<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
ATRION CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[ATRION CORPORATION LOGO]
April 8, 1998
Dear Stockholder:
You are cordially invited to attend the 1998 annual meeting of stockholders
of Atrion Corporation, which will be held at our offices in Allen, Texas on
Tuesday, May 12, 1998 at 10:00 a.m., Central Time. A notice of the annual
meeting and the Company's Proxy Statement, together with a proxy card, accompany
this letter. Also enclosed is a copy of our 1997 Annual Report.
In addition to the formal items of business to be brought before the
meeting, we will report on the Company's operations and answer stockholder
questions.
We hope that you will attend the meeting in person. However, whether or not
you plan to be personally present, we urge you to read the accompanying Proxy
Statement carefully and then complete, date and sign the enclosed proxy card and
return it promptly in the envelope provided herewith. This will ensure
representation of your shares of common stock if you are unable to attend the
meeting.
Sincerely,
/s/Jerry A. Howard
Jerry A. Howard
<PAGE> 3
ATRION CORPORATION
ONE ALLENTOWN PARKWAY
ALLEN, TEXAS 75002
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of Atrion Corporation:
Notice is hereby given that the annual meeting of stockholders of Atrion
Corporation (the "Company") will be held at the Company's offices, One Allentown
Parkway, Allen, Texas, on Tuesday, May 12, 1998 at 10:00 a.m., Central Time, for
the following purposes:
1. To elect three directors.
2. To consider and vote upon a proposal to approve certain amendments
to the Company's 1997 Stock Incentive Plan.
3. To consider and vote upon a proposal to approve the Company's 1998
Outside Directors Stock Option Plan.
4. To ratify the Board of Directors' appointment of Arthur Andersen
LLP as independent accountants to audit the Company's financial statements
for the year 1998.
5. To transact such other business as may properly come before the
meeting.
The Board of Directors has fixed the close of business on March 23, 1998 as
the record date for the determination of stockholders entitled to notice of and
to vote at the annual meeting and at any adjournment thereof.
By Order of the Board of Directors
Jeffery Strickland
Vice President and Chief Financial
Officer, Secretary and Treasurer
April 8, 1998
IMPORTANT
YOU ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
PROMPTLY IN THE ENVELOPE PROVIDED HEREWITH. IF YOU ATTEND THE MEETING, YOU MAY,
IF YOU WISH, WITHDRAW YOUR PROXY AND VOTE IN PERSON.
<PAGE> 4
ATRION CORPORATION
ONE ALLENTOWN PARKWAY
ALLEN, TEXAS 75002
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MAY 12, 1998
GENERAL INFORMATION
This Proxy Statement is being furnished to the stockholders of Atrion
Corporation (the "Company") in connection with the solicitation of proxies by
the Board of Directors of the Company to be voted at the annual meeting of
stockholders to be held at the Company's offices, One Allentown Parkway, Allen,
Texas, on Tuesday, May 12, 1998 at 10:00 a.m., Central Time, and at any
adjournment of such meeting. This Proxy Statement and the accompanying form of
proxy are being first sent or given to stockholders on or about April 8, 1998.
The 1997 Annual Report of the Company is being mailed to stockholders with this
Proxy Statement.
PURPOSE OF THE MEETING
At the annual meeting, the Company's stockholders will consider and vote
upon the following matters: (i) the election of three directors; (ii) a proposal
to approve certain amendments to the Atrion Corporation 1997 Stock Incentive
Plan (the "1997 Stock Incentive Plan"); (iii) a proposal to approve the Atrion
Corporation 1998 Outside Directors Stock Option Plan (the "1998 Directors
Plan"); and (iv) a proposal to ratify the Board of Directors' appointment of
Arthur Andersen LLP as independent accountants to audit the Company's financial
statements for the year 1998.
