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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, 1997
Commission File Number 0-10763
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ATRION CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 63-0821819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE ALLENTOWN PARKWAY,
ALLEN, TEXAS 75002
(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (972) 390-9800
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
TITLE OF CLASS
Common Stock, $.10 Par Value
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at February 28, 1998: $33,631,985
Number of shares of Common Stock outstanding at February 28, 1998: 3,243,645
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 ]
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 1998
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.
EXHIBIT INDEX ON PAGE 42
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ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1997
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
PART I...........................................................................1
ITEM 1. BUSINESS.................................................................1
ITEM 2. PROPERTIES..............................................................10
ITEM 3. LEGAL PROCEEDINGS.......................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................11
EXECUTIVE OFFICERS OF THE COMPANY...............................................11
PART II.........................................................................12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...12
ITEM 6. SELECTED FINANCIAL DATA.................................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................................36
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.........37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................37
PART IV.........................................................................37
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8--K...........................................................37
SIGNATURES......................................................................40
EXHIBIT INDEX...................................................................42
</TABLE>
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ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1997
PART I
ITEM 1. BUSINESS
GENERAL
Atrion Corporation ("Atrion" or the "Company") is a holding company which
through its subsidiaries designs, develops, manufactures, markets, sells and
distributes medical products and components. The Company was incorporated in
1996 and is the 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, which was formerly known as AlaTenn
Resources, Inc., was incorporated in the state of Alabama in 1982 in connection
with a reorganization of Alabama-Tennessee Natural Gas Company
("Alabama-Tennessee"), which was founded in 1944 and which began operations in
1950. The Company's operations were primarily in the natural gas pipeline and
energy services business until 1994, at which time the Company began acquiring
medical products businesses. In 1997, the Company disposed of all of its natural
gas and energy services operations, and the Company's current operations are
primarily in the medical products industry.
The Company's current operations are conducted through three medical products
subsidiaries, Atrion Medical Products, Inc. ("Atrion Medical Products") which
was acquired by the Company in April 1994, Halkey-Roberts Corporation
("Halkey-Roberts") which was acquired by the Company in May 1996, and QMI
Medical, Inc. ("QMI") which acquired the cardiovascular and intravenous fluid
division of Quest Medical, Inc. ("Quest") in January 1998. The Company also owns
AlaTenn Pipeline Company, Inc. ("AlaTenn Pipeline") which operates a gaseous
oxygen pipeline and Warrior Basin Leasing Company ("Warrior Basin") which is
engaged in leasing activities.
Atrion Medical Products is engaged in the design, development, manufacturing,
marketing, sale and distribution of medical products. Its products are used in
ophthalmic, diagnostic and cardiovascular procedures and are sold primarily to
major health care companies which market and distribute their 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. During 1996, Atrion Medical Products also began marketing its
own name-brand products. The initial 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. Marketing of LacriCATH products
through the Company's direct clinical sales specialists began in early 1996
following acquisition of the product line in late 1995. Atrion Medical Products
has recently introduced (in the first quarter of 1998) another line of
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name-brand products called CleanCut(TM), used in cardiovascular surgery, another
area of focus for the Company. This new product is a line of aortic punches 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 machining centers to
produce efficiently 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.
In May 1996, the Company expanded its medical products operations when it
purchased all of 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, pursuant to the terms of a Stock Purchase Agreement
between Atrion and Fenway Holdings, L.L.C. 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 its newly formed QMI subsidiary, acquired
the cardiovascular and intravenous fluid products division of Quest Medical (see
Note 14 of the "Notes to Consolidated Financial Statements" in Item 8). QMI
acquired several stable product lines from Quest, 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. QMI also
purchased the Quest 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 is designed to integrate 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. Quest received 510(k) market
clearance for the MPS from the FDA in March 1996, and shortly thereafter began
clinical validation of the system, which was completed during July 1996.
Commercial shipment of the MPS in the U.S. began during September 1996.
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AlaTenn Pipeline owns and operates a 22-mile high-pressure steel pipeline in
north Alabama which transports gaseous oxygen in north Alabama. Construction of
this pipeline was completed, and the pipeline became operational, during the
second quarter of 1996. AlaTenn Pipeline is a party to a fifteen-year contract
with an industrial gas producer to transport gaseous oxygen through that
pipeline to two of its customers.
DISCONTINUED OPERATIONS
The Company's natural gas pipeline and energy services subsidiaries were sold in
1997 and are treated as discontinued operations. These subsidiaries included
Alabama-Tennessee, Tennessee River Intrastate Gas Company, Inc. ("TRIGAS") and
AlaTenn Energy Marketing Company, Inc. ("ATEMCO"). Alabama-Tennessee was an
interstate natural gas pipeline company engaged in the transportation of natural
gas in the lower Tennessee Valley. Its main pipeline extended from Selmer,
Tennessee approximately 130 miles across northern Mississippi and Alabama to
Huntsville, Alabama. This system included approximately 288 miles of pipeline
and two compressor stations. TRIGAS operated a 38-mile, 10-inch intrastate
pipeline that extended from Barton, Alabama to Courtland, Alabama and a
one-mile, 8-inch intrastate pipeline in Morgan County, Alabama. ATEMCO was a
natural gas marketing company which bought natural gas, primarily on the spot
market, and sold that natural gas to customers on various interstate and
intrastate pipeline systems.
Alabama-Tennessee, TRIGAS and ATEMCO contributed materially to the Company's
revenues and net income prior to their disposition. As discussed herein, the
Company sold all of the stock of Alabama-Tennessee, TRIGAS and ATEMCO to
Midcoast Energy Resources, Inc. in May 1997. See Item 7: "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 2 of the "Notes to Consolidated Financial Statements" in Item 8.
MARKETING AND MAJOR CUSTOMERS
The Company has historically used sales managers to market products to other
manufacturers for use in their consumer products. With the introduction of the
LacriCATH product, the Company began utilizing direct clinical sales specialists
and commissioned sales agents for the marketing of LacriCATH products. The
Company is currently planning to market the MPS and related disposables through
a direct sales force operating on a sales team approach as well as through
specialty distributors. Most of the other products acquired from Quest are being
marketed through direct contact with hospitals, telemarketing, independent sales
representatives, marketing arrangements with certain distributors and, to a
lesser extent, through direct mail. In addition, the Company routinely attends
and participates in trade shows throughout the United States and
internationally.
During 1997, the Company's largest customer, CIBA Vision, which accounted for
16.3 percent of the Company's revenues, was the only customer accounting for
more than 10 percent of revenues from continuing operations. The loss of this
customer would have a material impact on the Company's operations.
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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 believes
that workers with these skills are readily available in the areas where the
Company's plants are located.
Atrion Medical Products, Halkey-Roberts and QMI 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 1997, more than 19
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 1998 for further
development of the MPS.
The Company's consolidated research and development expenditures for the years
ended December 31, 1997, 1996 and 1995 were $1,147,000, $1,003,000 and $928,000,
respectively.
AVAILABILITY OF SUPPLIES AND RAW MATERIALS
The Company subcontracts with various suppliers to provide it with the quantity
of component parts necessary to assemble its products. Almost all of these
components are available from a number of different suppliers, although certain
components are purchased from single sources, who 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
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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 Company currently has 78 active patents and 6 patents pending on products
that are being sold or are in development. The Company receives royalty payments
on three patents which are licensed to outside parties. The Company has licensed
the rights to two patents relating to the LacriCATH product line and for one
patent relating to Multiport(R) from outside parties. 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 obsolete. With
the possible exception of the patent relating to the specialized tubing sets
manufactured for the University of Texas System Cancer Center (M.D. Anderson
Hospital), 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 an agreement with each key employee prohibiting such
employee from disclosing any confidential information or trade secrets of the
Company and prohibiting that employee from engaging in any competitive business
while the employee is working for the Company and for a period of one to two
years thereafter. In addition, these agreements also provide that any inventions
or discoveries relating to the business of the Company by these individuals will
be assigned to the Company and become the Company's sole property.
Claims by competitors and other third parties that the Company's products
allegedly infringe the patent rights of others could have a material adverse
effect on the Company. The medical device industry is characterized by frequent
and substantial intellectual property litigation. Certain of the Company's
markets are maturing and, as such, are characterized by extensive patent and
other intellectual property claims, which can create greater potential than in
less developed markets for possible allegations of infringement, particularly
with respect to newly developed technology. Intellectual property litigation is
complex and expensive and the outcome of this litigation is difficult to
predict. Any future litigation, regardless of outcome, could result in
substantial expense to the Company and significant diversion of the efforts of
the Company's technical and management personnel. An adverse determination in
any such proceeding could subject the Company to significant liabilities to
third parties, or require the
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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, since Atrion Medical Products' 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.
To the extent that each Atrion Medical Products product is sold to a single
customer, Atrion Medical Products is dependent on the ability of that customer
to sell its products, of which Atrion Medical Products' products are a
component. Therefore, Atrion Medical Products seeks to choose highly successful
companies with which to do business. This risk is somewhat minimized by Atrion
Medical Products' ability to obtain long-term, exclusive manufacturing rights
while its customers have long-term marketing rights. Name-brand products, such
as the LacriCATH line recently introduced, are marketed to a much larger base of
customers and are not dependent on a single customer.
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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 where it sells check valves and medical clamps, Halkey-Roberts is a
leading competitor in both areas and shares these markets with only one other
major competitor in each area. 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 competitors exist for QMI's 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 the Company. Many of these
competitors offer broader product lines within the specific product market and
in the general field of medical devices and supplies. Broad product lines give
many of the Company's competitors the ability to negotiate exclusive, long-term
medical device supply contracts and, consequently, the ability to offer
comprehensive pricing of their competing products. By offering a broader product
line in the general field of medical devices and supplies, competitors may also
have a significant advantage in marketing competing products to group purchasing
organizations, HMOs and other managed care organizations that are increasingly
seeking to reduce costs through centralization of purchasing functions. In
addition, the Company's competitors may use price reductions to preserve market
share in their product markets.
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.
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 QMI's
facilities are registered with the FDA.
The FDA has traditionally pursued a rigorous enforcement program to ensure that
regulated entities comply with the FDC Act and Regulations. A company not in
compliance may face a variety of regulatory actions, including warning letters,
product detentions, device alerts, mandatory recalls or field corrections,
product seizures, 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
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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
Many of the Company's products are purchased by hospitals and other users, which
then bill various third party payors for the services provided to patients.
These payors, which include Medicare, Medicaid, private insurance companies and
managed care organizations, reimburse part or all of the costs and fees
associated with the procedures performed with these devices.
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 have incentives to use less costly methods in
treating Medicare and Medicaid patients, and will frequently make capital
expenditures to take advantage of less costly treatment technologies.
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
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may in the future be reduced in the event of further changes in the
resource-based relative value scale method of payment calculation, physicians
may seek greater cost efficiency in treatment to minimize any negative impact of
reduced reimbursement. Any amendments to existing reimbursement rules and
regulations which restrict or terminate the reimbursement eligibility (or the
extent or amount of coverage) of medical procedures using the Company's products
or the eligibility (or the extent or amount of coverage) of the Company's
products could have an adverse impact on the Company's business, financial
condition and results of operations. 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.
There can be no assurance that in the future third-party payors will continue to
reimburse for the Company's products, or that their reimbursement levels will
not adversely affect the profitability of the Company's products. In addition,
the cost of health care has risen significantly over the past decade, and there
have been and may continue to be proposals by legislators and regulators to curb
these costs. Legislative action limiting reimbursement for certain procedures
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In response to the focus of national attention on rising health care costs, a
number of changes to reduce costs have been proposed or have begun to emerge.
