<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1997 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 Number)
Post Office Box 587, Arab, Alabama 35016
----------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (205) 586-1580
--------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class September 30, 1997
- ----------------------- ------------------
Common Stock, Par Value $0.10 per share 3,242,004 Shares
<PAGE>
PART I - FINANCIAL INFORMATION
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -------------
(In thousands, except per share data) (In thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES 7,292 7,362 23,375 15,692
COST OF GOODS SOLD 4,802 4,474 14,978 8,965
----------- ----------- ----------- -----------
GROSS PROFIT 2,490 2,888 8,397 6,727
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling expense 514 529 1,617 1,247
General & administrative 1,544 1,576 5,180 4,378
----------- ----------- ----------- -----------
2,058 2,105 6,797 5,625
----------- ----------- ----------- -----------
OPERATING INCOME 432 783 1,600 1,102
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income (expense), net 493 (120) 396 (110)
Other income 52 49 218 206
----------- ----------- ----------- -----------
545 (71) 614 96
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 977 712 2,214 1,198
PROVISION FOR INCOME TAXES 319 269 801 450
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 658 443 1,413 748
INCOME FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES (20) 1,316 1,921 4,558
GAIN ON DISPOSAL OF DISCONTINUED
OPERATIONS, NET OF INCOME TAXES -- -- 17,002 --
----------- ----------- ----------- -----------
NET INCOME $ 638 $ 1,759 $ 20,336 $ 5,306
=========== =========== =========== ===========
EARNINGS PER SHARE:
Continuing operations $ 0.20 $ 0.14 $ 0.44 $ 0.24
Discontinued operations -- 0.41 0.60 1.43
Gain on disposal of discontinued operations -- -- 5.28 --
----------- ----------- ---------- -----------
$ 0.20 $ 0.55 $ 6.32 $ 1.67
=========== =========== ========== ===========
DIVIDENDS PER SHARE $ 0.10 $ 0.20 $ 0.50 $ 0.60
=========== =========== ========== ===========
AVERAGE SHARES OUTSTANDING 3,230,387 3,192,276 3,217,537 3,184,127
=========== =========== ========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2
<PAGE>
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30 December 31,
1997 1996
----------------- ------------------
(In thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 32,836 $ 144
Accounts receivable 3,522 3,658
Inventories 3,999 3,712
Prepaid expenses and other 499 486
----------------- ------------------
40,856 8,000
----------------- ------------------
PROPERTY, PLANT AND EQUIPMENT:
Original cost 14,907 13,932
Less - accumulated depreciation and amortization 2,164 1,252
----------------- ------------------
12,743 12,680
----------------- ------------------
DEFERRED CHARGES:
Patents 4,737 5,066
Goodwill 6,005 6,198
Other 2,267 795
----------------- ------------------
13,009 12,059
----------------- ------------------
NET ASSETS OF DISCONTINUED OPERATIONS (21) 12,694
----------------- ------------------
$ 66,587 $ 45,433
================= ==================
(Continued)
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<PAGE>
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30 December 31,
1997 1996
-------------------- --------------------
(In thousands)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 703 $ 703
Accounts payable and accrued liabilities 5,211 2,944
-------------------- --------------------
5,914 3,647
-------------------- --------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES 203 6,313
-------------------- --------------------
OTHER NON-CURRENT LIABILITIES 7,024 1,055
-------------------- --------------------
STOCKHOLDERS' EQUITY
Common shares, par value $0.10 per share; authorized
10,000,000 shares, issued 3,420,000 shares 342 342
Paid-in capital 6,356 6,204
Retained earnings 48,180 29,451
Treasury shares, at cost (1,432) (1,579)
-------------------- --------------------
Total stockholders' equity 53,446 34,418
-------------------- --------------------
$ 66,587 $ 45,433
==================== ====================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1997 1996
---------------- -------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,336 $ 5,306
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations (1,921) (4,558)
Gain on disposal of discontinued operations (17,002) ---
Depreciation and amortization 1,459 1,412
Deferred income taxes 120 307
Other (193) (674)
---------------- --------------------
2,799 1,793
Change in current assets and liabilities:
(Increase) decrease in accounts receivable 136 (633)
(Increase) decrease in other current assets (234) 134
Increase (decrease) in accounts payable (211) 151
Increase (decrease) in other current liabilities 179 58
---------------- --------------------
Net cash provided by continuing operations 2,669 1,503
Net cash provided by discontinued operations 309 6,466
---------------- --------------------
2,978 7,969
---------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions - continuing operations (994) (1,869)
Property, plant and equipment additions - discontinued operations (78) (38)
Acquisition of subsidiary --- (11,650)
Proceeds from disposal of discontinued operations 38,178 ---
Other 8 ---
---------------- --------------------
37,114 (13,557)
---------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in long-term indebtedness (6,091) 6,885
Cash dividends paid (1,607) (1,910)
Issuance of common stock 424 219
Repurchase of common stock (126) ---
---------------- --------------------
(7,400) 5,194
Net increase in cash and cash equivalents 32,692 (394)
Cash and cash equivalents, beginning of period 144 2,811
---------------- --------------------
Cash and cash equivalents, end of period $ 32,836 $ 2,417
================ ====================
Cash paid for:
Interest (net of capitalized amounts) $ 266 $ 302
Income taxes (net of refunds) 2,080 2,554
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
In the opinion of management, all adjustments necessary for a fair presentation
of results of operations for the periods presented have been included in the
accompanying unaudited consolidated financial statements of Atrion Corporation
(the Company). Such adjustments consist of normal recurring items. The
accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q and include the information and notes required by such
instructions. Accordingly, the consolidated financial statements and notes
thereto should be read in conjunction with the financial statements and notes
included in the Company's 1996 Annual Report on Form 10-K.