VOTING SECURITIES AND RECORD DATE
Stockholders of record at the close of business on March 23, 1998 (the
"Record Date") will be entitled to notice of, and to vote at, the annual meeting
and at any adjournment thereof. At the close of business on the Record Date, the
Company had outstanding 3,201,645 shares of common stock, the only voting
securities of the Company. Holders of record of shares of common stock
outstanding on the Record Date will be entitled to one vote for each share held
of record on that date upon each matter presented to the stockholders to be
voted upon at the meeting.
Shares of common stock of the Company represented by properly executed
proxies received in time for the annual meeting, unless previously revoked, will
be voted at the annual meeting as specified by the stockholders on the proxies.
If no such specification is made, shares represented by such proxies will be
voted as recommended by the Board of Directors. A proxy may be revoked at any
time before it is voted at the meeting by delivering to the Company a
later-dated proxy, by voting by ballot at the meeting or by filing with the
Inspectors of Election an instrument of revocation.
REQUIRED VOTE
The presence, in person or by proxy, of the holders of a majority of the
shares of common stock outstanding on the Record Date is necessary to constitute
a quorum at the annual meeting. Abstentions and broker non-votes will be counted
as present and represented at the annual meeting for purposes of determining a
quorum. Directors will be elected at the annual meeting by a plurality of the
votes cast by the stockholders present in person or by proxy and entitled to
vote. Abstentions and broker non-votes will have no effect on the outcome of the
election of directors. Approval of the amendments to the 1997 Stock Incentive
Plan and approval of the 1998 Directors Plan will require the affirmative vote
of a majority of the votes cast on each such matter. Abstentions will have the
same effect as a vote against and broker non-votes will have no effect on the
outcome of the vote with respect to such matters.
<PAGE> 5
SOLICITATION OF PROXIES
The cost of soliciting proxies will be borne by the Company. In addition to
the use of the mails, proxies may be solicited personally or by telephone by the
directors, officers and employees of the Company without additional
compensation. Brokerage firms, nominees, fiduciaries and other custodians will
be requested to forward soliciting materials to the beneficial owners of the
common stock of the Company held in their names or in those of their nominees
and their reasonable expenses will be reimbursed upon request.
SECURITIES OWNERSHIP
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the beneficial
ownership of shares of common stock of the Company as of February 1, 1998 by the
only persons known by the Company to be the beneficial owners of more than 5% of
the outstanding common stock of the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED CLASS (A)
- ------------------------------------ ------------------ ----------
<S> <C> <C>
Dimensional Fund Advisors Inc.(b)........................... 240,350(b) 7.2%
1299 Ocean Avenue
11th Floor
Santa Monica, California 90401
T. Rowe Price Associates, Inc.(c)........................... 300,000(c) 9.0%
100 E. Pratt Street
Baltimore, Maryland 21202
</TABLE>
- ---------------
(a) For purposes of this table, the percentage of class beneficially owned has
been computed, in accordance with Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), on the basis of
3,243,645 shares of common stock outstanding on February 1, 1998, plus
99,200 shares of common stock issuable pursuant to options exercisable on
February 1, 1998 or within 60 days thereafter.
(b) Based upon a Schedule 13G filed with the Securities and Exchange Commission
(the "Commission") and furnished to the Company by Dimensional Fund
Advisors Inc. ("Dimensional"), a registered investment adviser, reporting
that Dimensional is deemed to have beneficial ownership of 240,350 shares
of common stock of the Company and that all of such shares are held in
portfolios of DFA Investment Dimensions Group Inc., a registered open-end
investment company, or in series of the DFA Investment Trust Company, a
Delaware business trust, or the DFA Group Trust and DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional serves as investment manager. In its Schedule 13G,
Dimensional has reported that it has sole power to vote or direct the vote
of 140,600 shares of common stock of the Company included in the 240,350
shares listed above, that persons who are officers of Dimensional also
serve as officers of DFA Investment Dimensions Group Inc. and the DFA
Investment Trust Company and, in such capacity, have the power to vote or
direct the vote of 99,750 shares of common stock of the Company held by
such investment companies and included in the 240,350 shares listed above,
and that Dimensional has the sole power to dispose or direct the
disposition of the 240,350 shares of common stock of the Company.