There have been, and may continue to be, proposals by legislators and regulators
and third party payors to curb these costs. There has also been a significant
increase in the number of Americans enrolling in some form of managed care plan.
Higher managed care penetration typically drives down the prices of health care
procedures, which in turn places pressure on medical supply prices. This causes
hospitals to implement tighter vendor selection and certification processes, by
reducing the number of vendors used, purchasing more products from fewer vendors
and trading discounts on price for guaranteed higher volumes to vendors.
Hospitals have also sought to control and reduce costs over the last decade by
joining group purchasing organizations or purchasing alliances. The Company
cannot presently determine what continuing or future impact existing or proposed
legislation, regulation or such third party payor measures may have on its
future business, financial condition or results of operations; however, changes
in reimbursement policies and practices of third-party payors could have a
material adverse impact on sales of certain of the Company's products.
ADVISORY BOARD
The Company has established a Board of Clinical Advisors (the "Advisory Board").
The Advisory Board is comprised of individuals with substantial expertise in the
field of myocardial protection who have played instrumental roles 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 consult closely with the Advisory Board 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
the Advisory Board 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.
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<PAGE> 12
Certain members of the Advisory Board 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 members of the Advisory
Board may also serve as consultants to other medical device companies. No
members of the Advisory Board are expected to devote more than a small portion
of their time to the Company.
PEOPLE
At February 28, 1998, the Company had 386 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. Atrion Medical
Products owns three office buildings in Arab, Alabama. Atrion Medical Products
also owns 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' manufacturing facilities are located on a 67-acre site
in Arab, Alabama. In addition to three office buildings which house
administrative, engineering and design operations, the manufacturing facility,
situated on the same location, 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.
The Company has a one-year lease on Quest's facility in Allen, Texas, along with
an option, exercisable prior to the end of October 1998, to buy the facility for
$6.5 million. During the lease term, the facility is being used by the Company
as its headquarters office and by QMI and Quest. The facility covers
approximately 107,000 square feet and was constructed on a 19.2 acre tract.
The Company also currently leases approximately 4,600 square feet of office and
manufacturing space in Orange County, California on a month-to-month basis. The
Company plans to continue manufacturing certain cardiovascular surgery products
at this facility for the foreseeable future.
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, 1998.
-10-
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Jerry A. Howard 55 President and Chief Executive Officer of the
Company and Chairman of the Board or
President of all subsidiaries
Jeffery Strickland 39 Vice President and Chief Financial Officer,
and Secretary and Treasurer of the Company
and Vice President or Secretary-Treasurer of
all subsidiaries
Richard Rabenau 56 President and Secretary of Atrion Medical
Products, Inc.
Charles Gamble 57 President of Halkey-Roberts Corporation
</TABLE>
The persons who are identified as executive officers of the Company currently
serve as officers of the Company, Atrion Medical Products or Halkey-Roberts or
of both the Company and certain subsidiaries. The officers of the Company and
its subsidiaries are elected annually by the respective Boards of Directors of
the Company and its subsidiaries at the first meeting of such Boards of
Directors held after the annual meetings of stockholders of such entities.
Accordingly, the terms of office of the current officers of the Company and its
subsidiaries will expire at the time such meetings of the Board of Directors of
the Company and its subsidiaries are held, which is anticipated to be in May
1998.
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. Howard has served as President and Chief Executive Officer of the Company
and Chairman of the Board and President of all other subsidiaries, except for
AlaTenn Energy Marketing Company, Inc., Atrion Medical Products, Halkey-Roberts
and QMI for more than five years. Mr. Howard also served as Chairman of the
Board of the Company from January 1991 until January 1998. Mr. Howard has also
served as Chairman of the Board of Atrion Medical Products since April 1994 and
of Halkey-Roberts since May 1996. He has served as President of QMI since
December 1997. Mr. Howard served as Chairman of the Board for AlaTenn Energy
Marketing Company, Inc. from August 1986 until May 1997. Mr. Howard served as
-11-
<PAGE> 14
Chairman of the Board, President and Chief Executive Officer of
Alabama-Tennessee from May 1985 until May 1997.
Mr. Strickland has served as Vice President and Chief Financial Officer and
Secretary-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 QMI 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 from May 1992 until February 1997 and as Vice President and
Chief Financial Officer and Secretary-Treasurer of Alabama-Tennessee from
February 1997 until May 1997.
Mr. Rabenau has served as President and Secretary of Atrion Medical Products
since April 1994. From April 1990 until April 1994, Mr. Rabenau served as
President of the predecessor company, Ryder International Corporation, prior to
the purchase of its assets by the Company.
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 Stock Market (Symbol ATRI).
As of March 23, 1998, there were approximately 2,600 stockholders in the
Company, including beneficial owners holding shares in nominee or street name.
The high and low closing prices as reported by Nasdaq for each quarter of 1997
and 1996 are shown below along with the quarterly cash dividends paid per share.
<TABLE>
<CAPTION>
1997
Quarter Ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High 16.50 16.25 16.63 15.31
Low 11.00 11.63 13.25 13.00
Dividends per Share .20 .20 .10 .10
- -----------------------------------------------------------------------------------
<CAPTION>
1996
Quarter Ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High 14.67 17.00 17.50 20.50
Low 13.50 13.33 14.83 15.50
Dividends per Share .20 .20 .20 .20
- -----------------------------------------------------------------------------------
</TABLE>
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."
-12-
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 30,277 $ 22,121 $ 11,719 $ 6,876 --(a)
(Loss) income from continuing
operations (2,045)(b) 853 986 (142) --(a)
Net income 17,170 (b) 6,476 5,340 4,690 7,332
Total assets 60,942 45,433 34,317 32,183 25,288
Long-term debt (including current
maturities) 656 7,016 1,812 2,885 --
(Loss) income from continuing
operations, per basic share (0.63) 0.27 .31 (.04) --(a)
Net income per basic share 5.33 2.03 1.68 1.48 2.32
Dividends per share .60 .80 .80 .80 .80
Average basic shares outstanding 3,224 3,189 3,175 3,170 3,162
Book value per share 15.42 10.71 9.43 8.54 7.85
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) In 1993, the Company had no material operations other than the natural gas
operations which were discontinued in 1997.
(b) 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, QMI Medical, all of which are wholly-owned subsidiaries of the
Company. Atrion Medical Products and QMI 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 Company's operations have changed significantly over the past five years.
Prior to the sale of its natural gas operations in 1997 (see Discontinued
Operations below), the Company's primary operations were in the natural gas
pipeline and energy services business. The change in the nature of the Company's
operations began in 1994 when the Company acquired Atrion Medical Products. With
the completion of its fourth medical products business acquisition in early 1998
from Quest Medical, during this five-year period the Company has transitioned
from operating exclusively in the natural gas business to becoming a medical
products business with
-13-
<PAGE> 16
annual revenues which are anticipated to exceed $44 million in 1998, based on
the Company's 1997 revenues and the 1997 revenues of the business purchased from
Quest.
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 $17.3 million in 1997 based upon the
sale of the natural gas operations as described above.
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. These operations represented 84 percent and 85 percent of the
Company's total revenues and contributed approximately 87 percent and 82 percent
of the Company's net income in 1996 and 1995, respectively. The after-tax income
from discontinued operations, excluding the gain on disposal mentioned above,
totaled $1.9 million or $.60 per basic share in 1997 compared with $5.6 million
or $1.76 per basic share in 1996 and with $4.4 million or $1.37 per basic share
in 1995. The 1997 amounts reflect the operation of the major portion of these
discontinued operations for only the first five months in 1997. The decision to
sell these natural gas operations was based on a number of factors, including
the prospects for the Company's natural gas operations and the flexibility that
the sale would provide to the Company to grow its medical products business with
a view toward the improvement of the long-term profitability of the Company.
RESULTS OF OPERATIONS
The Company's 1997 net loss from continuing operations was $2.0 million or $.63
per basic share. This net 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 share after taxes (see Note 3 in Notes to Consolidated
Financial Statements). The net 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 share after taxes. Net 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
share compared with net income of $.9 million or $.27 per basic share in 1996
and with $1.0 million or $.31 per basic share in 1995. Net income, including
discontinued operations, for 1997 totaled $17.2 million or $5.33 per basic share
compared with $6.5 million or $2.03 per basic share in 1996 and with $5.3
million or $1.68 per basic share in 1995.
-14-
<PAGE> 17
Operating revenues were $30.3 million in 1997 compared with $22.1 million in
1996 and $11.7 million in 1995. The $8.2 million increase in revenues in 1997
above the 1996 level was attributable primarily to the inclusion of
Halkey-Roberts sales for a full year as compared to seven months in 1996. The
$10.4 million increase in revenues in 1996 above the 1995 level of $11.7 million
was also mostly attributable to the inclusion of revenues from Halkey-Roberts,
acquired by the Company in May 1996. This acquisition was recorded using the
purchase method of accounting. Accordingly, only results from operations
subsequent to the acquisition date are reflected in the Company's financial
statements, and results for prior periods are not included. The Company expects
its revenues from continuing operations to increase materially in 1998 in
comparison to those reported for 1997 due to the inclusion of 11 months of
revenues in 1998 from QMI.
The Company's cost of sales was $20.8 million in 1997 compared with $13.0
million in 1996 and $5.6 million in 1995. The increase in cost of sales for 1997
and 1996 was primarily attributable to the acquisition of Halkey-Roberts 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. The
Company believes its cost of sales will increase materially in 1998 as compared
with 1997 cost of sales as a result of the inclusion of 11 months of QMI's cost
of sales in 1998.
Gross profits were $9.5 million in 1997 compared with $9.1 million in 1996 and
$6.2 million in 1995. The increase in gross profit in 1997, as compared with
1996, was the result of the impact of a full year of operation by Halkey-Roberts
offset partially by the one-time adjustment due to the product replacement
charge of $.8 million. Also contributing to this increase in gross profit was
$.9 million in annual service revenues from the Company's gaseous oxygen
pipeline versus $.7 million for the nine months in 1996 after it was completed
and placed in service in April 1996. Gross profits were 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
as anticipated and reported by the Company approximately one year ago. Gross
profit increased by $2.9 million in 1996 compared with 1995 due to the
contribution of Halkey-Roberts in 1996 after its acquisition in May and the
contribution from AlaTenn Pipeline which began operations in April 1996.
The Company's gross profit in 1997 was 31 percent of sales, which was
significantly lower than the gross profit percentages of 41 percent and 52
percent in 1996 and 1995, respectively. This decline is partially attributable
to the product replacement program charge in 1997. The decrease also reflects
the inclusion of the sales from Halkey-Roberts which generated a gross profit
percentage in 1997 and 1996 of approximately 26 percent each year, excluding the
product replacement charge, which was significantly below Atrion Medical
Products' historic gross profit percentage. Another factor contributing to the
decline in gross profit percentage was a shift in sales from certain
higher-margin products to lower-margin products in 1997.
Operating expenses were $13.9 million in 1997 compared with $7.9 million in 1996
and $4.7 million in 1995. This increase of $6.0 million between 1997 and 1996
was the result of the unfavorable adjustment for an impairment loss of $4.8
million as discussed above, along with higher operating costs due to the
inclusion of a full year of Halkey-Roberts' expenses in 1997 and higher selling
expenses related to the product replacement program, partially offset by
-15-
<PAGE> 18
lower operating expenses at Atrion Medical Products. The increase in operating
expenses of $3.2 million between 1996 and 1995 was due primarily to the
acquisition of Halkey-Roberts by the Company in May 1996 as well as a full year
of selling, general and administrative expenses related to the LacriCATH product
line, which Atrion Medical Products began marketing in early 1996. The Company
expects its operating expenses to increase materially in 1998 as compared with
1997 operating expenses as a result of the inclusion of 11 months of QMI's
operating expenses in 1998.
