-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AQ/r4eBEBXYKHb+xFlIPISL6B3NWrSbxH6YNdJCqdr10By2r9vkHP9KnIuRfMX1J gNHbnJkDAj2/rbAFl9pMRw== 0000891554-02-001485.txt : 20020415 0000891554-02-001485.hdr.sgml : 20020415 ACCESSION NUMBER: 0000891554-02-001485 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATRION CORP CENTRAL INDEX KEY: 0000701288 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 630821819 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10763 FILM NUMBER: 02585936 BUSINESS ADDRESS: STREET 1: ONE ALLENTOWN PARKWAY CITY: ALLEN STATE: TX ZIP: 75002 BUSINESS PHONE: 9723909800 MAIL ADDRESS: STREET 1: POST OFFICE 3869 CITY: MUSCLE SHOALS STATE: AL ZIP: 356623869 FORMER COMPANY: FORMER CONFORMED NAME: ALATENN RESOURCES INC DATE OF NAME CHANGE: 19920703 10-K 1 d50119form10-k.txt FOR THE YEAR 12/31/01 ================================================================================ 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, 2001 Commission File Number 0-10763 ----------------------- Atrion Corporation (Exact name of registrant as specified in its charter) Delaware 63-0821819 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Allentown Parkway, Allen, Texas 75002 (Address of principal executive offices) (ZIP code) Registrant's telephone number, including area code: (972) 390-9800 SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: Name of Each Exchange Title of Each Class on Which Registered - ------------------- --------------------- NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: Title of Class Common Stock, $.10 Par Value ----------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES__X__ NO_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting Common Stock held by nonaffiliates of the registrant at March 1, 2002 was $45,135,272 based on the last reported sales price of the common stock on the Nasdaq National Market on such date. Number of shares of Common Stock outstanding at March 1, 2002: 1,695,271. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K incorporates by reference information from the Company's definitive proxy statement relating to the 2002 annual meeting of stockholders, to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report. ================================================================================ ATRION CORPORATION FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2001 ---------- 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....................................... 10 PART II.................................................................... 11 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................... 11 ITEM 6. SELECTED FINANCIAL DATA....................................... 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 12 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................... 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 33 PART III................................................................... 34 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 34 ITEM 11. EXECUTIVE COMPENSATION........................................ 34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................... 34 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 34 PART IV.................................................................... 35 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................................................... 35 SIGNATURES................................................................. 37 EXHIBIT INDEX.............................................................. 39 ATRION CORPORATION FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2001 PART I ITEM 1. BUSINESS General Atrion Corporation ("Atrion" or the "Company") designs, develops, manufactures, markets, sells and distributes products and components, primarily for the medical and healthcare industry. The Company's current operations are conducted through three subsidiaries, Atrion Medical Products, Inc. ("Atrion Medical Products"), Halkey-Roberts Corporation ("Halkey-Roberts") and Quest Medical, Inc. ("Quest Medical"). The Company also owns AlaTenn Pipeline Company LLC ("AlaTenn Pipeline") which owns and operates a gaseous oxygen pipeline and Atrion Leasing Company LLC ("Atrion Leasing") which is engaged in leasing activities. These two non-medical activities are small and incidental to the overall operations of the Company. Halkey-Roberts also has a line of non-medical components that are sold for use in aviation and marine safety products. Atrion Medical Products' business, which is the design, development, manufacturing, marketing, sale and distribution of medical products, has been in operation for more than 30 years. Its products are used in ophthalmic, diagnostic and cardiovascular procedures and are sold primarily to major health care companies which market and distribute Atrion Medical Products' products, in conjunction with their name-brand products, to hospitals, clinics, surgical centers, physicians and other health care providers. While soft contact lens storage and disinfection systems are its more mature ophthalmic products, Atrion Medical Products continues to be a leading manufacturer and supplier of such products. Soft lens storage and disinfection systems accounted for 18.7%, 16.4% and 15.0% of the Company's total revenues for the years ended December 31, 2001, 2000 and 1999, respectively. A growing area of sales for Atrion Medical Products is its line of ophthalmic surgical procedure kits that are assembled and distributed for several of its major customers. Products sold to other healthcare companies by Atrion Medical Products include a line of inflation devices used primarily in percutaneous balloon angioplasty procedures and diagnostic devices used to test blood platelet function and to obtain blood samples for the measurement of blood sugar. Atrion Medical Products also markets a line of name-brand products, called LacriCATH(R), which is used in a less invasive surgical procedure for the treatment of epiphora, or excessive tearing of the eye. These products are sold through commissioned sales agents. Atrion Medical Products' design and engineering team assists its OEM customers in the development of products. Halkey-Roberts, which has been in operation for 58 years, designs, develops, manufactures and sells proprietary medical device components used to control the flow of fluids and gases. Its valves and clamps are used in a wide variety of hospital and outpatient care products, such as Foley catheters, pressure cuffs, dialysis and blood collection sets and drug delivery systems. Within the past several years, Halkey-Roberts has introduced a line of needleless valves - 1 - designed to eliminate the use of needles by health care providers in many routine procedures. These products use a patented design and proprietary assembly technology. Halkey-Robertshas also applied its fluid control technology to inflation valves used in marine and aviation safety products. These components are used primarily in inflatable life vests and rafts. Working closely with its customers, Halkey-Roberts has developed an innovative line of products and is a leader in each of its major markets. Quest Medical manufactures and sells several medical product lines, including cardiovascular products (such as pressure control valves, filters and surgical retracting tapes, aortic punches and catheters), specialized intravenous fluid delivery tubing sets and accessories and pressure monitoring kits used primarily in labor and delivery. Quest Medical also manufactures and sells the MPS(R) myocardial protection system ("MPS"), an innovative and sophisticated system for the delivery of solutions to the heart during open-heart surgery. The MPS integrates key functions relating to the delivery of solutions to the heart, such as varying the rate and ratio of oxygenated blood, crystalloid, potassium and other additives, and controlling temperature, pressure and other variables to allow simpler, more flexible management of this process indicating improved patient outcomes. The MPS employs advanced pump, temperature control and microprocessor technologies and includes a line of disposable products. The Company has Food and Drug Administration ("FDA") approval for the use of the MPS in cardiac surgeries in which the beating of the heart is not interrupted ("beating-heart surgery") and no heart-lung machine is needed. This less-invasive method of surgery is beneficial to the patient but more challenging to the surgeon who must rely on the heart to provide coronary and systemic circulation throughout surgery. The Company believes that the use of the MPS offers a distinct safety advantage during beating-heart surgery by enhancing the coronary blood flow and infusing additives, as needed, directly to the heart during the surgery. To date, response to the use of MPS in beating-heart surgery has been positive. The Company expects an increasing use of beating-heart surgery in the place of conventional open-heart surgery over the next several years. While continuing to promote the use of the MPS in conventional open-heart surgery, the Company is actively promoting the use of the MPS for beating-heart surgery. AlaTenn Pipeline owns and operates a 22-mile high-pressure steel pipeline in north Alabama that transports gaseous oxygen from an industrial gas producer to one of its customers. Marketing and Major Customers Atrion Medical Products and Halkey-Roberts utilize sales managers to market their products to other manufacturers for use as components in their consumer products. Atrion Medical Products also uses commissioned sales agents for the marketing of LacriCATH products. Quest Medical is currently marketing the MPS and related disposables through a direct sales force as well as through specialty distributors. Most of Quest Medical's other products are marketed directly by telemarketing, independent sales representatives, marketing arrangements with certain distributors and, to a lesser extent, through direct mail. The Company periodically advertises its products in trade journals. In addition, the Company routinely attends and participates in trade shows throughout the United States and internationally. During 2001, various products sold to several divisions of Novartis accounted for approximately 19% of the Company's revenues, and Novartis was the only customer accounting for more than 10 percent of the Company's revenues. The loss of this customer would have a material adverse impact on the Company's business, financial condition and results of operations. - 2 - Manufacturing The Company's medical products and other components are produced at plants in Arab, Alabama, St. Petersburg, Florida and Allen, Texas. The plants in Arab and St. Petersburg both utilize plastic injection molding and specialized assembly as their primary manufacturing processes. The Company's other manufacturing processes consist of the assembly of standard and custom component parts and the testing of completed products. The Company devotes significant attention to quality control. Its quality control measures begin at the manufacturing level where many of its components are assembled in a "clean room" environment designed and maintained to reduce product exposure to particulate matter. Products are tested throughout the manufacturing process for adherence to specifications. Most finished products are then shipped to outside processors for sterilization through radiation or treatment with ethylene oxide gas. After sterilization, the products are quarantined and tested before they are shipped to customers. Skills of assembly workers required for the manufacture of medical products are similar to those required in typical assembly operations. The Company currently employs workers with the skills necessary for its assembly operations and believes that additional workers with these skills are readily available in the areas where the Company's plants are located. The Company's medical device operations are ISO9001 and EN46001 certified and are subject to FDA jurisdiction. The Company's products are used throughout the world and, during 2001, approximately 33 percent of the Company's total revenues were from sales to parties outside the United States. Research and Development The Company believes that a well-targeted research and development program is an essential part of the Company's activities, and the Company is currently engaged in a number of research and development projects. The objective of the Company's program is to develop new products in the Company's current product lines, improve current products and develop new product lines. Recent major development projects include, but are not limited to, a needleless injection site product designed to eliminate the use of needles by health care providers, a product designed for safe needle disposal and an automatic inflation device for use on life vests in the marine recreation industry. The Company expects to incur additional research and development expenses in 2002 for various projects, including further development of the MPS. The Company's consolidated research and development expenditures for the years ended December 31, 2001, 2000 and 1999 were $1,911,000, $2,054,000, and $2,601,000 respectively. - 3 - Availability of Supplies and Raw Materials The Company subcontracts with various suppliers to provide it with the quantity of component parts necessary to assemble its products. Almost all of these components are available from a number of different suppliers, although certain components are purchased from single sources that manufacture these components from the Company's toolings. The Company believes that there are satisfactory alternative sources for single-sourced components, although a sudden disruption in supply from one of these suppliers could adversely affect the Company's ability to deliver finished products on time. The Company owns the molds used for production of a majority of the components used in specialized tubing sets and cardiovascular products. Consequently, in the event of supply disruption, the Company would be able to fabricate its own components or subcontract with another supplier, albeit after a delay in the production process. Atrion Medical Products and Halkey-Roberts purchase various types of high-grade resins and other components for their manufacturing processes from various suppliers. The resins are readily available materials and, while the Company is selective in its choice of suppliers, it believes that there are no significant restrictions or limitations on supply. AlaTenn Pipeline is under no obligation to provide a gas supply to its customer. Patents and License Agreements The commercial success of the Company is dependent, in part, on its ability to continue to develop patentable products, to preserve its trade secrets and to operate without infringing or violating the proprietary rights of third parties. The Company currently has 184 active patents and 23 patent applications pending on products that are either being sold or are in development. The Company receives royalty payments on three patents that are licensed to outside parties. The Company has obtained licenses to the rights from outside parties to two patents relating to the LacriCATH product line. All of these patents and pending patents relate to current products being sold by the Company or to products in evaluation stages. Others may challenge the validity of any patents issued to the Company, and the Company could encounter legal and financial difficulties in enforcing its patent rights against infringers. In addition, there can be no assurance that other technologies cannot or will not be developed or that patents will not be obtained by others which would render the Company's patents less valuable or obsolete. With the possible exception of the patent relating to one of the Company's more mature products, the loss of any one patent would not have a material adverse effect on the Company's current revenue base. Although the Company does not believe that patents are the sole determinant in the commercial success of its products, the loss of a significant percentage of its patents or its patents relating to a specific product line, particularly the MPS product line, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has developed technical knowledge which, although non-patentable, is considered by the Company to be significant in enabling it to compete. However, the proprietary nature of such knowledge may be difficult to protect. The Company has entered into agreements with key employees prohibiting them from disclosing any confidential information or trade secrets of the Company and prohibiting them from engaging in any competitive business while employed by the Company and for various periods thereafter. In addition, these agreements also provide that any inventions or discoveries relating to the business of the Company by these individuals will be assigned to the Company and become the Company's sole property. - 4 - The medical device industry is characterized by extensive intellectual property litigation, and companies in the medical products industry sometimes use intellectual property litigation to gain a competitive advantage. Intellectual property litigation, regardless of outcome, is often complex and expensive, and the outcome of this litigation is generally difficult to predict. While the Company is not currently involved in any significant litigation, an adverse determination in any such proceeding could subject the Company to significant liabilities to third parties, or require the Company to seek licenses from third parties or pay royalties that may be substantial. Furthermore, there can be no assurance that necessary licenses would be available to the Company on satisfactory terms or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing or selling certain of its products, which could have a material adverse effect on the Company's business, financial condition and results of operations. Competition Depending on the product and the nature of the project, the Company's medical products subsidiaries compete on the basis of their ability to provide engineering and design expertise, quality, service, product and price. As such, successful competitors must have technical strength, responsiveness and scale. The Company believes that its expertise and reputation for quality medical products have allowed it to compete favorably with respect to each such factor and to maintain long-term relationships with its customers. However, in many of the Company's markets, the Company competes with numerous other companies that have substantially greater financial resources and engage in substantially more research and development activities than the Company. Furthermore, innovations in surgical techniques or medical practices could have the effect of reducing or eliminating market demand for one or more of the Company's products. Atrion Medical Products manufactures products for certain major health care companies and is dependent on several customers for the majority of its sales. Because its products are somewhat limited in number and normally are only a component of the ultimate product sold by its customers, Atrion Medical Products is dependent on its ability to meet the requirements of those major healthcare companies and must continually be attentive to the need to manufacture such products at competitive prices and in compliance with strict manufacturing standards. This risk is somewhat minimized by Atrion Medical Products' ability to obtain long-term, exclusive manufacturing rights while its customers have long-term marketing rights. Atrion Medical Products depends on the sales and marketing efforts of those customers to sell their products. Therefore, Atrion Medical Products seeks highly successful companies with which to do business. Depending on the product and the nature of the project, Atrion Medical Products competes on the basis of its ability to provide engineering and design expertise as well as on the basis of product and price. As Atrion Medical Products continues to expand its product lines, adding new products and customers, dependency on a limited number of customers is being reduced. Atrion Medical Products frequently designs products for a customer or potential customer prior to entering into long-term development and manufacturing agreements with that customer. Atrion Medical Products competes with a number of contract manufacturers of medical products. Most of these competitors are small companies that do not offer the breadth of services offered by Atrion Medical Products to its customers. - 5 - The United States is the principal market for the LacriCATH product. There is no direct competition in the United States where both the product and surgical procedure are patent-protected. LacriCATH products are marketed directly to ophthalmologists through commissioned sales agents. The LacriCATH line is marketed to a large base of customers and is not dependent on a single customer. Halkey-Roberts competes in the medical products market and in the market for inflation devices used in marine and aviation equipment. In the medical products market, Halkey-Roberts is a leading provider of check valves and medical clamps and has only one major competitor for each of those products. In the inflation device market, Halkey-Roberts is the dominant provider in its market areas. With the exception of one large company, Halkey-Roberts' competitors in both of these markets generate less than $50 million annually in revenues. Numerous companies compete with Quest Medical in the sale of cardiovascular products, specialized tubing sets and pressure monitoring kits. These markets are dominated by established manufacturers that have broader product lines, greater distribution capabilities, substantially greater capital resources and larger marketing, research and development staffs and facilities than Quest Medical. Many of these competitors offer broader product lines within the specific product market and in the general field of medical devices and supplies. Broad product lines give many of Quest Medical's competitors the ability to negotiate exclusive, long-term medical device supply contracts and, consequently, the ability to offer comprehensive pricing of their competing products. By offering a broader product line in the general field of medical devices and supplies, competitors may also have a significant advantage in marketing competing products to group purchasing organizations, HMOs and other managed care organizations that are increasingly seeking to reduce costs through centralization of purchasing functions. In addition, Quest Medical's competitors may use price reductions to preserve market share in their product markets. The Company is not aware of any [integrated] cardioplegia delivery system currently being marketed that competes with the MPS. Government Regulation Products The manufacture and sale of medical products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding foreign