Dimensional has disclaimed beneficial ownership of all such shares.
(c) Based upon a Schedule 13G filed with the Commission and furnished to the
Company by T. Rowe Price Associates, Inc. ("Price Associates") and T. Rowe
Price Small Cap Value Fund, Inc. reporting that T. Rowe Price Small Cap
Value Fund, Inc. has sole power to vote or direct the vote of such shares
of common stock and that Price Associates, which serves as investment
adviser for T. Rowe Price Small Cap Value Fund, Inc., has sole power to
dispose or direct the disposition of such shares. For purposes of the
reporting requirements of the Exchange Act, Price Associates is deemed to
be a beneficial owner of such shares of common stock; however, Price
Associates has disclaimed beneficial ownership of all such shares.
2
<PAGE> 6
SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of shares of common stock of the Company as of February 1, 1998 by (i)
each of the directors of the Company, three of whom are also the nominees for
election as directors at the annual meeting; (ii) the executive officers of the
Company who are named in the Summary Compensation Table herein; and (iii) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED(A) OF CLASS(A)
- ---- --------------------- -----------
<S> <C> <C>
Emile A. Battat............................................. 66,300(b) 2.0%
Jerry A. Howard............................................. 63,039(c) 1.9
Richard O. Jacobson......................................... 79,400(d) 2.4
Jerome J. McGrath........................................... 6,300(e) *
John H. P. Maley............................................ 3,000(f) *
Hugh J. Morgan, Jr.......................................... 31,500(g) *
J. Kenneth Smith............................................ 6,720(h) *
Roger F. Stebbing........................................... 4,800(i) *
John P. Stupp, Jr........................................... 141,000(j) 4.2
Jeffery Strickland.......................................... 20,184(k) *
Dick Rabenau................................................ 6,900(l) *
Charles S. Gamble........................................... 1,800 *
All directors and executive officers as a group............. 430,943(m) 12.9
</TABLE>
- ---------------
* Less than 1% of class outstanding
(a) The above information is based upon information furnished by the persons
listed. For purposes of this table, the percentage of class beneficially
owned has been computed, in accordance with Rule 13d-3(d)(1) under the
Exchange Act, on the basis of 3,243,645 shares of common stock outstanding
on February 1, 1998 plus 99,200 shares of common stock issuable pursuant to
options exercisable on February 1, 1998 or within 60 days thereafter.
Except as otherwise indicated in the notes to this table, beneficial
ownership includes sole voting and investment power.
(b) Includes 2,000 shares issuable to Mr. Battat pursuant to options
exercisable on February 1, 1998 or within 60 days thereafter.
(c) Includes 45,000 shares issuable to Mr. Howard pursuant to options
exercisable on February 1, 1998 or within 60 days thereafter.
(d) Includes 2,000 shares issuable to Mr. Jacobson pursuant to options
exercisable on February 1, 1998 or within 60 days thereafter.
(e) Includes 2,000 shares issuable to Mr. McGrath pursuant to options
exercisable on February 1, 1998 or within 60 days thereafter.
(f) Includes 2,000 shares issuable to Mr. Maley pursuant to options exercisable
on February 1, 1998 or within 60 days thereafter.
(g) Includes 2,000 shares issuable to Mr. Morgan pursuant to options
exercisable on February 1, 1998 or within 60 days thereafter.
(h) Includes 630 shares held under usufruct as to which Mr. Smith has voting
power but no dispositive power and 2,000 shares issuable to Mr. Smith
pursuant to options exercisable on February 1, 1998 or within 60 days
thereafter.
