-----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, FIM/UJVH4QL18SIhqEoi5PuulcNwYfYly2Y+650jvLRlQJc0uc7obUJtYWtzWVHZ K7LEIH+/ZHXgh13ZonlEdw== 0000950144-99-002954.txt : 19990323 0000950144-99-002954.hdr.sgml : 19990323 ACCESSION NUMBER: 0000950144-99-002954 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATRION CORP CENTRAL INDEX KEY: 0000701288 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 630821819 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-10763 FILM NUMBER: 99569907 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-K405 1 ATRION CORPORATION 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT: TITLE OF CLASS 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 18, 1999 was $23,553,414 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 18, 1999: 2,825,953. 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 1999 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. ================================================================================ 2 ATRION CORPORATION FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1998 -------- TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I.........................................................................................................1 ITEM 1. BUSINESS...............................................................................................1 ITEM 2. PROPERTIES.............................................................................................9 ITEM 3. LEGAL PROCEEDINGS.....................................................................................10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................10 Executive Officers of the Company.............................................................................10 PART II.......................................................................................................11 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................11 ITEM 6. SELECTED FINANCIAL DATA...............................................................................12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................................12 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................................17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................................35 PART III......................................................................................................36 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................................36 ITEM 11. EXECUTIVE COMPENSATION...............................................................................36 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................36 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................................36 PART IV.......................................................................................................37 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................................................................................37 SIGNATURES....................................................................................................39 EXHIBIT INDEX.................................................................................................41
3 ATRION CORPORATION FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1998 PART I ITEM 1. BUSINESS GENERAL Atrion Corporation ("Atrion" or the "Company") is a holding company which designs, develops, manufactures, markets, sells and distributes medical products and components. The Company's current operations are conducted through three medical products subsidiaries, Atrion Medical Products, Inc. ("Atrion Medical Products"), Halkey-Roberts Corporation ("Halkey-Roberts") and Quest Medical, Inc. ("Quest Medical"), formerly known as QMI Medical, Inc., which acquired the cardiovascular and intravenous fluid division of Advanced Neuromodulation Systems, Inc. (formerly known as Quest Medical, Inc., and herein referred to as "ANS") in January 1998. The Company also owns AlaTenn Pipeline Company, Inc. ("AlaTenn Pipeline") which operates a gaseous oxygen pipeline and Atrion Leasing Company, Inc. ("Atrion Leasing") which is engaged in leasing activities. Atrion Medical Products' business, which is the design, development, manufacturing, marketing, sale and distribution of medical products, has been in operation for more than 30 years. Its products are used in ophthalmic, diagnostic and cardiovascular procedures and are sold primarily to major health care companies which market and distribute Atrion Medical Products' products, in conjunction with their name-brand products, to hospitals, clinics, surgical centers, physicians and other health care providers. While soft contact lens storage and disinfection systems are its more mature ophthalmic products, Atrion Medical Products continues to be a leading manufacturer and supplier of such products. A new and growing area of sales for Atrion Medical Products is its line of ophthalmic surgical procedure kits which are distributed for two of its major customers. Atrion Medical Products also markets its own name-brand products. One line of name-brand products, called LacriCATH(R), is used in a less invasive surgical procedure for the treatment of epiphora, or excessive tearing of the eye. These products are sold through the Company's direct clinical sales specialists. In early 1998, Atrion Medical Products introduced a line of name-brand aortic punches called CleanCut(TM), used in cardiovascular surgery, another area of focus for the Company. These products are used in heart bypass surgeries to make a precision opening in the heart for attachment of the bypass vessels. Other products sold 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. Regardless of whether the product is intended for use by a major health care company or for use as one of Atrion Medical Products' branded products, the product development process follows a well-defined and disciplined path. Working models and prototypes are developed at an early stage to provide market feedback or to begin laboratory and clinical testing. Computer-aided design software has been integrated with the software to control multiaxis -1- 4 machining centers to efficiently produce single or multiple prototypes. When Atrion Medical Products develops a product for one of its customers, it typically bears the full expense of the product development and enters into a long-term contract that allows the Company to retain exclusive worldwide manufacturing rights. Atrion Medical Products is EN46001 certified. Halkey-Roberts, which has been in operation for 56 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. Halkey-Roberts' fluid control technology has also been applied to inflation valves used in marine and aviation safety products. Halkey-Roberts has recently introduced a new line of needleless valves designed to eliminate the use of needles by health care providers in many routine procedures. These products use a patented design and proprietary assembly technology. Working closely with its customers, Halkey-Roberts has developed an innovative line of products and is a leader in each of its major markets. In January 1998, the Company, through a newly formed subsidiary then known as "QMI Medical, Inc.," acquired the cardiovascular and intravenous fluid products division of ANS (including all rights to the name "Quest Medical, Inc.") which had been in operation for 19 years (see Note 2 of the "Notes to Consolidated Financial Statements" in Item 8). In June 1998, the Company changed the name of QMI Medical, Inc. to "Quest Medical, Inc.," which subsidiary is hereinafter referred to as "Quest Medical." Quest Medical manufactures and sells several stable product lines, including cardiovascular products (such as pressure control valves, filters and surgical retracting tapes), specialized intravenous fluid delivery tubing sets and accessories and pressure monitoring kits used primarily in labor and delivery. Quest Medical also manufactures and sells the MPS(R) myocardial protection system ("MPS"), an innovative and sophisticated system designed to manage the delivery of solutions to the heart during open-heart surgery. The MPS integrates key functions relating to the delivery of solutions to the heart, such as varying the rate and ratio of oxygenated blood, crystalloid, potassium and other additives, and controlling temperature, pressure and other variables to allow simpler, more flexible and cost-effective management of this process. The MPS employs advanced pump, temperature control and microprocessor technologies and includes a line of captive and noncaptive disposable products. In March 1996, 510(k) market clearance for the MPS was received from the FDA, and, shortly thereafter, clinical validation of the system began. The clinical validation was completed during July 1996. Commercial shipment of the MPS in the U.S. began during September 1996. AlaTenn Pipeline owns and operates a 22-mile high-pressure steel pipeline in north Alabama which transports gaseous oxygen from an industrial gas producer to two of its customers. MARKETING AND MAJOR CUSTOMERS Atrion Medical Products has historically used sales managers to market products to other manufacturers for use in their consumer products. More recently, Atrion Medical Products has begun utilizing direct clinical sales specialists and commissioned sales agents for the marketing of LacriCATH products. Quest Medical is currently marketing the MPS and related disposables through a direct sales force using a sales team approach as well as through specialty distributors. Most of Quest Medical's other products are marketed through direct contact with hospitals, telemarketing, independent sales representatives, marketing arrangements with certain distributors and, to a lesser extent, through direct mail. In addition, the Company -2- 5 routinely attends and participates in trade shows throughout the United States and internationally. During 1998, CIBA Vision, which accounted for 12.2 percent of the Company's revenues, was the only customer accounting for more than 10 percent of the Company's revenues from continuing operations. The loss of this customer would have a material adverse impact on the Company's operations. MANUFACTURING The Company's medical products are produced at plants in Arab, Alabama, St. Petersburg, Florida, Allen, Texas and Orange County, California. The plants in Arab and St. Petersburg both utilize plastic injection molding and specialized assembly as their primary manufacturing processes. The Company's other manufacturing processes consist of the assembly of standard and custom component parts and the testing of completed products. The Company devotes significant attention to quality control. Its quality control measures begin at the manufacturing level where many of its components are assembled in a "clean room" environment designed and maintained to reduce product exposure to particulate matter. Products are tested throughout the manufacturing process for adherence to specifications. Most finished products are then shipped to outside processors for sterilization through radiation or treatment with ethylene oxide gas. After sterilization, the products are quarantined and tested before they are shipped to customers. Skills of assembly workers required for the manufacture of medical products are similar to those required in typical assembly operations. The Company currently employs workers with the skills necessary for its assembly operations and believes that additional workers with these skills are readily available in the areas where the Company's plants are located. Atrion Medical Products, Halkey-Roberts and Quest Medical operate under the Food and Drug Administration's Good Manufacturing Practices and are ISO 9001 certified. The Company's products are used throughout the world and, during 1998, more than 22 percent of sales were shipped to international markets. RESEARCH AND DEVELOPMENT The Company believes that a well-targeted research and development program is an essential part of the Company's activities and is currently engaged in a number of research and development projects. The objective of the Company's program is to develop new products in the areas that the Company is currently engaged, improve current products and develop new products in other areas. Recent major development projects include, but are not limited to, a needleless valve product designed to eliminate the use of needles by health care providers and the CleanCut product line for use in cardiovascular surgery. The Company expects to incur additional research and development expenses in 1999 for various projects including further development of the MPS. The Company's consolidated research and development expenditures for the years ended December 31, 1998, 1997 and 1996 were $2,750,000, $1,147,000 and $1,003,000, respectively. -3- 6 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 which manufacture these components from the Company's toolings. The Company believes that there are alternative and satisfactory sources for single-sourced components, although a sudden disruption in supply from one of these suppliers could adversely affect the Company's ability to deliver the finished product on time. The Company owns its own molds for production of a majority of the components used in specialized tubing sets and cardiovascular products. Consequently, in the event of supply disruption, the Company would be able to fabricate its own components or subcontract with another supplier, albeit after a delay in the production process. Atrion Medical Products and