agencies. The research and development, manufacturing, promotion, marketing and distribution of medical products in the United States are governed by the Federal Food, Drug and Cosmetic Act and the regulations promulgated thereunder ("FDC Act and Regulations"). The Company's medical product subsidiaries and certain of their customers are subject to inspection by the FDA for compliance with such regulations and procedures. Atrion Medical Products' and Quest Medical's facilities are registered with the FDA. - 6 - The FDA has traditionally pursued a rigorous enforcement program to ensure that regulated entities comply with the FDC Act and Regulations. A company not in compliance may face a variety of regulatory actions, including warning letters, product detentions, device alerts, mandatory recalls or field corrections, product seizures, total or partial suspension of production, injunctive actions or civil penalties and criminal prosecutions of the company or responsible employees, officers and directors. The Company's medical products subsidiaries and certain of their customers are subject to these inspections. The Company believes that it has met all FDA requirements [, and it also believes that its medical device OEM customers are in compliance]; however, if the Company or its OEM medical device customers should fail the FDA inspections, it could have a material adverse impact on the Company's business, financial condition and results of operations. Under the FDA's requirements, if a manufacturer can establish that a newly-developed device is "substantially equivalent" to a legally marketed device, the manufacturer may seek marketing clearance from the FDA to market the device by filing a 510(k) premarket notification with the FDA. The 510(k) premarket notification must be supported by data establishing the claim of substantial equivalence to the satisfaction of the FDA. The process of obtaining a 510(k) clearance typically can take several months to a year or longer. If substantial equivalence cannot be established or if the FDA determines that the device requires a more rigorous review, the FDA will require that the manufacturer submit a premarket approval ("PMA") that must be reviewed and approved by the FDA prior to marketing and sale of the device in the United States. The process of obtaining a PMA can be expensive, uncertain and lengthy, frequently requiring anywhere from one to several or more years from the date of FDA submission. Both a 510(k) and a PMA, if granted, may include significant limitations on the indicated uses for which a product may be marketed. FDA enforcement policy strictly prohibits the promotion of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory requirements or the occurrence of unforeseen problems following initial marketing. The Company believes that it [and all of its current medical device OEM customers] is in compliance with these rules; however, there is no assurance that the Company or its OEM customers are now, or will continue to be, in compliance with such rules. If the Company or its customers do not meet these standards, the Company's financial performance could be adversely affected. Furthermore, delays by the FDA in approving a product or a customer's product could delay the Company's expectations for future sales of certain products. Certain products manufactured by Halkey-Roberts are also subject to regulation by the Coast Guard and the Federal Aviation Administration and similar organizations in foreign countries which regulate the safety of marine and aviation equipment. Third-Party Reimbursement and Cost Containment In the United States, health care providers, including hospitals and physicians, that purchase medical products for treatment of their patients generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or a part of the costs and fees associated with the procedures performed using these products. Accordingly, the Company is dependent, in part, upon the ability of health care providers to obtain satisfactory reimbursement from third-party payors for medical procedures in which the Company's products are used. Third-party payors may deny reimbursement if they determine that a prescribed product has not received appropriate regulatory clearances or approvals, is - 7 - not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed health care systems that control reimbursement for new products and procedures. In most markets, there are private insurance systems as well as government-managed systems. Market acceptance of the Company's products in international markets depends, in part, on the availability and level of reimbursement. Medicare and Medicaid reimbursement for hospitals is based on a fixed amount for admitting a patient with a specific diagnosis. Because of this fixed reimbursement method, hospitals may seek to use less costly methods in treating Medicare and Medicaid patients. Frequently, reimbursement is reduced to reflect the availability of a new procedure or technique, and as a result hospitals are generally willing to implement new cost saving technologies before these downward adjustments take effect. Likewise, because the rate of reimbursement for certain physicians who perform certain procedures has been and may in the future be reduced, physicians may seek greater cost efficiency in treatment to minimize any negative impact of reduced reimbursement. Third party payors may challenge the prices charged for medical products and services and may deny reimbursement if they determine that a device was not used in accordance with cost-effective treatment methods as determined by the payor, was experimental or was used for an unapproved application. Failure by hospitals and other users of the Company's products to obtain reimbursement from third-party payors, or adverse changes in government and private third-party payors' policies toward reimbursement for procedures employing the Company's products, could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company is unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on the Company. Political, economic and regulatory influences are continuing to subject the health care industry in the United States to fundamental change. The Company anticipates that Congress, state legislatures and the private sector will continue to review and assess alternative health care delivery and payment systems. Potential approaches that have been considered include mandated basic health care benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, price controls and other fundamental changes to the health care delivery system. Legislative debate is expected to continue in the future, and market forces are expected to continue demanding reduced costs. The Company cannot predict what impact the adoption of any federal or state health care reform measures, future private sector reform or market forces may have on its business. Advisory Board Several physicians and perfusionists with substantial expertise in the field of myocardial protection serve as Clinical Advisors for the Company. These Clinical Advisors have assisted in the identification of the market need for MPS and its subsequent design and development. - 8 - Members of the Company's management and scientific and technical staff from time to time consult with these Clinical Advisors to better understand the technical and clinical requirements of the cardiovascular surgical team and product functionality needed to meet those requirements. The Company anticipates that these Clinical Advisors will play a similar role with respect to other products and may assist the Company in educating other physicians in the use of the MPS and related products. Certain of the Clinical Advisors are employed by academic institutions and may have commitments to, or consulting or advisory agreements with, other entities that may limit their availability to the Company. The Clinical Advisors may also serve as consultants to other medical device companies. The Clinical Advisors are not expected to devote more than a small portion of their time to the Company. People At February 28, 2002, the Company had 443 full-time employees. Employee relations are good and there has been no work stoppage due to labor disagreements. None of the Company's employees is represented by any labor union. ITEM 2. PROPERTIES The headquarters of the Company are located in Allen, Texas in a Company-owned facility. Quest Medical's office, manufacturing and warehouse activities are located at the Company's headquarters facility in Allen, Texas. This facility consists of a 108,000-square-foot office, manufacturing and warehouse building situated on approximately 14.8 acres and 4.3 acres adjacent to such property which are unimproved. Atrion Medical Products owns three office buildings and a manufacturing facility that are located on a 67-acre site in Arab, Alabama. The three office buildings house administrative, engineering and design operations, and the manufacturing facility contains approximately 112,000 square feet of manufacturing space. Halkey-Roberts has a ten-year operating lease that commenced in May 1996 on a manufacturing and administrative facility located on a 7-acre site in St. Petersburg, Florida. The facility consists of approximately 72,000 square feet. AlaTenn Pipeline owns and operates a 22-mile high-pressure steel pipeline that transports gaseous oxygen between Decatur and Courtland, Alabama. ITEM 3. LEGAL PROCEEDINGS There were no material pending legal proceedings to which the Company or any of its subsidiaries was a party or of which any of their property was the subject as of February 28, 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None - 9 - Executive Officers of the Company Name Age Title ---- --- ----- Emile A. Battat 64 Chairman, President and Chief Executive Officer of the Company and Chairman or President of all subsidiaries Jeffery Strickland 43 Vice President and Chief Financial Officer, Secretary and Treasurer of the Company and Vice President or Secretary-Treasurer of all subsidiaries The persons who are identified as executive officers of the Company currently serve as officers of the Company and all subsidiaries. The officers of the Company and its subsidiaries are elected annually by the respective Boards of Directors of the Company and its subsidiaries at the first meeting of such Boards of Directors held after the annual meetings of stockholders of such entities. Accordingly, the terms of office of the current officers of the Company and its subsidiaries will expire at the time such meetings of the Board of Directors of the Company and its subsidiaries are held, which is anticipated to be in May 2002. There are no arrangements or understandings between any officer and any other person pursuant to which the officer was elected. There are no family relationships between any of the executive officers or directors. There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officers during the past five years. Brief Account of Business Experience During the Past Five Years Mr. Battat has been a director of the Company since 1987 and has served as Chairman of the Board of the Company since January 1998. Mr. Battat has served as President and Chief Executive Officer of the Company and as Chairman or President of all subsidiaries since October 1998. From March 1994 to October 1998, Mr. Battat served as President and Chief Executive Officer of Piedmont Enterprises, Inc., a privately held consulting firm. Mr. Strickland has served as Vice President and Chief Financial Officer, Secretary and Treasurer of the Company since February 1, 1997. He has served as Vice President of Atrion Medical Products and of Halkey-Roberts since January 1997 and as Vice President of Quest Medical since December 1997. Mr. Strickland served as Vice President-Corporate Development of the Company from May 1992 to February 1997 and as Assistant Secretary and Assistant Treasurer of the Company from May 1990 until February 1997. Mr. Strickland also served as Vice President-Planning of Alabama-Tennessee Natural Gas Company from May 1992 until February 1997 and as Vice President and Chief Financial Officer and Secretary-Treasurer of Alabama-Tennessee Natural Gas Company from February 1997 until May 1997. - 10 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Nasdaq National Market (Symbol ATRI). As of March 7, 2002, the Company had approximately 1,500 stockholders, including beneficial owners holding shares in "nominee" or "street" name. The high and low closing prices as reported by Nasdaq for each quarter of 2000 and 2001 are shown below. Year Ended December 31, 2000: High Low ------------------ ---- --- First Quarter $ 12.38 $ 10.00 Second Quarter $ 12.94 $ 10.75 Third Quarter $ 12.94 $ 12.06 Fourth Quarter $ 15.00 $ 10.63 Year Ended December 31, 2001: High Low ------------------ ---- --- First Quarter $ 15.88 $ 13.75 Second Quarter $ 25.74 $ 15.19 Third Quarter $ 25.70 $ 19.51 Fourth Quarter $ 38.05 $ 23.39 No dividends were declared or paid during 2001, and the Company presently has no plans to pay cash dividends. See Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data (In thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Revenues $57,605 $51,447 $49,917 $43,397 $30,277 Income (loss) from continuing operations 4,262 2,663 2,128 1,478 (2,045)(a) Net income 9,754(b) 2,792 2,293 2,140 17,170(a) Total assets 64,287 63,690 64,640 60,415 60,942 Long-term debt 17,125 7,400 10,417 -- 203 Income (loss) from continuing operations, per basic share 2.10 1.30 0.82 0.46 (0.63) Net income per basic share 4.80(b) 1.36 0.88 0.67 5.33 Dividends per share -- -- -- -- 0.60 Average basic shares outstanding 2,033 2,047 2,593 3,203 3,224 - ---------------------------------------------------------------------------------------------------------------------
- 11 - a The 1997 amounts include an impairment loss of $3.0 million after tax and a charge for a product replacement program of $.7 million after tax. b Includes a $5.5 million after-tax gain ($ 2.70 per share) from discontinued operations (See Note 2) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company's income from continuing operations was $4.3 million or $2.10 per basic and $1.88 per diluted share in 2001 compared to income from continuing operations of $2.7 million or $1.30 per basic and $1.25 per diluted share in 2000 and $2.1 million or $.82 per basic and $.81 per diluted share in 1999. Net income, including discontinued operations, totaled $9.8 million or $4.80 per basic and $4.30 per diluted share in 2001 compared with $2.8 million or $1.36 per basic and $1.31 per diluted share in 2000 and $2.3 million or $.88 per basic and $.87 per diluted share in 1999. Operating revenues were $57.6 million in 2001 compared with $51.4 million in 2000 and $49.9 million in 1999. The 12% revenue increase in 2001 over the prior year reflected increases in revenues in most of the Company's major product lines. The areas which realized the greatest percentage increases included the Company's ophthalmology products, kitting operations and the MPS product line. The 3% revenue growth experienced in 2000 was led by these same product lines. However, unusually large product shipments in late 1999 to some of the Company's significant customers that were building up inventory levels of some of its other products negatively impacted 2000 revenues and significantly reduced revenue growth between those years. The Company's cost of sales was $35.8 million in 2001 compared with $31.6 million in 2000 and $30.3 million in 1999. The increase in cost of sales for 2001 over 2000 and for 2000 over 1999 was primarily related to the increased sales mentioned above and the impact of increased manufacturing volumes. Gross profits were $21.8 million in 2001 compared with $19.9 million in 2000 and $19.6 million in 1999. The increase in gross profit in 2001 over 2000 and in 2000 over 1999 was primarily the result of the above mentioned revenue increases. The Company's gross profit in 2001 was 38 percent of revenues compared with 39 percent of revenues in 2000 and in 1999. The decline in gross profit percentage in 2001 from the prior years was primarily due to increased costs of a specialty resin used in one of the Company's major products. This increase was caused by a temporary shortage of supply of the resin caused by an explosion at the supplier's plant. This problem was resolved at the end of 2001 and prices for this resin have since returned to normal. Operating expenses were $16.0 million in 2001 compared with $15.6 million in 2000 and $16.5 million in 1999. The increase in operating expenses from 2000 to 2001 was primarily attributable to increased General and Administrative (G&A) expenses offset partially by reductions of Selling expenses and, to a lesser extent, Research and Development (R&D) expenses. G&A expenses for 2001 were $1.3 million higher than G&A expenses for 2000 primarily as a result of higher spending on outside services, compensation and benefit programs. The decrease in Selling expenses in 2001 from 2000 of $762,000 was primarily related to reductions in compensation - 12 - and benefit programs and travel-related expenses. R&D expenses were $143,000 lower for 2001 compared with 2000 primarily as a result of reduced spending on outside services and qualification materials. The decrease in operating expenses from 1999 to 2000 was primarily attributable to reduced G&A expenses and reduced R&D expenses partially offset by increased Selling expenses. G&A expenses for 2000 were $446,000 less than the prior year primarily as a result of reduced spending on outside services and compensation and benefit programs. R&D expenses were $547,000 lower for 2000 as compared with 1999. This reduction resulted primarily from the Company's reduced R&D efforts on non-core products with limited market potential. The Company's operating income for 2001 was $5.8 million compared with $4.2 million in 2000 and $3.1 million in 1999. Revenue growth, cost containment and cost reduction activities were the major contributors to the operating income improvements during the three-year period. Net interest expense was $223,000 in 2001 compared to $654,000 in 2000 and $257,000 in 1999. The reduction in 2001 from 2000 was primarily related to lower interest rates and the Company's lower average borrowing level in 2001. The Company's borrowing of funds under its revolving credit facility in late December 2001 in connection with its repurchase of outstanding common stock of the Company under a tender offer is expected to result in increased interest expense in 2002. The increase in interest expense from 1999 to 2000 was primarily attributable to the higher average borrowing level in 2000 caused by additional borrowings under the Company's revolving credit facility to fund its repurchases of outstanding common stock of the Company during 1999 and 2000. The increase in other income in 2001 is primarily related to the Company's one-time pre-tax gain of $428,000 on the sale of a patent. Income tax expense in 2001 totaled $1,803,000 compared with $923,000 in 2000 and $741,000 in 1999. The differences between years reflect changes in pre-tax income between the respective years. The Company believes that 2002 revenues at all operations will be higher than 2001 revenues at those operations and that the cost of goods sold, gross profit, operating income, net interest expense and income from continuing operations will each be higher in 2002 than in 2001. Discontinued Operations During 1997, the Company sold all of its natural gas operations. The financial statements presented herein reflect the Company's natural gas operations as discontinued operations for all periods presented. The financial statements also reflect an after-tax gain on disposal of these discontinued operations of $5.5 million or $2.70 per basic and $2.42 per diluted share in 2001, $.1 million or $.06 per basic and diluted share in 2000 and $.2 million or $.06 per basic and diluted share in 1999. In addition to the initial consideration received in 1997 upon the sale of the natural gas operations, certain annual contingent deferred payments of up to $250,000 per year were to be paid to the Company over an eight-year period which began in 1999, with the amount paid each year to be dependent upon revenues received by the purchaser from certain gas transportation contracts. The Company received deferred payments of $250,000 each, before tax from the purchaser in April 1999, 2000 and 2001 which are reflected in each year as a gain from discontinued operations of $165,000, net of tax. The 2001 gain also includes a $5,326,000 non-cash gain from reversal of a reserve established when the Company - 13 - disposed of its natural gas operations in 1997. This reversal in the third quarter of 2001 followed the resolution of an outstanding contingency related to the sale of those assets. The 2000 gain reflected above is net of a $36,000 loss related to the sale of certain residual properties associated with the Company's natural gas operations. Liquidity and Capital Resources The Company has a $25 million revolving credit facility (the "Credit Facility") with a regional bank to be utilized for the funding of operations and for major capital projects or acquisitions subject to certain limitations and restrictions (see Note 3 of Notes to Consolidated Financial Statements). Borrowings under the Credit Facility bear interest that is payable monthly at 30-day, 60-day or 90-day LIBOR, as selected by the Company, plus one percent. At December 31, 2001 the Company had outstanding borrowings of $17.1 million under the Credit Facility. The Credit Facility, which expires November 12, 2004 and may be extended under certain circumstances, contains various restrictive covenants none of which is expected to impact the Company's liquidity or capital resources. As of December 31, 2001, the Company had cash and cash equivalents of $542,000 compared with $159,000 at December 31, 2000. The Company had long-term debt as of December 31, 2001 of $17.1 million compared with $7.4 million as of December 31, 2000. The increase in cash and cash equivalents from December 31, 2000 to December 31, 2001 was primarily funded by net cash from operating activities and borrowings under the Company's Credit Facility remaining after repurchases of outstanding common stock of the Company and purchases of new machinery. The increase in long-term debt from December 31, 2000 to December 31, 2001 was primarily related to a $17.4 million repurchase of outstanding common stock of the Company under a tender offer in December 2001. Cash provided by continuing operations increased to $8.7 million in 2001 compared to $7.4 million in 2000 and $5.3 million in 1999. Capital expenditures for property, plant and equipment for continuing operations totaled $2.8 million in 2001 compared with $3.3 million in 2000 and $12.1 million in 1999. Included in the 1999 capital expenditure amount was $6.5 million for the purchase of the Company's Allen, Texas facility. As previously discussed, the Company recorded a non-cash gain from discontinued