 14,662 1,385 1,097 .64
12/31/02 15,271 1,442 1,031 .60
- ------------------ ---------------------- ---------------------- ---------------------- ---------------------
(a) Includes a $1.6 million after-tax charge ($ .96 per share) from goodwill
impairment (see Note 2)
-40-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
As discussed in the Company's Proxy Statement with respect to the Annual Meeting
of Stockholders as filed with the Commission on April 18, 2002, during 2002 the
Company dismissed Arthur Andersen LLP and engaged Grant Thornton, LLP to serve
as the Company's independent accountants.
ITEM 9A. CONTROLS AND PROCEDURES
With the participation of management, the Company's Chief Executive Officer and
its Chief Financial Officer evaluated the Company's disclosure controls and
procedures as of the end of 2003. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the reports that the Company files with
the Securities and Exchange Commission
There has been no change in the Company's internal controls over financial
reporting that occurred in the fourth quarter of 2003 that has materially
affected, or is reasonably likely to materially affect the Company's internal
controls over financial reporting.
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
2004 annual meeting of stockholders.
Executive Officers
The information for this item relating to executive officers of the Company is
set forth on pages 9 through 10 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 2004 annual
meeting of stockholders.
The Company has adopted a Code of Ethics and Business Conduct that applies to
all of the Company's directors, officers and employees. The Code of Ethics and
Business Conduct will be provided to any person, without charge, upon request
addressed to : Corporate Secretary, Atrion Corporation, One Allentown Parkway,
Allen, Texas 75002.
ITEM 11. EXECUTIVE COMPENSATION
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2004 annual meeting of stockholders.
-41-
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 2004 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 2004 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
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information for this item is incorporated by reference form the Company's
definitive proxy statement for its 2004 annual meeting of stockholders.
PART IV
ITEM 15. 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.
-42-
2. Financial Statement Schedules:
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL SCHEDULE
Board of Directors
Atrion Corporation
In connection with our audit of the consolidated financial
statements of Atrion Corporation and Subsidiaries referred to in
our report dated February 13, 2004, which is included in Part IV of
this Annual Report on Form 10-K, we have also audited Schedule II
for each of the two years in the period ended December 31, 2003. In
our opinion, this schedule when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ Grant Thornton LLP
Dallas, Texas
February 13, 2004
Schedule II - Consolidated Valuation and Qualifying Accounts
Allowance for Doubtful Receivables
December 31,
---------------------------------------
2003 2002
----------------- ----------------
Beginning balance $ 151 $ 113
Additions charged to expense 75 62
Deductions from reserve (122) (24)
- ---------------------------------------- ----------------- ---- ----------------
Ending balance $ 104 $ 151
- ---------------------------------------- ----------------- ---- ----------------
All other financial statement schedules have been omitted since the
required information is included in the consolidated financial
statements or the notes thereto or is not applicable or required.
3. Exhibits: (Numbered in accordance with Item 601 of Regulation S-K)
The exhibits listed below are filed as part of this 2003 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:
On October 30, 2003, the Company filed a report on Form 8-K with the
SEC regarding the public dissemination of a press release announcing
its financial results for the quarter ended September 30, 2003 (Item
12).
-43-
Exhibit
Numbers Description
- ------- -------------
2a Asset Purchase Agreement, dated March 19, 1997, between Atrion
Corporation and Midcoast Energy Resources, Inc. (1)
2b Asset Purchase Agreement, dated as of December 29, 1997, by and among
Quest Medical, Inc., QMI Acquisition Corp. and Atrion Corporation (2)
3a Certificate of Incorporation of Atrion Corporation, dated December
30, 1996(3)
3b Amended and Restated Bylaws of Atrion Corporation (18)
4a Rights Agreement, dated as of February 1, 1990, between AlaTenn
Resources, Inc. and American Stock Transfer & Trust Company which
includes the form of Right Certificate as Exhibit A and the
Summary of Rights to Purchase Common Shares as Exhibit B (5)
4b Second Amendment to Rights Agreement (6)
10a* 1990 Stock Option Plan (7)
10b* Form of Incentive Stock Option Agreement (8)
10c* 1994 Key Employee Stock Incentive Plan (9)
10d* Form of Incentive Stock Option Agreement (10)
10e* Atrion Corporation 1997 Stock Incentive Plan (11)
10f* Form of Award Agreement for Incentive Stock Option (12)
10g* Form of Award Agreement for Nonqualified Stock Option for Key
Employee (13)
10h* Form of Award Agreement for Nonqualified Stock Option for Director (14)
10i* Atrion Corporation 1998 Outside Directors Stock Option Plan (15)
10j* Form of Stock Option Agreement (16)
10k* Atrion Corporation Incentive Compensation Plan for Chief Executive
Officer (17)
10l* Atrion Corporation Incentive Compensation Plan for Chief Financial
Officer (18)
10m* Severance Plan for Chief Financial Officer (19)
10n* Atrion Corporation Incentive Compensation Plan for Chief Financial
Officer (20)
10o* Agreement regarding the nullification of Incentive Compensation Plan
for Chief Executive Officer (21)
10p* Chief Executive Officer Employment Agreement (22)
10q* Amendment to Chief Executive Officer Employment Agreement (23)
21 Subsidiaries of Atrion Corporation as of December 31, 2002 (24)
23 Consent of Grant Thornton LLP (24)
31.1 Sarbanes-Oxley Act Section 302 Certification of Chief Financial
Officer (24)
31.2 Sarbanes-Oxley Act Section 302 Certification of Chief Financial
Officer (24)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes - Oxley Act Of 2002 (24)
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes - Oxley Act Of 2002 (24)
Notes
- -----
(1) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 23, 1997.