Halkey-Roberts purchase various types of high-grade resins and other components for their manufacturing processes from various suppliers. The resins are readily available materials and, while the Company is selective in its choice of suppliers, it believes that there are no significant restrictions or limitations on supply. AlaTenn Pipeline is under no obligation to provide a gas supply to its customer. PATENTS AND LICENSE AGREEMENTS The commercial success of the Company is dependent, in part, on its ability to continue to develop patentable products, to preserve its trade secrets and to operate without infringing or violating the proprietary rights of third parties. The Company currently has 78 active patents and 6 patent applications pending on products that are either being sold or are in development. The Company receives royalty payments on three patents that are licensed to outside parties. The Company has obtained licenses to the rights from outside parties to two patents relating to the LacriCATH product line and for one patent relating to Multiport(R). All of these patents and pending patents relate to current products being sold by the Company or to products still in evaluation stages. The validity of any patents issued to the Company may be challenged by others, and the Company could encounter legal and financial difficulties in enforcing its patent rights against infringers. In addition, there can be no assurance that other technologies cannot or will not be developed or that patents will not be obtained by others which would render the Company's patents less valuable or obsolete. With the possible exception of the patent relating to one of the Company's more mature products, the loss of any one patent would not have a material adverse effect on the Company's current revenue base. Although the Company does not believe that patents are the sole determinant in the commercial success of its products, the loss of a significant percentage of its patents or its patents relating to a specific product line, particularly the MPS product line, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has developed technical knowledge which, although non-patentable, is considered by the Company to be significant in enabling it to compete. However, the proprietary nature of such knowledge may be difficult to protect. The Company has entered into agreements with key employees prohibiting them from disclosing any confidential information or trade secrets of the Company and prohibiting them from engaging in any competitive business while employed by the Company and for various periods thereafter. In addition, these agreements also provide that any inventions or discoveries relating to the -4- 7 business of the Company by these individuals will be assigned to the Company and become the Company's sole property. The medical device industry is characterized by extensive intellectual property litigation, and companies in the medical products industry sometimes use intellectual property litigation to gain a competitive advantage. Intellectual property litigation, regardless of outcome, is often complex and expensive, and the outcome of this litigation is generally difficult to predict. An adverse determination in any such proceeding could subject the Company to significant liabilities to third parties, or require the Company to seek licenses from third parties or pay royalties that may be substantial. Furthermore, there can be no assurance that necessary licenses would be available to the Company on satisfactory terms or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing or selling certain of its products, which could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION Depending on the product and the nature of the project, the Company's medical products subsidiaries compete on the basis of their ability to provide engineering and design expertise, quality, service, product and price. As such, successful competitors must have technical strength, responsiveness and scale. The Company believes that its expertise and reputation for quality medical products have allowed it to compete favorably with respect to each such factor and to maintain long-term relationships with its customers. However, in many of the Company's markets, the Company competes with numerous other companies that have substantially greater financial resources and engage in substantially more research and development activities than the Company. Atrion Medical Products manufactures products for certain major health care companies and is dependent on several customers for the majority of its sales. Also, because its products are somewhat limited in number and normally are only a component of the ultimate product sold by its customers, Atrion Medical Products must continually be attentive to the need to manufacture such products at competitive prices and in compliance with strict manufacturing standards. Depending on the product and the nature of the project, Atrion Medical Products competes on the basis of its ability to provide engineering and design expertise as well as on the basis of product and price. Also, as Atrion Medical Products continues to expand its product lines, adding new products and customers, dependency on a limited number of customers will be reduced. The United States is the principal market for the LacriCATH product. There is no direct competition in the United States where both the product and surgical procedure are patent-protected. LacriCATH products are marketed directly to ophthalmologists through the Company's clinical sales specialists. Atrion Medical Products frequently designs products for a customer or potential customer, at its own expense, prior to entering into long-term development and manufacturing agreements with that customer. While certain of Atrion Medical Products' customers may internally design and develop their own products or outsource certain aspects of the design and development processes, the Company is unaware of any other companies that directly compete on the same basis as Atrion Medical Products. With respect to those products manufactured by Atrion Medical Products which are sold to customers for use as components, Atrion Medical Products is dependent on the ability of those customers to sell their products. Therefore, Atrion Medical Products seeks to choose highly -5- 8 successful companies with which to do business. This risk is somewhat minimized by Atrion Medical Products' ability to obtain long-term, exclusive manufacturing rights while its customers have long-term marketing rights. Name-brand products, such as the LacriCATH line and the recently introduced CleanCut line, are marketed to a much larger base of customers and are not dependent on a single customer. Halkey-Roberts competes in the medical products market and in the market for inflation devices used in marine and aviation equipment. In the medical products market, Halkey-Roberts is a leading competitor in the sale of check valves and medical clamps and has only one major competitor for each of those products. In the inflation device market, Halkey-Roberts is the dominant competitor in its market areas. With the exception of one large company, Halkey-Roberts' competitors in both of these markets generate less than $50 million annually in revenues. Numerous companies compete with Quest Medical in the sale of cardiovascular products, specialized tubing sets and pressure monitoring kits. These markets are dominated by established manufacturers that have broader product lines, greater distribution capabilities, substantially greater capital resources and larger marketing, research and development staffs and facilities than Quest Medical. Many of these competitors offer broader product lines within the specific product market and in the general field of medical devices and supplies. Broad product lines give many of Quest Medical's competitors the ability to negotiate exclusive, long-term medical device supply contracts and, consequently, the ability to offer comprehensive pricing of their competing products. By offering a broader product line in the general field of medical devices and supplies, competitors may also have a significant advantage in marketing competing products to group purchasing organizations, HMOs and other managed care organizations that are increasingly seeking to reduce costs through centralization of purchasing functions. In addition, Quest Medical's competitors may use price reductions to preserve market share in their product markets. The Company is aware of at least two cardioplegia delivery systems currently being marketed that compete with the MPS. While these products represent improvements over cardioplegia delivery systems currently in use in that they have partially integrated some of the cardioplegia equipment components, the Company believes that the MPS offers a greater range of functionality, flexibility and ease-of-use. In addition, 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. GOVERNMENT REGULATION Products The manufacture and sale of medical products are subject to regulation by numerous governmental authorities, principally the Food and Drug Administration ("FDA") and corresponding foreign agencies. The research and development, manufacturing, promotion, marketing and distribution of medical products in the United States are governed by the Federal Food, Drug and Cosmetic Act and the regulations promulgated thereunder ("FDC Act and Regulations"). The Company and its medical device customers are subject to inspection by the FDA for compliance with such regulations and procedures. Atrion Medical Products' and Quest Medical's facilities are registered with the FDA. -6- 9 The FDA has traditionally pursued a rigorous enforcement program to ensure that regulated entities comply with the FDC Act and Regulations. A company not in compliance may face a variety of regulatory actions, including warning letters, product detentions, device alerts, mandatory recalls or field corrections, product seizures, total or partial suspension of production, injunctive actions or civil penalties and criminal prosecutions of the company or responsible employees, officers and directors. The Company and its customers are subject to these inspections. The Company believes that it has met all FDA requirements, and it also believes that its medical device OEM customers are in compliance; however, if the Company or its OEM medical device customers should fail the FDA inspections, it could have an adverse impact on the Company. Under the FDA's requirements, if a manufacturer can establish that a newly developed device is "substantially equivalent" to a legally marketed device, the manufacturer may seek marketing clearance from the FDA to market the device by filing a 510(k) premarket notification with the FDA. The 510(k) premarket notification must be supported by data establishing the claim of substantial equivalence to the satisfaction of the FDA. The process of obtaining a 510(k) clearance typically can take several months to a year or longer. If substantial equivalence cannot be established or if the FDA determines that the device requires a more rigorous review, the FDA will require that the manufacturer submit a premarket approval ("PMA") that must be reviewed and approved by the FDA prior to sale and marketing of the device in the United States. The process of obtaining a PMA can be expensive, uncertain and lengthy, frequently requiring anywhere from one to several or more years from the date of FDA submission. Both a 510(k) and a PMA, if granted, may include significant limitations on the indicated uses for which a product may be marketed. FDA enforcement policy strictly prohibits the promotion of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory requirements or the occurrence of unforeseen problems following initial marketing. The Company believes that it and all of its current medical device OEM customers are in compliance with these rules; however, there is no assurance that the Company or its OEM customers are now, or will continue to be, in compliance with such rules. If the Company or its customers do not meet these standards, the Company's financial performance could be adversely affected. Furthermore, delays by the FDA in approving a product or a customer's product could delay the Company's expectations for future sales of certain products. Certain products manufactured by Halkey-Roberts are also subject to regulation by the Coast Guard and the Federal Aviation Authority and similar organizations in foreign countries which regulate the safety of marine and aviation equipment. For international sales, the Company and its OEM customers are primarily responsible that the products meet the standards for the country in which the product is sold. This is true for both the medical and aviation/marine products of the Company. Third-Party Reimbursement and Cost Containment In the United States, health care providers, including hospitals and physicians, that purchase medical products for treatment of their patients, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or a part of the costs and fees associated with the procedures performed using these products. The Company is dependent, in part, upon the ability of health care providers to obtain satisfactory reimbursement from third-party payors for medical procedures in which the Company's products are used. Third-party payors may deny reimbursement if they determine -7- 10 that a prescribed product has not received appropriate regulatory clearances or approvals, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed health care systems that control reimbursement for new products and procedures. In most markets, there are private insurance systems as well as government-managed systems. Market acceptance of the Company's products in international markets depends, in part, on the availability and level of reimbursement. 