operations during 2001. The gain had no effect on the Company's cash position or the balance of its outstanding indebtedness and it will not have any impact on earnings from continuing operations in future periods. The Company believes that its existing cash and cash equivalents, cash flows from operations, borrowings available under the Company's Credit Facility, supplemented, if necessary, with equity or debt financing, which the Company believes would be available, will be sufficient to fund the Company's cash requirements for at least the foreseeable future. Companies sometimes establish legal entities for a specific business transaction or activity in the form of a Special Purpose Entity (SPE). SPEs may be used to facilitate off-balance sheet financing, acquiring financial assets, raising cash from owned assets and similar transactions. The Company has no SPEs, no off-balance sheet financing arrangements or any derivative financial instruments. In January 1998, the Board of Directors discontinued the payment of quarterly cash dividends. Such action was taken to facilitate the Company's growth strategy as well as to bring the - 14 - Company's dividend policy more in line with other companies in the medical products industry. Impact of Inflation The Company experiences the effects of inflation primarily in the prices it pays for labor, materials and services. Over the last three years, the Company has experienced the effects of moderate inflation in these costs. At times, the Company has been able to offset a portion of these increased costs by increasing the sales prices of its products. However, competitive pressures have not allowed for full recovery of these cost increases. New Accounting Pronouncements The Financial Accounting Standards Board ("FASB") has issued SFAS No. 141, SFAS No. 142, SFAS No. 143 and SFAS No.144. The impact to the Company for these items is described in Note 1 of our Notes to Consolidated Financial Statements. Critical Accounting Policies In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions. Inventories are stated at the lower of cost or market value. The Company records provisions for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The physical condition (e.g., age and quality) of the inventories is also considered in establishing its valuations. The Company assesses the impairment of long-lived assets, identifiable intangibles and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. This review is based upon projections of anticipated future cash flows. While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows or future changes in the Company's business plan could materially affect its evaluations. No such changes are anticipated at this time. Forward-looking Statements The statements in this Management's Discussion and Analysis and elsewhere in this Annual Report that are forward looking are based upon current expectations, and actual results may differ materially. Therefore, the inclusion of such forward-looking information should not be regarded as a representation by the Company that the objectives or plans of the Company will be achieved. Such statements include, but are not limited to, the Company's expectations - 15 - regarding future revenues, cost of sales, gross profit, operating income, net interest expense, income from continuing operations, cash flows from operations, and availability of equity and debt financing. Words such as "anticipates," "believes," "intends," "expects" and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements contained herein involve numerous risks and uncertainties, and there are a number of factors that could cause actual results to differ materially, including, but not limited to, the following: changing economic, market and business conditions; acts of war or terrorism; the effects of governmental regulation; the impact of competition and new technologies; slower-than-anticipated introduction of new products or implementation of marketing strategies; implementation of new manufacturing processes or implementation of new information systems; the Company's ability to protect its intellectual property; changes in the prices of raw materials; changes in product mix; product liability claims and product recalls; the ability to attract and retain qualified personnel and the loss of any significant customers. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic review which may cause the Company to alter its marketing, capital expenditures or other budgets, which in turn may affect the Company's results of operations and financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rates The Company has an $25.0 million credit facility with a regional bank. Borrowings under the Credit Facility bear interest at 30-day, 60-day or 90-day LIBOR, as selected by the Company, plus one percent. The Company is subject to interest rate risk based on an adverse change in the 30-day, 60-day or the 90-day LIBOR. At December 31, 2001, the Company had borrowings under the Credit Facility of $17.1 million. A one percent increase in the market interest rate would reduce the Company's annual pretax income by approximately $171,000 at the current borrowing level. - 16 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of Atrion Corporation: We have audited the accompanying consolidated balance sheets of Atrion Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Atrion Corporation and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/Arthur Andersen LLP Atlanta, Georgia February 25, 2002 - 17 - CONSOLIDATED STATEMENTS OF INCOME (For the years ended December 31, 2001, 2000 and 1999)
- ------------------------------------------------------------------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Revenues $ 57,605 $ 51,447 $ 49,917 Cost of Goods Sold 35,777 31,561 30,337 - ------------------------------------------------------------------------------------------------------------- Gross Profit 21,828 19,886 19,580 - ------------------------------------------------------------------------------------------------------------- Operating Expenses: Selling 6,248 7,010 6,841 General and administrative 7,849 6,576 7,022 Research and development 1,911 2,054 2,601 - ------------------------------------------------------------------------------------------------------------- 16,008 15,640 16,464 - ------------------------------------------------------------------------------------------------------------- Operating Income 5,820 4,246 3,116 Interest Expense, net (223) (654) (257) Other Income (Expense), net 468 (6) 10 - ------------------------------------------------------------------------------------------------------------- Income from Continuing Operations before Provision for Income Taxes 6,065 3,586 2,869 Income Tax Provision (Note 4) (1,803) (923) (741) - ------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 4,262 2,663 2,128 Gain on Disposal of Discontinued Operations, net of tax (Note 2) 5,492 129 165 - ------------------------------------------------------------------------------------------------------------- Net Income $ 9,754 $ 2,792 $ 2,293 ============================================================================================================= Earnings Per Basic Share: Continuing operations $ 2.10 $ 1.30 $ 0.82 Discontinued operations 2.70 0.06 0.06 - ------------------------------------------------------------------------------------------------------------- Net Income Per Basic Share $ 4.80 $ 1.36 $ 0.88 ============================================================================================================= Weighted Average Basic Shares Outstanding 2,033 2,047 2,593 ============================================================================================================= Earnings Per Diluted Share: Continuing Operations $ 1.88 $ 1.25 $ 0.81 Discontinued operations 2.42 0.06 0.06 - ------------------------------------------------------------------------------------------------------------- Net Income Per Diluted Share $ 4.30 $ 1.31 $ 0.87 ============================================================================================================= Weighted Average Diluted Shares Outstanding 2,272 2,135 2,631 =============================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. - 18 - CONSOLIDATED BALANCE SHEETS As of December 31, 2001 and 2000
- -------------------------------------------------------------------------------------------------- Assets: 2001 2000 - -------------------------------------------------------------------------------------------------- (In thousands) Current Assets: Cash and cash equivalents $ 542 $ 159 Accounts receivable, net 7,559 7,175 Inventories, net (Note 1) 11,114 10,110 Prepaid expenses 1,463 575 - -------------------------------------------------------------------------------------------------- 20,678 18,019 - -------------------------------------------------------------------------------------------------- Property, Plant and Equipment: Original cost (Note 1) 39,866 37,472 Less accumulated depreciation and amortization 14,488 11,225 - -------------------------------------------------------------------------------------------------- 25,378 26,247 - -------------------------------------------------------------------------------------------------- Other Assets and Deferred Charges: Patents, net of accumulated amortization of $6,543 and $6,238 in 2001 and 2000, respectively (Note 1) 2,707 3,012 Goodwill, net of accumulated amortization of $4,114 and $3,511 in 2001 and 2000, respectively (Note 1) 12,216 12,803 Other 3,308 3,609 - -------------------------------------------------------------------------------------------------- 18,231 19,424 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- $64,287 $63,690 ==================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. - 19 -
- ------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity: 2001 2000 - ------------------------------------------------------------------------------------------------------ (In thousands) Current Liabilities: Accounts payable and accrued liabilities $ 5,337 $ 4,518 Accrued income and other taxes 109 187 - ------------------------------------------------------------------------------------------------------ 5,446 4,705 - ------------------------------------------------------------------------------------------------------ Long-term Debt (Note 3) 17,125 7,400 - ------------------------------------------------------------------------------------------------------ Other Liabilities and Deferred Credits: Deferred income taxes (Note 4) 1,576 6,470 Other 965 1,101 - ------------------------------------------------------------------------------------------------------ 2,541 7,571 - ------------------------------------------------------------------------------------------------------ Commitments and Contingencies (Note 12) Stockholders' Equity: Common stock, par value $0.10 per share, authorized 10,000,000 shares, issued 3,419,953 shares in 2001 and 2000 (Note 5) 342 342 Paid-in capital 7,991 6,419 Retained earnings (Note 8) 61,660 51,906 Treasury shares, 1,732,032 shares in 2001 and 1,427,660 shares in 2000, at cost (Note 5) (30,818) (14,653) - ------------------------------------------------------------------------------------------------------ 39,175 44,014 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ $ 64,287 $ 63,690 ======================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. - 20 - CONSOLIDATED STATEMENTS OF CASH FLOWS (For the years ended December 31, 2001, 2000 and 1999)
- --------------------------------------------------------------------------------------------------------------- 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------- (In thousands) Cash Flows From Operating Activities: Net income $ 9,754 $ 2,792 $ 2,293 Adjustments to reconcile net income to net cash provided by operating activities: Gain on disposal of discontinued operations (Note 2) (5,492) (129) (165) Depreciation and amortization 4,569 4,119 3,975 Deferred income taxes 316 77 593 Tax benefit related to stock plans 1,238 -- -- Other (262) (242) (744) - --------------------------------------------------------------------------------------------------------------- 10,123 6,617 5,952 - --------------------------------------------------------------------------------------------------------------- Changes in current assets and liabilities: Decrease (increase) in accounts receivable (384) 592 (489) Increase in other current assets (1,893) (575) (184) Increase (decrease) in accounts payable 253 170 (35) Increase in other current liabilities 605 578 13 - --------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 8,704 7,382 5,257 Net cash provided by discontinued operations (Note 2) 165 165 165 - --------------------------------------------------------------------------------------------------------------- 8,869 7,547 5,422 - --------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Property, plant and equipment additions, net (2,808) (3,289) (12,102) Patent Sale 428 -- -- Proceeds from disposal of discontinued operations -- 199 -- - --------------------------------------------------------------------------------------------------------------- (2,380) (3,090) (12,102) - --------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net increase (decrease) in long-term indebtedness 9,725 (3,017) 10,214 Issuance of treasury stock 1,778 85 -- Purchase of treasury stock (17,609) (1,436) (9,099) - --------------------------------------------------------------------------------------------------------------- (6,106) (4,368) 1,115 - --------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 383 89 (5,565) Cash and cash equivalents, beginning of year 159 70 5,635 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 542 $ 159 $ 70 =============================================================================================================== Cash paid for: Interest (net of capitalized amounts) $ 272 $ 746 $ 283 Income taxes (net of refunds) 1,217 4 186 - ---------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. - 21 - Atrion Corporation Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies Atrion Corporation designs, develops, manufactures and markets products primarily for the medical and healthcare industry. As of December 31, 2001 the principal subsidiaries of the Company through which it conducted its operations were Quest Medical, Inc., Atrion Medical Products, Inc. and Halkey-Roberts Corporation. Principles of Consolidation The consolidated financial statements include the accounts of Atrion Corporation and its subsidiaries (the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents Cash equivalents are securities with original maturities of 90 days or less. Inventories Inventories are stated at the lower of cost or market. Cost is determined by using the first-in, first-out method. The following table details the major components of inventory (in thousands): December 31, 2001 2000 -------------------------------------------------------------- Raw materials $ 6,188 $ 5,483 Finished goods 4,189 3,778 Work in process 888 980 Reserve for obsolescence (151) (131) -------------------------------------------------------------- Net inventory $ 11,114 $ 10,110 ============================================================== Property, Plant and Equipment Property, plant and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from three to 30 years. Expenditures for repairs and maintenance are charged to expense as incurred. The following table represents a summary of property, plant and equipment at original cost as of December 31, 2001 and 2000 (in thousands): December 31, 2001 2000 --------------------------------------------------------------- Land $ 1,506 $ 1,506 Buildings 10,834 10,578 Machinery and equipment 27,526 25,388 --------------------------------------------------------------- Total property, plant and equipment $ 39,866 $ 37,472 =============================================================== Depreciation expense of $3,743,000, $3,225,000 and $3,079,000 was recorded for the years ended December 31, 2001, 2000 and 1999, respectively. Goodwill and Patents Goodwill represents the excess of cost over the fair market value of tangible and identifiable intangible net assets acquired. Values assigned to patents were agreed to at - 22 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) the time of the acquisition between selling and acquiring parties. Through December 31, 2001, goodwill was being amortized over 25 years. Patents are being amortized over the remaining lives of the individual patents, which are 5 to 15 years. Goodwill and patents, as well as other long-lived assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, as determined based on the undiscounted cash flows of the operations acquired over the remaining amortization period. There were no impairments recorded in the periods presented. Management of the Company will continue to evaluate the realizability of its intangible and other long-lived assets as changes in the medical and healthcare industry take place. Research and Development Costs Research and development costs relating to the development of new products and improvements of existing products are expensed as incurred. Revenues For the majority of its products, the Company recognizes revenue from sales when products are shipped to customers. For certain other products revenue is recognized based on usage or time under defined leasing agreements. Revenue is recognized only when all of the following criteria are met: 1) persuasive evidence that an arrangement exists, 2) delivery and performance, 3) fixed or determinable sales price and 4) collectibility is reasonably assured. Provisions are made for bad debts where appropriate and are reviewed periodically. The allowance for bad debts was $113,000 and $44,000 at December 31, 2001 and 2000, respectively. Income Taxes The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes." The asset and liability approach used under SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting basis and the tax basis of the Company's other assets and liabilities (see Note 4). New Accounting Pronouncements In July 2001, the FASB issued Statement No. 141 ("SFAS 141"), "Business Combinations," and Statement No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 eliminates pooling of interest accounting and requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. SFAS 142 eliminates the amortization of goodwill and certain other intangible assets and requires the Company to evaluate goodwill for impairment on an annual basis by applying a fair value test. SFAS 142 also requires that an identifiable intangible asset which is determined to have an indefinite useful economic life not be amortized, but separately tested for impairment using a fair value-based approach. As of December 31, 2001, the Company had not recorded any identifiable intangible assets that have an indefinite useful life. The Company adopted SFAS 142 effective January 1, 2002. As a result, the amortization of existing goodwill ceased on December 31, 2001, which will result in a decrease in amortization expense from the 2001 level of approximately $603,000 before tax, $428,000 after tax, in 2002. However, the Company will be required to test its goodwill for impairment under the new standard effective for the first quarter of 2002, - 23 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) which could have an adverse effect on the Company's future results of operations if these assets are deemed impaired. The Company has not determined if a goodwill asset write-down will occur upon adoption. The Company plans to engage an independent firm to assist in the evaluation of its major goodwill assets. The remaining goodwill asset balance totaled $12.2 million at December 31, 2001. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets. This statement is effective for the fiscal year beginning January 1, 2003. The Company does not anticipate that the adoption of this statement will have an impact on the Company's results of operations or financial position. In July 2001, the FASB issued SFAS No. 144 "Impairment or Disposal of Long-Lived Assets," which is effective for the fiscal year that began January 1, 2002. The provisions of this statement provide a single accounting model for impairment of long-lived assets, including discontinued operations. The Company does not anticipate that the adoption of this statement will have an impact on the Company's results of operations or financial position. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Financial Presentation Certain prior-year amounts have been reclassified to conform with current-year presentation. (2) Discontinued Operations During 1997, the Company sold all of its natural gas operations. The consolidated financial statements presented herein reflect the Company's natural gas operations as discontinued operations for all periods presented. The consolidated financial statements reflect a gain on disposal of these discontinued operations of $5,492,000, $129,000 and $165,000 in 2001, 2000 and 1999, respectively. These amounts include an income tax benefit of $5,126,000 in 2001 and are net of income tax expense of $67,000 and $85,000 in 2000 and 1999, respectively. In addition to the initial consideration received in 1997 upon the sale of the natural gas operations, certain annual contingent deferred payments of up to $250,000 per year were to be paid to the Company over an eight-year period which began in 1999, with the amount paid each year to be dependent upon revenues received by the purchaser from certain gas transportation contracts. The Company received deferred payments of $250,000 each, before tax from the purchaser in April 1999, 2000 and 2001 which are reflected in each year as a gain from discontinued operations of $165,000, net of tax. The 2001 gain also includes a $5,326,000 non-cash gain from reversal of a reserve established when the Company disposed of its natural gas operations in 1997. This - 24 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) reversal in the third quarter of 2001 followed the resolution of an outstanding contingency related to the sale of those assets. The 2000 gain reflected above is net of a $36,000 loss related to the sale of certain residual properties associated with the Company's natural gas operations. (3) Long-term Debt and Other Borrowings Long-term debt as of December 31, 2001 and 2000 consisted of the following (in thousands): 2001 2000 ---------------------------------------------------------------- Revolving credit facility $17,125 $ 7,400 Less amounts due in one year -- -- ---------------------------------------------------------------- $17,125 $ 7,400 ================================================================ The Company has a revolving credit facility ("Credit Facility") with a regional bank. In December 2001 the Credit Facility arrangement was amended to increase the credit line under the Credit Facility from $18.5 million to $25.0 million. Under the Credit Facility, the Company and certain of its subsidiaries have a line of credit which is secured by substantially all inventory, equipment and accounts receivable of the Company. Interest under the Credit Facility is assessed at 30-day, 60-day or 90-day LIBOR, as selected by the Company, plus one percent (3.081% at December 31, 2001) and is payable monthly. The term of the Credit Facility expires November 12, 2004 and may be extended under certain circumstances. At any time during the term, the Company may convert any or all outstanding amounts under the Credit Facility to a term loan with a maturity of two years. The Company's ability to borrow funds under the Credit Facility from time to time is contingent on meeting certain covenants in the loan agreement, the most restrictive of which is the ratio of total debt to earnings before interest, income tax, depreciation and amortization. At December 31, 2001, the Company was in compliance with all financial covenants. On December 31, 2001, the estimated fair value of long-term debt described above was approximately the same as the carrying amount of such debt on the consolidated balance sheet. The fair value was calculated in accordance with the requirements of SFAS No. 107, "Disclosures About the Fair Value of Financial Instruments," and was estimated by discounting the future cash flows using rates currently available to the Company for debt instruments with similar terms and remaining maturities. - 25 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) (4) Income Taxes The items comprising income tax expense for continuing operations are as follows: 2001 2000 1999 (In thousands) ------------------------------------------------------------------ Current -- Federal $ 1,520 $ 579 $ 181 -- State 188 85 93 ------------------------------------------------------------------ 1,708 664 274 Deferred -- Federal 74 225 424 -- State 21 34 43 ------------------------------------------------------------------ 95 259 467 ------------------------------------------------------------------ Total income tax expense $ 1,803 $ 923 $ 741 ================================================================== Temporary differences and carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of December 31, 2001 and 2000 are as follows: 2001 2000 (In thousands) ------------------------------------------------------------------- Deferred tax assets: Benefit plans $ 603 $ 569 Tax credits 816 934 Other, net 922 1,159 ------------------------------------------------------------------- Subtotal 2,341 2,662 Valuation allowance -- (68) ------------------------------------------------------------------- Total deferred tax assets $2,341 $2,594 =================================================================== Deferred tax liabilities: Depreciation and property basis differences $2,654 $2,516 Pensions 333 384 Other, net 930 6,164 ------------------------------------------------------------------- Total deferred tax liabilities $3,917 $9,064 =================================================================== The deferred tax assets as of December 31, 2001 reflected in the table above include alternative minimum tax credit carryforwards of $423,000 and research and development (R&D) tax credit carryforwards of $393,000. The R&D tax credit carryforwards expire from 2018 to 2021. Management believes that a valuation allowance is not necessary based on the Company's earnings history, the projections for future taxable income and other relevant considerations over the periods during which the deferred tax assets become deductible. - 26 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) Total income tax expense for continuing operations differs from the amount that would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below: 2001 2000 1999 (In thousands) - -------------------------------------------------------------------------------- Income tax expense at the statutory federal income tax rate $ 2,062 $ 1,219 $ 975 Increase (decrease) resulting from: State income taxes 220 141 136 Decrease in valuation allowance (68) (63) -- Research and development credit (52) (130) (101) Foreign Sales Corporation benefit (352) (265) (269) Other, net (7) 21 -- - -------------------------------------------------------------------------------- Total income tax expense $ 1,803 $ 923 $ 741 ================================================================================ (5) Common Stock The Board of Directors of the Company has at various times authorized repurchases of Company stock in open-market or negotiated transactions at such times and at such prices as management may from time to time decide. The Company has effected a number of open-market or negotiated transactions to purchase its stock during the past three years. These repurchases totaled 10,300, 114,500 and 220,900 shares during the years 2001, 2000 and 1999, respectively, at per share prices ranging from $7.77 to $21.75. As of December 31, 2001, there remained authorization for the repurchase of 140,200 additional shares. The Company made one tender offer during 2001 and two tender offers during 1999 purchasing a total of 1,146,289 shares of its common stock. Pursuant to these tender offers, the Company purchased 502,229 shares of its common stock at $34.50 per share in December 2001, 342,536 shares of its common stock at $12.00 per share in December 1999, and 301,524 shares of its common stock at $10.00 per share in April 1999. All shares purchased in the tender offers and in the open-market or negotiated transactions became treasury shares upon repurchase by the Company. The Company utilized 234,900 treasury shares in 2001 in connection with the exercise of options under its various stock option plans (see note 9). Employees tendered to the Company 26,743 shares of common stock in connection with the exercise of these stock options which also became treasury shares. At December 31, 2001 and 2000, there were 1,732,032 and 1,427,660 shares, respectively, of common stock held in treasury. The cost of these shares is shown as a reduction in stockholders' equity in the consolidated balance sheets. The Company has a Common Share Purchase Rights Plan, which is intended to protect the interests of stockholders in the event of a hostile attempt to take over the Company. The rights, which are not presently exercisable and do not have any voting powers, represent the right of the Company's stockholders to purchase at a substantial discount, upon the occurrence of certain events, shares of common stock of the Company or of an acquiring company involved in a business combination with the Company. In January 2000, this plan, which was adopted in February 1990, was extended until February 2005. - 27 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) (6) Earnings Per Share The following is the computation for basic and diluted earnings per share from continuing operations: 2001 2000 1999 (In thousands, except per share amounts) - -------------------------------------------------------------------------------- Income from continuing operations $4,262 $2,663 $2,128 Weighted average basic shares outstanding 2,033 2,047 2,593 Add: Effect of dilutive securities (options) 239 88 38 - -------------------------------------------------------------------------------- Weighted average diluted shares outstanding 2,272 2,135 2,631 ================================================================================ Earnings per share from continuing operations: Basic $ 2.10 $ 1.30 $ 0.82 Diluted $ 1.88 $ 1.25 $ 0.81 ================================================================================ (7) Stock Option Plans The Company's 1997 Stock Incentive Plan provides for the grant to key employees of incentive and nonqualified stock options, stock appreciation rights, restricted stock and performance shares. In addition, under the 1997 Stock Incentive Plan, outside directors (directors who are not employees of the Company or any subsidiary) receive automatic annual grants of nonqualified stock options to purchase 2,000 shares of common stock. The aggregate number of shares of common stock reserved for grants under the 1997 Stock Incentive Plan is the sum of 500,000 shares and the number of shares reserved for issuance under prior plans in excess of the number of shares as to which options have been granted, including any shares subject to previously granted options that lapse, expire, terminate or are canceled. The purchase price of shares issued on the exercise of incentive options must be at least equal to the fair market value of such shares on the date of grant. The purchase price for shares issued on the exercise of nonqualified options and restricted and performance shares is fixed by the Compensation Committee of the Board of Directors. The options granted become exercisable as determined by the Compensation Committee and expire no later than 10 years after the date of grant. During 1990 and 1994, the stockholders of the Company approved the adoption of the Company's 1990 Stock Option Plan and 1994 Key Employee Stock Incentive Plan, respectively, which provided for the grant to key employees of incentive and nonqualified options to purchase shares of common stock of the Company. During 1998, the Company's stockholders approved the adoption of the Company's 1998 Outside Directors Stock Option Plan which, as amended, provided for the automatic grant on February 1, 1998 and February 1, 1999 of nonqualified stock options to the Company's outside directors. Although no additional options may be granted under the 1990 Stock Option Plan, the 1994 Key Employee Stock Incentive Plan or the 1998 Outside Directors Stock Option Plan, all outstanding options under those plans continue to be governed by the terms and conditions of those plans and the existing option agreements for those grants. - 28 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) Option transactions for the years 1999, 2000 and 2001 are as follows:
Shares Price Per Share - ------------------------------------------------------------------------------------------------ Options outstanding at December 31, 1998 664,300 $ 6.88 -- 17.00 Granted in 1999 99,000 $ 7.63 -- 7.63 Expired in 1999 (271,750) $ 6.88 -- 17.00 Exercised in 1999 -- $ 0.00 -- 0.00 - ------------------------------------------------------------------------------------------------ Options outstanding at December 31, 1999 491,550 $ 6.88 -- 15.17 Granted in 2000 48,300 $ 11.56 -- 12.31 Expired in 2000 (38,300) $ 6.88 -- 12.25 Exercised in 2000 (9,200) $ 6.88 -- 9.00 - ------------------------------------------------------------------------------------------------ Options outstanding at December 31, 2000 492,350 $ 6.88 -- 15.17 Granted in 2001 81,000 $ 14.06 -- 22.50 Expired in 2001 (13,600) $ 6.88 -- 12.25 Exercised in 2001 (234,900) $ 6.88 -- 22.50 - ------------------------------------------------------------------------------------------------ Options outstanding at December 31, 2001 324,850 $ 6.88 -- 22.50 ================================================================================================
As of December 31, 2001, options for 174,350 of the above-listed shares were exercisable and there remained 280,484 shares for which options may be granted in the future under the 1997 Stock Incentive Plan. For the 324,850 options outstanding at December 31, 2001, the weighted average exercise price was $11.62 and the weighted average remaining life was 7.2 years. The Company accounts for stock options under Accounting Principles Board ("APB") Opinion No. 25, which requires compensation costs to be recognized only when the option exercise price is below the market price at the grant date. SFAS No. 123, "Accounting for Stock-Based Compensation," allows a company to follow APB Opinion No. 25 with an additional disclosure that shows what the company's pro forma net income would have been using SFAS No. 123. Pro forma information regarding net income and earnings per share as required by SFAS No. 123 has been determined as if the Company had accounted for its stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2001, 2000 and 1999: 2001 2000 1999 -------------------------------------------------------------------------- Risk-free interest rate 5.2% 6.6% 4.9% Dividend yield 0.0% 0.0% 0.0% Volatility factor 33.0% 30.0% 30.0% Weighted average expected life 7 years 7 years 7 years ========================================================================== - 29 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma net income and earnings per basic share were as follows: 2001 2000 1999 (In thousands except per share amounts) - -------------------------------------------------------------------------------- Net income - as reported $9,754 $2,792 $2,293 Net income - pro forma $9,479 $2,274 $1,839 Earnings per basic share - as reported $4.80 $1.36 $0.88 Earnings per basic share - pro forma $4.66 $1.11 $0.71 Weighted average fair value of options granted during the year $7.06 $5.57 $3.29 ================================================================================ The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the model used for the above disclosure does not provide a reliable measure of the fair value of its stock options. (8) Retained Earnings The following table reflects changes in consolidated retained earnings for the years ended December 31, 2001, 2000 and 1999: 2001 2000 1999 (In thousands) - -------------------------------------------------------------------------------- Balance, beginning of year $ 51,906 $ 49,114 $ 46,821 Add: Net income for the year 9,754 2,792 2,293 - -------------------------------------------------------------------------------- Balance, end of year $ 61,660 $ 51,906 $ 49,114 ================================================================================ (9) Revenues From Major Customers The Company had one major customer which represented approximately $11.0 million (19.1 percent), $8.9 million (17.3 percent), and $8.3 million (16.6 percent) of the Company's operating revenues during the years 2001, 2000 and 1999, respectively. (10) Industry Segment and Geographic Information SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments in annual financial statements and requires reporting selected information about operating segments in interim financial reports issued to stockholders. The Company operates in one reportable industry segment: designing, developing, manufacturing and marketing products for the medical and healthcare industry and has no foreign operating subsidiaries. The Company's product lines include pressure relief valves and inflation - 30 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) systems which are sold primarily to the aviation and marine industries. Due to the similarities in product technologies and manufacturing processes, these products are managed as part of the medical products segment. The Company recorded incidental revenues from its oxygen pipeline, which totaled approximately $950,000 in each of the years of 2001, 2000 and 1999. Pipeline net assets totaled $2,737,000 at December 31, 2001. Company revenues from sales to parties outside the United States totaled approximately 33 percent of the Company's total revenues in 2001 and 22 percent of the Company's total revenues in 2000 and 1999. No Company assets are located outside the United States. (11) Employee Retirement and Benefit Plans A noncontributory defined benefit retirement plan is maintained for all regular employees of the Company except those of Quest Medical. This plan was amended effective January 1, 1998 to become a cash balance pension plan. The Company's funding policy is to make the annual contributions required by applicable regulations and recommended by its actuary. The changes in the plan's projected benefit obligation ("PBO") as of December 31, 2001 and 2000 are as follows (in thousands): 2001 2000 ---- ---- Change in Benefit Obligation Benefit obligation, January 1 $ 4,268 $ 3,429 Service cost 369 383 Interest cost 296 271 Actuarial loss 12 522 Benefits paid (346) (337) ------------------------------------------------------------------------ Benefit obligation, December 31 $ 4,599 $ 4,268 ======================================================================== The changes in the fair value of plan assets, funded status of the plan and the status of the prepaid pension benefit recognized, which is included in the Company's balance sheets as of December 31, 2001 and 2000, are as follows (in thousands): - 31 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) 2001 2000 ---- ---- Change in Plan Assets Fair value of plan assets, January 1 $ 5,497 $ 5,872 Actual return on plan assets (601) (38) Benefits paid (346) (337) - -------------------------------------------------------------------------------- Fair value of plan assets, December 31 $ 4,550 $ 5,497 ================================================================================ Funded status of plan $ (49) $ 1,229 Unrecognized actuarial loss 1,118 28 Unrecognized prior service cost 84 89 Unrecognized net transition obligation (175) (219) - -------------------------------------------------------------------------------- Net amount recognized as other assets $ 978 $ 1,127 ================================================================================ The components of net periodic pension cost for 2001, 2000 and 1999 were as follows (in thousands): 2001 2000 1999 ---- ---- ---- Components of Net Periodic Pension Cost Service cost $ 369 $ 383 $ 315 Interest cost 296 271 226 Expected return on assets (477) (506) (421) Prior service cost amortization 6 6 6 Actuarial gain -- (9) (7) Transition amount amortization (44) (44) (43) -------------------------------------------------------------------------- Net periodic pension cost $ 150 $ 101 $ 76 ========================================================================== Actuarial assumptions used to determine the values of the PBO at December 31, 2001 and 2000 and the benefits cost for 2001, 2000 and 1999 included the following: a discount rate of 7.25 percent for 2001 and 2000, and a discount rate of 7.75 percent for 1999; an estimated long-term rate of return on plan assets of 9 percent in 2001 and 2000, and 8 percent in 1999; and an estimated weighted average rate of compensation increase of 5 percent in 2001 and 2000, and 6 percent in 1999. As of December 31, 2001, the plan's assets were invested in mutual funds as follows: equity, 76 percent; fixed income, 22 percent; and money market, 2 percent. The Company also sponsors a defined contribution plan for all employees. Each participant may contribute certain amounts of eligible compensation. The Company makes a matching contribution to the plan. The Company's contribution under this plan was $258,000 in 2001, $272,000 in 2000, and $250,000 in 1999. - 32 - Atrion Corporation Notes to Consolidated Financial Statements--(Continued) (12) Commitments and Contingencies The Company is subject to legal proceedings, third-party claims and other contingencies related to product liability, regulatory, employee and other matters that arise in the ordinary course of business. In the opinion of management, the amount of potential liability with respect to these actions will not materially affect the Company's financial position, results of operations or liquidity. The Company has arrangements with its executive officers (the "Executives") pursuant to which the termination of their employment under certain circumstances would result in lump sum payments to the Executives. Termination under such circumstances in 2002 could result in payments aggregating $4.9 million, excluding any excise tax that may be reimbursable by the Company. In May 1996, Halkey-Roberts Corporation ("Halkey-Roberts") began leasing the land, building and building improvements in St. Petersburg, Florida, which serve as Halkey-Roberts' headquarters and manufacturing facility, under a 10-year lease. The lease provides for monthly payments, including certain lease payment escalators, and provides for certain sublease and assignment rights. The lease also provides the right of either the landlord or Halkey-Roberts to terminate the lease on 12 months notice effective at any time after May 21, 2002. The Company has guaranteed Halkey-Roberts' payment and performance obligations under the lease. The lease is being accounted for as an operating lease, and the rental expense for the years ended December 31, 2001, 2000 and 1999 was $372,000, $361,000 and $351,000 respectively. Future minimum rental commitment under this lease is $384,000 in 2002. (13) Quarterly Financial Data (Unaudited) Quarterly financial data for 2001 and 2000 are as follows:
Quarter Operating Operating Earnings Per Basic Ended Revenue Income Net Income Share - ----------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) - ----------------------------------------------------------------------------------------------------------------- 03/31/01 $ 14,803 $ 1,413 $ 905 $ 0.45 06/30/01 14,776 1,513 1,433 0.71 09/30/01 15,418 1,733 6,503 (a) 3.17 (a) 12/31/01 12,608 1,161 913 0.44 - ----------------------------------------------------------------------------------------------------------------- 03/31/00 $ 12,985 $ 864 $ 532 $ 0.25 06/30/00 13,042 1,044 738 0.36 09/30/00 12,459 1,056 728 0.36 12/31/00 12,961 1,282 794 0.39 - -----------------------------------------------------------------------------------------------------------------