The Company's operating loss for 1997 was $4.4 million, including the charges
for the impairment loss and the product replacement program. Excluding these
charges, the Company had operating income in 1997 of $1.5 million compared with
$1.2 million and $1.4 million in 1996 and 1995, respectively. The $.3 million
increase between 1997 and 1996 was primarily the result of a full year's
contribution from Halkey-Roberts' operations in 1997. The decrease of $.2
million between 1996 and 1995 was attributable to the startup costs for the
LacriCATH product line and other higher operating expenses partially offset by
operating income from Halkey-Roberts following its acquisition in May 1996 and
the impact of the inclusion of the gaseous oxygen pipeline for nine months in
1996.
Net interest income amounted to $818,000 in 1997 compared with net interest
expense in 1996 of $159,000. The increase in net interest income in 1997 was
primarily attributable to investment income earned on the investment of the
funds received from the sale of the natural gas businesses of the Company in May
1997, as described above. The cash received from the 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 decrease in net interest income of approximately $.2 million in
1996 compared with 1995 was the result of the use of cash in the acquisition of
Halkey-Roberts.
Income tax benefits in 1997 totaled $1.3 million, including $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 compared
with $.5 million in 1996 and $.5 million in 1995. Differences between years
reflect changes in pretax income between the respective years.
The Company is currently assessing the impact of the inclusion of 11 months of
QMI's operations in 1998 on the Company's gross profit and net income and is
presently unable to determine how the Company's gross profit and net income for
1998 will be affected by QMI's operations.
LIQUIDITY AND CAPITAL RESOURCES
In January 1995, the Company entered into a $20 million revolving loan agreement
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 agreement at December 31, 1997. Indebtedness under this facility
totaled $5.4 million at December 31, 1996. There was no indebtedness under this
facility at December 31, 1995. The term of the $20 million revolving loan
facility has been extended until April 19, 1999.
-16-
<PAGE> 19
As of December 31, 1997, the Company had cash and cash equivalents of $32.2
million compared with $0.2 million at December 31, 1996 and $2.8 million at the
end of 1995. The Company had long-term debt of $0.7 million as of December 31,
1997 compared with $7.0 million as of December 31, 1996. The increase in cash
and cash equivalents as of December 31, 1997 was due to the proceeds from the
sale of the natural gas operations during 1997. The proceeds from these sales
were used to pay off all long-term debt except for $0.7 million relating to
outstanding borrowings on a note and on the industrial revenue bonds (see Note
4).
Cash provided by continuing operations increased to $3.0 million in 1997
compared with $1.9 million and $2.4 million in 1996 and 1995, respectively.
Capital expenditures for property, plant and equipment for continuing operations
totaled $1.7 million in 1997 compared with $2.3 million in 1996. Of the 1996
amount, $1.2 million was attributable to the completion of the Company's 22-mile
gaseous oxygen pipeline. In 1995, capital expenditures for continuing operations
totaled $2.6 million, the majority of which was attributable to the construction
of the gaseous oxygen pipeline. The most significant uses of cash flow in 1997
were the retirement of long-term debt of $6.3 million, capital expenditures of
$1.7 million and the payment of $1.9 million in dividends on common stock.
The acquisition of certain assets of Quest in January 1998 (see Note 14) used
approximately $23.6 million of the Company's existing cash balance. The Company
believes that its remaining cash and cash equivalents, cash flows from
operations, borrowings available under the Company's revolving loan agreement
and other equity or debt financing, which the Company believes would be
available, will be sufficient to fund operations, potential projects and
budgeted capital expenditures over the next two years.
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 February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 129, "Disclosure of Information About Capital Structure." SFAS No. 129
requires companies to disclose descriptive information about an entity's capital
structure. It also requires disclosure of information about the liquidation
preference of preferred stock and redeemable stock. SFAS No. 129 is effective
for the Company's fiscal year ending December 31, 1998. The Company does not
expect that SFAS No. 129 will require significant revision of prior disclosures.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is designed to improve the reporting of changes in equity
from period to period. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. The Company will adopt
-17-
<PAGE> 20
SFAS No. 130 for its fiscal year ending December 31, 1998. Management does not
expect SFAS No. 130 to have a significant impact on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 requires that an enterprise
disclose certain information about operating segments. SFAS No. 131 is effective
for financial statements for the Company's fiscal year ending December 31, 1998.
The Company does not expect that SFAS No. 131 will require significant revision
of prior disclosures.
YEAR 2000 INITIATIVE
The Company has determined that it will need to modify or replace portions of
its software so that its computer systems will function properly with respect to
dates in the year 2000 and beyond. The Company also has initiated discussions
with its significant suppliers and financial institutions to ensure that those
parties have appropriate plans to remediate Year 2000 issues where their systems
interface with the Company's systems or otherwise impact its operations. The
Company is assessing the extent to which its operations are vulnerable should
those organizations fail to properly remediate their computer systems.
The Company's comprehensive Year 2000 initiative is being managed by a team of
internal staff. The team's activities are designed to ensure that there is no
adverse effect on the Company's core business operations and that transactions
with customers, suppliers and financial institutions are fully supported. While
the Company believes its planning efforts are adequate to address its Year 2000
concerns, there can be no guarantee that the systems of other companies on which
the Company's systems and operations rely will be converted on a timely basis
and will not have a material effect on the Company. The cost of Year 2000
initiatives is not expected to be material to the Company's results of
operations or financial position.
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
growth prospects in the medical products industry, opportunities to achieve
manufacturing and marketing synergies, future revenues, future cost of sales,
future expenses, capital liquidity position, 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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<PAGE> 21
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 (formerly AlaTenn Resources, Inc.) and subsidiaries as of December
31, 1997 and 1996 and the related consolidated statements of income and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 20, 1998
-19-
<PAGE> 22
CONSOLIDATED STATEMENTS OF INCOME
(FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
REVENUES $ 30,277 $ 22,121 $ 11,719
COST OF GOODS SOLD 20,755 13,033 5,567
- ---------------------------------------------------------------------------------------------
GROSS PROFIT 9,522 9,088 6,152
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling 2,413 1,799 661
General and Administrative 5,552 5,062 3,126
Research and Development 1,147 1,003 928
Impairment Loss (Note 3) 4,797 0 0
- ---------------------------------------------------------------------------------------------
13,909 7,864 4,715
- ---------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (4,387) 1,224 1,437
INTEREST INCOME (EXPENSE), NET 818 (159) 29
OTHER INCOME, NET 241 262 67
- ---------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (3,328) 1,327 1,533
INCOME TAX BENEFIT (PROVISION) (NOTE 5) 1,283 (474) (547)
- ---------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (2,045) 853 986
INCOME FROM DISCONTINUED OPERATIONS,
NET OF TAX (NOTE 2) 1,923 5,623 4,354
GAIN ON DISPOSAL OF DISCONTINUED
OPERATIONS, NET OF TAX (NOTE 2) 17,292 0 0
- ---------------------------------------------------------------------------------------------
NET INCOME $ 17,170 $ 6,476 $ 5,340
=============================================================================================
(LOSS) EARNINGS PER BASIC SHARE:
Continuing Operations $ (0.63) $ 0.27 $ 0.31
Discontinued Operations 0.60 1.76 1.37
Gain on Disposal of Discontinued Operations 5.36 0.00 0.00
- ---------------------------------------------------------------------------------------------
NET INCOME PER BASIC SHARE $ 5.33 $ 2.03 $ 1.68
=============================================================================================
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING 3,224 3,189 3,175
=============================================================================================
(LOSS) EARNINGS PER DILUTED SHARE:
Continuing Operations $ (0.63) $ 0.26 $ 0.30
Discontinued Operations 0.60 1.73 1.34
Gain on Disposal of Discontinued
Operations 5.36 0.00 0.00
- ---------------------------------------------------------------------------------------------
NET INCOME PER DILUTED SHARE $ 5.33 $ 1.99 $ 1.64
=============================================================================================
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 3,224 3,253 3,244
=============================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-20-
<PAGE> 23
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
ASSETS: 1997 1996
- --------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $32,172 $ 144
Accounts receivables, net 2,897 3,658
Inventories (Note 1) 3,960 3,712
Prepaid expenses 337 486
- --------------------------------------------------------------------------------------------
39,366 8,000
- --------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Original cost (Note 1) 15,617 13,932
Less accumulated depreciation and amortization 2,475 1,252
- --------------------------------------------------------------------------------------------
13,142 12,680
- --------------------------------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES:
Patents, net of accumulated amortization of $5,342 and $1,184 in
1997 and 1996, respectively (Notes 1 and 3) 908 5,066
Goodwill, net of accumulated amortization of $1,733 and $392 in
1997 and 1996, respectively (Notes 1 and 3) 4,862 6,198
Other 2,664 795
- --------------------------------------------------------------------------------------------
8,434 12,059
- --------------------------------------------------------------------------------------------
NET ASSETS - DISCONTINUED OPERATIONS (NOTE 2) 0 12,694
- --------------------------------------------------------------------------------------------
============================================================================================
$60,942 $45,433
============================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
-22-
<PAGE> 24
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY: 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 4) $ 453 $ 703
Accounts payable and accrued liabilities 5,042 2,922
Accrued income and other taxes 278 22
- ---------------------------------------------------------------------------------------------------------------------------------
5,773 3,647
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 4) 203 6,313
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS:
Accumulated deferred income taxes (Note 5) 3,948 801
Other 1,032 253
- ---------------------------------------------------------------------------------------------------------------------------------
4,980 1,054
- ---------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.10 per share, authorized 10,000,000 shares,
issued 3,419,953 shares in 1997 and 1996 (Note 1) 342 342
Paid-in capital 6,395 6,205
Retained earnings (Note 9) 44,681 29,451
Treasury shares, 177,949 shares in 1997 and 205,299 shares in 1996, at cost (Note 6) (1,432) (1,579)
- ---------------------------------------------------------------------------------------------------------------------------------
49,986 34,419
- ---------------------------------------------------------------------------------------------------------------------------------
=================================================================================================================================
$60,942 $45,433
=================================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
-22-
<PAGE> 25
CONSOLIDATED STATEMENTS OF CASH FLOWS (For the years ended December 31, 1997,
1996 and 1995)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,170 $ 6,476 $ 5,340
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations (1,923) (5,623) (4,354)
Gain on disposal of discontinued operations (Note 2) (17,292) 0 0
Depreciation and amortization 1,948 1,490 1,391
Deferred income taxes (1,928) 670 80
Impairment loss (Note 3) 4,797 0 0
Other (548) (136) (479)
- ----------------------------------------------------------------------------------------------------------------
2,224 2,877 1,978
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable 761 (277) 192
(Increase) in other current assets (34) (120) (129)
Increase (decrease) in accounts payable (205) (357) 413
Increase (decrease) in other current liabilities 280 (248) (67)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 3,026 1,875 2,387
Net cash provided by discontinued operations (Note 2) 310 6,603 6,617
- ----------------------------------------------------------------------------------------------------------------
3,336 8,478 9,004
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary companies (Note 2) 0 (11,650) 0
Proceeds from disposal of discontinued operations 38,448 0 0
Property, plant and equipment additions (1,695) (2,263) (2,570)
Discontinued operations property, plant and equipment additions (78) (257) (510)
- ----------------------------------------------------------------------------------------------------------------
36,675 (14,170) (3,080)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in long-term indebtedness (6,341) 5,167 (1,073)
Issuance of treasury stock 424 408 60
Purchase of treasury stock (126) 0 0
Cash dividends paid (1,940) (2,550) (2,540)
- ----------------------------------------------------------------------------------------------------------------
(7,983) 3,025 (3,553)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,028 (2,667) 2,371
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 144 2,811 440
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 32,172 $ 144 $ 2,811
================================================================================================================
CASH PAID FOR:
Interest (net of capitalized amounts) $ 285 $ 425 $ 207
Income taxes (net of refunds) 2,938 3,506 2,931
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-23-
<PAGE> 26
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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, 1997 the principal subsidiaries of the
Company were 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):
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------------------------------------------
<S> <C> <C>
Raw materials $ 2,962 $ 2,715
Finished goods 863 949
Work in process 299 178
Reserve for obsolescence (164) (130)
------------------------------------------------------------
Net inventory $ 3,960 $ 3,712
------------------------------------------------------------
</TABLE>
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, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------------------------------------------
<S> <C> <C>
Land $ 413 $ 413
Buildings 3,040 2,962
Facilities and equipment 12,164 10,557
-------------------------------------------------------------
Total property, plant and equipment $15,617 $13,932
-------------------------------------------------------------
</TABLE>
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
-24-
<PAGE> 27
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
lives of the individual patents. Carrying values of patents and goodwill
are periodically 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
The Company recognizes revenues from sales when products are shipped to
customers. 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
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.