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 are increasingly challenging the prices charged for medical products and services and may deny reimbursement if they determine that a device was not used in accordance with cost-effective treatment methods as determined by the payor, was experimental or was used for an unapproved application. Failure by hospitals and other users of the Company's products to obtain reimbursement from third-party payors, or adverse changes in government and private third-party payors' policies toward reimbursement for procedures employing the Company's products, would have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company is unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on the Company. Political, economic and regulatory influences are subjecting the health care industry in the United States to fundamental change. The Company anticipates that Congress, state legislatures and the private sector will continue to review and assess alternative health care delivery and payment systems. Potential approaches that have been considered include mandated basic health care benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, price controls and other fundamental changes to the health care delivery system. Legislative debate is expected to continue in the future, and market forces are expected to demand 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 The Company has selected several physicians and perfusionists with substantial expertise in the field of myocardial protection to serve as Clinical Advisors. These Clinical Advisors have -8- 11 assisted in the identification of the market need for MPS and its subsequent design and development. Members of the Company's management and scientific and technical staff from time to time consult closely 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 continue to 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, 1999, the Company had 461 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 its Quest Medical facility. Atrion Medical Products owns three office buildings and a manufacturing facility in Arab, Alabama and leases office space in Birmingham, Alabama. Halkey-Roberts leases a manufacturing facility in St. Petersburg, Florida under a ten-year operating lease which commenced in May 1996. Atrion Medical Products' three office buildings and manufacturing facilities are located on a 67-acre site in Arab, Alabama. The three office buildings house administrative, engineering and design operations, and the manufacturing facility contains approximately 112,000 square feet of manufacturing space. Halkey-Roberts has a long-term lease on a manufacturing and administrative facility located on a 7-acre site in St. Petersburg, Florida. The facility consists of approximately 72,000 total square feet. On January 30, 1998, as part of the Quest Medical acquisition, the Company executed a one-year lease on the facility occupied by Quest Medical in Allen, Texas. The Company also obtained an option to buy the facility for $6.5 million. On February 1, 1999, the Company purchased that facility pursuant to the option agreement (see Note 2 of the "Notes to Consolidated Financial Statements" in Item 8). During the lease term, and since the purchase was completed, the facility has been used by Quest Medical, and since June 1998, by the Company as its headquarters office. The 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. The Company also currently leases approximately 4,600 square feet of office and manufacturing space in Orange County, California on a yearly basis. The Company plans to continue manufacturing certain cardiovascular surgery products at this facility for the foreseeable future. -9- 12 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, 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE TITLE ---- --- ----- Emile A. Battat 61 Chairman, President and Chief Executive Officer of the Company and Chairman of the Board or President of all subsidiaries Jeffery Strickland 40 Vice President and Chief Financial Officer, Secretary and Treasurer of the Company and Vice President or Secretary-Treasurer of all subsidiaries Charles Gamble 58 President of Halkey-Roberts Corporation
The persons who are identified as executive officers of the Company currently serve as officers of the Company, or Halkey-Roberts or of both the Company and certain subsidiaries. The officers of the Company and its subsidiaries are elected annually by the respective Boards of Directors of the Company and its subsidiaries at the first meeting of such Boards of Directors held after the annual meetings of stockholders of such entities. Accordingly, the terms of office of the current officers of the Company and its subsidiaries will expire at the time such meetings of the Board of Directors of the Company and its subsidiaries are held, which is anticipated to be in June 1999. There are no arrangements or understandings between any officer and any other person pursuant to which the officer was elected. There are no family relationships between any of the executive officers or directors. There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officers during the past five years. BRIEF ACCOUNT OF THE BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS Mr. Battat has been a director of the Company since 1987 and has served as Chairman of the Board of the Company since January 1998. Mr. Battat has served as President and Chief Executive Officer of the Company and as Chairman or President of all subsidiaries since -10- 13 October 1998. Since March 1994, Mr. Battat has served as President and Chief Executive Officer of Piedmont Enterprises, Inc., a privately held consulting firm. Mr. Battat served as the President and Chief Executive Officer of Minemet, Inc., a company engaged in international trade, from August 1978 until February 1994. 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. Mr. Gamble has served as President of Halkey-Roberts since May 1989. 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 15, 1999, there were approximately 900 holders of common stock of record. This number does not include beneficial holders for whom shares are held in "nominee" of "street" name. The high and low closing prices as reported by Nasdaq for each quarter of 1998 and 1997 are shown below along with the quarterly cash dividends paid per share.
YEAR ENDED DIVIDENDS DECEMBER 31, 1997: HIGH LOW PAID ------------------ ---- --- ---- First Quarter $ 16.50 $ 11.00 $ .20 Second Quarter $ 16.25 $ 11.63 $ .20 Third Quarter $ 16.63 $ 13.25 $ .10 Fourth Quarter $ 15.31 $ 13.00 $ .10 YEAR ENDED DECEMBER 31, 1998: HIGH LOW ------------------ ---- --- First Quarter $ 13.75 $ 10.88 -- Second Quarter $ 11.44 $ 8.81 -- Third Quarter $ 9.44 $ 7.63 -- Fourth Quarter $ 9.00 $ 6.25 --
In January 1998, the Company's Board of Directors discontinued the payment of quarterly cash dividends. See Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations." -11- 14 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (In thousands except per share amounts)
- ------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Revenues $43,397 $ 30,277 $22,121 $11,719 $ 6,876 Income (loss) from continuing operations 1,478 (2,045)(a) 853 986 (142) Net income 2,140 17,170 (a) 6,476 5,340 4,690 Total assets 60,415 60,942 45,433 34,317 32,183 Long-term debt 0 203 6,313 1,609 2,682 Income (loss) from continuing operations, per basic share .46 (.63) 0.27 .31 (.04) Net income per basic share .67 5.33 2.03 1.68 1.48 Dividends per share 0 .60 .80 .80 .80 Average basic shares outstanding 3,203 3,224 3,189 3,175 3,170 Book value per share 16.66 15.42 10.71 9.43 8.54 - ------------------------------------------------------------------------------------------------------------
(a) The 1997 amounts include an impairment loss of $3.0 million after tax and a charge for a product replacement program of $.7 million after tax. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Atrion Corporation is a holding company engaged in the design, development, manufacturing, marketing, sale and distribution of proprietary products and components for the medical and health care industry. The Company's operations are conducted primarily by Atrion Medical Products, Halkey-Roberts and, since January 30, 1998, Quest Medical, all of which are wholly owned subsidiaries of the Company. Atrion Medical Products and Quest Medical design, develop, manufacture, market, sell and distribute proprietary products for the medical and health care industry. Halkey-Roberts designs, develops, manufactures and sells proprietary medical device components and related components, all of which are used to control the flow of fluids and gases. The acquisition of Quest Medical's business in January 1998 has had a significant impact on the Company's operations. During the eleven months of 1998 subsequent to the acquisition, Quest Medical accounted for $13.1 million of the Company's sales, $6.0 million of the Company's gross profit and $6.5 million of the Company's operating expenses. The high level of operating expenses, which was primarily attributable to the Company's additional research and development expenses associated with enhancements to certain Quest Medical product lines and expansion of Quest Medical's marketing organization, had the effect of reducing the Company's net income for 1998 by approximately $.7 million. This investment in the Quest Medical research and development and the marketing organization is expected to continue through 1999. -12- 15 DISCONTINUED OPERATIONS As discussed in Note 2 in the Notes to Consolidated Financial Statements, on May 30, 1997, the Company completed the sale of all of the issued and outstanding shares of common stock of Alabama-Tennessee Natural Gas Company, Tennessee River Intrastate Gas Company, Inc. and AlaTenn Energy Marketing Company, Inc. for approximately $38.2 million. In the fourth quarter of 1997, the Company's two small remaining natural gas subsidiaries, Central Gas Company and Tennessee River Development Company, sold their assets for $470,000. The financial statements presented herein reflect the Company's natural gas operations as discontinued operations for all periods presented, and, accordingly, all financial statements for prior periods have been adjusted and restated to reclassify the natural gas operations from continuing operations to discontinued operations. The financial statements also reflect an after-tax gain on disposal of discontinued operations of $.7 million in 1998 and $17.3 million in 1997 based upon the sale of the natural gas operations as described above. The after-tax income from discontinued operations, excluding the gain on disposal mentioned above, totaled $1.9 million or $.60 per basic and diluted share in 1997 compared with $5.6 million or $1.76 per basic share and $1.73 per diluted share in 1996. The 1997 amounts reflect the operation of the major portion of these discontinued operations for only the first five months in 1997. As a result of the sale of these operations, the Company's revenues and net income since May 30, 1997 have been and are expected to be materially lower than historical levels. RESULTS OF OPERATIONS The Company's 1998 income from continuing operations was $1.5 million or $.46 per basic and diluted share compared to a loss from continuing operations in 1997 of $2.0 million or $.63 per basic and diluted share and income from continuing operations in 1996 of $853,000 or $.27 per basic share and $.26 per diluted share. The loss in 1997 included an impairment loss on patents and goodwill of approximately $4.8 million before income taxes or $3.0 million or $.95 per basic and diluted share after taxes (see Note 3 in Notes to Consolidated Financial Statements). The loss in 1997 also included a charge related to a product replacement program of approximately $1.1 million before income taxes or $.7 million or $.21 per basic and diluted share after taxes. Income from continuing operations for 1997, excluding the adjustment for the impairment loss and the product replacement program charges, totaled $1.7 million or $.53 per basic and diluted share. Income from continuing operations in 1998 was less than 1997 income from continuing operations, excluding the 1997 one-time charges mentioned above, primarily because of the inclusion of Quest Medical operations for the eleven months subsequent to the January 1998 asset purchase partially offset by improvements at Halkey-Roberts. Net income, including discontinued operations, for 1998 totaled $2.1 million or $.67 per basic and diluted share compared with $17.2 million or $5.33 per basic and diluted share in 1997 and $6.5 million or $2.03 per basic share and $1.99 per diluted share in 1996. Operating revenues were $43.4 million in 1998 compared with $30.3 million in 1997 and $22.1 million in 1996. The $13.1 million increase in revenues from 1997 to 1998 was attributable primarily to the inclusion of Quest Medical's sales for eleven months in 1998. The $8.2 million increase in revenues in 1997 above the 1996 level of $22.1 million was attributable primarily to the inclusion of revenues from Halkey-Roberts for a full year as compared to seven months in 1996. These acquisitions were recorded using the purchase method of accounting. Accordingly, -13- 16 only results from operations subsequent to the acquisition dates are reflected in the