-44-
(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 4.4(b) to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(12) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(13) Incorporated by reference to Exhibit 4.6 to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(14) Incorporated by reference to Exhibit 4.7 to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(15) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(16) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(17) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion
Corporation dated November 15, 1999.
(18) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion
Corporation dated May 12, 2000.
(19) Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion
Corporation dated May 12, 2000.
(20) Incorporated by reference to Exhibit 10k to Form 10-K of Atrion
Corporation dated March 30, 2001.
(21) Incorporated by reference to Exhibit 10l to Form 10-K of Atrion
Corporation dated March 26, 2002.
(22) Incorporated by reference to Exhibit 10m to Form 10-K of Atrion
Corporation dated March 26, 2002.
(23) Incorporated by reference to Exhibit 10q to Form 10-K of Atrion
Corporation dated March 13, 2003.
(24) Filed herewith.
* Management Contract or Compensatory Plan or Arrangement
-45-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Atrion Corporation
By: /s/ Emile A. Battat
--------------------
Emile A. Battat
Chairman,
President and Chief
Executive Officer
Dated: March 26, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
----------- ------- -------
/s/ Emile A. Battat Chairman, President and Chief Executive March 26, 2004
- ----------------------- Officer (Principal Executive Officer)
Emile A. Battat
/s/ Jeffery Strickland Vice President, Chief Financial Officer March 26, 2004
- ----------------------- and Secretary-Treasurer (Principal
Jeffery Strickland Financial and Accounting Officer)
/s/ Richard O. Jacobson Director March 26, 2004
- -----------------------
Richard O. Jacobson
/s/ John H. P. Maley Director March 26, 2004
- -----------------------
John H. P. Maley
-46-
Signature Title Date
----------- ------- -------
/s/ Hugh J. Morgan, Jr. Director March 26, 2004
- -----------------------
Hugh J. Morgan, Jr.
/s/ Roger F. Stebbing Director March 26, 2004
- -----------------------
Roger F. Stebbing
/s/ John P. Stupp, Jr. Director March 26, 2004
- -----------------------
John P. Stupp, Jr.
EXHIBIT INDEX
Exhibit
Numbers Description Page
- ------- ------------- ------
2a Asset Purchase Agreement, dated March 19, 1997, between Atrion Corporation and Midcoast Energy Resources,
Inc. (1)
2b Asset Purchase Agreement, dated as of December 29, 1997, by and among Quest Medical, Inc., QMI Acquisition
Corp. and
Atrion Corporation (2)
3a Certificate of Incorporation of Atrion Corporation, dated December 30, 1996(3)
3b Amended and Restated Bylaws of Atrion Corporation (18)
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* Form of Award Agreement for Incentive Stock Option (12)
10g* Form of Award Agreement for Nonqualified Stock Option for Key Employee (13)
10h* Form of Award Agreement for Nonqualified Stock Option for Director (14)
10i* Atrion Corporation 1998 Outside Directors Stock Option Plan (15)
10j* Form of Stock Option Agreement (16)
10k* Atrion Corporation Incentive Compensation Plan for Chief Executive Officer ( 17)
10l* Atrion Corporation Incentive Compensation Plan for Chief Financial Officer (18)
10m* Severance Plan for Chief Financial Officer (19)
10n* Atrion Corporation Incentive Compensation Plan for Chief Financial Officer (20)
10o* Agreement regarding the nullification of Incentive Compensation Plan for Chief Executive Officer (21)
10p* Chief Executive Officer Employment Agreement (22)
10q* Amendment to Chief Executive Officer Employment Agreement (23)
21 Subsidiaries of Atrion Corporation as of December 31, 2002 (24) 50
23 Consent of Grant Thornton LLP (24) 51
31.1 Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer (24) 52
31.2 Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer (24) 54
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes -
Oxley Act Of 2002 (24) 56
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes -
Oxley Act Of 2002 (24)
Notes
- ------
(1) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 23, 1997.
-48-
(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 4.4(b) to the Form S-8 of
Atrion Corporation filed June 10, 1998 (File No. 333-56509).
(12) Incorporated by reference to Exhibit 4.5 to the Form S-8 of
Atrion Corporation filed June 10, 1998 (File No. 333-56509).
(13) Incorporated by reference to Exhibit 4.6 to the Form S-8 of
Atrion Corporation filed June 10, 1998 (File No. 333-56509).
(14) Incorporated by reference to Exhibit 4.7 to the Form S-8 of
Atrion Corporation filed June 10, 1998 (File No. 333-56509).
(15) Incorporated by reference to Exhibit 4.4 to the Form S-8 of
Atrion Corporation, filed June 10, 1998 (File No. 333-56511).
(16) Incorporated by reference to Exhibit 4.5 to the Form S-8 of
Atrion Corporation, filed June 10, 1998 (File No. 333-56511).
(17) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion
Corporation dated November 15, 1999.
(18) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion
Corporation dated May 12, 2000.
(19) Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion
Corporation dated May 12, 2000.
(20) Incorporated by reference to Exhibit 10k to Form 10-K of Atrion
Corporation dated March 30, 2001.
(21) Incorporated by reference to Exhibit 10l to Form 10-K of Atrion
Corporation dated March 26, 2002.
(22) Incorporated by reference to Exhibit 10m to Form 10-K of Atrion
Corporation dated March 26, 2002.
(23) Incorporated by reference to Exhibit 10q to Form 10-K of Atrion
Corporation dated March 13, 2003
(24) Filed herewith.
* Management Contract or Compensatory Plan or Arrangement
-49-