(a) Includes a $5.3 million after-tax gain ($ 2.60 per share) from discontinued operations (See Note 2) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None - 33 - PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The information for this item relating to directors of the Company is incorporated by reference from the Company's definitive proxy statement for its 2002 annual meeting of stockholders. Executive Officers The information for this item relating to executive officers of the Company is set forth on pages 10 through 11 of this report. The information required by Item 405 of Regulation S-K is incorporated by reference from the Company's definitive proxy statement for its 2002 annual meeting of stockholders. ITEM 11. EXECUTIVE COMPENSATION The information for this item is incorporated by reference from the Company's definitive proxy statement for its 2002 annual meeting of stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners The information for this item is incorporated by reference from the Company's definitive proxy statement for its 2002 annual meeting of stockholders. Security Ownership of Management The information for this item is incorporated by reference from the Company's definitive proxy statement for its 2002 annual meeting of stockholders. Changes in Control The Company knows of no arrangements that may at a subsequent date result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None - 34 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8--K (a) 1. Financial Statements: See Item 8: "Financial Statements and Supplementary Data" and financial statement pages attached hereto. 2. Financial Statement Schedules: All financial statement schedules have been omitted since the required information is included in the consolidated financial statements or the notes thereto or is not applicable or required. 3. Exhibits: (Numbered in accordance with Item 601 of Regulation S-K) The exhibits listed below are filed as part of this 2001 Form 10-K Report. Those exhibits previously filed and incorporated herein by reference are identified by a note reference to the previous filing. (b) Reports on Form 8-K: None Exhibit Numbers Description - ------- ----------- 2a Asset Purchase Agreement, dated March 19, 1997, between Atrion Corporation and Midcoast Energy Resources, Inc. (1) 2b Asset Purchase Agreement, dated as of December 29, 1997, by and among Quest Medical, Inc., QMI Acquisition Corp. and Atrion Corporation (2) 3a Certificate of Incorporation of Atrion Corporation, dated December 30, 1996(3) 3b Amended and Restated Bylaws of Atrion Corporation (18) 4a Rights Agreement, dated as of February 1, 1990, between AlaTenn Resources, Inc. and American Stock Transfer & Trust Company which includes the form of Right Certificate as Exhibit A and the Summary of Rights to Purchase Common Shares as Exhibit B (5) 4b Second Amendment to Rights Agreement (6) 10a* 1990 Stock Option Plan (7) 10b* Form of Incentive Stock Option Agreement (8) 10c* 1994 Key Employee Stock Incentive Plan (9) 10d* Form of Incentive Stock Option Agreement (10) 10e* Atrion Corporation 1997 Stock Incentive Plan (11) 10f* Atrion Corporation 1998 Outside Directors Stock Option Plan (12) 10g* Form of Stock Option Agreement (13) 10h* Atrion Corporation Incentive Compensation Plan for Chief Executive Officer (14) 10i* Atrion Corporation Incentive Compensation Plan for Chief Financial Officer (15) 10j* Severance Plan for Chief Financial Officer (16) 10k* Atrion Corporation Incentive Compensation Plan for Chief Financial Officer (17) - 35 - 10l* Agreement regarding the nullification of Incentive Compensation Plan for Chief Executive Officer (18) 10m* Chief Executive Officer Employment Agreement (18) 21 Subsidiaries of Atrion Corporation as of December 31, 2001(18) 23 Consent of Arthur Andersen LLP(18) 99.1 Auditor Assurance Letter(18) Notes ----- (1) Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company dated April 23, 1997. (2) Incorporated by reference to Exhibit 2 to the Form 8-K of Atrion Corporation dated February 17, 1998. (3) Incorporated by reference to Appendix B to the Definitive Proxy Statement of the Company dated January 10, 1997. (4) Incorporated by reference to Appendix C to the Definitive Proxy Statement of the Company dated January 10, 1997. (5) Incorporated by reference to Exhibit 1 to Registration Statement on Form 8-A of AlaTenn Resources, Inc. dated February 15, 1990. (6) Incorporated by reference to Exhibit 4(b) to Form 10-K of Atrion Corporation dated March 29, 2000. (7) Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company dated April 6, 1990. (8) Incorporated by reference to Exhibit 4(d) to the Registration Statement on Form S-8 of AlaTenn Resources, Inc., filed May 17, 1991 (File No. 33-40639). (9) Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company dated March 28, 1994. (10) Incorporated by reference to Exhibit 4(d) to the Form S-8 of AlaTenn Resources, Inc., filed July 26, 1995 (File No. 33-61309). (11) Incorporated by reference to Exhibit 10j to Form 10-K of Atrion Corporation dated March 31, 1998. (12) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion Corporation, filed June 10, 1998 (File No. 333-56511). (13) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion Corporation, filed June 10, 1998 (File No. 333-56511). (14) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion Corporation dated November 15, 1999. (15) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion Corporation dated May 12, 2000. (16) Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion Corporation dated May 12, 2000. (17) Incorporated by reference to Exhibit 10k to Form 10-K of Atrion Corporation dated March 30, 2001. (18) Filed herewith * Management Contract or Compensatory Plan or Arrangement - 36 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Atrion Corporation By: /s/Emile A. Battat ----------------------------- Emile A. Battat Chairman, President and Chief Executive Officer Dated: March 26, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/Emile A. Battat Chairman, President and Chief Executive March 26, 2002 ---------------------------- Officer (Principal Executive Officer) Emile A. Battat /s/Jeffery Strickland Vice President, Chief Financial Officer and March 26, 2002 ---------------------------- Secretary-Treasurer (Principal Financial Jeffery Strickland and Accounting Officer) /s/Richard O. Jacobson Director March 26, 2002 ---------------------------- Richard O. Jacobson /s/John H. P. Maley Director March 26, 2002 ---------------------------- John H. P. Maley
- 37 -
Signature Title Date --------- ----- ---- /s/Jerome J. McGrath Director March 26, 2002 ---------------------------- Jerome J. McGrath /s/Hugh J. Morgan, Jr. Director March 26, 2002 ---------------------------- Hugh J. Morgan, Jr. /s/Roger F. Stebbing Director March 26, 2002 ---------------------------- Roger F. Stebbing /s/John P. Stupp, Jr. Director March 26, 2002 ---------------------------- John P. Stupp, Jr.
- 38 - EXHIBIT INDEX Exhibit Numbers Description Page - ------- ----------- ---- 2a Asset Purchase Agreement, dated March 19, 1997, between Atrion Corporation and Midcoast Energy Resources, Inc. (1) 2b Asset Purchase Agreement, dated as of December 29, 1997, by and among Quest Medical, Inc., QMI Acquisition Corp. and Atrion Corporation (2) 3a Certificate of Incorporation of Atrion Corporation, dated December 30, 1996(3) 3b Amended and Restated Bylaws of Atrion Corporation (18) 41 4a Rights Agreement, dated as of February 1, 1990, between AlaTenn Resources, Inc. and American Stock Transfer & Trust Company which includes the form of Right Certificate as Exhibit A and the Summary of Rights to Purchase Common Shares as Exhibit B (5) 4b Second Amendment to Rights Agreement (6) 10a* 1990 Stock Option Plan (7) 10b* Form of Incentive Stock Option Agreement (8) 10c* 1994 Key Employee Stock Incentive Plan (9) 10d* Form of Incentive Stock Option Agreement (10) 10e* Atrion Corporation 1997 Stock Incentive Plan (11) 10f* Atrion Corporation 1998 Outside Directors Stock Option Plan (12) 10g* Form of Stock Option Agreement (13) 10h* Atrion Corporation Incentive Compensation Plan for Chief Executive Officer (14) 10i* Atrion Corporation Incentive Compensation Plan for Chief Financial Officer (15) 10j* Severance Plan for Chief Financial Officer (16) 10k* Atrion Corporation Incentive Compensation Plan for Chief Financial Officer (17) 10l* Agreement regarding the nullification of Incentive Compensation Plan for Chief Executive Officer (18) 58 10m* Chief Executive Officer Employment Agreement (18) 60 21 Subsidiaries of Atrion Corporation as of December 31, 2002 (18) 72 23 Consent of Arthur Andersen LLP (18) 73 99.1 Auditor Assurance Letter (18) 74 Notes (1) Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company dated April 23, 1997. (2) Incorporated by reference to Exhibit 2 to the Form 8-K of Atrion Corporation dated February 17, 1998. (3) Incorporated by reference to Appendix B to the Definitive Proxy Statement of the Company dated January 10, 1997. (4) Incorporated by reference to Appendix C to the Definitive Proxy Statement of the Company dated January 10, 1997. (5) Incorporated by reference to Exhibit 1 to Registration Statement on Form 8-A of AlaTenn Resources, Inc. dated February 15, 1990. (6) Incorporated by reference to Exhibit 4(b) to Form 10-K of Atrion Corporation dated March 29, 2000. - 39 - (7) Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company dated April 6, 1990. (8) Incorporated by reference to Exhibit 4(d) to the Registration Statement on Form S-8 of AlaTenn Resources, Inc., filed May 17, 1991 (File No. 33-40639). (9) Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company dated March 28, 1994. (10) Incorporated by reference to Exhibit 4(d) to the Form S-8 of AlaTenn Resources, Inc., filed July 26, 1995 (File No. 33-61309). (11) Incorporated by reference to Exhibit 10j to Form 10-K of Atrion Corporation dated March 31, 1998. (12) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion Corporation, filed June 10, 1998 (File No. 333-56511). (13) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion Corporation, filed June 10, 1998 (File No. 333-56511). (14) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion Corporation dated November 15, 1999. (15) Incorporated by reference to Exhibit 10a to Form 10-Q of Atrion Corporation dated May 12, 2000. (16) Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion Corporation dated May 12, 2000. (17) Incorporated by reference to Exhibit 10k to Form 10-K of Atrion Corporation dated March 30, 2001. (18) Filed herewith * Management Contract or Compensatory Plan or Arrangement - 40 - EX-3.(B) 3 d50119ex3b.txt AMENDED AND RESTATED BYLAWS Exhibit 3b AMENDED AND RESTATED BYLAWS OF ATRION CORPORATION ARTICLE ONE STOCKHOLDERS MEETINGS 1.01. Fixing Record Date. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the date next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the date on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the date on which the Board of Directors adopts the resolution relating thereto. 1.02. Place of Meetings. All annual and special meetings of the stockholders shall be held at such place, either within or without the State of Delaware, as may be designated by the Board of Directors. In the absence of such designation, such meetings shall be held at the principal office of the Corporation in the State of Alabama. 1.03. Time of Annual Meetings; Business Transacted. The annual meeting of the stockholders shall be held at such time as may be specified by resolution by the Board of Directors. At such annual meetings, directors shall be elected, reports of the affairs of the Corporation shall be considered, and such other business as may properly come before the meeting may be transacted. 1.04. Persons Entitled to Call Special Meetings; Business Transacted. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute, shall be called in accordance with the Certificate of Incorporation. Only such business shall be conducted at special meetings of stockholders as shall have specified in the Corporation's notice of meeting as set forth in Section 1.07 of these Bylaws. 1.05. Notice of Annual or Special Meetings. The Secretary or Assistant Secretary shall cause written notice of each annual or special meeting to be given before the date of the meeting either personally or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to have been given when deposited in the United States mail, addressed to the stockholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. - 41 - Unless the Certificate of Incorporation otherwise provides, any previously scheduled meeting of the stockholders may be postponed and any special meeting of the stockholders may be canceled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. 1.06. Time of Notice. Unless a different period is prescribed by law, notice of any meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting. 1.07. Contents of Notice. Notice of any meeting of stockholders shall state the place, day and hour of the meeting. In the case of a special meeting, such notice shall also state the purpose or purposes for which the meeting is called. 1.08. Quorum and Required Vote. (a) Quorum of Stockholders. A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If a quorum is present, in all matters other than the election of directors the affirmative vote of a majority of the shares represented at the meeting shall be the act of the stockholders, unless the vote of a greater number on the matter being voted upon is required by statute, the Certificate of Incorporation, or these Bylaws. Directors shall be elected by a plurality of the shares represented at the meeting and entitled to vote on the election of directors. Shares shall not be counted to make up a quorum for a meeting if voting of them at the meeting has been enjoined or for any reason they cannot be lawfully voted at the meeting. (b) Adjournment. Any meeting of stockholders may be adjourned from time to time, whether or not there is a quorum, by the Chairman or the vote of a majority of the shares. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of such number of stockholders as to result in their being present less than a quorum. 1.09. List of Stockholders Entitled to Vote. The Secretary shall make, at least ten (10) days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept either at a place within the city where the meeting is to be held, which place shall be specified in the notice, or, if not specified, at the place where the meeting is to be held, and shall be open to examination by any stockholder at any time during usual business hours for any purpose germane to the meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting. The stock ledger shall be prima facie evidence as to who are the stockholders entitled to examine the stock ledger or such list or to vote at any meeting of stockholders. 1.10. Voting. Subject to the provisions of the Certificate of Incorporation or of law, every holder of common stock of the Corporation which is entitled to vote shall be entitled to one vote for each share of such stock registered in the name of such stockholder upon the books of the Corporation. 1.11. Voting by Voice and Ballot. Voting by stockholders in elections for directors shall be by ballot, and voting as to all other matters shall be by voice or by ballot as directed by the Chairman of the meeting. - 42 - 1.12. Voting of Shares by Certain Holders. The rights of persons in whose names shares stand on the stock records of the Corporation to vote or execute consents is subject to the following provisions: (a) No Voting of Treasury Shares. Neither treasury shares nor shares held by another corporation if a majority of the shares entitled to vote for the election of directors of such other corporation is held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time. (b) Voting of Shares Standing in the Name of Another Corporation. Except as otherwise provided in this Section 1.12, shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe or, in the absence of such provision, as the board of directors of such corporation may determine. (c) Voting of Shares Held by Administrator, Executor, Guardian, Conservator or Trustee. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name and no corporate trustee shall be entitled to vote for the election of directors shares held by it solely in a fiduciary capacity if such shares are shares issued by the corporate trustee itself. (d) Voting of Shares Standing in the Name of, Held by or Under the Control of a Receiver. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority so to do be contained in an appropriate order of the court by which such receiver was appointed. (e) Voting of Shares by Pledgee. A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. 1.13. Inspectors of Elections. (a) Appointment of Inspectors of Elections. In advance of any meeting of stockholders, the Board of Directors shall appoint one (1) or more inspectors of elections to act at such meeting or any adjournment thereof. If an inspector of elections be not so appointed, the Chairman of any such meeting shall make such appointment at the meeting. The number of inspectors shall be determined by the Board of Directors if it makes the appointment in advance of the meeting or by the Chairman if he makes the appointment at the meeting. The inspectors of elections may be officers or employees of the Corporation or any subsidiaries of the Corporation or such other persons as may be selected as hereinabove provided; provided, however, that no inspector shall be a candidate for election as a director. In case any person appointed as an inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting or at the meeting by the person or officer acting as Chairman. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. (b) Duties of Inspectors. The inspectors of elections shall (i) ascertain the number of shares outstanding and the voting rights of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity, and effect of proxies and ballots; (ii) determine all challenges and questions in any way arising in connection with the vote; (iii) count and tabulate all votes and ballots; (iv) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots; and (v) perform such other acts as may be proper to conduct the election or vote with fairness to all stockholders. The decision, act, or certificate of a majority of the inspectors shall be effective in all respects as the decision, act, or certificate of all. - 43 - (c) Report of Inspectors. On request of the Chairman of the meeting, or his proxy, the inspectors shall make a report in writing of any challenge or question or matter determined by them, and shall execute a certificate of any fact found by them. 1.14. Conduct of Stockholders Meetings. Stockholders meetings shall be presided over by the Chairman of the Board, or, in his absence, by the President of the Corporation. The Secretary of the Corporation, or, in his absence, an Assistant Secretary, or, if no such officer is present, a person designated by the Chairman, shall act as Secretary of the meeting. The precedence of, and procedure on, motions and other procedural matters at such meetings shall be as determined by the Chairman, in his sole discretion, provided that he acts in a manner not inconsistent with law, with the Certificate of Incorporation, or with these Bylaws. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. 1.15. Notification of Stockholder Business. (a) The provisions of this Section 1.15(a) shall apply with respect to annual meetings of stockholders up to and including the annual meeting held in 2002 but shall not apply thereafter. All business properly brought before an annual meeting of stockholders shall be transacted at such meeting. Business shall be deemed properly brought only if it is (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) brought before the meeting by a stockholder of record entitled to vote at such meeting if written notice of such stockholder's intent to bring such business before such meeting is delivered to, or mailed, postage prepaid, and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting and the 10th day following the issuance by the Corporation of a press release announcing the meeting date. In no event shall any press release announcing an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. For the purpose of the annual meeting of stockholders to be held in 1997, the first anniversary of the preceding year's annual meeting shall be the first anniversary of the 1996 annual meeting of shareholders of AlaTenn Resources, Inc. Each notice given by such stockholder shall set forth: (A) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (B) the name and address of the stockholder who intends to propose such business; (C) a representation that the stockholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at such meeting to propose such business; (D) any material interest of the stockholder in such business; and (E) as to the stockholder giving the notice and the beneficial owner, if any, or whose behalf the proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. The Chairman of the meeting may refuse to transact any business at any meeting presented without compliance with the foregoing procedure. (b) The provisions of this Section 1.15(b) shall apply with respect to the annual meetings of stockholders held in 2003 and thereafter. Only such business as shall have been properly brought before an annual meeting of stockholders shall be transacted at such meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder of - 44 - record entitled to vote at such meeting. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the date of the Corporation's proxy statement released to stockholders in connection with the preceding year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after the anniversary date of the previous year's meeting, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of the one hundred twentieth (120th) day prior to such annual meeting and the tenth (10th) day following the date on which public announcement of the date of the meeting is first made. In no event shall any press release announcing an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Each notice given by such stockholder shall set forth: (A) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (B) the name and address of the stockholder who intends to propose such business; (C) a representation that the stockholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at such meeting to propose such business; (D)any material interest of the stockholder in such business; and (E) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. The Chairman of the meeting may refuse to transact any business at any meeting presented without compliance with the foregoing procedure. ARTICLE TWO DIRECTORS 2.01. Powers. Except as may be otherwise provided in the Certificate of Incorporation, the business and affairs of the Corporation shall be managed by the Board of Directors, subject to limitations imposed by law, the Certificate of Incorporation, or these Bylaws as to action which requires authorization or approval by the stockholders. 2.02. Number of Directors. The number of directors of the Corporation shall be determined solely by the Board of Directors, by resolution. 2.03. Classification of Directors. The Board of Directors shall be divided into three (3) classes, Class I, Class II, and Class III, with the term of office of one class expiring each year. Each class shall be as nearly equal in number as possible. Initially each director in Class I shall hold office until the annual meeting of stockholders in 1999, each director in Class II shall hold office until the annual meeting of stockholders in 1997, and each director in Class III shall hold office until the annual meeting of stockholders in 1998. Directors elected to succeed those whose terms shall then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election and until the election and qualification of their respective successor in office, subject, however, to the prior death, resignation or removal of any such director. If the number of directors is changed, any increase or decrease in the number of directors shall be apportioned among the classes so as to maintain all classes as equal in number as possible. Notwithstanding anything herein to the contrary, no decrease in the number of directors shall have the effect of shortening the term of a then incumbent director. 