2. Change of Domicile
Atrion Corporation was incorporated in 1996 and is successor to the former
ATRION Corporation as a result of a merger to change the state of incorporation
of ATRION Corporation from Alabama to Delaware. The predecessor corporation was
formerly known as "AlaTenn Resources, Inc."
3. Sale of Natural Gas Subsidiaries - Discontinued Operations
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., Alabama corporations hereinafter referred to as the "Natural Gas
Subsidiaries," to Midcoast Energy Resources, Inc. (Midcoast), a Nevada
corporation, pursuant to the terms of an Asset Purchase Agreement dated March
19, 1997 (the "Asset Purchase Agreement"), between the Company and Midcoast. The
Natural Gas Subsidiaries comprised substantially all of the Company's natural
gas operations and their assets include approximately 327 miles of natural gas
pipelines and related facilities.
In consideration for the common stock of the Natural Gas Subsidiaries, Midcoast
paid to the Company cash in the amount of $39,373,000 on May 30, 1997. In
accordance with the Asset Purchase Agreement, on September 3, 1997, the Company
paid Midcoast $1,195,000 as a post-closing adjustment. The Asset Purchase
Agreement also provides that certain annual contingent deferred payments of up
to $250,000 per year are to be paid by Midcoast to the Company
6
<PAGE>
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.
The financial statements presented herein treat 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 remove the natural gas operations from continuing operations. The
financial statements also reflect an after-tax gain on disposal of discontinued
operations of $17 million in the second quarter of 1997 based upon the sale of
the Natural Gas Subsidiaries as described above. Discontinued operations also
include the Company's remaining two small natural gas subsidiaries. These two
subsidiaries reached an agreement on July 28, 1997 with their sole customer to
sell substantially all of their assets to such customer for $470,000. This
transaction received requisite regulatory approval in October and closing of the
transaction occurred on November 1, 1997. The Company will record an after-tax
gain of approximately $280,000 on this transaction in the fourth quarter.
4. Purchase of Halkey-Roberts Corporation
On May 21, 1996, the Company purchased all the outstanding capital stock of HRC
Acquisition Holding Corp., a Delaware corporation which, in turn, owned all of
the outstanding capital stock of Halkey-Roberts Corporation, a Florida
corporation (Halkey-Roberts), pursuant to the terms of a Stock Purchase
Agreement, dated the same date, between the Company and Fenway Holdings, L.L.C.
The Company paid Fenway a total of $11,650,000 in cash under the Stock Purchase
Agreement. This acquisition was accounted for using the purchase method of
accounting, and, accordingly, the results from Halkey-Roberts' operations prior
to the acquisition date have not been included in the Company's financial
statements for the 1996 year-to-date period.
The following table presents unaudited consolidated selected financial data on a
pro forma basis assuming the purchase of Halkey-Roberts had occurred as of
January 1, 1996. 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 period presented, or of
future results.
7
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues from continuing operations (000) $23,375 $21,756
- --------------------------------------------------------------------------------
Net Income (000) $20,336 $ 5,547
- --------------------------------------------------------------------------------
Net Income Per Share $ 6.32 $ 1.74
- --------------------------------------------------------------------------------
</TABLE>
For further information regarding the acquisition of Halkey-Roberts, refer to
the Company's 8-K Report, filed with the Securities and Exchange Commission on
June 5, 1996, as amended on August 5, 1996.
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 to shares and per share amounts have been
restated to reflect the three-for-two stock split for all periods presented.