Company's financial statements, and results for prior periods are not included. The Company's cost of sales was $26.9 million in 1998 compared with $20.8 million in 1997 and $13.0 million in 1996. The increase in cost of sales from 1997 to 1998 was primarily related to the inclusion of Quest Medical for eleven months in 1998. The increase in cost of sales for 1997 over 1996 was attributable primarily to the acquisition of Halkey-Roberts for a full year in 1997 as compared to seven months in 1996. The cost of sales in 1997 also included a charge of $.8 million for the cost of replacing certain components that were manufactured and sold by the Company. These components were used in marine inflation devices and were replaced because of a potential reliability problem. The Company recorded a charge totaling $1.1 million in the fourth quarter of 1997 for this product replacement program with $.8 million being charged to cost of sales and $.3 million being charged to selling, general and administrative expenses. Gross profits were $16.5 million in 1998 compared with $9.5 million in 1997 and $9.1 million in 1996. The increase in gross profit from 1997 to 1998 was primarily the result of the inclusion in 1998 of eleven months of operations of Quest Medical and the absence of the 1997 one-time charge mentioned above. The increase in gross profit in 1997, as compared with 1996, was the result of the inclusion of Halkey-Roberts for a full year in 1997 as compared to seven months in 1996, offset partially by the 1997 one-time charges. Gross profits were also negatively impacted in 1997 due to a significant decline in sales to two major OEM customers which was caused by their decision not to use the Company's product in their product kits. The Company's gross profit in 1998 was 38 percent of sales, which was significantly higher than the gross profit percentage of 31 percent in 1997 and lower than the gross profit percentage of 41 percent in 1996. The increase in gross profit percentage in 1998 was partially attributable to the inclusion of eleven months of Quest Medical operations in 1998. Quest Medical generally has a higher gross profit percentage of sales than the Company's other operations. The additional gross profit percentage improvement in 1998 compared to 1997 was attributable to the inclusion in 1997 of Halkey-Roberts' one-time charges as mentioned above. The decline in gross profit from 1996 to 1997 was partially attributable to the 1997 product replacement program charge mentioned above. The decrease also reflects the inclusion of Halkey-Roberts' operations for a full year in 1997 as compared to seven months in 1996. Halkey-Roberts' gross profit percentage excluding the product replacement charge in 1997 and 1996 was approximately 26 percent each year, which was significantly below Atrion Medical Products' historic gross profit percentage. Another factor contributing to the decline in gross profit percentage in 1997 as compared to 1996 was a shift in sales from certain higher-margin products to lower-margin products in 1997. Operating expenses were $14.9 million in 1998 compared with $13.9 million in 1997 and $7.9 million in 1996. With the inclusion of $6.5 million of Quest Medical's operating expenses for the eleven months in 1998, the increase in operating expenses from 1997 to 1998 would have been greater except for the inclusion in 1997 of $5.1 million in one-time charges as discussed above. The $6.0 million increase in operating expenses from 1996 to 1997 was the result of the one-time charges in 1997, and the inclusion of a full year of Halkey-Roberts' expenses in 1997 partially offset by lower operating expenses at Atrion Medical Products. The Company's operating income for 1998 was $1.6 million compared with an operating loss of $4.4 million in the previous year. The 1997 operating loss included the charges for the impairment loss and the product replacement program. Excluding these charges, the Company -14- 17 had operating income in 1997 of $1.5 million. The Company's 1996 operating income was $1.2 million. Net interest income amounted to $577,000 in 1998 compared with net interest income in 1997 of $818,000. Net interest income in 1998 was primarily attributable to interest earned on the proceeds of the sale of the Company's natural gas subsidiaries in May 1997 remaining after the late January 1998 purchase of the Quest Medical operation. Net interest income in the 1997 period reflects interest earned on the proceeds from the sale of the Company's natural gas subsidiaries in May 1997. The cash received on this sale was used to retire most of the Company's outstanding debt, and the balance was invested in money market accounts and other short-term government and corporate interest-bearing investments. The Company's use of cash and cash equivalents in February 1999 to fund its purchase of its Allen, Texas facility is expected to result in a substantial reduction in interest income in 1999 and thereafter, and anticipated borrowings by the Company to fund its tender offer for outstanding common stock of the Company which is to commence on March 22, 1999 are expected to result in substantial interest expense in 1999 and thereafter until such borrowings are repaid. Income tax expense in 1998 totaled $.7 million as compared to income tax benefits in 1997 of $1.3 million. The 1997 tax benefits include $2.1 million related to the impairment loss and product replacement program charges described above. Excluding these adjustments, income tax expense was $.8 million in 1997. The differences between years reflect changes in pretax income between the respective years. The Company believes that 1999 revenues at all operations will be higher than 1998 revenues at those operations and that the cost of goods sold and gross profit will be higher in 1999 than in 1998. The Company also anticipates that 1999 earnings from continuing operations will significantly exceed earnings from continuing operations for 1998. LIQUIDITY AND CAPITAL RESOURCES The Company maintains a $20 million revolving loan facility to be utilized for the funding of operations and for major capital projects or acquisitions subject to certain limitations and restrictions (see Note 4 of Notes to Consolidated Financial Statements). The Company had no indebtedness under this loan facility at December 31, 1998 and 1997. Indebtedness under this facility totaled $5.4 million at December 31, 1996. On February 1, 1999, the Company purchased its headquarters in Allen, Texas for $6.5 million. The Company borrowed $1.2 million under its revolving loan facility and used existing cash reserves to fund the purchase of the Allen, Texas facility. The term of the $20 million revolving loan facility has been extended until May 20, 2000. As of December 31, 1998, the Company had cash and cash equivalents of $5.6 million compared with $32.2 million at December 31, 1997 and $0.2 million at the end of 1996. The Company had no long-term debt as of December 31, 1998 compared with $.2 million as of December 31, 1997. The decrease in cash and cash equivalents from December 31, 1997 to December 31, 1998 was primarily attributable to the Quest Medical asset acquisition in January 1998 which used approximately $23.2 million of the Company's cash. Cash provided by continuing operations increased to $3.5 million in 1998 compared with $3.0 million in 1997 and $1.9 million in 1996. Capital expenditures for property, plant and equipment for continuing operations totaled $2.0 million in 1998 compared with $1.7 million in 1997 and $2.3 million in 1996. -15- 18 The Company believes that its existing cash and cash equivalents, cash flows from operations, borrowings available under the Company's revolving loan facility and other equity or debt financing, which the Company believes would be available, will be sufficient to fund the Company's cash requirements for at least the next two years, including the cash required to purchase shares of the Company's common stock tendered to the Company pursuant to its tender offer for outstanding common stock which is to commence on March 22, 1999. In January 1998, the Board of Directors discontinued the payment of quarterly cash dividends. Such action was taken to facilitate the Company's growth strategy as well as to bring the Company's dividend policy more into 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 In 1998, the Company adopted Statement of Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income," which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. This statement did not impact the Company for the years presented, as the Company did not have any components of comprehensive income other than net income. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record all derivatives on the balance sheet at fair value and establish "special accounting" for the three different types of hedges. SFAS No. 133 is effective for quarters beginning after June 15, 1999. The Company has no derivative investments and does not expect SFAS No. 133 to have a significant impact on the Company's financial statements. YEAR 2000 INITIATIVE In 1998, the Company began, and is now continuing, its assessment of its information systems, products, facilities and equipment to determine if they are Year 2000 ready. During 1998, the Company's operating units were using several different information systems. As a part of the Company's ongoing efforts to achieve operating synergies, as well as to assure Year 2000 compliance, the Company has purchased and is installing new computer systems in one of its units and is taking steps to determine whether the new and existing systems are Year 2000 compliant. The Company has contacted its major suppliers to determine whether they are Year 2000 compliant and, where not, intends to monitor their progress and take appropriate action.The Company is also contacting other suppliers to determine whether they are Year 2000 compliant and, if not, intends to monitor their progress and take appropriate actions. In addition, the Company has reviewed its products that process information that may be date sensitive and believes that those products are not Year 2000 sensitive products. The Company's facilities and -16- 19 equipment are also being examined to determine whether they are Year 2000 ready. The Company feels it is over 80 percent complete with its assessment of its information systems, products, facilities and equipment and, accordingly, has not determined the total costs associated with its efforts to prepare for Year 2000. However, to date, the Company has incurred costs of approximately $120,000, including the cost and time for Company employees to address Year 2000 issues, and believes that the additional costs of addressing its Year 2000 transition will not have a material adverse effect on the Company's financial condition or business operations. Given the uncertain consequences of failure to resolve significant Year 2000 issues, however, there is no assurance that any one or more of such failures would not have a material adverse impact on the Company. The Company is in the process of developing a contingency plan addressing failure to be Year 2000 ready. 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 inclusions of such forward-looking information should not be regarded as a representation by the Company that the objectives or plans of the Company will be achieved. Such statements include, but are not limited to, the Company's expectations regarding future revenues, future cost of sales and gross profit, future expenses, interest income and expense, future earnings from continuing operations, liquidity, Year 2000 compliance and impact, compliance with financial covenants and long-term profitability. Words such as "anticipates," "believes," "intends," "expects," "estimated," and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements contained herein involve numerous risks and uncertainties, and there are a number of factors that could cause actual results to differ materially including, but not limited to the following: changing economic, market and business conditions, the effects of governmental regulation, the impact of competition and new technologies, slower-than-anticipated introduction of new products or implementation of marketing strategies, changes in the prices of raw materials, the ability to attract and retain qualified personnel and the loss of any significant customers. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic review which may cause the Company to alter its marketing, capital expenditures or other budgets, which in turn may affect the Company's results of operations and financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rates The Company has a $20 million revolving credit facility with a regional bank. Borrowings under the facility bear interest at 90-day LIBOR plus one percent. The Company is subject to interest rate risk based on an adverse change in the 90-day LIBOR. At December 31, 1998, the Company had no borrowings under the revolving credit agreement. An adverse hypothetical change in the market interest rate of one percent would not have a material effect on the Company's financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -17- 20 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 and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing standards. 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, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Atlanta, Georgia February 12, 1999 -18- 21 CONSOLIDATED STATEMENTS OF INCOME (For the years ended December 31, 1998, 1997 and 1996)