2.04. Vacancies. Vacancies occurring in the Board of Directors and newly created directorships resulting from any increase in the authorized number of directors may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. A director elected - 45 - to fill a vacancy shall be elected to serve until the next election of directors in the class for which such director was chosen and until his successor shall be elected and qualified. 2.05. Compensation. The amount, if any, which each director shall be entitled to receive as compensation for his services as such shall be fixed from time to time by resolution of the Board of Directors. If any director shall serve as a member of any committee of the Board of Directors or perform special services at the instance of the Board of Directors, such director may be paid such additional compensation as the Board of Directors may determine. Each director shall be entitled to reimbursement for traveling expenses incurred by him in attending any meeting of the Board of Directors or of a committee. Such compensation and reimbursement shall be payable even though there be an adjournment because of the absence of a quorum. 2.06. Designation of Committees. The Board of Directors may by resolution or resolutions passed by a majority of the whole Board of Directors designate one or more committees, each committee to consist of two or more of the directors of the Corporation, which to the extent provided in the resolution or resolutions shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, that no such committee shall have any power or authority in reference to those matters prohibited by Section 141(c) of the Delaware General Corporation Law. Such committee or committees shall have such name or names as may be determined from time to time by resolution or resolutions adopted by the Board of Directors. If provision be made for any such committee or committees, the members thereof shall be appointed by the Board of Directors and shall serve during the pleasure of the Board of Directors. A majority of the members of a committee shall constitute a quorum for the transaction of business. The Board of Directors may designate one or more directors of the Corporation as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee and who, in such event, shall be counted in determining the presence of a quorum. Vacancies in such committees shall be filled by the Board of Directors; provided, however, that in the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Board of Directors may at its pleasure discontinue any such committee or committees. 2.07. Director or Committee Member Relying Upon Certain Reports and Records Protected. A director or a member of a committee designated by the Board of Directors shall, in the performance of his duties, be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, committees of the Board of Directors or by any other person as to matters the director or member reasonably believes are within such person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. 2.08. Resignation of Directors. Any director of the Corporation may resign at any time by giving written notice to the President or the Secretary of the Corporation, or to the Board of Directors. Such resignation shall take effect at the time of receipt of such notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 2.09 Notification of Stockholder Nominations. (a) The provisions of this Section 2.09(a) shall apply with respect to the meetings of stockholders up to and including the annual meeting held in 2002 but shall not apply thereafter. Nominations for the election of directors may be made only (i) by or at the direction of the Board of Directors or (ii) at a meeting of stockholders called for the purpose of electing directors by any stockholder entitled to vote for the election of directors at such meeting. Any stockholder entitled to vote for the election of directors at an annual meeting or a special meeting called for the purpose of electing directors may nominate persons for election - 46 - as directors at such meeting only if written notice of such stockholder's intent to make such nomination is delivered to, or mailed, postage prepaid, and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting and the 10th day following the issuance by the Corporation of a press release announcing the meeting date. In no event shall any press release announcing an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. For the purpose of the annual meeting of stockholders to be held in 1997, the first anniversary of the preceding year's annual meeting shall be the first anniversary of the 1996 annual meeting of shareholders of AlaTenn Resources, Inc. Each notice given by such stockholder shall set forth: (A) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (B) a representation that the stockholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (C) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (D) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (E) the consent of each nominee to serve as a director of the Corporation if so elected. The Chairman of the meeting may refuse to acknowledge the nomination of any person made without compliance with the foregoing procedure. (b) The provisions of this Section 2.09(b) shall apply with respect to the meetings of stockholders held after the 2002 annual meeting of stockholders. Nominations for the election of directors may be made only (i) by or at the direction of the Board of Directors or (ii) at a meeting of stockholders called for the purpose of electing directors by any stockholder of record entitled to vote for the election of directors at such meeting. Any stockholder entitled to vote for the election of directors at an annual meeting or a special meeting called for the purpose of electing directors may nominate persons for election as directors at such meeting only if written notice of such stockholder's intent to make such nomination is delivered to, or mailed, postage prepaid, and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the date of the Corporation's proxy statement released to stockholder in connection with the preceding year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after the anniversary date, or in the case of a special meeting called for the purpose of electing directors, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of the one hundred twentieth (120th) day prior to such meeting and the tenth (10th) day following the date on which public announcement of the date of the meeting is first made. In no event shall any press release announcing an adjournment of a meeting commence a new time period for the giving of a stockholder's notice as described above. Each notice given by such stockholder shall set forth: (A) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (B) a representation that the stockholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (C) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (D) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (E) the consent of each nominee to - 47 - serve as a director of the Corporation if so elected. The Chairman of the meeting may refuse to acknowledge the nomination of any person made without compliance with the foregoing procedure. ARTICLE THREE DIRECTORS MEETINGS 3.01. Place of Meeting. All regular and special meetings of the Board of Directors shall be held as may be determined by the Board of Directors. In the absence of any such designation, such meetings shall be held at the principal office of the Corporation in the State of Alabama. 3.02. Regular Meetings. Regular meetings of the Board of Directors shall be held without call or notice immediately after the annual meeting of the stockholders, and at such other times as the Board of Directors may by resolution provide. 3.03. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by or at the request of the Chairman of the Board of the President or any three or more directors. 3.04. Notice of Special Meetings. The Secretary of Assistant Secretary shall give notice to each director of the time and place of holding each special meeting by mailing the notice at least thirty-six (36) hours before the meeting or by causing the same to be transmitted by other means at least twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at any special meeting subject to the provisions of this Article Three. 3.05. Notice of Adjourned Meetings. When a regular or special meeting of the Board of Directors is adjourned for thirty (30) days or more, notice of such adjourned regular or special meeting shall be given as in the case of a special meeting. When a regular or special meeting of the Board of Directors is adjourned for less than thirty (30) days, it is not necessary to give any notice of the time and place of the adjourned meeting other than by announcement at the regular or special meeting at which the adjournment is taken. 3.06. Waiver of Notice by Directors. Whenever any notice is required to be given to any director of the Corporation under any provision of law, the Certificate of Incorporation or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the directors, or members of a committee or directors, need be specified in any written waiver of notice unless otherwise so required by these Bylaws. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 3.07. Quorum. A majority of the total number of directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than a majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. If a quorum is present when the meeting is convened, the directors present may continue to do business, taking action by a majority of a quorum as herein fixed, until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum or the refusal of any director to vote. 3.08. Majority Action. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless otherwise provided by the Certificate of Incorporation or these Bylaws. - 48 - 3.09. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors, or any committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all of the directors, or all of the members of the committee, and the written consent is filed with the minutes of the Board of Directors or the committee, as the case may be. Such consent shall have the same effect as a unanimous vote. 3.10. Adjournment. In the absence of a quorum, any meeting of the Board of Directors may be adjourned from time to time by a majority of the directors present. At any adjourned meeting of the Board of Directors at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally noticed. 3.11. Conduct of Meetings. At every meeting of the Board of Directors, the Chairman of the Board, or in his absence, the President, or in his absence, the Vice President designated by him, or in the absence of such designation, a Chairman chosen by a majority of the directors present, shall preside. The Secretary of the Corporation shall act as Secretary of the Board of Directors. In case the Secretary shall be absent from any meeting, the Chairman may appoint any person to act as Secretary of the meeting. 3.12. Participation in Meetings by Conference Telephone. Members of the Board of Directors or any committee designated thereby may participate in a meeting of such Board of Directors or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at such meeting. ARTICLE FOUR OFFICERS 4.01. Officers. The officers of the Corporation shall be a President, one (1) or more Vice Presidents, a Chief Financial Officer, a Secretary and a Treasurer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one (1) or more Assistant Secretaries, one (1) or more Assistant Treasurers, and such other officers and assistant officers as may be appointed in accordance with the provisions of Section 4.03 below. Any number of offices may be held by the same person. In its discretion, the Board of Directors may leave unfilled for any period it may fix any office. None of the officers except the Chairman of the Board need be directors of the Corporation. 4.02. Election of Officers. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 4.03, shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held immediately after the adjournment of the annual meeting of the stockholders. If the Board of Directors shall fail to fill any office at such meeting, such office shall be filled at the first adjourned or special meeting of the Board of Directors held thereafter. Failure to elect officers at any time designated for their election shall not work a dissolution of the Corporation. Each officer shall hold office until his successor is duly elected and qualified, or until his earlier death, resignation or removal. 4.03. Subordinate Officers, Agents and Employees. In addition to the officers described in Section 4.01 above, the Board of Directors may appoint such other officers or agents as may be deemed advisable, each of whom shall hold office for such period, have such authority, and perform such duties in the management of the property and affairs of the Corporation as may be provided in these Bylaws or as may be determined by resolution of the Board of Directors not inconsistent herewith. The Board of Directors may delegate to any officer or committee the power to appoint and to remove any such subordinate officers, committees, or agents, to specify their duties and determine their compensation. - 49 - 4.04. Delegation of Duties of Officers. The Board of Directors may delegate the duties and powers of any officer of the Corporation to any other officer or to any director for a specified period of time for any reason that the Board of Directors may deem sufficient. 4.05. Removal of Officers or Agents. The Board of Directors may with or without cause remove any officer at any time or relieve any officer of any or all of his powers and duties and delegate such powers and duties to any other officer or to any director or directors; and the Board of Directors may terminate or suspend payment of salaries of officers so removed or so relieved. Election or appointment of an officer or agent shall not of itself create any contract right in favor of such officer or agent. 4.06. Resignations of Officers or Agents. Any officer or agent may resign at any time by giving written notice of resignation to the Board of Directors, to the Chairman of the Board, to the President or to the Secretary of the Corporation. Any such resignation shall take effect upon receipt of such notice or at any later time specified therein. Unless otherwise specified in the notice, the acceptance of a resignation shall not be necessary to make the resignation effective. 4.07. Vacancies. A vacancy in any office, the holder of which is elected or appointed by the Board of Directors, because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term of such office. A vacancy in any other office for any reason shall be filled by the Board of Directors, or any committee, or officer to whom authority in the premises may have been delegated by these Bylaws or by resolution of the Board of Directors. ARTICLE FIVE DUTIES OF OFFICERS 5.01. Chairman of the Board. The Chairman of the Board, if there be one, shall preside at all meetings of the stockholders and of the Board of Directors, of which he must be a member, at which he is present. The Chairman of the Board shall have such other powers and perform such other duties as may be assigned to him from time to time by these Bylaws or by the Board of Directors. 5.02. President and Vice Presidents. The President shall have general supervision, direction and control of the business and affairs of the Corporation, subject to the control of the Board of Directors and, unless otherwise determined by resolution of the Board of Directors, shall be the chief executive officer of the Corporation. The President shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. In the absence or disability of the President or if the office of President be vacant, the Chairman of the Board or, upon designation by the Board of Directors, a Vice President, shall perform the duties and exercise the powers of the President, subject to the right of the Board of Directors at any time to extend or confine such powers and duties or to assign them to others. Each Vice President shall have such powers and perform such other duties as may be assigned to him from time to time by the Board of Directors or the President and shall generally assist the President in such manner as the President shall direct. 5.03. Chief Financial Officer. The Chief Financial Officer (who may have such additional titles as shall from time to time be assigned to him by these Bylaws or by the Board of Directors) shall be the principal financial officer of the Corporation and shall have such powers and perform such duties as shall from time to time be assigned to him by these Bylaws, the Board of Directors or the President. 5.04. Secretary. The Secretary shall have all powers and duties usually incident to the office of the Secretary of a corporation, except as specifically limited by a resolution of the Board of Directors, and shall have such other powers and perform such other duties as may be assigned to him from time to time by the - 50 - Board of Directors or the President. Within this authority and in the course of his duties, the Secretary shall: (a) Minutes of Meetings. Keep at the place where the Bylaws or a copy thereof are kept a record of the proceedings of meetings of the Corporation's Board of Directors, committees of the Board of Directors, and stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at meetings of the Board of Directors, the number of shares or members present or represented at stockholders meetings, and the proceedings thereof. (b) Sign or Attest Documents and Affix Seal. Sign, certify, or attest such documents as may be required by law or the business of the Corporation, and keep the corporate seal, if any, and affix it to such instruments as may be necessary or proper. (c) Notices. See that all notices are duly given in accordance with the provisions of these Bylaws or as required by law. In case of the absence or disability of the Secretary, or his refusal or neglect to act, notice may be given and served by an Assistant Secretary or by the President or Vice Presidents, if any, or by the Board of Directors. (d) Custodian of Records and Seal. Be custodian of the records and of the seal of the Corporation, and see that it is engraved, lithographed, printed, stamped, impressed on, or affixed to, all certificates for shares prior to their issuance and to all documents, the execution of which, on behalf of the Corporation under its seal, is duly authorized in accordance with the provisions of these Bylaws. (e) Secretary of Meetings. Act as Secretary of meetings of the stockholders and Board of Directors except as otherwise provided in these Bylaws. (f) Absence of Secretary. In case of the absence or disability of the Secretary or his refusal or neglect to act, the Assistant Secretary, or if there be none, the Treasurer, acting as Assistant Secretary, may perform all of the functions of the Secretary. In the absence or inability to act, or refusal or neglect to act of the Secretary, the Assistant Secretary, and Treasurer, any person thereunto authorized by the President or Vice Presidents, if any, or by the Board of Directors, may perform the functions of the Secretary. 5.05. Assistant Secretary. At the request of the Secretary, or in his absence or disability, the Assistant Secretary, designated as set forth in Section 5.04(f) of these Bylaws, shall perform all the duties of the Secretary, and, when so acting, he shall have all the powers of, and be subject to all the restrictions on, the Secretary. The Assistant Secretary shall perform such other duties as from time to time may be assigned to him by the Board of Directors or the Secretary. 5.06. Treasurer. The Treasurer shall have all the powers and duties usually incident to the office of Treasurer, except as specifically limited by a resolution of the Board of Directors, and shall have such other powers and perform such other duties as may be assigned to him from time to time by the Board of Directors or the President. Within this authority and in the course of his duties, the Treasurer shall: (a) Funds: Custody and Deposit. Have charge and custody of, and be responsible for, all funds and securities of the Corporation, and deposit all such funds in the name of the Corporation in such banks, trust companies, or other depositories as shall be selected by the Board of Directors. (b) Funds: Receipt and Disbursement. Receive, and give receipt for, moneys due and payable to the Corporation from any source whatever, and disburse, or cause to be disbursed, the funds of the Corporation as may be directed by the Board of Directors, taking proper vouchers for such disbursements. - 51 - (c) Maintain Accounts. Keep and maintain adequate and correct accounts of the Corporation's properties and business transactions including account of its assets, liabilities, receipts, disbursements, gains, losses, capital, surplus, and shares. (d) Reports. The Treasurer shall make such reports and statements of his transactions as Treasurer as may be required of him by the President, the Board of Directors or by applicable law. (e) Absence of Treasurer. In case of the absence or disability of the Treasurer or his refusal or neglect to act, the Assistant Treasurer, or if there be none, the Secretary acting as Assistant Treasurer may perform all of the functions of the Treasurer. In the absence or inability to act, or refusal or neglect to act, of both the Assistant Treasurer and the Secretary, any person thereunto authorized by the President or Vice Presidents, if any, or by the Board of Directors may perform the functions of the Treasurer. 5.07. Assistant Treasurer. At the request of the Treasurer, or in his absence or disability, the Assistant Treasurer designated as set forth in Section 5.06(e) of these Bylaws shall perform all the duties of the Treasurer, and when so acting, shall have all the powers of, and be subject to all restrictions on, the Treasurer. The Assistant Treasurer shall perform such other duties as from time to time may be assigned to him by the Board of Directors or the Treasurer. 5.08. Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary by reason of fact that he is also a director of the Corporation. 5.09. Giving of Bond by Officers. Any officer of the Corporation, if required to do so by the Board of Directors, shall furnish a bond to the Corporation for the faithful performance of his duties, in such penalties and with such conditions and security or surety or sureties as the Board of Directors shall require. ARTICLE SIX INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS; LIABILITY INSURANCE 6.01. Action Against Party Because of Corporate Position . (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the - 52 - Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b) of this Article Six, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) and (b) of this Article Six. Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. 6.02. Indemnification Not Exclusive. The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 6.03. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under this section. 