8
<PAGE>
ATRION CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results For The Three Months Ended September 30, 1997
The Company's consolidated net income from continuing operations for the quarter
ended September 30, 1997 was $658,000, or $.20 per share, compared with
$443,000, or $.14 per share, for the third quarter of 1996. The earnings per
share computations are based on weighted average shares outstanding of 3,230,387
in 1997 and 3,192,276 in 1996 (after adjustment to reflect the three-for-two
stock split effected in December 1996).
Consolidated revenues of $7.3 million from continuing operations for the third
quarter of 1997 were $.1 million or 1% lower than revenues of $7.4 million for
the third quarter of 1996. The decrease in revenues in the third quarter of
1997, compared to the same period in the prior year, was the result of a
reduction in sales of certain higher-margin products to two of the Company's
larger customers which purchased competing products from other suppliers. As
reported previously, the Company had anticipated the reduction in sales to those
customers since early 1997. This reduction in revenue was partially offset by
increased revenues from the sale of certain other high-margin products and
lower-margin products in the third quarter of 1997. Gross profit of $2.4 million
in the third quarter of 1997 was $.4 million or 14% lower than in the comparable
period in 1996 primarily due to the reduction in sales of higher-margin
products. The gross profit percentage in the third quarter of 1997 of 34% was
lower than the gross profit percentage in the third quarter of 1996 of 39% due
to decreased sales of higher-margin products and increased sales of lower-margin
products.
The Company's selling, general and administrative expenses of $2.1 million for
the third quarter of 1997 were 2% lower than in the third quarter of 1996.
Operating income in the third quarter of 1997 totaled $432,000 compared with
$783,000 in 1996. This decrease was due to lower gross profits resulting from
the change in the gross profit percentage discussed above.
The Company has recently identified a quality issue related to a component
manufactured by a Company unit for use in marine inflation equipment. As a
result, the Company has initiated a program to replace all questionable product.
The cost of this replacement program including trade advertising, customer
costs, and cost
9
<PAGE>
for the replacement product is not presently known. However, the Company
currently anticipates that it will take a one-time after-tax charge of
approximately $460,000 or $.14 per share in the fourth quarter for the cost of
this replacement program.
Net interest income of $493,000 in the third quarter of 1997 compares with
$120,000 of net interest expense in the third quarter of 1996. The interest
income amount in 1997 reflects interest earned on the proceeds from the sale of
the Natural Gas Subsidiaries. Other income in the third quarter of 1997 of
$52,000 was about the same as in 1996 and included certain one-time gains in
both periods. Income tax expense in the third quarter of 1997 was $50,000 more
than in the comparable period in the prior year due to the increase in income in
the current period.
The Company recorded a loss from discontinued operations in the third quarter of
1997 of $20,000, compared with income from those operations of $1,316,000 for
the third quarter of 1996.
Results For The Nine Months Ended September 30, 1997
The Company's consolidated net income from continuing operations for the nine
months ended September 30, 1997 was $1,413,000, or $.44 per share, compared with
$748,000, or $.24 per share, for the first nine months of 1996. The earnings per
share computations are based on weighted average shares outstanding of 3,217,537
in 1997 and 3,184,127 in 1996 (after adjustment to reflect the three-for-two
stock split effected in December 1996).
Consolidated revenues of $23.4 million from continuing operations for the first
nine months of 1997 were $7.7 million or 49% higher than revenues of $15.7
million for the first nine months of 1996. The increase in revenues in the first
nine months of 1997, compared to the same period in the prior year, was the
result of the inclusion of the operations of Halkey-Roberts for the full nine
month period in 1997 compared with only a four month period after its
acquisition in the second quarter of 1996. Gross profit of $8.4 million in the
first nine months of 1997 was $1.7 million or 25% higher than that in the
comparable period in 1996 primarily due to the inclusion of the operations of
Halkey-Roberts for the full current year period. The gross profit percentage in
the first nine months of 1997 of 36% was lower than the gross profit percentage
for the first nine months of 1996 of 43% due to the inclusion of the operations
of Halkey-Roberts which have a lower gross profit percentage on sales than the
Company's remaining operations and to a reduction in sales of certain higher-
margin products at another operating unit.
10
<PAGE>
The Company's selling, general and administrative expenses of $6.8 million for
the first nine months of 1997 were $1.2 million higher than in the first nine
months of 1996. This increase was primarily attributable to the inclusion in
1997 of the operating expenses related to Halkey-Roberts for the full current
year period. Operating income in the first nine months of 1997 totaled
$1,600,000 compared with $1,102,000 in 1996.
Net interest income of $396,000 in the first nine months of 1997 compares with
$110,000 of net interest expense in the first nine months of 1996. The net
interest income in 1997 reflects interest earned on the proceeds from the sale
of the Natural Gas Subsidiaries and the retirement of long-term debt. Other
income in the first nine months of 1997 of $218,000 was about the same as in
1996 and included certain one-time gains in both periods.