-25-
<PAGE> 28
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, $5,623,000 and $4,354,000 for the years ended
December 31, 1997, 1996 and 1995, respectively, net of income tax expense
of $1,099,000, $3,203,000 and $2,484,000, respectively. The consolidated
financial statements also reflect a gain on disposal of discontinued
operations of $17,292,000, net of income tax expense of $7,340,000 in 1997
based upon the sale of the natural gas operations as described above.
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, 1997 and 1996 was $332,000
and $200,000, respectively. Future minimum rental commitments under this
lease are $319,000, $328,000, $337,000, $347,000 and $137,000,
respectively, over each of the next five years.
-26-
<PAGE> 29
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
Twelve Months Ended
December 31, 1996
(In thousands)
-----------------------------------------------------------------------
<S> <C>
Operating revenues $28,184
Income from continuing operations 1,094
Net income 6,718
Net income per basic share 2.10
-----------------------------------------------------------------------
</TABLE>
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 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.
-27-
<PAGE> 30
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt as of December 31 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------
<S> <C> <C>
Revolving credit agreement $ 0 $5,388
Industrial revenue bonds 406 628
Notes payable 250 1,000
-------------------------------------------------------
656 7,016
Less amounts due in one year 453 703
-------------------------------------------------------
$203 $6,313
-------------------------------------------------------
</TABLE>
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 April
19, 1999. 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, 1997, the Company was in compliance with all covenants. At
December 31, 1997, 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 the business. The note is due in four
quarterly installments beginning July 1, 1997, with interest to be paid
quarterly at 6 percent on the unpaid balance. The last payment on this
note is due April 1, 1998.
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
1998 1999
(In thousands)
---------------------------------
<S> <C>
$453 $203
---------------------------------
</TABLE>
On December 31, 1997, 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.
-28-
<PAGE> 31
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) INCOME TAXES
The items comprising income tax (benefit) expense for continuing
operations are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Current -- Federal $ (42) $(49) $469
-- State 2 (25) 16
- ---------------------------------------------------------------------
(40) (74) 485
Deferred -- Federal (1,134) 504 34
-- State (109) 44 28
- ---------------------------------------------------------------------
(1,243) 548 62
- ---------------------------------------------------------------------
Total income tax (benefit) expense $(1,283) $474 $547
- ---------------------------------------------------------------------
</TABLE>
Temporary differences and carryforwards which gave rise to a significant portion
of deferred tax assets and liabilities as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 996
(In thousands)
--------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Benefit plans $ 495 $ 175
Other, net 2,479 286
--------------------------------------------------------------------
Subtotal 2,974 461
Valuation allowance -- --
--------------------------------------------------------------------
Total deferred tax assets $2,974 $ 461
--------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and basis differences $1,322 $ 859
Pensions 489 --
Other, net 5,111 403
--------------------------------------------------------------------
Total deferred tax liabilities $6,922 $1,262
--------------------------------------------------------------------
</TABLE>
-29-
<PAGE> 32
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total income tax (benefit) expense 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:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax (benefit) expense at the statutory
federal income tax rate $(1,132) $451 $521
Increase (decrease) resulting from:
State income taxes (106) 19 44
Tax exempt interest (38) -- --
Other, net (7) 4 (18)
- ---------------------------------------------------------------------------------------
Total income tax (benefit) expense $(1,283) $474 $547
- ---------------------------------------------------------------------------------------
</TABLE>
(6) COMMON STOCK
The Company utilized 37,050 and 36,075 treasury shares in 1997 and 1996,
respectively, to make distributions under 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). On May 4, 1995, the Board of
Directors of the Company authorized a program under which the Company may
repurchase up to 100,000 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 1997, the Company repurchased 9,700 shares of
its common stock under the Stock Repurchase Program. On November 7, 1996,
the Board of Directors of the Company approved a three-for-two stock split
that was effected in the form of a stock dividend of one share for every
two common shares outstanding. Cash was paid in lieu of fractional shares.
The split increased the number of shares of common stock issued to 3.4
million. At December 31, 1997, there were 177,949 shares of common stock
being held in treasury and the cost of the shares is shown as a reduction
in stockholders' equity in the consolidated balance sheets. Per share
information has been restated to reflect the split for all periods
presented.
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.
-30-
<PAGE> 33
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
128 for its fiscal year ended December 31, 1997. The following is a
reconciliation of the weighted average shares outstanding used in
calculating basic and diluted earnings (loss) per share as presented in
the consolidated statements of income:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average basic shares outstanding 3,244 3,189 3,175
Add: Effect of dilutive securities
(options and warrants) -- 64 69
- -----------------------------------------------------------------------------------
Weighted average diluted shares outstanding 3,224 3,253 3,244
- -----------------------------------------------------------------------------------
</TABLE>
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 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.
The aggregate number of shares of common stock reserved for grants under
the 1997 Stock Incentive Plan is the sum of 300,000 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 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.
-31-
<PAGE> 34
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Option transactions, adjusted for the three-for-two stock split, for the years
1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
Shares Price Per Share
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at December 31, 1994 167,025 $ 6.75 -- 16.08
Granted in 1995 66,150 $12.00
Expired in 1995 (2,250) $15.17
Exercised in 1995 (2,700) $ 6.75 -- 11.67
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, options for 99,200 of the above-listed shares
were exercisable and there remained 243,575 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 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.7% 6.8% 6.7%
Dividend yield 0.0% 5.4% 5.3%
Volatility factor 25% 29% 18%
Weighted average expected life 7 YEARS 10 years 10 years
- --------------------------------------------------------------------
</TABLE>
-32-
<PAGE> 35
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:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $17,170 $6,476 $5,340
Net income - pro forma $17,020 $6,461 $5,326
Earnings per basic share - as reported $ 5.33 $ 2.03 $ 1.68
Earnings per basic share - pro forma $ 5.28 $ 2.03 $ 1.68
Weighted average fair value of options
granted during the year $ 6.10 $ 3.50 $ 3.40
-----------------------------------------------------------------------------
</TABLE>
(9) RETAINED EARNINGS
The following is a recap of changes in consolidated retained earnings for
the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
---------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $29,451 $25,525 $22,725
Add: Net income for the year 17,170 6,476 5,340
Deduct: Cash dividends, $0.60 per share in
1997, $0.80 in 1996 and 1995 (1,940) (2,550) (2,540)
---------------------------------------------------------------------------
Balance, end of year $44,681 $29,451 $25,525
---------------------------------------------------------------------------
</TABLE>
(10) REVENUES FROM MAJOR CUSTOMERS
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.
In 1995, approximately $7.3 million (62.1 percent), $1.7 million (14.5
percent) and $1.2 million (10.2 percent) of the Company's operating
revenues were attributable to three customers.
(11) EMPLOYEE RETIREMENT AND BENEFIT PLANS
A noncontributory retirement plan is maintained for all regular employees
of the Company. The plan provides benefits based on years of service and
other factors. The Company's funding policy is to make the annual
contributions required by applicable regulations and recommended by its
actuary.
-33-
<PAGE> 36
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension income for 1997, 1996 and 1995 included the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
---------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 124 $ 151 $ 112
Interest cost 248 305 287
Actual return on assets (966) (633) (919)
Curtailment gain (807) -- --
Net amortization and deferral 489 168 509
---------------------------------------------------------------------
Net periodic pension income $(912) $ (9) $ (11)
---------------------------------------------------------------------
</TABLE>
The following schedule sets forth the plan's funded status as of December
31, 1997 and 1996 and the amounts recognized in the Company's consolidated
balance sheets during those years:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
-----------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 2,720 $ 3,485
Nonvested 86 55
-----------------------------------------------------------------------------------
Accumulated benefit obligation $ 2,806 $ 3,540
-----------------------------------------------------------------------------------
Projected benefit obligation $(2,806) $(4,314)
Plan assets at fair value 5,498 5,583
-----------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 2,692 1,269
Unrecognized net gain (921) (335)
Unrecognized net assets at date of
initial adoption (423) (498)
-----------------------------------------------------------------------------------
Prepaid pension asset $ 1,348 $ 436
-----------------------------------------------------------------------------------
</TABLE>
As reflected in the December 31, 1997 pension income table above, the
Company recognized a curtailment gain of $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," the curtailment gain is reflected as a component
of the gain on disposal of discontinued operations (see Note 2).
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation shown above was 7.25
percent in both 1997 and 1996. The rate of increase in future compensation
levels used in determining the actuarial present value of the projected
benefit obligation shown above was 6 percent in both 1997 and 1996. The
expected long-term rate of return on assets was 8 percent in both years.
At December 31, 1997, plan assets were invested in all cash and cash
equivalents due to
-34-
<PAGE> 37
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
a pending change in the plan investment manager on January 1, 1998. On
January 3, 1998, the new investment manager invested the plan assets into
new mutual funds with approximately 70 percent in equity securities, 25
percent in fixed income securities and 5 percent in cash and cash
equivalents.
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. Expense recognized
in connection with the SERP in 1997, 1996 and 1995 was $100,000, $78,000
and $69,000, respectively.
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 $352,000 in 1997, $375,000 in 1996 and
$245,000 in 1995.
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.
(12) 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.
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Quarter Operating Operating Earnings (Loss) Per
Ended Revenue Income (Loss) Net Income (Loss) Basic Share
- -----------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
- ----------------------------------------------------------------------------------------------------
03/31/96 $3,078 $ (55) $ 2,099 $0.66
06/30/96 5,251 373 1,447 0.46
09/30/96 7,363 783 1,759 0.55
12/31/96 6,429 123 1,171 0.36
- ----------------------------------------------------------------------------------------------------
</TABLE>
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.
-35-
<PAGE> 38
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) SUBSEQUENT EVENT (UNAUDITED)
On January 30, 1998, the Company, through a newly formed subsidiary,
purchased certain assets of Quest Medical, Inc. ("Quest"). The assets
acquired from Quest are those that Quest used in its cardiovascular and
intravenous fluid delivery business. The purchase price for the net assets
acquired was $23.6 million in cash. Goodwill and other intangible assets
to be recorded on this transaction total approximately $12.0 million. The
transaction will be accounted for using the purchase method of accounting.