- -------------------------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Revenues $ 43,397 $ 30,277 $ 22,121 Cost of Goods Sold 26,937 20,755 13,033 - -------------------------------------------------------------------------------------------------------- Gross Profit 16,460 9,522 9,088 - -------------------------------------------------------------------------------------------------------- Operating Expenses: Selling 5,368 2,413 1,799 General and Administrative 6,763 5,552 5,062 Research and Development 2,750 1,147 1,003 Impairment Loss (Note 3) 0 4,797 0 - -------------------------------------------------------------------------------------------------------- 14,881 13,909 7,864 - -------------------------------------------------------------------------------------------------------- Operating Income (Loss) 1,579 (4,387) 1,224 Interest Income (Expense), net 577 818 (159) Other Income, net 57 241 262 - -------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations Before Provision for Income Taxes 2,213 (3,328) 1,327 Income Tax (Provision) Benefit (Note 5) (735) 1,283 (474) - -------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations 1,478 (2,045) 853 Income from Discontinued Operations, net of tax (Note 2) 0 1,923 5,623 Gain on Disposal of Discontinued Operations, net of tax (Note 2) 662 17,292 0 - -------------------------------------------------------------------------------------------------------- Net Income $ 2,140 $ 17,170 $ 6,476 ======================================================================================================== Earnings (Loss) Per Basic Share: Continuing Operations $ 0.46 $ (0.63) $ 0.27 Discontinued Operations 0 0.60 1.76 Gain on Disposal of Discontinued Operations 0.21 5.36 0 - -------------------------------------------------------------------------------------------------------- Net Income Per Basic Share $ 0.67 $ 5.33 $ 2.03 ======================================================================================================== Weighted Average Basic Shares Outstanding 3,203 3,224 3,189 ======================================================================================================== Earnings (Loss) Per Diluted Share: Continuing Operations $ 0.46 $ (0.63) $ 0.26 Discontinued Operations 0 0.60 1.73 Gain on Disposal of Discontinued Operations 0.21 5.36 0 - -------------------------------------------------------------------------------------------------------- Net Income Per Diluted Share $ 0.67 $ 5.33 $ 1.99 ======================================================================================================== Weighted Average Diluted Shares Outstanding 3,210 3,224 3,253 ========================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. -19- 22 CONSOLIDATED BALANCE SHEETS As of December 31, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------------ Assets: 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ (In thousands) Current Assets: Cash and cash equivalents $ 5,635 $32,172 Accounts receivables, net 7,278 2,897 Inventories, net (Note 1) 8,568 3,960 Prepaid expenses 1,358 337 - ------------------------------------------------------------------------------------------------------------------------ 22,839 39,366 - ------------------------------------------------------------------------------------------------------------------------ Property, Plant and Equipment: Original cost (Note 1) 22,315 15,617 Less accumulated depreciation and amortization 4,921 2,475 - ------------------------------------------------------------------------------------------------------------------------ 17,394 13,142 - ------------------------------------------------------------------------------------------------------------------------ Other Assets and Deferred Charges: Patents, net of accumulated amortization of $5,630 and $5,342 in 1998 and 1997, respectively (Notes 1 and 3) 3,620 908 Goodwill, net of accumulated amortization of $2,304 and $1,733 in 1998 and 1997, respectively (Notes 1 and 3) 13,986 4,862 Other 2,576 2,664 - ------------------------------------------------------------------------------------------------------------------------ 20,182 8,434 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ $60,415 $60,942 ========================================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. -20- 23 CONSOLIDATED BALANCE SHEETS As of December 31, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: 1998 1997 - --------------------------------------------------------------------------------------------------------------------- (In thousands) Current Liabilities: Current maturities of long-term debt (Note 4) $ 203 $ 453 Accounts payable and accrued liabilities 3,925 5,042 Accrued income and other taxes 4 278 - --------------------------------------------------------------------------------------------------------------------- 4,132 5,773 - --------------------------------------------------------------------------------------------------------------------- Long-term Debt, less current maturities (Note 4) 0 203 - --------------------------------------------------------------------------------------------------------------------- Other Liabilities and Deferred Credits: Accumulated deferred income taxes (Note 5) 5,800 3,948 Other 1,114 1,032 - --------------------------------------------------------------------------------------------------------------------- 6,914 4,980 - --------------------------------------------------------------------------------------------------------------------- Stockholders' Equity: Common stock, par value $0.10 per share, authorized 10,000,000 shares, issued 3,419,953 shares in 1998 and 1997 (Note 1) 342 342 Paid-in capital 6,394 6,395 Retained earnings (Note 9) 46,821 44,681 Treasury shares, 457,400 shares in 1998 and 177,949 shares in 1997, at cost (Note 6) (4,188) (1,432) - --------------------------------------------------------------------------------------------------------------------- 49,369 49,986 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- $ 60,415 $ 60,942 =====================================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. -21- 24 CONSOLIDATED STATEMENTS OF CASH FLOWS (For the years ended December 31, 1998, 1997 and 1996)
- ------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,140 $ 17,170 $ 6,476 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations 0 (1,923) (5,623) Gain on disposal of discontinued operations (Note 2) (662) (17,292) 0 Depreciation and amortization 3,304 1,948 1,490 Deferred income taxes 1,511 (1,928) 670 Impairment loss (Note 3) 0 4,797 0 Other 154 (548) (136) - ------------------------------------------------------------------------------------------------------------------------------- 6,447 2,224 2,877 Changes in current assets and liabilities: (Increase) decrease in accounts receivable (2,337) 761 (277) (Increase) in other current assets (1,690) (34) (120) Increase (decrease) in accounts payable 771 (205) (357) Increase (decrease) in other current liabilities 284 280 (248) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 3,475 3,026 1,875 Net cash provided by discontinued operations (Note 2) (1,614) 310 6,603 - ------------------------------------------------------------------------------------------------------------------------------- 1,861 3,336 8,478 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of subsidiary companies (Note 2) (23,198) 0 (11,650) Proceeds from disposal of discontinued operations 0 38,448 0 Property, plant and equipment additions (1,998) (1,695) (2,263) Discontinued operations property, plant and equipment additions 0 (78) (257) - ------------------------------------------------------------------------------------------------------------------------------- (25,196) 36,675 (14,170) - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in long-term indebtedness (453) (6,341) 5,167 Issuance of treasury stock 20 424 408 Purchase of treasury stock (2,769) (126) 0 Cash dividends paid 0 (1,940) (2,550) - ------------------------------------------------------------------------------------------------------------------------------- (3,202) (7,983) 3,025 - ------------------------------------------------------------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (26,537) 32,028 (2,667) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 32,172 144 2,811 - ------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,635 $ 32,172 $ 144 =============================================================================================================================== CASH PAID FOR: Interest (net of capitalized amounts) $ 22 $ 285 $ 425 Income taxes (net of refunds) 340 2,938 3,506
The accompanying notes to consolidated financial statements are an integral part of these statements. -22- 25 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Atrion Corporation is a holding company that designs, develops, manufactures and markets products for the medical and health care industry. As of December 31, 1998 the principal subsidiaries of the Company were Quest Medical, Inc., Atrion Medical Products, Inc. and Halkey-Roberts Corporation. Principles of Consolidation The consolidated financial statements include the accounts of Atrion Corporation and its subsidiaries (the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents Cash equivalents are securities with original maturities of 90 days or less. Inventory 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, 1998 1997 ----------------------------------------------------- Raw materials $ 4,983 $ 2,962 Finished goods 3,109 863 Work in process 1,022 299 Reserve for obsolescence (546) (164) ----------------------------------------------------- Net inventory $ 8,568 $ 3,960 -----------------------------------------------------
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 thirty 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, 1998 and 1997 (in thousands):
December 31, 1998 1997 --------------------------------------------------------------- Land $ 413 $ 413 Buildings 3,056 3,040 Machinery and equipment 18,846 12,164 --------------------------------------------------------------- Total property, plant and equipment $22,315 $15,617 ---------------------------------------------------------------
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 the time of the acquisition between selling and acquiring parties. Goodwill is being amortized over twenty-five years and patents are being amortized over the remaining lives of the individual patents. Carrying values of patents and goodwill are periodically -23- 26 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) evaluated in accordance with Statement of Financial Accounting Standard ("SFAS") No. 121 (see Note 3). 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. Allowances are made for bad debts where appropriate and are reviewed periodically. Income Taxes The Company accounts for income taxes in accordance with the provisions of 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 5). Stock Split On November 7, 1996, the Board of Directors authorized a three-for-two stock split to be effected in the form of a stock dividend of one share for every two shares of common stock outstanding. The stock dividend was paid on December 2, 1996 to stockholders of record on November 20, 1996. All references in the consolidated financial statements referring to shares, share prices, per share amounts and stock plans have been adjusted retroactively for the three-for-two stock split. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Presentation Certain prior-year amounts have been reclassified to conform with current-year presentation. (2) ACQUISITIONS, DISPOSITIONS AND MERGERS OF ASSETS AND SUBSIDIARIES Acquisition of Quest Medical, Inc. On January 30, 1998, the Company, through a wholly owned Texas subsidiary then known as "QMI Medical, Inc.," acquired the cardiovascular and intravenous fluid products division of Advanced Neuromodulation Systems, Inc. (formerly known as Quest Medical, Inc. and herein referred to as "ANS") and all rights to the name "Quest Medical, Inc." The Company paid $22,922,000 (after taking into account certain postclosing adjustments and excluding $276,000 of related acquisition costs) in cash for the net assets acquired from ANS. As part of the transaction, the Company also obtained a one-year lease on ANS's facility in Allen, Texas, along with an option to buy the facility. This acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price -24- 27 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) was allocated to the assets and liabilities acquired based on their estimated fair value at the date of acquisition. The excess of the consideration paid over the estimated fair value of the net assets acquired of $9.7 million was recorded as goodwill and is being amortized over 25 years. The Company changed the name of QMI Medical, Inc. to "Quest Medical, Inc." in June 1998, and that subsidiary is herein referred to as "Quest Medical." On February 1, 1999, the Company purchased the Allen, Texas facility for $6.5 million pursuant to the option mentioned above. The following table presents unaudited consolidated selected financial data on a pro forma basis assuming the purchase of these assets had occurred as of January 1, 1997 and January 1, 1998. The unaudited consolidated pro forma data reflect certain assumptions, which are based on estimates. The unaudited consolidated pro forma combined results presented have been prepared for comparative purposes only and are not necessarily indicative of actual results that would have been achieved had the acquisition occurred at the beginning of the periods presented, or of future results.