Income tax expense in the first nine months of 1997 was $351,000 more than in
the comparable period in the prior year due to the increase in income in the
current period.
The Company recorded income from discontinued operations in the first nine
months of 1997 of $1,921,000, or $.60 per share, compared with $4,558,000, or
$1.43 per share, for the first nine months of 1996. The Company also recorded a
gain on disposal of discontinued operations of $17,002,000 in the first nine
months of 1997.
Liquidity and Capital Resources
During the second quarter of 1997, the Company repaid all borrowings under its
$20.0 million revolving loan facility with a regional bank (the Credit
Agreement) with the proceeds from the sale of the Natural Gas Subsidiaries.
Other remaining long-term debt, including current maturities, was $906,000 at
September 30, 1997. At September 30, 1997, the Company had cash and cash
equivalents of $32.8 million compared with $.1 million at December 31, 1996. In
the third quarter of 1997, the Company renewed the Credit Agreement until April
20, 1998. The Company has a unilateral option to extend the Credit Agreement
until April 20, 1999 as long as it remains in compliance with the financial
covenants of the Credit Agreement.
The Company believes that existing cash and cash equivalents, cash flows from
operations, borrowings under the Company's Credit Agreement and other equity or
debt financing, which the Company believes would be available, will be
sufficient to fund operations and budgeted capital expenditures over the next
two years.
11
<PAGE>
It is the Company's intent to use its existing cash and cash equivalents to make
acquisitions in the medical products industry. Although existing cash and cash
equivalents are substantial, the size and number of acquisitions which can be
effected with such funds are limited, and it may be necessary for the Company to
obtain additional funds by incurring from time to time additional short-term or
long-term indebtedness or by issuing, in public or private transactions, equity
or debt securities. The availability and terms of such financing will depend on
market and other conditions. There can be no assurance that additional financing
will be available on terms acceptable to the Company. Pending an acquisition or
business combination, cash is being invested in short-term instruments
including, but not limited to, money-market accounts, bonds, and United States
Government and municipal securities.
In March 1997 the Company's Board of Directors determined that the quarterly
dividend commencing with the dividend paid on September 1, 1997 would be paid at
the rate of $.10 per share rather than at the previous rate of $.20 per share.
Forward-Looking Statements
The statements in this Management's Discussion and Analysis that are forward
looking are based upon current expectations and actual results may differ
materially. Therefore, the inclusion of such forward-looking information should
not be regarded as a representation by the Company that the objectives or plans
of the Company will be achieved. Such statements include, but are not limited
to, the Company's expectations regarding liquidity and capital resources and use
of proceeds from the sale described herein. 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 that could cause actual results to differ materially, including,
but not limited to, the effect of changing economic conditions, business
conditions and growth in the medical products industry, and accurately
forecasting capital expenditures. In addition, the Company's future results of
operations and financial conditions described in the description of the
Company's business, operations and financial condition may be adversely impacted
by various factors. Assumptions relating to budgeting, marketing, product
development and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic impact which may cause the
Company to alter its marketing, capital expenditures or other budgets, which in
turn may affect the Company's financial position and results of operations.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As a result of the sale of the Natural Gas Subsidiaries, the Company and its
subsidiaries are no longer party to any of the legal proceedings reported in the
Company's Form 10-K for the year ended December 31, 1996.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedules (Filed electronically only)
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements 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
------------------
(Registrant)
Date: November 13, 1997 /s/ Jerry A. Howard
----------------------------
Jerry A. Howard
Chairman, President
& Chief Executive Officer
Date: November 13, 1997 /s/ Jeffery Strickland
----------------------------
Jeffery Strickland
Vice President
& Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 32,836
<SECURITIES> 0
<RECEIVABLES> 3,522
<ALLOWANCES> 0
<INVENTORY> 3,999
<CURRENT-ASSETS> 40,856
<PP&E> 14,907
<DEPRECIATION> 2,164
<TOTAL-ASSETS> 66,587
<CURRENT-LIABILITIES> 5,914
<BONDS> 203
0
0
<COMMON> 342
<OTHER-SE> 53,104
<TOTAL-LIABILITY-AND-EQUITY> 66,587
<SALES> 23,375
<TOTAL-REVENUES> 23,375
<CGS> 14,978
<TOTAL-COSTS> 14,978
<OTHER-EXPENSES> 6,797
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (396)
<INCOME-PRETAX> 2,214
<INCOME-TAX> 801
<INCOME-CONTINUING> 1,413
<DISCONTINUED> 18,293
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,336
<EPS-PRIMARY> 6.32
<EPS-DILUTED> 6.32
</TABLE>