This transaction is subject to certain postclosing adjustments tied to the
asset and liability values as reflected on the closing balance sheet.
Total revenues for the twelve months ended December 31, 1997 produced by
the business acquired from Quest totaled approximately $14.3 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 relating
to the annual meeting of stockholders to be held on May 12, 1998.
EXECUTIVE OFFICERS
The information for this item relating to executive officers of the Company is
set forth on pages 11 through 12 of this report.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the Company's definitive proxy statement relating to the annual
meeting of stockholders to be held on May 12, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information for this item is incorporated by reference from the Company's
definitive proxy statement relating to the annual meeting of stockholders to be
held on May 12, 1998.
-36-
<PAGE> 39
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 relating to the annual meeting of stockholders to be
held on May 12, 1998.
SECURITY OWNERSHIP OF MANAGEMENT
The information for this item is incorporated by reference from the Company's
definitive proxy statement relating to the annual meeting of stockholders to be
held on May 12, 1998.
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
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 1997 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:
No reports on Form 8-K were filed during the last quarter of the year
ended December 31, 1997.
-37-
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
------- -----------
<S> <C>
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)
2d Agreement and Plan of Merger of Atrion Corporation, a Delaware
Corporation, and Atrion Corporation, an Alabama Corporation,
dated January 2, 1997(4)
3a Certificate of Incorporation of Atrion Corporation, dated
December 30, 1996(5)
3b Bylaws of Atrion Corporation (6)
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(7)
10a* Change in Control Agreement between AlaTenn Resources, Inc.
and Jerry A. Howard, dated October 23, 1987, and amendment
dated March 11, 1988(8)
10b* 1990 Stock Option Plan(9)
10c* Form of Incentive Stock Option Agreement(10)
10d* Restricted Shares Compensation Plan for Non-Employee Directors
adopted May 6, 1991(11)
10e* Alabama-Tennessee Natural Gas Company Non-Employee Directors
Deferral Plan(12)
10f* Alabama-Tennessee Natural Gas Company Supplemental Executive
Retirement Plan(13)
10g* Alabama-Tennessee Natural Gas Company Supplemental Executive
Thrift Plan(14)
10h* 1994 Key Employee Stock Incentive Plan(15)
10i* Form of Incentive Stock Option Agreement(16)
10j* Atrion Corporation 1997 Stock Incentive Plan(17)
21 Subsidiaries of Atrion Corporation as of December 31, 1997(17)
23 Consent of Arthur Andersen LLP(17)
27 Financial Data Schedules (filed electronically only)(17)
NOTES
-----
(1) Filed as Exhibit 2 to Form 8-K of Atrion Corporation dated
June 5, 1996.
(2) Filed as Appendix A to the Definitive Proxy Statement of the
Company dated April 23, 1997.
(3) Filed as Exhibit 2 to the Form 8-K of Atrion Corporation dated
February 17, 1998.
(4) Filed as Appendix A to the Definitive Proxy Statement of the
Company dated January 10, 1997.
(5) Filed as Appendix B to the Definitive Proxy Statement of the
Company dated January 10, 1997.
</TABLE>
-38-
<PAGE> 41
<TABLE>
<S> <C>
(6) Filed as Appendix C to the Definitive Proxy Statement of the
Company dated January 10, 1997.
(7) Filed as Exhibit 1 to Registration Statement on Form 8-A of
AlaTenn Resources, Inc. dated February 15, 1990.
(8) Filed as Exhibit 10c to Form 10-K of AlaTenn Resources, Inc.
dated March 29, 1988.
(9) Filed as Appendix A to the Definitive Proxy Statement of the
Company dated April 6, 1990.
(10) Filed as Exhibit 4(d) to the Registration Statement on Form
S-8 of AlaTenn Resources, Inc., filed May 17, 1991 (File No.
33-40639).
(11) Filed as Appendix A to the Definitive Proxy Statement of the
Company dated March 29, 1991.
(12) Filed as Exhibit 10t to Form 10-K of AlaTenn Resources, Inc.
dated March 27, 1992.
(13) Filed as Exhibit 10u to Form 10-K of AlaTenn Resources, Inc.
dated March 26, 1993.
(14) Filed as Exhibit 10v to Form 10-K of AlaTenn Resources, Inc.
dated March 26, 1993.
(15) Filed as Appendix A to the Definitive Proxy Statement of the
Company dated March 28, 1994.
(16) Filed as Exhibit 4(d) to the Form S-8 of AlaTenn Resources,
Inc., filed July 26, 1995 (File No. 33-61309)
(17) Filed herewith
</TABLE>
* Management Contract or Compensatory Plan or Arrangement
-39-
<PAGE> 42
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/Jerry A. Howard
--------------------------------
Jerry A. Howard
President and Chief
Executive Officer
Dated: March 31, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Jerry A. Howard President and Chief Executive Officer March 31, 1998
------------------------- (Principal Executive Officer)
Jerry A. Howard
/s/Jeffery Strickland Vice President, Chief Financial Officer and March 31, 1998
------------------------- Secretary-Treasurer (Principal Financial
Jeffery Strickland and Accounting Officer)
/s/Emile A. Battat Director March 31, 1998
-------------------------
Emile A. Battat
/s/Jerry A. Howard Director March 31, 1998
-------------------------
Jerry A. Howard
/s/Richard O. Jacobson Director March 31, 1998
-------------------------
Richard O. Jacobson
</TABLE>
-40-
<PAGE> 43
<TABLE>
<S> <C> <C>
/s/John H. P. Maley Director March 31, 1998
-------------------------
John H. P. Maley
/s/Jerome J. McGrath Director March 31, 1998
-------------------------
Jerome J. McGrath
/s/Hugh J. Morgan, Jr. Director March 31, 1998
-------------------------
Hugh J. Morgan, Jr.
/s/J. Kenneth Smith Director March 31, 1998
-------------------------
J. Kenneth Smith
/s/Roger F. Stebbing Director March 31, 1998
-------------------------
Roger F. Stebbing
/s/John P. Stupp, Jr. Director March 31, 1998
-------------------------
John P. Stupp, Jr.
</TABLE>
-41-
<PAGE> 44
\
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
10j Atrion Corporation 1997 Stock Incentive Plan 43-61
21 Subsidiaries of Atrion Corporation as of December 31, 1997 62
23 Consent of Arthur Andersen & Co. 63
27 Financial Data Schedules (filed electronically only)
</TABLE>
-42-
<PAGE> 1
EXHIBIT 10j
<PAGE> 2
ATRION CORPORATION
1997 STOCK INCENTIVE PLAN
ARTICLE 1 - ESTABLISHMENT, PURPOSE AND DURATION
1.1 Establishment of the Plan. Atrion Corporation, a Delaware corporation (the
"Company"), hereby establishes an incentive compensation plan to be known as the
"Atrion Corporation 1997 Stock Incentive Plan" (the "Plan"), as set forth
herein. The Plan permits the Company to grant Nonqualified Stock Options,
Incentive Stock Options, Stock Appreciation Rights, Restricted Stock and
Performance Shares, as defined herein.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the interests of
the Company by affording employees of the Company and the Subsidiaries and
directors of the Company an opportunity to acquire a proprietary interest in the
Company, and by providing such persons with long-term financial incentives for
outstanding performance. The Plan is further intended to provide flexibility to
the Company in its ability to motivate, attract, and retain the services of
employees and directors upon whose judgment, interest and special effort the
successful conduct of its operation is largely dependent.
1.3 Duration of the Plan. The Plan shall be effective on March 12, 1997, the
date of its adoption by the Board of Directors (the "Effective Date"), subject
to approval by the Company's stockholders within twelve (12) months thereafter,
such approval to be by stockholder vote sufficient to satisfy the federal tax
requirements then in effect related to stockholder approval of stock option
plans providing for the grant of Incentive Stock Options and any requirement of
The Nasdaq Stock Market, and shall remain in effect, subject to the right of the
Board of Directors to amend or terminate the Plan at any time pursuant to
Article 15 hereof, until all Shares subject to it shall have been purchased or
acquired according to the provisions hereof. However, in no event may an Award
of an ISO, as such terms are defined herein, be granted under the Plan after
March 12, 2007, although an ISO granted prior thereto may extend beyond such
date.
ARTICLE 2 - DEFINITIONS
Whenever used in the Plan, the following capitalized terms shall have the
meanings set forth below:
2.1 "Award" means, individually or collectively, a grant under this Plan of
Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights,
Restricted Stock or Performance Shares.
2.2 "Award Agreement" means a written agreement between the Company and a
Participant setting forth the terms and provisions applicable to an Award
granted by the Company to such Participant hereunder.
<PAGE> 3
2.3 "Board" or "Board of Directors" means the Board of Directors of the Company.
2.4 "Change in Control" means the occurrence of any of the following:
(a) when any "person," as such term is used in Section 13(d) or 14(d) of the
Exchange Act (other than the Company or any subsidiary or any employee benefit
plan of the Company or any subsidiary (including its trustee)), is or becomes
the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange
Act), directly or indirectly of securities of the Company representing
twenty-five percent (25%) or more of the combined voting power of the Company's
outstanding securities;
(b) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving or
parent entity) seventy-five percent (75%) or more of the combined voting power
of the voting securities of the Company or such surviving or parent entity
outstanding immediately after such merger or consolidation or (ii) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no "person" (as hereinabove defined) acquired
twenty-five percent (25%) or more of the combined voting power of the Company's
then outstanding securities;
(c) when, during any period of two (2) consecutive years during the existence of
the Plan, the individuals who, at the beginning of such period, constitute the
Board cease, for any reason, to constitute at least a majority thereof, unless
the election or the nomination for election by the Company's stockholders of
each director first elected during such period was approved by a vote of at
least sixty-seven percent (67%) of the directors then still in office who were
directors of the Company at the beginning of any such period or whose election
or nomination for election was previously so approved; or
(d) the stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company of all or
substantially all of the assets of the Company which will result in the Company
having no significant continuing operations.
2.5 "Change in Control Price" means the highest price per share (a) paid for
Shares in any transaction reported on any exchange on which the Common Stock is
listed or on The Nasdaq Stock Market, as the case may be, or (b) paid or offered
in any transaction related to a Change in Control of the Company, in either
event at any time during the preceding sixty (60) day period, as determined by
the Committee.
<PAGE> 4
2.6 "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and references thereto shall include the applicable Treasury regulations
thereunder.
2.7 "Committee" means the Compensation Committee of the Board.
2.8 "Common Stock" means the ten cent ($0.10) par value common stock of the
Company.
2.9 "Company" means Atrion Corporation, a Delaware corporation, and any
successor as provided in Article 18 hereof.
2.10 "Director" means any individual who is a member of the Board.
2.11 "Disability" with respect to a Participant means physical or mental
inability to perform the normal duties of his employment by the Company or
service as a Director as determined by a physician selected by the Committee
after an examination of such Participant; provided, however, that if such
participant fails or refuses to cooperate in such examination, the determination
of his Disability shall be made by the Committee in its sole discretion.
2.12 "Earnings per Share" means the consolidated "earnings per share" of the
Common Stock determined in accordance with generally accepted accounting
principles.
2.13 "Effective Date" means the date described in Section 1.3 hereof.
2.14 "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, or any successor act thereto.