6.04. Certain Terms Used in this Article Six. (a) For purposes of this Article Six, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the - 53 - resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Article Six, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this section. 6.05. Continuation of Indemnification. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article Six shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE SEVEN EXECUTION OF INSTRUMENTS AND DEPOSIT OF FUNDS 7.01. Contracts and Other Documents. Contracts and other instruments or documents may be signed in the name of the Corporation by the Chairman of the Board, the President or by any other officer authorized to sign such contract, instrument, or document by the Board of Directors, and such authority may be general or confined to specific instances. 7.02. Interested Directors; Quorum. No contract or transaction between the Corporation and one (1) or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one (1) or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (i) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 7.03. Dividends. Subject to the laws of the State of Delaware, the Board of Directors may, from time to time, declare and the Corporation may pay dividends on its outstanding shares in cash, property, or its own shares, except when the Corporation is insolvent or when the declaration or payment thereof would be contrary to any restrictions contained in the Certificate of Incorporation. 7.04. Bank Accounts and Deposits. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation with such banks, bankers, trust companies, or other depositories as the Board of Directors may select or as may be selected by any officer or officers, agent or agents of the Corporation to whom such power may be delegated from time to time by the Board of Directors. - 54 - 7.05. Signing of Checks and Drafts. Except as otherwise provided in these Bylaws, all checks, drafts, or other order for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as shall be determined from time to time by resolution of the Board of Directors. 7.06. Loans. No loans and no renewals of any loans shall be contracted on behalf of the Corporation except as authorized by the Board of Directors. When authorized so to do by the Board of Directors, any officer or agent of the Corporation may effect loans and advances for the Corporation from any bank, trust company or other institution or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the Corporation. When authorized so to do by the Board of Directors, any officer or agent of the Corporation may pledge, hypothecate or transfer, as security for the payment of any and all loans, advances, indebtedness and liabilities of the Corporation, any and all stocks, securities and other personal property at any time held by the Corporation, and to that end may endorse, assign and deliver the same. Such authority may be general or confined to specific instances. ARTICLE EIGHT ISSUANCE AND TRANSFER OF SHARES 8.01. Issuance of Certificates. Each stockholder of the Corporation shall be entitled to a certificate or certificates, in such form as shall be approved by the Board of Directors and required by law, certifying the number of shares of the Corporation owned by such stockholder. 8.02. Signatures on Stock Certificates. The shares of the Corporation shall be represented by certificates signed by the Chairman of the Board, President, an Executive Vice President, or a Vice President and the Secretary, an Assistant Secretary or the Treasurer or an Assistant Treasurer and may be sealed with the seal of the Corporation or a facsimile thereof. The signature of any of these officers upon a certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issue. 8.03. Stock Transfer Books. A record of all certificates for shares issued by the Corporation shall be kept by the Secretary or by any transfer agent or registrar appointed pursuant to Section 8.04 below at the principal office of the Corporation or at the office of such transfer agent or registrar. Such record shall show the name and address of the person, firm or corporation in which certificates for shares are registered, the number and classes of shares represented by each such certificate, the date of each such certificate, and in case of certificates which have been canceled, the dates of cancellation thereof. 8.04. Transfer Agents and Registrars. The Board of Directors may appoint one (1) or more transfer agents, registrars of other agents for the purpose of registering transfer of shares of the Corporation, issuing new certificates of shares of the Corporation and canceling certificates surrendered to the Corporation. Such agents and registrars shall be appointed at such times and places as the requirements of the Corporation may necessitate and the Board of Directors may designate. Any such transfer agent, registrar or other agent shall be under a duty to the Corporation to exercise good faith and due diligence in performing his functions. Such transfer agent, registrar or other agent shall have, with regard to the particular functions he performs, the same obligation to the holder or owner of shares of the Corporation and shall have the same rights and privileges as the Corporation has in regard to those functions. Notice to a transfer such agent, registrar or other such agent is notice to the Corporation with respect to the functions performed by the agent. - 55 - 8.05. Replacement of Lost, Destroyed and Stolen Certificates. Where a certificate for shares of the Corporation has been lost, destroyed or stolen, the Corporation shall issue a new certificate in place of the original certificate if the owner: (i) files with the Corporation a sufficient indemnity bond; and (ii) satisfies any other reasonable requirements imposed by the Board of Directors of the Corporation. 8.06 Transfer of Shares. Shares of the capital stock of the Corporation shall be transferred on the books of the Corporation by the holder thereof in person or by his attorney duly authorized in writing, upon surrender and cancellation of certificates for the number of shares to be transferred, except as provided in the preceding section. Books for the transfer of shares of the capital stock shall be kept by the Corporation or by one or more transfer agents appointed by it. 8.07. Regulations. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation. ARTICLE NINE CORPORATE RECORDS, REPORTS, AND SEAL 9.01. Minutes of Corporate Meetings. The Corporation shall keep at its principal place of business a book of minutes of all proceedings of its stockholders and Board of Directors, with the time and place of holding of all meetings, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors meetings, the number of shares or members present or represented at stockholders meetings, and the proceedings thereof. 9.02. Inspection of Records and Properties by Directors. Every director shall have the absolute right at any reasonable time to inspect all books, records, documents of every kind, and the physical properties of the Corporation, and also of its subsidiary corporations. Such inspection by a director may be made in person or by agent or attorney, and the right of inspection includes the right to make extracts. 9.03. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January, and terminate on the last day of December of each year; except that the initial fiscal year of the Corporation shall begin on the date the Certificate of Incorporation was filed and shall terminate on the last day of December, 1996. 9.04. Corporate Seal. The seal of the Corporation shall be circular in form and shall have engraved upon it the words, "Atrion Corporation." The seal shall be used by causing it to be affixed or impressed or a facsimile thereof may be reproduced or otherwise used in such manner as the Board of Directors shall determine. ARTICLE TEN ADOPTION, AMENDMENT, AND REPEAL OF BYLAWS 10.01. Power of Directors to Amend. The Board of Directors shall have the power to alter, amend or repeal the Bylaws of the Corporation or adopt new Bylaws for the Corporation, provided, however, that the Board of Directors may not alter, amend, or repeal any provision of the Bylaws which was adopted by the stockholders pursuant to the Certificate of Incorporation and specifically provides that it cannot be altered, amended or repealed by the Board of Directors. - 56 - 10.02. Power of Stockholders to Amend. The stockholders shall have the power to alter, amend or repeal the Bylaws of the Corporation or adopt new Bylaws of the Corporation only as provided in the Certificate of Incorporation of the Corporation. - 57 - EX-10.(L) 4 d50119ex10l.txt AGREEMENT Exhibit 10.l AGREEMENT AGREEMENT made and entered into this the 24th day of February, 2002, between ATRION CORPORATION, a Delaware corporation (the "Company") and EMILE A. BATTAT, a resident of the State of Connecticut ("Battat"). R E C I T A L S: WHEREAS, in 1999 the Company adopted an Incentive Compensation Plan for Chief Executive Officer (the "Plan") for the purpose of securing the continuing services of Battat as Chief Executive Officer of the Company and to provide an opportunity for Battat to receive incentive compensation tied to the enhancement of shareholder value; WHEREAS, the financial reporting for the Plan would be different than that anticipated by the Company at the time of its adoption; WHEREAS, in light of such difference in financial reporting for the Plan, the Company and Battat desire that neither party hereto have any rights or obligations in or under the Plan; and WHEREAS, the Board of Directors of the Company has approved nullification of the Plan, subject to Battat's release of all of his rights under the Plan, including any benefits and payments that he may now or in the future be entitled to thereunder. NOW, THEREFORE, in consideration of the Company's payment of Ten and 00/100 Dollars ($10.00) to Battat, receipt of which is hereby acknowledged, and of the premises, mutual covenants, and releases contained herein, the parties hereby agree as follows: 1. Nullification and Release. The Company and Battat hereby agree that effective December 31, 2001 the Plan is null and void and is of no further force or effect and that neither party shall have any rights or obligations under the Plan. Battat hereby relinquishes all of his rights under the Plan, including any benefits or payments that he may now or in the future be entitled to thereunder, and he hereby releases, acquits, and discharges forever the Company, its subsidiaries and their respective past and present officers, directors, shareholders, agents, servants, employees, attorneys, affiliates, successors, and assigns of and from any and all claims, demands, actions, causes of action, suits, and liabilities of every kind, character, and description, either direct or consequential, past, present or future, and whether known or unknown, at law, in equity, or otherwise, arising out of or related to the Plan or the nullification thereof. 2. Arbitration. Any claim or controversy arising out of or relating to this Agreement shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association as then in effect, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 3. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, assigns and legal representatives. - 58 - 4. Construction. The parties hereto acknowledge that the Agreement has been jointly negotiated and drafted. The language of this Agreement shall be construed as a whole according to its fair meaning, and not strictly for or against either of the parties. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, applied without giving effect to conflict-of-laws principles. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. 5. Counterparts. This Agreement may be executed in separate counterparts each of which shall be an original and all of which shall be deemed to be one and the same instrument. 6. Agreement Under Seal. The parties hereto intend for this Agreement to be an instrument under seal. 7. Entire Agreement. This Agreement contains the entire agreement of the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, each of the parties has hereunto set its or his hand and seal on the date first above written. ATRION CORPORATION (SEAL) By:/s/ Jeffery Strickland ----------------------------- Vice President and Chief Financial Officer, Secretary and Treasurer /s/ Emile A. Battat (SEAL) ----------------------------- EMILE A. BATTAT - 59 - EX-10.(M) 5 d50119ex10m.txt EMPLOYMENT AGREEMENT Exhibit 10m EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 1st day of January, 2002, (the "Commencement Date") by and between Atrion Corporation, a Delaware corporation (the "Company"), and Emile A. Battat (the "Executive"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Executive currently is employed by the Company as the Chairman of the Board of Directors of the Company (the "Board") and as its President and Chief Executive Officer; WHEREAS, the Company and the Executive desire to continue the Executive's employment by the Company upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing, the mutual provisions contained herein, and for other good and valuable consideration, the parties hereto agree as follows: 1. EMPLOYMENT. (a) Continuation of Employment. The Company hereby agrees to continue to employ the Executive and the Executive hereby accepts continued employment as the Company's Chairman of the Board ("Chairman") and President and Chief Executive Officer on the terms and conditions hereinafter set forth. The Executive shall perform such duties, and have such powers, authority, functions, and responsibilities (commensurate with his position and title), as may be reasonably assigned to him from time to time by the Board which are not (except with the Executive's prior written consent) inconsistent with and which do not interfere with or detract from those vested in or being performed by the Executive for the Company. (b) Duties. During the Employment Term (as defined below), the Executive shall devote such time and effort as is reasonably necessary to perform his duties and responsibilities as Chairman and President and Chief Executive Officer of the Company; provided, however that the Executive shall be allowed, to the extent that such activities do not materially interfere with the performance of his duties and responsibilities hereunder, to manage his personal financial affairs and to serve on corporate, civic, not-for-profit, charitable industry boards and advisory committees. 2. TERM. The initial term of the Executive's employment under this Agreement shall be for period of five (5) years from the Commencement Date (the "Initial Term"). The term of the Executive's employment under this Agreement shall be automatically renewed for additional one (1) year terms (each referred to as an "Additional Term") at the end of the Initial Term - 60 - and at the end of each Additional Term, as the case may be, unless either party delivers written notice of termination to the other at least thirty (30) days prior to the end of the Initial Term or Additional Term, as the case may be. The Initial Term and the Additional Terms shall be referred to herein as the "Employment Term." 3. COMPENSATION. The Company shall pay the Executive the following, subject to withholding and other applicable employment taxes: (c) Base Salary and Bonuses. The Company shall pay the Executive a base salary (the "Base Salary") of Five Hundred Thousand and no/100 Dollars ($500,000.00) for calendar year 2002, and for each calendar year in the Employment Term after 2002 the Base Salary shall be increased by twelve percent (12%) over the Base Salary for the preceding calendar year. In addition to the Base Salary, the Company shall pay the Executive a cash bonus (the "Annual Bonus") for each calendar year in the Employment Term in such amount as the Board may determine but in no event less than, or in the event the Board makes no such determination in an amount equal to, fifty percent (50%) of the Base Salary for such calendar year. The Base Salary shall be payable in intervals consistent with the Company's normal payroll schedules (but in no event less frequently than monthly). The Base Salary, as in effect from time to time, may be increased but not reduced without the written consent of the Executive. The Annual Bonus for each calendar year in the Employment Term shall be payable during the January immediately following the end of such calendar year. In addition to the Base Salary and the Annual Bonus, the Company shall pay the Executive such other incentive compensation as the Company may from time to time determine. (d) Benefits and Expenses. The Executive shall have the right to participate in the employee benefit plans, insurance contracts, policies, arrangements or agreements maintained by the Company for the benefit of its employees and relating to retirement, health, disability and other employee benefits, subject to the Executive's qualification for participation in such benefit plans pursuant to the terms and conditions under which such benefit plans are offered, at a level commensurate with the Executive's position. The Executive's rights and entitlements with respect to any such benefits shall be subject to the provisions of the relevant agreements, contracts, policies, arrangements or plans providing such benefits. Nothing contained herein shall be deemed to impose any obligation on the Company to adopt or maintain any such plans, policies, arrangements, contracts or agreements. In accordance with its policies and procedures, the Company shall pay or reimburse the Executive for all reasonable or necessary travel and other out-of-pocket expenses incurred by the Executive in performing his obligations under this Agreement. The Executive shall comply with all such policies and procedures applicable to the Company's senior executive employees relating to the nature and extent of reimbursable expenses, the manner of accounting therefor and the manner or reimbursement of same. The Company shall also furnish the Executive with such office and clerical assistance as shall be suitable to the character of the Executive's position with the Company and adequate for the performance of his duties hereunder. (e) Vacation and Holidays. The Executive shall be entitled to such vacation with - 61 - pay during each fiscal year of the Company as determined by the Company, but in no event less than four (4) weeks per year, such vacation to be taken at such time or times as shall be approved by the Company, which approval shall not be unreasonably withheld. In addition, the Executive shall be entitled to such holidays with pay as the Company makes available to its other senior executive employees. Unless otherwise agreed between the parties, unused days of vacation and unused holidays may not be carried over from one fiscal year of the Company to another. 4. TERMINATION. (f) Termination by the Company. The Company may terminate the employment of the Executive prior to the expiration of the Employment Term (i) for "just cause" (as defined below) by delivering written notice of termination to the Executive or (ii) without "just cause" upon thirty (30) days written notice of termination to the Executive. (g) Termination by Executive. The Executive may terminate his employment under this Agreement prior to the expiration of Employment Term (i) for "good reason" (as defined below) by written notice to the Company or (ii) without "good reason" by giving the Company thirty (30) days written notice of his intention to terminate such employment. (h) Termination Upon Death or Disability. The Executive's employment shall terminate immediately upon his death. In the event that the Executive becomes subject to a Disability (as defined below), the Executive's employment may be terminated upon thirty (30) days written notice by either party to the other. (i) Definitions. For purposes of this Agreement, the following terms shall have the respective meanings indicated below: (i) Just Cause. The term "just cause" shall mean (A) the Executive's continuing willful failure to perform his material duties and obligations under this Agreement (except by reason of his death or incapacity due to his Disability) after written notice thereof by the Company to the Executive, and the Executive's failure or refusal to perform such duties and obligations within thirty (30) days after the receipt of such notice by the Executive or (B) the conviction of, or the entering of a plea of nolo contendere by, the Executive with respect to a felony (other than as a result of a traffic violation or as a result of vicarious liability), provided that on or after a Change in Control (as defined in Exhibit A hereto), "just cause" shall be limited to only subsection (B) above. For purposes of this Section 4(d)(i), no act, or failure to act, on Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interests of the Company. The Company must assert a "just cause" termination event no later than ninety (90) days after discovery of such event. The date of termination for a termination for "just cause" shall be the date indicated in the Notice of Termination (as defined herein). A "Notice of Termination" for "just cause" shall mean a notice that shall indicate the specific termination provision in Section 4(d)(i) relied upon and shall set forth in reasonable detail the facts and circumstances which provide for a basis for termination for "just cause." Further, a Notice for Termination for "just cause" shall be required to include a copy of a resolution duly adopted by at least two-thirds (2/3) of the entire membership of the - 62 - Board at a meeting of the Board which was called for the purpose of considering such termination and which Executive and his representative had the right to attend and address the Board, finding that, in the good faith of the Board, Executive engaged in conduct set forth in the definition of "just cause" herein and specifying the particulars thereof in reasonable detail. Any purported termination for "just cause" which is held by an arbitrator not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a termination by the Company without "just cause." (ii) Good Reason. The term "good reason" shall mean any one or more of the following: (A) Without the Executive's express written consent, any diminution in the Executive's titles, authorities, responsibilities or the assignment of the Executive to any duties inconsistent with his position, duties, responsibilities and status with the Company as its Chairman, President and Chief Executive Officer or the removal by the Board, or the failure or refusal of the Board to re-elect, the Executive as the Chairman, President and Chief Executive Officer of the Company at any time during the term of this Agreement. For purposes hereof, a "diminution in the Executive's titles, authorities or responsibilities" shall be deemed to have occurred if the Company is no longer required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended. (B) The Company's breach of any provision of this