------------------------ 1998 1997 (In thousands) -------- -------- Revenues $ 44,531 $ 44,583 Income (loss) from continuing operations $ 1,613 $ (4,222) Net income $ 2,163 $ 16,438 Net income per basic share $ 0.68 $ 5.10
Disposal of Natural Gas Operations During 1997, the Company disposed of all of its natural gas operations. During the second quarter of 1997, the Company sold all the issued and outstanding shares of common stock of Alabama-Tennessee Natural Gas Company, Tennessee River Intrastate Gas Company Inc. and AlaTenn Energy Marketing Company, Inc. to Midcoast Energy Resources, Inc. ("Midcoast") for $38,178,000 in cash. In addition, certain annual contingent deferred payments of up to $250,000 per year are to be paid by Midcoast to the Company over an eight-year period beginning in 1999 with the amount paid each year to be dependent upon revenues received by Midcoast from certain gas transportation contracts. During the fourth quarter of 1997, the Company also sold the assets of its two remaining small natural gas subsidiaries, Central Gas Company and Tennessee River Development Company, to the City of Florence, Alabama for $470,000, consisting of $270,000 in cash and a note in the amount of $200,000. The consolidated financial statements presented herein reflect the Company's natural gas operations as discontinued operations for all periods presented, and, accordingly, all consolidated financial statements for prior periods have been adjusted and restated to remove the natural gas operations from continuing operations. Income from discontinued operations was $1,923,000 and $5,623,000 for the years ended December 31, 1997 and 1996, respectively, net of income tax expense of $1,099,000 and $3,203,000, respectively. The consolidated financial statements also reflect a gain on disposal of discontinued operations of $662,000 and $17,292,000, net of income tax expense of $340,000, and $7,340,000 in 1998 and 1997, respectively, based upon the sale of the natural gas operations as described above. -25- 28 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During 1996, the Company sold the assets of one of its small natural gas distribution companies, Hardin County Gas Company. Subsequent to the end of 1996, the Company dissolved Hardin County Gas Company as well as another inactive subsidiary, North Mississippi Natural Gas Corporation. Acquisition of Halkey-Roberts Corporation On May 21, 1996, the Company acquired Halkey-Roberts, a company that designs, develops, manufactures and sells proprietary medical device components and related components, all of which are used to control the flow of fluids and gases, from Fenway Partners, Inc., a New York-based private investment firm ("Fenway"). The Company purchased all of the outstanding stock of Halkey-Roberts for $11.65 million in cash, including postclosing adjustments. Halkey-Roberts is based in St. Petersburg, Florida. The acquisition was recorded using the purchase method of accounting. Accordingly, the purchase price was allocated to the assets and liabilities acquired based on their estimated fair value at the date of acquisition. The excess of the consideration paid over the estimated fair value of the net assets acquired of $3.7 million was recorded as goodwill and is being amortized over 25 years. Only results from operations subsequent to the acquisition date are reflected in the accompanying consolidated financial statements. On May 21, 1996, Halkey-Roberts leased the land, building and building improvements in St. Petersburg, Florida, which serve as Halkey-Roberts' headquarters and manufacturing facility, from HRC Properties, Inc., an affiliate of Fenway, under a ten-year lease. The lease provides for monthly payments, including certain lease payment escalators, and provides for certain termination, sublease and assignment rights. 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, 1998, 1997 and 1996 was $342,000, $332,000 and $200,000, respectively. Future minimum rental commitments under this lease are $328,000, $337,000, $347,000 and $137,000, respectively, over each of the next four years. Merger of Subsidiaries During 1997, Central Gas Company and Tennessee River Development Company, after the sale of their assets as described above, were merged into AlaTenn Pipeline Company, Inc., which was the surviving corporation. During 1996, the Company merged two medical products subsidiaries, Atrion Medical Products, Inc. and Ryder International Corporation, and changed the name of the surviving corporation to Atrion Medical Products, Inc. In 1996, AlaTenn Pipeline Company, Inc. and Vulcan Oil and Gas Company were merged with AlaTenn Pipeline Company, Inc. continuing as the surviving corporation. (3) IMPAIRMENT LOSS Effective January 1, 1996, the Company adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Accordingly, the Company periodically analyzes the recoverability of certain of its long-lived assets (including patents and related goodwill). In the fourth quarter of 1997, the Company determined that an impairment had occurred with respect -26- 29 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) to certain of its patents. This determination was made by estimating the net future cash flows expected from its identifiable patents. With respect to any identified patent, if the sum of the undiscounted net future cash flows was less than the net book value of the patent and related goodwill, an impairment loss was recognized and measured based on discounted net cash flows. As a result of this review, the Company recognized an impairment loss in the amount of $4,797,000 in the fourth quarter of 1997. The impairment loss is reflected as an increase in accumulated amortization in the consolidated balance sheets. (4) LONG-TERM DEBT AND OTHER BORROWINGS Long-term debt as of December 31 consisted of the following (in thousands):
1998 1997 -------------------------------------------------------- Industrial revenue bonds $203 $406 Notes payable 0 250 -------------------------------------------------------- 203 656 Less amounts due in one year 203 453 -------------------------------------------------------- $ 0 $203 --------------------------------------------------------
The Company has a $20 million revolving credit agreement with a regional bank. Under this agreement, there is a $10 million unsecured revolving facility and a $10 million revolving facility which must be secured at the time it is used. The term of the agreement has been extended through May 20, 2000. At any time during the term of the agreement, the Company may convert any or all outstanding amounts under either facility to a secured term loan with a minimum maturity of two years. The Company's ability to borrow funds under the secured and unsecured credit facilities is contingent on meeting certain covenants in the loan agreement. At December 31, 1998, the Company was in compliance with all covenants. At December 31, 1998, the Company had no borrowings under the revolving credit agreement. The industrial revenue bonds are due and payable in semiannual installments of $101,500. Such bonds bear interest at 70 percent of the prime rate with a minimum rate of 6 percent and are secured by Atrion Medical Products' land, buildings and equipment and by a Company guaranty. In April 1994, Atrion Medical Products executed a promissory note for $1.0 million to the former owner of its business. The last payment on this note was paid on April 1, 1998. On December 31, 1998, 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. -27- 30 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (5) INCOME TAXES The items comprising income tax expense (benefit) for continuing operations are as follows:
1998 1997 1996 (In thousands) -------------------------------------------------------------------------------------------------- Current -- Federal $ (71) $ (42) $ (49) -- State 33 2 (25) -------------------------------------------------------------------------------------------------- (38) (40) (74) Deferred -- Federal 673 (1,134) 504 -- State 100 (109) 44 -------------------------------------------------------------------------------------------------- 773 (1,243) 548 -------------------------------------------------------------------------------------------------- Total income tax expense (benefit) $ 735 $(1,283) $ 474 --------------------------------------------------------------------------------------------------
Temporary differences and carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of December 31, 1998 and 1997 are as follows:
1998 1997 (In thousands) ------------------------------------------------------------- Deferred tax assets: Benefit plans $ 476 $ 495 Other, net 1,714 2,479 ------------------------------------------------------------- Subtotal 2,190 2,974 Valuation allowance -- -- ------------------------------------------------------------- Total deferred tax assets $2,190 $2,974 ------------------------------------------------------------- Deferred tax liabilities: Depreciation and basis differences $1,674 $1,322 Pensions 440 489 Other, net 5,876 5,111 ------------------------------------------------------------- Total deferred tax liabilities $7,990 $6,922 -------------------------------------------------------------
Management believes that a valuation allowance is not considered 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. -28- 31 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Total income tax expense (benefit) for continuing operations differs from the amount which would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below:
1998 1997 1996 (In thousands) - -------------------------------------------------------------------------------------------------- Income tax expense (benefit) at the statutory federal income tax rate $ 752 $(1,132) $451 Increase (decrease) resulting from: State income taxes 133 (106) 19 Tax exempt interest (4) (38) -- Research and development credit (50) Other, net (96) (7) 4 - -------------------------------------------------------------------------------------------------- Total income tax expense (benefit) $ 735 $(1,283) $474 - --------------------------------------------------------------------------------------------------
(6) COMMON STOCK The Company utilized 1,641 and 37,050 treasury shares in 1998 and 1997, respectively, to make distributions under its 1997 Stock Incentive Plan and its Restricted Shares Compensation Plan for Nonemployee Directors and in connection with the exercise of options under its 1994 Key Employee Stock Incentive Plan and 1990 Stock Option Plan (see Note 8). Pursuant to a Dutch auction tender offer, the Company purchased 239,092 shares of common stock at $9.00 per share in December 1998. On May 4, 1995, the Board of Directors of the Company authorized a stock repurchase program under which the Company may repurchase up to 150,000 shares of its common stock in open-market or negotiated transactions at such times and at such prices as management may from time to time decide. In 1998 and 1997, the Company repurchased 42,000 and 9,700 shares, respectively, of its common stock under the Stock Repurchase Program. At December 31, 1998, there were 457,400 shares of common stock being held in treasury. The cost of these shares is shown as a reduction in stockholders' equity in the consolidated balance sheets. The Company has a Common Share Purchase Rights Plan which is intended to protect the interests of stockholders in the event of a hostile attempt to take over the Company. The Rights, which are not presently exercisable and do not have any voting powers, represent the right of the Company's stockholders to purchase at a substantial discount, 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. (7) EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 is designed to improve the earnings per share information provided in the consolidated financial statements by simplifying the existing computational guidelines, revising the disclosure requirements and increasing the comparability of earnings per share data. SFAS No. 128 is effective for periods ending after December 15, 1997, including interim periods. The Company adopted SFAS No. 128 for its fiscal year ended December 31, 1997. The following is a reconciliation of the -29- 32 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) weighted average shares outstanding used in calculating basic and diluted earnings (loss) per share as presented in the consolidated statements of income:
1998 1997 1996 (In thousands) - ------------------------------------------------------------------------------------------------------------ Weighted average basic shares outstanding 3,203 3,244 3,189 Add: Effect of dilutive securities (options and warrants) 7 -- 64 - ------------------------------------------------------------------------------------------------------------ Weighted average diluted shares outstanding 3,210 3,224 3,253 - ------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1997, there was no difference between basic and diluted weighted average shares outstanding as potential shares of common stock (options, warrants) would have an antidilutive effect on the resulting net loss per share from continuing operations. (8) STOCK OPTION PLANS During 1998, the Company's stockholders approved the adoption of the Company's 1998 Outside Directors Stock Option Plan ("1998 Directors Option Plan"). The 1998 Directors Option Plan provides for the automatic grant on each of February 1, 1998, February 1, 1999 and February 1, 2000 of nonqualified stock options to purchase 10,000 shares of common stock to each director, other than the Chairman of the Board, who is not an employee of the Company or any subsidiary and of nonqualified stock options to purchase 20,000 shares of common stock to the Chairman of the Board if he is not an employee of the Company or any subsidiary. The aggregate number of shares of common stock reserved for grants under the 1998 Directors Option Plan is 270,000 shares. The purchase price of the shares of common stock on exercise of the options is the fair market value of such shares on the date of grant. The options become exercisable in four equal quarterly installments on the May 1, August 1, November 1 and February 1 next succeeding the date of grant and expire no later than 10 years after the date of grant. During 1997, the stockholders of the Company approved the adoption of the Company's 1997 Stock Incentive Plan. The 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, after giving effect to the amendments approved by the Company's stockholders in 1998, 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 incentive options must be at least equal to the fair market value of such shares on the date of grant. The purchase price for nonqualified options and restricted and performance shares is fixed by the Compensation Committee. The options granted become exercisable as determined by the Compensation Committee and expire no later than ten years after the date of grant. During 1994 and 1990, the stockholders of the Company approved the adoption of the Company's 1994 Key Employee Stock Incentive -30- 33 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Plan and 1990 Stock Option Plan which provided for the grant to key employees of incentive and nonqualified options to purchase shares of common stock of the Company. Option transactions, adjusted for the three-for-two stock split, for the years 1996, 1997 and 1998 are as follows:
Shares Price Per Share - ---------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1995 228,225 $ 6.75 -- 16.08 Granted in 1996 32,550 $ 13.83 -- 17.00 Expired in 1996 (3,150) $ 11.67 -- 15.17 Exercised in 1996 (31,875) $ 9.92 -- 16.08 - ---------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1996 225,750 $ 6.75 -- 17.00 Granted in 1997 113,200 $ 13.25 -- 14.88 Expired in 1997 (41,100) $ 11.67 -- 15.17 Exercised in 1997 (33,850) $ 6.75 -- 15.17 - ---------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1997 264,000 $ 9.92 -- 17.00 Granted in 1998 422,100 $ 6.88 -- 13.25 Expired in 1998 (21,800) $ 12.25 -- 13.25 Exercised in 1998 0 $ 0.00 -- 0.00 - ---------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1998 664,300 $ 6.88 -- 17.00 - ----------------------------------------------------------------------------------------------------
As of December 31, 1998, options for 233,000 of the above-listed shares were exercisable and there remained 147,534 shares for which options may be granted in the future under the 1997 Stock Incentive Plan. The Company accounts for stock options under Accounting Principles Board ("APB") Opinion No. 25, which requires compensation costs to be recognized only when the option price differs from the market price at the grant date. SFAS No. 123, "Accounting for Stock-Based Compensation," allows a company to follow APB Opinion No. 25 with an additional disclosure that shows what the Company's pro forma net income would have been using SFAS No. 123. Pro forma information regarding net income and earnings per share as required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996:
1998 1997 1996 - ----------------------------------------------------------------------------------------------- Risk-free interest rate 5.28% 6.7% 6.8% Dividend yield 0.0% 0.0% 5.4% Volatility factor 28% 25% 29% Weighted average expected life 7 YEARS 7 years 10 years - ------------------------------------------------------------------------------------------------
-31- 34 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 period. The Company's pro forma net income and earnings per basic share were as follows:
1998 1997 1996 ------------------------------------------------------------------------------------------- Net income - as reported $2,140 $17,170 $6,476 Net income - pro forma $1,487 $17,020 $6,461 Earnings per basic share - as reported $ 0.67 $ 5.33 $ 2.03 Earnings per basic share - pro forma $ 0.46 $ 5.28 $ 2.03 Weighted average fair value of options granted during the year $ 4.64 $ 6.10 $ 3.50 -------------------------------------------------------------------------------------------
(9) RETAINED EARNINGS The following is a recap of changes in consolidated retained earnings for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 (In thousands) - ---------------------------------------------------------------------------------------------------- Balance, beginning of year $44,681 $29,451 $25,525 Add: Net income for the year 2,140 17,170 6,476 Deduct: Cash dividends, $0.60 per share in 1997 and $0.80 per share in 1996 0 (1,940) (2,550) - ---------------------------------------------------------------------------------------------------- Balance, end of year $46,821 $44,681 $29,451 - ----------------------------------------------------------------------------------------------------
(10) REVENUES FROM MAJOR CUSTOMERS In 1998, approximately $5.3 million (12.2 percent) of the Company's operating revenues were attributable to one customer. In 1997, approximately $4.9 million (16.3 percent) of the Company's operating revenues were attributable to one customer. In 1996, approximately $5.9 million (26.6 percent) of the Company's operating revenues were attributable to one customer. (11) INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires reporting selected information about operating segments in interim financial reports issued to stockholders. -32- 35 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company operates in one reportable industry segment: designing, developing, manufacturing and marketing products for the medical and health care industry with no foreign operating subsidiaries. Company revenues from sales outside the United States totaled approximately 22 percent, 21 percent, and 18 percent of the Company's total revenues in 1998, 1997, and 1996, respectively. (12) 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. SFAS No. 132, "Employer's Disclosures About Pensions and Other Postretirement Benefits," was implemented by the Company effective January 1, 1998. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. This revision requires additional information on changes in the benefit obligations and the fair value of plan assets. The changes in the plan's projected benefit obligation ("PBO") as of December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ------ ------- CHANGE IN BENEFIT OBLIGATION Benefit obligation, January 1 $2,806 $ 4,314 Service Cost 297 124 Interest cost 235 248 Plan amendments 175 (74) Actuarial loss 90 616 Settlement gain 0 (643) Curtailment gain 0 (729) Benefits paid (306) (1,050) -------------------------------------------------------------------------------- Benefit obligation, December 31 $3,297 $ 2,806 --------------------------------------------------------------------------------
The changes in the fair value of plan assets, funded status of the plan, and the status of the prepaid pension benefit obligation recognized, which is included in the Company's balance sheets as of December 31, 1998 and 1997, are as follows (in thousands): -33- 36 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1998 1997 -------- -------- CHANGE IN PLAN ASSETS Fair value of plan assets, January 1 $ 5,499 $ 5,583 Actual return on plan assets 503 966 Benefits paid (306) (1,050) ----------------------------------------------------------------------------------------- Fair value of plan assets, December 31 $ 5,696 $ 5,499 Funded status of plan $ 2,399 $ 2,693 Unrecognized actuarial gain (888) (921) Unrecognized prior service cost 102 (68) Unrecognized net transition obligation (307) (356) ----------------------------------------------------------------------------------------- Net amount recognized $ 1,306 $ 1,348 -----------------------------------------------------------------------------------------
The components of net periodic pension benefit cost (income) for 1998, 1997 and 1996 were as follows (in thousands):
1998 1997 1996 ------ ------ ------ COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 297 $ 124 $ 151 Interest cost 235 248 305 Expected return on assets (430) (423) (412) Prior service cost amortization 6 1 7 Actuarial (gain) loss (17) 0 0 Transition amount amortization (49) (55) (60) Curtailment gain 0 (663) 0 Settlement gain 0 (144) 0 ------------------------------------------------------------------------------------------ Net periodic benefit cost (income) $ 42 $ (912) $ (9) ------------------------------------------------------------------------------------------