2.15 "Fair Market Value" as of any date means (i) with respect to an Award of an
ISO and an Award which is intended to qualify under the Performance-Based
Exception, the average of the high and low sales price of a Share on such date
as reported by (1) any national securities exchange on which the Shares are
actively traded or (2) The Nasdaq Stock Market or, if no Shares are traded on
such exchange or system on such date, then on the next preceding date on which
any Shares were traded on such exchange or system; and (ii) with respect to all
other Awards, the closing sales price of a Share on such date as reported by (1)
any national securities exchange on which the Shares are actively traded or (2)
The Nasdaq Stock Market or, if no Shares are traded on such exchange or system
on such date, then on the next preceding date on which any Shares were traded on
such exchange or system.
2.16 "Freestanding SAR" means an SAR granted independently of any Options.
2.17 "Incentive Stock Option" or "ISO" means an option to purchase Shares
granted pursuant to Article 5 hereof which is designated as an Incentive Stock
Option and is intended to meet the requirements of Section 422 of the Code.
<PAGE> 5
2.18 "Insider" shall mean an individual who is required to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange Commission under Section 16 of the Exchange Act.
2.19 "Key Employee" means an employee of the Company or any Subsidiary who is
designated as a key employee by the Committee.
2.20 "Named Executive Officer" means, for a calendar year, a Participant who is
one of the group of "covered employees" for such calendar year within the
meaning of Section 162(m) of the Code.
2.21 "Non-Employee Director" means a Director who, at the time of determination
of such status, (i) is not an officer or otherwise employed by the Corporation
or a Subsidiary; (ii) does not receive compensation directly or indirectly from
the Corporation or a Subsidiary for services rendered as a consultant or in any
capacity other than as a Director, except for an amount for which disclosure
would not be required pursuant to Item 404(a) of Regulation S-K; (iii) does not
possess an interest in any other transactions for which disclosure would be
required pursuant to Item 404(a) of Regulation S-K; and (iv) is not engaged in a
business relationship for which disclosure would be required pursuant to Item
404(b) of Regulation S-K.
2.22 "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares
granted pursuant to Article 5 or Article 10 hereof which is not intended to meet
the requirements of Section 422 of the Code.
2.23 "Option" means an Incentive Stock Option or a Nonqualified Stock Option.
2.24 "Option Price" means the price at which a Share may be purchased by a
Participant pursuant to the exercise of an Option.
2.25 "Outside Director" means a Director who is not an employee of
the Company or any Subsidiary.
2.26 "Participant" means a Key Employee or an Outside Director who has been
granted an Award which is outstanding hereunder.
2.27 "Performance-Based Exception" means the performance-based exception, set
forth in Section 162(m)(4)(C) of the Code, from the deductibility limitations of
Section 162(m) of the Code.
2.28 "Performance Share" means an Award granted pursuant to Article 8 hereof.
2.29 "Period of Restriction" means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the passage of time,
the achievement of performance goals, or upon the occurrence of other events as
determined by the Committee, at its discretion), and such Shares are subject to
a
<PAGE> 6
substantial risk of forfeiture, as provided in Article 7 hereof.
2.30 "Prior Plans" means the (i) Atrion Corporation 1990 Stock Option Plan and
(ii) Atrion Corporation 1994 Key Employee Stock Incentive Plan.
2.31 "Restricted Stock" means an Award granted pursuant to Article 7 hereof.
2.32 "Return on Assets" means the consolidated "return on average assets" of the
Company and its subsidiaries determined in accordance with generally accepted
accounting principles.
2.33 "Return on Equity" means the consolidated "return on average common
stockholders' equity" of the Company and its subsidiaries determined in
accordance with generally accepted accounting principles.
2.34 "Revenues" means the consolidated "revenues" of the Company and its
subsidiaries determined in accordance with generally accepted accounting
principles.
2.35 "Shares" means the shares of Common Stock of the Company.
2.36 "Stock Appreciation Right" or "SAR" means an Award granted to a Key
Employee alone or in tandem with a related Option pursuant to Article 6 hereof
which is designated as an SAR and which grants such Key Employee the right to
receive payment of an amount equal to the appreciation in the value of Shares.
2.37 "Subsidiary" means any corporation, partnership, joint venture, affiliate,
or other entity of which a majority of the outstanding voting stock or power is
beneficially owned, directly or indirectly, by the Company.
2.38 "Tandem SAR" means an SAR that is granted in connection with a related
Option, the exercise of which shall require forfeiture of the right to purchase
a Share under the related Option (and when a Share is purchased under the
Option, the Tandem SAR shall similarly be canceled).
2.39 "Total Stockholder Return" means the percentage change in the value of an
initial investment in the Common Stock assuming the reinvestment of all
dividends paid on such shares.
ARTICLE 3 - ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Committee, all of the
members of which shall be Non-Employee Directors. Any action taken with respect
to Named Executive Officers for purposes of meeting the Performance-Based
Exception shall be taken by the Committee only if all of the members of the
Committee are "outside directors" within the meaning of Code Section 162(m),
subject to any applicable transition rules under
<PAGE> 7
Code Section 162(m). If all of the members of the Committee are not "outside
directors," such action shall be taken by a subcommittee of the Committee of two
(2) or more members, all of whom are "outside directors."
3.2 Authority of the Committee. Except as limited by law, or by the Certificate
of Incorporation or Bylaws of the Company, and subject to the provisions hereof,
the Committee shall have full power to designate the Key Employees who shall
participate in the Plan; determine the sizes and types of Awards (other than
Options granted to Outside Directors pursuant to Article 10 hereof); determine
the terms and provisions of Awards in a manner consistent with the Plan (other
than Options granted to Outside Directors pursuant to Article 10 hereof);
construe and interpret the Plan and any agreement or instrument entered into
under the Plan; establish, amend, or waive rules and regulations for the Plan's
administration; determine whether Awards (other than Options granted to Outside
Directors pursuant to Article 10 hereof) will be granted singularly, in
combination or in tandem; accelerate or defer (with the consent of the Key
Employee) the vesting, exercise or payment of an Award (other than Options
granted to Outside Directors pursuant to Article 10 hereof) or the performance
period of an Award (other than Options granted to Outside Directors pursuant to
Article 10 hereof), but no deferral shall extend beyond the term of the Award;
to accept the surrender of Awards and the substitution of new or revised Awards
in exchange therefor (other than Options granted to Outside Directors pursuant
to Article 10 hereof); and (subject to the provisions of Article 15 hereof),
amend the terms and provisions of any outstanding Award to the extent such terms
and provisions are within the discretion of the Committee as provided in the
Plan; provided, however, that notwithstanding the foregoing, the Committee shall
not have the power or authority to cancel any Options granted under the Plan to
executive officers of the Company (as such term is defined in rules promulgated
under the Exchange Act) and to replace such Options with, or regrant such
Options through, Awards having a lower Option Price. The Committee shall make
all other decisions relating to the operation of the Plan, and all other
determinations which may be necessary or advisable for the administration of the
Plan.
3.3 Decisions Binding. All determinations and decisions made by the Committee
pursuant to the provisions of the Plan shall be final, conclusive and binding on
all persons, including the Company, its stockholders, Directors, employees,
Participants, and their estates and beneficiaries.
3.4 Administration of Article 10. Notwithstanding any other provision of the
Plan, the Board shall administer Article 10 of the Plan, and the Committee shall
exercise no discretion with respect to Article 10. In the Board's administration
of Article 10 and the Options granted to Outside Directors, the Board shall have
all of the authority and discretion otherwise granted to the Committee with
respect to the administration of the Plan.
<PAGE> 8
ARTICLE 4 - SHARES SUBJECT TO THE PLAN
4.1 Number of Shares Available for Grants. Beginning on the Effective Date,
there is hereby reserved for grants of Awards under the Plan the number of
Shares equal to the sum of:
(a) Three Hundred Thousand (300,000) Shares; and
(b) such number of Shares reserved for issuance under the Prior Plans in excess
of the number of Shares as to which options have been awarded thereunder as of
the Effective Date including any Shares subject to options previously granted
under the Prior Plans which hereafter shall lapse, expire, terminate or be
canceled.
The number of Shares reserved for grants of Awards under this Section 4.1 shall
be subject to adjustment as provided in Section 4.3 hereof. In no event shall a
Participant receive Awards of Options, Freestanding SARs, Restricted Stock or
Performance Shares during any one (1) calendar year covering in the aggregate
more
than Fifty Thousand (50,000) Shares.
4.2 Lapsed Awards. If any Award granted hereunder is canceled, terminates,
expires or lapses for any reason (with the exception of the termination of a
Tandem SAR upon exercise of the related Option, or the termination of a related
Option upon exercise of the corresponding Tandem SAR), any Shares subject to
such Award shall again be available for the grant of an Award under the Plan.
4.3 Adjustments in Authorized Shares. Subject to Article 14 hereof, in the event
of any change in corporate capitalization, such as a stock dividend or stock
split, or a corporate transaction, such as any merger, consolidation,
separation, including a spin-off, or other distribution of stock or property of
the Company, any reorganization (whether or not such reorganization comes within
the definition of such term in Section 368 of the Code) or any partial or
complete liquidation of the Company, such adjustment shall be made in the number
and class of Shares reserved under the Plan, in the number, class and price of
Shares subject to outstanding Awards granted under the Plan, and in the
numerical limit set forth in the last sentence of Section 4.1 hereof, as may be
determined to be appropriate and equitable by the Committee, in its sole
discretion, to prevent dilution or enlargement of rights; provided, however,
that the number of Shares subject to any Award shall always be a whole number.
In the case of Options granted to Outside Directors pursuant to Article 10
hereof, the foregoing adjustments shall be made by the Board, and any such
adjustments also shall apply to the future grants provided by Article 10 hereof.
ARTICLE 5 - STOCK OPTIONS
5.1 Grant of Options. Subject to the terms and conditions of this Article, and
to such other terms and conditions as the Committee may determine, Options may
be granted to Key Employees in such
<PAGE> 9
number and at such times as shall be determined by the Committee.
5.2 Award Agreement. Each Option granted shall be evidenced by an Award
Agreement that shall specify the Option Price, the term of the Option, the
number of Shares subject to such Option and such other provisions as the
Committee shall determine which are not inconsistent with the provisions of the
Plan. The Award Agreement also shall specify whether the Option is intended to
be an ISO or an NQSO.
5.3 Option Price. The Option Price of an ISO shall not be less than the Fair
Market Value of a Share on the date the Option is granted and the Option Price
of an NQSO shall be as determined by the Committee in its sole discretion.
5.4 Term of Options. Each Option shall expire at such time as the Committee
shall determine at the time of grant; provided, however, that no Option shall be
exercisable later than the tenth (10th) anniversary date of its grant.
5.5 Exercise of Options. The Shares subject to an Option may be purchased in
such installments and on such exercise dates as shall be set forth in the Award
Agreement. Any Shares not purchased on the applicable exercise date may be
purchased thereafter at any time prior to the final expiration of the Option. In
no event shall any Option be exercised, in whole or in part, after its
expiration date.
5.6 Payment. Options shall be exercised by the delivery of a written notice of
exercise to the Company, setting forth the number of Shares with respect to
which the Option is to be exercised, accompanied by full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the Company:
(a) in cash or its equivalent, or (b) by tendering previously acquired Shares
having an aggregate Fair Market Value at the time of exercise equal to the
aggregate Option Price, or (c) by a combination of (a) and (b). The Committee
also may allow cashless exercise or payment by any other means which the
Committee determines to be consistent with the Plan's purpose and applicable
law. As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option.