Agreement or any other agreement between the Company and the Executive and failure, within the ten (10) day period following its receipt of written notice from the Executive describing such breach in reasonable detail, to promptly commence in good faith to cure such breach (if curable); provided that such cure must be effected no later than thirty (30) days following such notice and provided further that such cure right shall not be available on more than one occasion in any twelve (12) month period. (C) Adoption by a majority of the Board of any resolution or series of related resolutions that, individually or collectively, has or could reasonably be expected to have a material effect on the strategic direction, operations, financial condition or results of operations of the Company and that is voted against by the Executive in a good faith exercise of his fiduciary duty or the failure or refusal of a majority of the Board to adopt a proposed resolution or series of related resolutions that, individually or collectively, has or could reasonably have been expected to have a material effect on the strategic direction, operations, financial condition or results of operations of the Company and that the Executive proposed, by a motion or series of motions (whether or not seconded), be adopted by the Board in a good faith exercise of his fiduciary duty. (D) Failure of the Company to obtain the assumption in writing (a copy of which is delivered to the Executive) of the Company's obligations hereunder to the Executive by any successor to the Company prior to or at the time of a merger, acquisition, consolidation, disposition of substantially all of the - 63 - assets of the Company or similar transaction. The Executive must assert a "good reason" termination event no later than ninety (90) days after the Executive discovers such event. (iii) Disability. The Executive shall be considered to be subject to a "Disability" if, as a result of physical or mental sickness or incapacity or accident, the Executive is unable to perform the normal duties of his employment with the Company for a period of ninety (90) days in any one hundred twenty (120) day period. If there is any disagreement between the Company and the Executive as to whether the Executive was unable to perform the normal duties of his employment due to Disability, the same shall be determined after examination of the Executive by a physician selected by the Executive (or, if the Executive is unable to make such selection, it shall be made by the Executive's spouse or, if the Executive is not married or if his spouse is unable or unwilling to make the selection, by any other adult member of the Executive's immediate family) and approved by the Company. The costs and expenses of such examination shall be borne by the Company. The determination of such physician shall be conclusive evidence as to whether the Executive was unable to perform the normal duties of his employment due to Disability. If the Executive does not permit such examination by such physician, then, for purposes hereof, the determination as to whether the Executive was unable to perform the normal duties of his employment due to Disability shall be made by the Board. Nothing herein shall have any effect upon the Executive's eligibility to receive any disability benefits from the Company pursuant to the terms and conditions of any disability plan or other arrangement which the Company may have in effect from time to time. (j) Termination Payment. (i) Termination for Just Cause. In the event the Company terminates the Executive's employment pursuant to Section 4(a)(i) of this Agreement, the Company shall have no further obligation hereunder except to pay the Executive any compensation earned but not yet paid, including without limitation, the Base Salary and Annual Bonus for the calendar year in which the date of termination falls, in each case prorated for the number of days of the calendar year that elapsed prior to the date of termination, any accrued vacation pay payable pursuant to the Company's policies, and any unreimbursed business expenses (collectively the "Accrued Amounts"). (ii) Termination Without Just Cause. In the event the Company terminates Executive's employment pursuant to Section 4(a)(ii) of this Agreement, the Executive's employment under this Agreement shall terminate at the expiration of said thirty (30) day period, and the Company shall have no further obligation hereunder except to pay to the Executive a cash lump sum amount equal to the sum of: (A) the Accrued Amounts; and (B) the Executive's Base Salary and Annual Bonus for the remainder of the Initial Term or Additional Term, as applicable (collectively, the "Severance Payment"); - 64 - which sum shall be paid by the Company as soon as practicable after the termination date, but in no event later than ten (10) days after the termination of the Executive's employment. Notwithstanding the foregoing, in the event the Company terminates Executive's employment pursuant to Section 4(a)(ii), the Company may, at its option, require the Executive to cease providing services hereunder and serving as an employee of the Company at any time during said thirty (30) day period. In addition, all stock options and/or equity granted to the Executive shall fully vest and become exercisable upon the termination date. The Company shall continue to provide the Executive (and his spouse and dependents) with group health plan benefits (or substantially similar substitute arrangements), at its sole expense, for the remainder of the Initial Term or Additional Term, as applicable (the "Medical Benefits"). (iii) Termination for Good Reason. In the event the Executive terminates the Executive's employment pursuant to Section 4(b)(i) of this Agreement, the Company shall have no further obligation hereunder except to pay to the Executive a cash lump sum equal to the Accrued Amounts and the Severance Payment, which shall be paid by the Company as soon as practicable after the termination date, but in no event later than ten (10) days after the termination of the Executive's employment. In addition, all stock options and/or equity granted to the Executive shall fully vest and become exercisable upon the termination date. The Company shall also provide the Executive (and his spouse and dependents) with the Medical Benefits for the remainder of the Initial Term or Additional Term, as applicable. (iv) Termination Without Good Reason. In the event the Executive terminates the Executive's employment pursuant to Section 4(b)(ii) of this Agreement, the Executive's employment under this Agreement shall terminate at the expiration of said thirty (30) day period, and the Company shall have no further obligation hereunder except to pay the Executive a cash lump sum equal to the Accrued Amounts as soon as practicable after the termination date, but in no event later than ten (10) days after the termination of Executive's employment. Notwithstanding the foregoing, in the event the Executive terminates his employment pursuant to Section 4(b)(ii), the Company may, at its option, require the Executive to cease providing services hereunder and serving as an employee of the Company at any time during said thirty (30) day period; provided that the Executive shall be entitled to such payments as would have otherwise been due to him had he continued in the employment of the Company for such thirty (30) day period, including, without limitation, payments of the Accrued Amounts and amounts to be paid under any other plan, agreement or policy which survives the termination of this Agreement. (v) Termination upon Death or Disability. In the event the Executive's employment is terminated pursuant to Section 4(c) hereof, the Company shall have no further obligation hereunder except to pay to the Executive (or his personal representative or guardian) a cash lump sum amount equal to the Accrued Amounts and the Severance Payment, which shall be paid by the Company as soon as practicable after the termination date, but in no event later than ten (10) days after the termination of the Executive's employment. In addition, all stock options and/or equity granted to the Executive shall fully vest and become exercisable upon the termination date. The Company shall also provide the Executive (and his spouse and dependents) with the Medical Benefits for the remainder of the Initial Term or Additional Term, as applicable. - 65 - 5. WITHHOLDING. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state, or local withholding or other taxes or charges which it is from time to time required to withhold; provided, that the amount so withheld shall not exceed the minimum amount required to be withheld by law in light of the circumstances. The Company shall be entitled to rely on an opinion of tax counsel if any question as to the amount or requirement of any such withholding shall arise. 6. NOTICES. All notices provided for by this Agreement shall be in writing and shall be (a) personally delivered to the party thereunto entitled or (b) deposited in the United States mail, postage prepaid, addressed to the party to be notified at the address listed below (or at such other address as may have been designated by written notice), certified or registered mail, return receipt requested. The notice shall be deemed to be received (a) if by personal delivery, on the date of its actual receipt by the party entitled thereto or (b) if by mail, two (2) days following the date of deposit in the United States mail. To the Company: Atrion Corporation One Allentown Parkway Allen, TX 75002 Attention: Chief Financial Officer To Executive: Emile A. Battat To the most recent address on file with the Company. 7. PARTIES BOUND. This Agreement and the rights and obligations hereunder shall be binding upon and inure to the benefit of the Company, Executive, and their respective heirs, personal representatives, successors and assigns; provided, however, that Executive may not assign any rights or obligations hereunder without the express written consent of Company. This Agreement shall also bind and inure to the benefit of any successor of the Company by merger or consolidation, or any assignee of all or substantially all of the Company's properties. 8. INVALID PROVISIONS. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. 9. EXCISE TAX GROSS-UP. (k) Payment of Excise Tax Amount. In the event any of the payments or benefits provided to the Executive hereunder or under any other plan, agreement or arrangement (the "Company Payments") will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may be imposed by any taxing authority), the Company shall pay to the Executive at the time specified below an additional amount (the "Gross-up Payment") such that the net amount retained by the Executive, after the deduction of any Excise Tax on the Company Payments and any U.S. federal, state and local income or payroll tax on the Gross-Up Payment - 66 - provided for herein but before deduction for any federal, state or local income or payroll tax on the Company Payments, shall be equal to the Company Payments. (l) Applicability of Excise Tax. For purposes of determining whether any of the Company Payments and Gross-up Payments (collectively the "Total Payments") will be subject to the Excise Tax and the amount of such Excise Tax, (x) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, to the extent that, in the opinion of a national independent accounting firm designated by the Executive or tax counsel with a nationally-recognized law firm selected by such accountants (the "Accountants"), such Total Payments (in whole or in part) constitute "parachute payments," do not represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the "base amount" or are otherwise subject to the Excise Tax, and (y) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (m) Amount of Gross-Up Payment. For purposes of determining the amount of the Gross-up Payment, the Executive shall be deemed to pay U.S. federal income taxes at the highest marginal rate of U.S. federal income taxation in the calendar year in which the Gross-up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence for the calendar year in which the Company Payment is to be made, net of the maximum reduction in U.S. federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and U.S. federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by the Executive if such repayment results in a reduction in Excise Tax or a U.S. federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has been paid to any U.S. federal, state and local tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if the Executive's claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. - 67 - (n) Time of Payment. The Gross-up Payment or portion thereof provided for in subsection (c) above shall be paid not later than the thirtieth (30th) day following an event occurring which subjects the Executive to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Accountants, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code), subject to further payments pursuant to subsection (c) hereof, as soon as the amount thereof can reasonably be determined, but in no event later than the ninetieth day after the occurrence of the event subjecting the Executive to the Excise Tax. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (o) Procedures. In the event of any controversy with the Internal Revenue Service (or other taxing authority) with regard to the Excise Tax, the Executive shall permit the Company to control issues related to the Excise Tax (at its expense), provided that such issues do not potentially materially adversely affect the Executive, but the Executive shall control any other issues. In the event the issues are interrelated, the Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree the Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany the Employee, and the Executive and the Executive's representative shall cooperate with the Company and its representative. (p) Costs. The Company shall be responsible for all charges of the Accountant. (q) Notices. The Company and the Executive shall promptly deliver to each other copies of any written communications, and summaries of any verbal communications, with any taxing authority regarding the Excise Tax. 10. NO MITIGATION; NO SET-OFF. (a) No Duty to Mitigate. In the event of any termination of employment hereunder, Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. (b) Other Payments. Any amounts or benefits payable to the Executive under this Agreement are, in addition to, and are not in lieu of, amounts payable to the Executive under any other salary continuation or cash severance arrangement of the Company or any other type of agreement entered into between the parties, and to the extent paid or provided under any other such arrangement or agreement shall not be offset from the amounts or benefits due hereunder, except to the extent expressly provided in such other arrangement or agreement. 11. ATTORNEYS' FEES AND COSTS. In the event that it becomes necessary for the Executive to seek legal counsel with regard to a dispute , claim or issue under this Agreement - 68 - or the Executive deems it necessary to initiate arbitration in order to enforce his rights hereunder, then the Company shall bear and, upon notification to the Company by the Executive, immediately advance to the Executive all expenses of such dispute, claim, issue or arbitration, including the reasonable fees and expenses of the counsel of the Executive incurred in connection with such dispute, claim, issue or arbitration, unless an arbitrator determines that the Executive's position was frivolous or otherwise taken in bad faith, in which case an arbitrator may determine that Executive shall bear his own legal fees. Notwithstanding any existing or prior attorney-client relationship between the Company and the counsel selected by the Executive, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. 12. ARBITRATION. All disputes and controversies arising under or in connection with this Agreement, shall be settled by arbitration conducted before one (1) arbitrator sitting in New York, New York, or such other location agreed by the parties hereto, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in effect. The determination of the arbitrator shall be final and binding on the parties. Judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. All expenses of such arbitration, including the fees and expenses of the counsel of the Executive, shall be borne by the Company unless the arbitrator determines that Executive's position was frivolous or otherwise taken in bad faith, in which case the arbitrator may determine that Executive shall bear his own legal fees. 13. LEGAL FEES. The Company shall pay the Executive's reasonable legal fees and costs associated with entering into this Agreement. 14. INDEMNIFICATION. The Company shall indemnify and hold harmless Executive to the fullest extent permitted under the Company's Bylaws as in effect on the Commencement Date or the date of termination of employment, if on such date the Bylaws provide the Executive with greater rights to indemnification, and to the fullest extent permitted by law for any action or inaction of Executive while serving as an officer or director of the Company or, at the Company's request, as an officer or director of any other entity or as a fiduciary of any benefit plan. The Company shall cover the Executive under directors and officers liability insurance both during and, while potential liability exists, after the Employment Term (but in no event for a period which is less than six (6) years after termination) in the same amount and to the same extent as the Company covers its other officers and directors as of the Commencement Date or the date of termination of employment, if on such date the Executive will receive greater coverage under such insurance. 15. WAIVERS AND CONSENTS. One or more waivers of any breach of any covenant, term or provision of this Agreement by any party shall not be construed as a waiver of a subsequent breach of the same covenant, term or provision, nor shall it be considered a waiver of any other then existing or subsequent breach of a different covenant, term or provision. The consent or approval of either party to or of any act by the other party requiring such consent or approval shall not be deemed to waive or render unnecessary consent to or approval or any subsequent similar act. No custom or practice of the parties shall constitute a waiver of either party's rights to insist upon strict compliance with the terms hereof. - 69 - 16. SECTION HEADINGS. The headings contained in this Agreement are for reference purposes only and do not affect in any way the meaning or interpretation of this Agreement. 17. MULTIPLE COUNTERPARTS. This Agreement may be executed in counterparts, each of which for all purposes is to be deemed an original, and both of which constitute, collectively, one agreement; but in making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart. 18. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without regard to its conflict-of-law rules. 19. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties hereto, and supersedes all prior agreements and understandings, oral or written, if any, between the parties hereto, with respect to the subject matter hereof. No modification or amendment of any of the terms, conditions, or provisions herein may be made otherwise than by written agreement signed by the parties hereto. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. ATRION CORPORATION By:/s/ Jeffery Strickland -------------------------------------------- Vice President and Chief Financial Officer, Secretary and Treasurer /s/ Emile A. Battat ----------------------------------------------- EMILE A. BATTAT - 70 - Exhibit A (a) For purposes of the Agreement, the term "Change in Control" shall mean the occurrence of any one of the following events: (i) any person (as the term "person" is used in Section 13(d) (3) or Section 14(d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (other than the Company, any of its subsidiaries, or any trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company or any of its subsidiaries) becomes the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities of the Company representing 25% or more of the combined voting power of the then-outstanding voting securities of the Company (ii) the Company is merged, consolidated or reorganized into or with another corporation or other person and as a result of such merger, consolidation or reorganization less than 75% of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of voting securities of the Company immediately prior to such transaction; (iii) the stockholders of the Company approve a plan of complete liquidation of the Company or the Company sells all or substantially all of its assets to any other corporation or other person and as a result of such sale less than 75% of the combined voting power of the then-outstanding voting securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of voting securities of the Company immediately prior to such sale; or (iv) during any period of two consecutive years, individuals who, at the beginning of any such period, constitute the directors of the Company cease for any reason to constitute at least a majority thereof unless the election or the nomination for election by the Company's stockholders of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period. - 71 - EX-21 6 d50119ex21.txt SUBSIDIARIES OF ATRION Exhibit 21 Subsidiaries of Atrion Corporation As of December 31, 2001 State of Subsidiary Incorporation Ownership - -------------------------------------------------------------------------------- Atrion Medical Products, Inc. Alabama 100% Halkey-Roberts Corporation Florida 100% Quest Medical, Inc. Texas 100% AlaTenn Pipeline Company LLC Alabama 100% Atrion Leasing Company LLC Alabama 100% Atrion International, Inc. U.S. V. I. 100% - -------------------------------------------------------------------------------- - 72 - EX-23 7 d50119ex23.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 25, 2002 included in this Form 10-K into Atrion Corporation's previously filed Registration Statement (File No. 33-40639). /s/ Arthur Andersen LLP Atlanta, Georgia March 25, 2002 - 73 - EX-99.1 8 d50119ex99-1.txt LETTER TO SEC FROM ATRION Exhibit 99.1 March 26, 2002 [OBJECT OMITTED] ATRION CORPORATION Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: Arthur Andersen LLP ("Andersen") has represented to Atrion Corporation that its audit of the financial statements contained in Atrion Corporation's Annual Report on Form 10-K for the year ended December 31, 2001 was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Andersen personnel working on the audit and availability of national office consultation. ATRION CORPORATION By: /s/ Jeffery Strickland ----------------------------------------- Jeffery Strickland Its: Vice President and Chief Financial Officer - 74 - -----END PRIVACY-ENHANCED MESSAGE-----