As reflected in the 1997 pension income table above, the Company recognized curtailment and settlement gains totaling $807,000 in connection with the sale of Alabama-Tennessee Natural Gas Company. In accordance with SFAS No. 88, "Employer Accounting for Settlements and Curtailments of Defined Benefit Pension Plans," these gains are reflected as a component of the gain on disposal of discontinued operations (see Note 2). Actuarial assumptions used to determine the values of the PBO at December 31, 1998 and 1997 and the benefits cost for 1998, 1997 and 1996 included a discount rate of 7.25 percent, an estimated long-term rate of return on plan assets of 8 percent, and an estimated weighted average rate of compensation increase of 6 percent. As of December 31, 1998, the plan's assets were invested in mutual funds as follows: equity, 75 percent; fixed income, 24 percent; and money market, 1 percent. Effective July 1, 1992, the Company adopted a nonqualified Supplemental Executive Retirement Plan ("SERP") which provides additional pension benefits to certain executive officers of the Company. The Company recognized income of $4,000 in connection with -34- 37 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the SERP in 1998 and recorded expense of $100,000 and $78,000 in 1997 and 1996, respectively. The SERP was terminated December 31, 1998. The Company also sponsors defined contribution plans for all employees. Each participant may contribute certain amounts of eligible compensation. The Company makes a matching contribution to the plans. The Company's contribution under these plans was $264,000 in 1998, $352,000 in 1997 and $375,000 in 1996. Included in these amounts are contributions to the Company's Supplemental Executive Thrift Plan, which was terminated December 31, 1998. The Company previously provided certain postretirement health care and life insurance benefits to full-time employees of its natural gas operations. After the disposal of the natural gas operations in 1997, the Company no longer has any obligations for such postretirement benefits. (13) LEGAL PROCEEDINGS The Company is subject to legal proceedings and third-party claims which 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 or results of operations. (14) QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for 1998 and 1997 are as follows:
Quarter Operating Operating Earnings (Loss) Ended Revenue Income (Loss) Net Income (Loss) Per Basic Share - -------------------------------------------------------------------------------------------------------- (In thousands except per share amounts) - -------------------------------------------------------------------------------------------------------- 03/31/98 $ 10,162 579 $ 498 $ .15 06/30/98 11,375 706 537 .17 09/30/98 11,570 217 226 .07 12/31/98 10,290 77 879 .28 - -------------------------------------------------------------------------------------------------------- 03/31/97 $ 7,946 491 $ 1,631 $ 0.50 06/30/97 8,138 677 18,067 5.62 09/30/97 7,292 432 638 0.19 12/31/97 6,901 (5,987) (3,166) (.98) - --------------------------------------------------------------------------------------------------------
The fourth quarter of 1997 amounts include charges for an impairment loss and a product replacement program totaling $5,897,000 ($3,737,000 after tax) or $1.16 per basic share. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -35- 38 ATRION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 1999 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 1999 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 1999 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 1999 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 1999 annual meeting of stockholders. CHANGES IN CONTROL The Company knows of no arrangements which may at a subsequent date result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None -36- 39 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 1998 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: The Company filed a current report on Form 8-K, dated November 18, 1998, related to the Company's exercise of its option to purchase its headquarters building and adjacent property. -37- 40 2a Stock Purchase Agreement, dated May 21, 1996, between Fenway Holdings, L.L.C. and Atrion Corporation(1) 2b Asset Purchase Agreement, dated March 19, 1997, between Atrion Corporation and Midcoast Energy Resources, Inc.(2) 2c Asset Purchase Agreement, dated as of December 29, 1997, by and among Quest Medical, Inc. QMI Acquisition Corp. and Atrion Corporation(3) 3a Certificate of Incorporation of Atrion Corporation, dated December 30, 1996(4) 3b Bylaws of Atrion Corporation(5) 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(6) 10a* 1990 Stock Option Plan(7) 10b* Form of Incentive Stock Option Agreement(8) 10c* Restricted Shares Compensation Plan for Non-Employee Directors adopted May 6, 1991(9) 10d* Alabama-Tennessee Natural Gas Company Supplemental Executive Retirement Plan(10) 10e* Alabama-Tennessee Natural Gas Company Supplemental Executive Thrift Plan(11) 10f* 1994 Key Employee Stock Incentive Plan(12) 10g* Form of Incentive Stock Option Agreement(13) 10h* Atrion Corporation 1997 Stock Incentive Plan(14) 10i* Atrion Corporation 1998 Outside Directors Stock Option Plan(15) 10j* Form of Stock Option Agreement(16) 21 Subsidiaries of Atrion Corporation as of December 31, 1998 23 Consent of Arthur Andersen LLP 27 Financial Data Schedules (filed electronically only)
NOTES - ----- (1) Incorporated by reference to Exhibit 2 to Form 8-K of Atrion Corporation dated June 5, 1996. (2) Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company dated April 23, 1997. (3) Incorporated by reference to Exhibit 2 to the Form 8-K of Atrion Corporation dated February 17, 1998. (4) Incorporated by reference to Appendix B to the Definitive Proxy Statement of the Company dated January 10, 1997. (5) Incorporated by reference to Appendix C to the Definitive Proxy Statement of the Company dated January 10, 1997. (6) Incorporated by reference to Exhibit 1 to Registration Statement on Form 8-A of AlaTenn Resources, Inc. dated February 15, 1990. (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 29, 1991. (10) Incorporated by reference to Exhibit 10u to Form 10-K of AlaTenn Resources, Inc. dated March 26, 1993. (11) Incorporated by reference to Exhibit 10v to Form 10-K of AlaTenn Resources, Inc. dated March 26, 1993. (12) Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company dated March 28, 1994. (13) Incorporated by reference to Exhibit 4(d) to the Form S-8 of AlaTenn Resources, Inc., filed July 26, 1995 (File No. 33-61309). (14) Incorporated by reference to Exhibit 10(j) to Form 10-K of Atrion Corporation dated March 31, 1998. (15) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion Corporation, filed June 10, 1998 (File No. 333-56511). (16) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion Corporation, filed June 10, 1998 (File No. 333-56511).
* Management Contract or Compensatory Plan or Arrangement -38- 41 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 22, 1999 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 22, 1999 ---------------------------------------- Officer (Principal Executive Officer) Emile A. Battat /s/Jeffery Strickland Vice President, Chief Financial Officer and March 22, 1999 ---------------------------------------- Secretary-Treasurer (Principal Financial Jeffery Strickland and Accounting Officer) /s/Richard O. Jacobson Director March 22, 1999 ---------------------------------------- Richard O. Jacobson /s/John H. P. Maley Director March 22, 1999 ---------------------------------------- John H. P. Maley
-39- 42
Signature Title Date --------- ----- ---- /s/Jerome J. McGrath Director March 22, 1999 ---------------------------------------- Jerome J. McGrath /s/Hugh J. Morgan, Jr. Director March 22, 1999 ---------------------------------------- Hugh J. Morgan, Jr. /s/J. Kenneth Smith Director March 22, 1999 ---------------------------------------- J. Kenneth Smith /s/Roger F. Stebbing Director March 22, 1999 ---------------------------------------- Roger F. Stebbing /s/John P. Stupp, Jr. Director March 22, 1999 ---------------------------------------- John P. Stupp, Jr.
-40- 43 EXHIBIT INDEX
EXHIBIT NUMBERS DESCRIPTION PAGE ------- ----------- ---- 2a Stock Purchase Agreement, dated May 21, 1996, between Fenway Holdings, L.L.C. and Atrion Corporation(1) 2b Asset Purchase Agreement, dated March 19, 1997, between Atrion Corporation and Midcoast Energy Resources, Inc.(2) 2c Asset Purchase Agreement, dated as of December 29, 1997, by and among Quest Medical, Inc. QMI Acquisition Corp. and Atrion Corporation(3) 3a Certificate of Incorporation of Atrion Corporation, dated December 30, 1996(4) 3b Bylaws of Atrion Corporation(5) 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(6) 10a* 1990 Stock Option Plan(7) 10b* Form of Incentive Stock Option Agreement(8) 10c* Restricted Shares Compensation Plan for Non-Employee Directors adopted May 6, 1991(9) 10d* Alabama-Tennessee Natural Gas Company Supplemental Executive Retirement Plan(10) 10e* Alabama-Tennessee Natural Gas Company Supplemental Executive Thrift Plan(11) 10f* 1994 Key Employee Stock Incentive Plan(12) 10g* Form of Incentive Stock Option Agreement(13) 10h* Atrion Corporation 1997 Stock Incentive Plan(14) 10i* Atrion Corporation 1998 Outside Directors Stock Option Plan(15) 10j* Form of Stock Option Agreement(16) 21 Subsidiaries of Atrion Corporation as of December 31, 1998 42 23 Consent of Arthur Andersen & Co. 43 27 Financial Data Schedules (filed electronically only) NOTES ----- (1) Incorporated by reference to Exhibit 2 to Form 8-K of Atrion Corporation dated June 5, 1996. (2) Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company dated April 23, 1997. (3) Incorporated by reference to Exhibit 2 to the Form 8-K of Atrion Corporation dated February 17, 1998. (4) Incorporated by reference to Appendix B to the Definitive Proxy Statement of the Company dated January 10, 1997. (5) Incorporated by reference to Appendix C to the Definitive Proxy Statement of the Company dated January 10, 1997. (6) Incorporated by reference to Exhibit 1 to Registration Statement on Form 8-A of AlaTenn Resources, Inc. dated February 15, 1990. (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 29, 1991. (10) Incorporated by reference to Exhibit 10u to Form 10-K of AlaTenn Resources, Inc. dated March 26, 1993. (11) Incorporated by reference to Exhibit 10v to Form 10-K of AlaTenn Resources, Inc. dated March 26, 1993. (12) Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company dated March 28, 1994. (13) Incorporated by reference to Exhibit 4(d) to the Form S-8 of AlaTenn Resources, Inc., filed July 26, 1995 (File No. 33-61309). (14) Incorporated by reference to Exhibit 10(j) to Form 10-K of Atrion Corporation dated March 31, 1998. (15) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion Corporation, filed June 10, 1998 (File No. 333-56511). (16) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion Corporation, filed June 10, 1998 (File No. 333-56511).
* Management Contract or Compensatory Plan or Arrangement -41- EX-21 2 SUBSIDIARIES OF ATRION CORPORATION 1 EXHIBIT 21 SUBSIDIARIES OF ATRION CORPORATION As of December 31, 1998
State of Subsidiary Incorporation Ownership - -------------------------------------------------------------------------------- Atrion Medical Products Alabama 100% Halkey-Roberts Corporation Florida 100% Quest Medical, Inc. Texas 100% AlaTenn Pipeline Company Alabama 100% Atrion Leasing Company, Inc. Alabama 100% Atrion International, Inc. U.S. V.I. 100% - --------------------------------------------------------------------------------
-42- EX-23 3 CONSENT OF ARTHUR ANDERSON & COMPANY 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 12, 1999 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 19, 1999 -43- EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ATRION CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 5,635 0 7,278 0 8,568 22,839 22,315 4,921 60,415 4,132 0 0 0 342 49,027 60,415 43,397 43,397 26,937 26,937 14,881 0 (577) 2,213 735 1,478 662 0 0 2,140 0.67 0.67
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