5.7 Restrictions on Share Transferability. The Committee may impose such
restrictions on the transfer of Shares acquired pursuant to the exercise of an
Option granted under this Article as it may deem advisable including, without
limitation, restrictions under applicable federal securities laws, under the
requirements of any stock exchange or market upon which the Common Stock is then
listed or traded and under any state securities laws applicable to such Shares.
5.8 Termination of Employment. Each Award Agreement with respect
<PAGE> 10
to Options granted hereunder shall set forth the extent to which the Participant
shall have the right to exercise the Options following termination of the
Participant's employment with the Company or its Subsidiaries, as the case may
be. Such provisions shall be determined in the sole discretion of the Committee,
shall be included in the Award Agreement, need not be uniform among all Options
issued pursuant to this Article, may reflect distinctions based on the reasons
for termination of employment and may include provisions relating to a
Participant's competition with the Company after termination of employment. In
that regard, if an Award Agreement permits exercise of an Option following the
death of the Participant, the Award Agreement shall provide that such Option
shall be exercisable to the extent provided therein by any person that may be
empowered to do so under the Participant's will or, if the Participant shall
fail to make a testamentary disposition of the Option or shall have died
intestate, by the Participant's executor or other legal representative.
5.9 TRANSFERABILITY OF OPTIONS.
(a) Incentive Stock Options. No ISO granted under this Article may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, all ISOs
granted to a Participant shall be exercisable during his or her lifetime only by
such Participant.
(b) Nonqualified Stock Options. Any NQSO granted under this Article 5 may be
transferable or nontransferable in the discretion of the Committee and under
such terms and conditions as may be set forth in the Award Agreement with
respect to such NQSO.
5.10 No Rights. A Participant granted an Option under the Plan shall have no
rights as a stockholder of the Company with respect to the Shares subject to
such Option except to the extent that Shares are issued to the Participant upon
the exercise of such Option.
5.11 Certain Additional Provisions for Incentive Stock Options.
(a) Exercisability. The aggregate Fair Market Value (determined on the date
the Award is granted) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by any Key Employee during any
calendar year (under all plans of the Company and its Subsidiaries) shall not
exceed One Hundred Thousand Dollars ($100,000).
(b) Termination of Employment. No Incentive Stock Option may be exercised
more than three (3) months after termination of employment for any reason other
than Disability or death, unless (i) the Participant dies during such three
(3)-month period, and (ii) the Award Agreement or the Committee permits later
exercise.
(c) Company and Subsidiaries Only. Incentive Stock Options may be granted
only to persons who are employees of the Company or
<PAGE> 11
a Subsidiary on the date the Award is granted.
(d) Expiration. No Incentive Stock Option may be exercised after the
expiration of ten (10) years from the date the Award is granted; provided,
however, that if the Option is granted to a Key Employee who, together with
persons whose stock ownership is attributed to the Key Employee pursuant to
section 424(d) of the Code, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of the stock of the Company or
any of its Subsidiaries, the Option may not be exercised after the expiration of
five (5) years from the Grant Date.
5.12 Substitute Options. Notwithstanding any other provision of this Plan, in
the event that the Company or a Subsidiary consummates a transaction described
in section 424(a) of the Code (e.g., the acquisition of property or stock from
an unrelated corporation), persons who become employees of the Company or any
Subsidiary on account of such transaction may be granted Options in substitution
for options granted by their former employer. If such substitute Options are
granted, the Committee, in its sole discretion and consistent with section
424(a) of the Code, shall determine the exercise price of such substitute
Options.
ARTICLE 6 - STOCK APPRECIATION RIGHTS
6.1 Grant of SARs. Subject to the terms and conditions of this Article, and to
such other terms and conditions as the Committee may determine, SARs may be
granted to Key Employees at any time and from time to time as shall be
determined by the Committee. The Committee may grant Freestanding SARs, Tandem
SARs, or any combination of such forms of SARs. The Committee shall have
complete discretion in determining the number of Shares covered by SARs granted
hereunder (subject to Article 4 hereof) and in determining the terms and
provisions pertaining to such SARs. The number of Shares covered by a
Freestanding SAR shall be counted against the number of Shares available for
grants of Awards under Section 4.1 hereof, but the number of Shares covered by a
Tandem SAR shall not be so counted. The grant price of a Freestanding SAR shall
equal the Fair Market Value of a Share on the date of grant of the SAR. The
grant price of a Tandem SAR shall equal the Option Price of the related Option.
6.2 Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the
Shares subject to the related Option upon the surrender of the right to exercise
the equivalent portion of the related Option. A Tandem SAR may be exercised only
with respect to the Shares for which its related Option is then exercisable. In
no event shall the exercise period for a Tandem SAR exceed the exercise period
for the related Option. Notwithstanding any other provision of this Plan to the
contrary, with respect to a Tandem SAR granted in connection with an ISO: (i)
the Tandem SAR will expire no later than the expiration of the underlying ISO;
(ii) the value of the payout with respect to the Tandem SAR shall not exceed the
difference between the Option Price of the underlying ISO and
<PAGE> 12
the Fair Market Value of the Shares subject to the underlying ISO at the time
the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when
the Fair Market Value of the Shares subject to the ISO exceeds the Option Price
of the ISO.
6.3 Exercise of Freestanding SARs. Freestanding SARs may be exercised upon
whatever terms and provisions the Committee, in its sole discretion, imposes
upon them.
6.4 Award Agreement. Each SAR grant shall be evidenced by an Award Agreement
that shall specify the grant price, the term of the SAR, and such other
provisions as the Committee shall determine.
6.5 Term of SARs. The term of an SAR granted under the Plan shall be determined
by the Committee, in its sole discretion; provided, however, that such term
shall not exceed 10 years.
6.6 Payment of SAR Amount. Upon exercise of an SAR, a Participant shall be
entitled to receive payment from the Company equal to the product of (i) the
difference between the Fair Market Value of a Share on the date of exercise over
the grant price and (ii) the number of Shares with respect to which the SAR is
exercised. At the discretion of the Committee, the payment upon exercise may be
in cash, in Shares of equivalent value, or in some combination thereof;
provided, however, that from and after the date of a Change in Control, the
exercise of an SAR may be settled only in cash.
6.7 Termination of Employment. Each Award Agreement with respect to SARs granted
hereunder shall set forth the extent to which the Key Employee shall have the
right to exercise the SAR following termination of the Key Employee's employment
with the Company or its Subsidiaries, as the case may be. Such provisions shall
be determined in the sole discretion of the Committee, shall be included in the
Award Agreement, need not be uniform among all SARs issued pursuant to the Plan,
may reflect distinctions based on the reasons for termination of employment and
may include provisions relating to a Key Employee's competition with the Company
after termination of employment. In that regard, if an Award Agreement permits
exercise of an SAR following the death of the Participant, the Award Agreement
shall provide that such SAR shall be exercisable to the extent provided therein
by any person that may be empowered to do so under the Key Employee's will, or
if the Key Employee shall fail to make a testamentary disposition of the SAR or
shall have died intestate, by the Key Employee's executor or other legal
representative.
6.8 Nontransferability of SARs. Except as otherwise provided in an Award
Agreement, no SAR may be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated, other than by will or by the laws of descent and
distribution. Further, except as otherwise provided in an Award Agreement, all
SARs granted to a Key Employee under the Plan shall be exercisable during his or
her lifetime only by such Key Employee.
<PAGE> 13
6.9 No rights. A Key Employee granted an SAR shall have no rights as a
stockholder of the Company with respect to the Shares covered by such SAR except
to the extent that Shares are issued to the Key Employee upon exercise of the
SAR.
ARTICLE 7 - RESTRICTED STOCK
7.1 Grant of Restricted Stock. Subject to the terms and conditions of this
Article, and to such other terms and conditions as the Committee may determine,
the Committee, at any time and from time to time, may grant Shares of Restricted
Stock to Key Employees in such numbers as the Committee shall determine.
7.2 Award Agreement. Each Restricted Stock grant shall be evidenced by an Award
Agreement that shall specify the Period or Periods of Restriction, the number of
Shares of Restricted Stock granted, and such other provisions as the Committee
shall determine.
7.3 Transferability. Except as provided in this Article, the Shares of
Restricted Stock granted herein may not be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the Award Agreement,
or upon earlier satisfaction of any other conditions, as specified by the
Committee in its sole discretion and set forth in the Award Agreement. All
rights with respect to Restricted Stock granted to a Key Employee under the Plan
shall be available during his or her lifetime only to such Key Employee.
7.4 Other Restrictions. The Committee may impose such other conditions or
restrictions on any Shares of Restricted Stock granted pursuant to the Plan as
it may deem advisable including, without limitation, a requirement that Key
Employees pay a certain purchase price for each Share of Restricted Stock,
restrictions based upon the achievement of specific performance goals
(Company-wide, divisional, or individual), time-based restrictions on vesting
following the attainment of the performance goals and restrictions under
applicable federal or state securities laws. The Company shall retain the
certificates representing Shares of Restricted Stock in the Company's possession
until such time as all conditions and restrictions applicable to such Shares
have been satisfied. Except as otherwise provided in this Article or in the
applicable Award Agreement, or as otherwise required by law, Shares of
Restricted Stock shall become freely transferable by the Key Employee after the
last day of the Period of Restriction.
7.5 Voting Rights. During the Period of Restriction, Key Employees owning Shares
of Restricted Stock granted hereunder may exercise full voting rights with
respect to such Shares.
7.6 Dividends and other Distributions. During the Period of Restriction, Key
Employees owning Shares of Restricted Stock granted hereunder may be credited
with regular cash dividends paid
<PAGE> 14
with respect to the underlying Shares while they are so owned. The Committee may
apply any restrictions to the dividends that the Committee deems appropriate. In
the event that any dividend constitutes a "derivative security" or an "equity
security" pursuant to Section 16 under the Exchange Act, such dividend shall be
subject to a vesting period equal to the remaining vesting period of the Shares
of Restricted Stock with respect to which the dividend is paid.
7.7 Termination of Employment. Each Award Agreement with respect to Restricted
Stock granted hereunder shall set forth the extent to which the Key Employee
shall have the right to receive unvested Restricted Shares following termination
of the Key Employee's employment with the Company or its Subsidiaries, as the
case may be. Such provisions shall be determined in the sole discretion of the
Committee, shall be included in the Award Agreement, need not be uniform among
all Shares of Restricted Stock issued pursuant to the Plan, may reflect
distinctions based on the reasons for termination of employment and may include
provisions relating to a Key Employee's competition with the Company after
termination of employment. In amplification but not limitation of the foregoing,
in the case of an Award of Restricted Stock to a Named Executive Officer which
is intended to qualify for the Performance-Based Exception, the Award Agreement
may provide that such Restricted Stock may become payable in the event of a
termination of employment by reason of death, Disability or Change in Control,
such payment not to occur before attainment of the related performance goal.
ARTICLE 8 - PERFORMANCE SHARES
8.1 Grant of Performance Shares. Subject to the terms and conditions of this
Article and to such other terms and conditions as the Committee may determine,
Performance Shares may be granted to Key Employees in such amounts, upon such
terms and at such times as shall be determined by the Committee. The number and
vesting of Performance Shares granted shall be conditioned upon the degree of
attainment of specified performance goals or other conditions over a specified
period (the "Performance Period") as determined by the Committee, subject to
Section 3.1 hereof. The terms and provisions of an Award of Performance Shares
shall be evidenced by an appropriate Award Agreement.
8.2 Value of Performance Shares. The value of a Performance Share at any time
shall be the Fair Market Value of a Share at such time.
8.3 Form and Timing of Payment of Performance Shares. The Committee shall
establish the amount of payment to be made under an Award of Performance Shares
if the performance goals or other conditions are met. Such Award shall be
expressed in terms of Shares. After the completion of a Performance Period, the
performance of the Company, subsidiary, division or individual, as the case may
be, shall be measured against the performance goals or other conditions, and the
Committee shall determine whether all,
<PAGE> 15
none or a portion of an Award shall be paid. The Committee shall pay any earned
Performance Shares as soon as practicable after they are earned in the form of
cash, Shares or a combination thereof (as determined by the Committee) having an
aggregate Fair Market Value equal to the value of the earned Performance Shares
as of the date they are earned. Any Shares used to pay earned Performance Shares
may be issued subject to any restrictions deemed appropriate by the Committee.
In addition, the Committee, in its discretion, may cancel any earned Performance
Shares and grant Stock Options to the Key Employee which the Committee
determines to be of equivalent value based on a conversion formula stated in the
applicable Award Agreement. The Committee, in its discretion, may also grant
dividend equivalent rights with respect to earned but unpaid Performance Shares
as evidenced by the applicable Award Agreement. Performance Shares shall have no
voting rights.
8.4 Termination of Employment. Each Award Agreement with respect to Performance
Shares granted hereunder shall set forth the extent to which the Key Employee
shall have the right to receive unearned Performance Shares following
termination of the Key Employee's employment with the Company and its
Subsidiaries, as the case may be. Such provisions shall be determined in the
sole discretion of the Committee, shall be included in the Award Agreements,
need not be uniform among all Performance Shares awarded pursuant to the Plan,
may reflect distinctions based on the reasons for termination of employment and
may include provisions relating to a Key Employee's competition with the Company
after termination of employment.
8.5 Nontransferability. Except as otherwise provided in an Award Agreement with
respect to Performance Shares granted hereunder, Performance Shares may not be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, except
as otherwise provided in an Award Agreement, a Key Employee's rights under the
Plan shall be exercisable during the Key Employee's lifetime only by the Key
Employee.
ARTICLE 9 - PERFORMANCE MEASURES
The performance measure or measures to be used for purposes of Awards, other
than Options, to Named Executive Officers which are designed to qualify for the
Performance-Based Exception shall be selected from among the following
alternatives:
(a) Earnings per Share;
(b) Return on Assets;
(c) Return on Equity;
(d) Revenues; or
(e) Total Stockholder Return
<PAGE> 16
In the event that applicable tax or securities laws change in order to permit
Committee discretion to alter the governing performance measures without
obtaining stockholder approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining stockholder approval.
ARTICLE 10 - OUTSIDE DIRECTOR OPTIONS.
The provisions of this Article 10 shall apply only to grants of Options
to Outside Directors as provided below. Except as set forth in this Article 10,
the other provisions of the Plan shall apply to grants of Options to Outside
Directors to the extent not inconsistent with this Article 10. For purposes of
interpreting the applicable provisions of the Plan, an Outside Director's
service as a member of the Board shall be deemed to be employment with the
Company.
10.1 General. Outside Directors shall be granted Nonqualified Stock Options in
accordance with this Article 10. The Option Price per share of Shares
purchasable under Options granted to Outside Directors shall be the Fair Market
Value of a Share on the date of grant. Options granted pursuant to this Article
10 shall be subject to the terms of this Article 10 and shall not be subject to
discretionary acceleration of exercisability.
10.2 Annual Grants. On July 10 of each year while this Plan is in effect,
commencing with July 10, 1997, each Outside Director will be granted
automatically, without action by the Committee, an Option to purchase Two
Thousand (2,000) Shares. The Option Price shall equal the Fair Market Value of
the Common Stock as of the date of grant.
10.3 Vesting. Each Option granted under this Article 10 shall be fully
exercisable on the date of grant. Sections 5.4 and 5.8 hereof shall not apply to
Options granted to Outside Directors.
10.4 Duration. Each Option granted to an Outside Director shall expire on the
first to occur of (i) the tenth anniversary of the date of grant of the Option,
(ii) six (6) months after the date the Outside Director ceases to be a Director
other than as a result of the death of the Outside Director; or (iii) one (1)
year after the Outside Director ceases to be a Director by reason of the death
of the Outside Director, in which event the Option may be exercised during such
period by the executor or administrator of the Outside Director's estate, by the
person or persons to whom the Outside Director's rights under the Option shall
pass by the Outside Director's will or the laws of descent and distribution or
by the Outside Director's designated beneficiary. The Committee may not provide
for an extended exercise period beyond the periods set forth in this Article 10.
ARTICLE 11 - BENEFICIARY DESIGNATION
Each Participant may, from time to time, designate any beneficiary
<PAGE> 17
or beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid in case of his or her death before he or
she receives any or all of such benefit. Each such designation shall revoke all
prior designations by the same Participant, shall be in a form prescribed by the
Company, and will be effective only when filed by the Participant in writing
with the Company during the Participant's lifetime. In the absence of any such
designation, benefits remaining unpaid at the Participant's death shall be paid
to the Participant's estate.
ARTICLE 12 - DEFERRALS
The Committee may permit a Key Employee to defer such Key Employee's receipt of
the payment of cash or the delivery of Shares that would otherwise be due to
such Key Employee by virtue of the exercise of an Option or SAR, the lapse or
waiver of restrictions with respect to Restricted Stock, or the satisfaction of
any requirements or goals with respect to Performance Shares. If any such
deferral election is required or permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals.
ARTICLE 13 - RIGHTS OF PARTICIPANTS
13.1 Employment. Nothing in the Plan shall interfere with or limit in any way
the right of the Company to terminate any Participant's employment or service at
any time and for any reason, nor confer upon any Participant any right to
continue in the employ or service of the Company or its Subsidiaries. For
purposes of this Plan, a transfer of a Key Employee's employment between the
Company and a Subsidiary, or between Subsidiaries, shall not be deemed to be a
termination of employment.
13.2 Participation. No Key Employee shall have the right to be selected to
receive any Award under this Plan, or, having been so selected, to be selected
to receive any future Award.
ARTICLE 14 - CHANGE IN CONTROL OF THE COMPANY
Except as may be set forth in an Award Agreement, in the event of a Change in
Control, the following provisions shall apply: (i) Options granted under Article
5 hereof and SARs shall become immediately and fully exercisable; (ii)
Restricted Shares granted under the Plan shall be immediately and fully vested
and all restrictions shall lapse; and (iii) the target payout opportunities
attainable under all outstanding Awards of Restricted Stock and Performance
Shares shall be deemed to have been fully earned for the entire Performance
Period(s) as of the effective date of the Change in Control. To the extent set
forth in any Award Agreement (other than with respect to Options granted to
Outside Directors pursuant to Article 10 hereof) a Key Employee will be
permitted to surrender for cancellation within sixty (60) days after such Change
in Control any outstanding Options, SARs, Restricted Stock or Performance Shares
and the Key Employee will be entitled to receive
<PAGE> 18
a payment (i) with respect to each Option in an amount equal to the excess, if
any, of the Change in Control Price over the Option Price; (ii) with respect to
each SAR in an amount equal to the excess, if any, of the Change in Control
Price over the grant price of the SAR; (iii) with respect to each share of
Restricted Stock the Change in Control Price; and (iv) with respect to each
Performance Share, the Change in Control Price.
ARTICLE 15 - AMENDMENT, MODIFICATION AND TERMINATION
The Board may at any time, and from time to time, alter, amend, discontinue,
suspend or terminate the Plan in whole or in part; provided, however, that no
termination, amendment, or modification of the Plan shall adversely affect in
any material way any Award previously granted under the Plan, without the
written consent of the Participant holding such Award.
ARTICLE 16 - WITHHOLDING
16.1 Tax Withholding. The Company shall have the power and the right to deduct
or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising as a result of this Plan.
16.2 Share Withholding. With respect to withholding required upon the exercise
of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon
any other taxable event arising as a result of Awards granted hereunder,
Participants may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date as of which the tax is to be
determined equal to the minimum statutory total tax which could be imposed on
the transaction. All such elections shall be irrevocable, made in writing,
signed by the Participant, and subject to any restrictions or limitations that
the Committee, in its sole discretion, deems appropriate.
ARTICLE 17 - INDEMNIFICATION
Each person who is or shall have been a member of the Committee shall be
indemnified and held harmless by the Company against and from any loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by him or
her in connection with or resulting from any claim, action, suit, or proceeding
to which he or she may be a party or in which he or she may be involved by
reason of any action taken or failure to act under the Plan and against and from
any and all amounts paid by him or her in settlement thereof, with the Company's
approval, or paid by him or her in satisfaction of any judgment in any such
action, suit, or proceeding against him or her, provided he or she shall give
the Company an opportunity, at its own expense, to defend the same before he or
she undertakes to defend it on his or her own behalf.
<PAGE> 19
The foregoing right of indemnification shall not be exclusive of any other
rights of indemnification to which such persons may be entitled under the
Company's Certificate of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.
ARTICLE 18 - SUCCESSORS
All obligations of the Company under the Plan with respect to Awards granted
hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
or assets of the Company.
ARTICLE 19 - MISCELLANEOUS
19.1 Gender and Number. Whenever the context so requires, the singular shall
include the plural and the plural shall include the singular and the gender of
any pronoun shall include the other genders.
19.2 Severability. The invalidity of this Plan with respect to one or more
persons shall not affect the rights and obligations of any other person
hereunder in any manner whatsoever. The invalidity of one or more provisions of
this Plan shall not affect the validity of any other provision of this Plan in
any manner whatsoever.
19.3 Requirements of Law. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
19.4 Securities Laws Compliance. With respect to Insiders, transactions under
this Plan are intended to comply with all applicable conditions of Rule 16b-3
promulgated under the Exchange Act. To the extent any provision of the Plan or
action by the Committee fails to so comply, it shall be deemed null and void, to
the extent permitted by law and deemed advisable by the Committee.
19.5 Governing Law. This Plan shall be construed according to the laws of the
State of Delaware.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF ATRION CORPORATION
As of December 31, 1997
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation Ownership
- ---------------------------------------------------------------------------------
<S> <C> <C>
Atrion Medical Products Alabama 100%
Halkey-Roberts Corporation Florida 100%
QMI Medical, Inc. Texas 100%
AlaTenn Pipeline Company Alabama 100%
Warrior Basin Leasing Company Alabama 100%
Atrion International, Inc. U.S. V. I. 100%
- --------------------------------------------------------------------------------
</TABLE>
-62-
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated February 20, 1998 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 31, 1998
-63-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ATRION CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,172
<SECURITIES> 0
<RECEIVABLES> 2,897
<ALLOWANCES> 0
<INVENTORY> 3,960
<CURRENT-ASSETS> 39,366
<PP&E> 15,617
<DEPRECIATION> 2,475
<TOTAL-ASSETS> 60,942
<CURRENT-LIABILITIES> 5,773
<BONDS> 203
0
0
<COMMON> 342
<OTHER-SE> 49,644
<TOTAL-LIABILITY-AND-EQUITY> 60,942
<SALES> 30,277
<TOTAL-REVENUES> 30,277
<CGS> 20,755
<TOTAL-COSTS> 20,755
<OTHER-EXPENSES> 13,909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (818)
<INCOME-PRETAX> (3,328)
<INCOME-TAX> (1,283)
<INCOME-CONTINUING> (2,045)
<DISCONTINUED> 19,215
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,170
<EPS-PRIMARY> 5.33
<EPS-DILUTED> 5.33
</TABLE>