(i) Includes 2,000 shares issuable to Mr. Stebbing pursuant to options
exercisable on February 1, 1998 or within 60 days thereafter.
(j) Includes 135,000 shares held by Stupp Bros., Inc. as to which shares Mr.
Stupp shares voting power and investment power as a director and executive
officer of, and as a voting trustee of a voting trust which owns 100% of
the stock of, Stupp Bros., Inc. and 2,000 shares issuable to Mr. Stupp
pursuant to options exercisable on February 1, 1998 or within 60 days
thereafter.
(k) Includes 1,225 shares owned jointly with his wife and 17,300 shares
issuable to Mr. Strickland pursuant to options exercisable on February 1,
1998 or within 60 days thereafter.
3
<PAGE> 7
(l) Includes 3,900 shares issuable to Mr. Rabenau pursuant to options
exercisable on February 1, 1998 or within 60 days thereafter.
(m) See notes (b)-(l) above.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors to file initial reports of ownership and reports of changes of
ownership of the Company's common stock with the Commission. Executive officers
and directors are required to furnish the Company with copies of Section 16(a)
forms that they file. Based upon a review of these filings and written
representations from the Company's directors and executive officers regarding
the filing of such reports, the Company believes that its directors and
executive officers complied with all applicable Section 16(a) filing
requirements during 1997.
ELECTION OF DIRECTORS
The Company's Board of Directors is divided into three classes: Class I,
Class II and Class III. Three Class III directors are to be elected at the
annual meeting to serve until the annual meeting of stockholders to be held in
2001 and until the election and qualification of their respective successors in
office. Each of the three nominees for election as a Class III director
currently is a member of the Board of Directors and was elected by the
stockholders to the Board of Directors of ATRION Corporation, the predecessor to
the Company prior to its reincorporation in Delaware in February 1997. If any of
the nominees listed below, each of whom has indicated his willingness to serve
as a director if elected, is not a candidate when the election occurs, proxies
will be voted for election of the remaining nominees and may be voted for the
election of any substitute nominee.
The following information is furnished with respect to each nominee for
election as a director and each director whose term will continue after the
annual meeting.
Name, Age, Service as a Director of the Company(a)
Principal Occupation, Positions and Offices, Other Directorships and Business
Experience
NOMINEES FOR ELECTION AS DIRECTORS
Class III -- Term Ending in 2001
JERRY A. HOWARD
Mr. Howard, age 55, has been a director since 1985. He is President and
Chief Executive Officer of the Company and is Chairman of the Board or President
of each of the Company's subsidiaries. Mr. Howard joined the Company as
President in December 1984 and was elected to the additional positions of Chief
Executive Officer of the Company and Chairman of the Board or President of the
Company's subsidiaries at various times in the period from May 1985 to May 1996.
He served as Chairman of the Board of the Company from January 1991 to January
1998.
ROGER F. STEBBING
Mr. Stebbing, age 57, has been a director since 1992. Mr. Stebbing is
President and Chief Executive Officer of Marlboro Enterprises, Inc., a company
engaged in chemical plant engineering, design, construction and operation, and
has served in such capacities since 1976. He is also President and Chief
Executive Officer of Stebbing and Associates, Inc., an engineering consulting
company, and has served in such capacities since 1986.
JOHN P. STUPP, JR.
Mr. Stupp, age 47, has been a director since 1985. He is the Executive Vice
President of Stupp Bros., Inc., a structural steel fabrication company, and has
served in such capacity since December 1989. From
4
<PAGE> 8
January 1992 to August 1995, Mr. Stupp also served as President and since August
1995 he has served as Chief Executive Officer of Stupp Corporation, a division
of Stupp Bros., Inc.
DIRECTORS CONTINUING IN OFFICE
Class I -- Term Ending in 1999
EMILE A. BATTAT
Mr. Battat, age 60, has been a director since 1987 and has served as
Chairman of the Board of the Company since January 1998. Mr. Battat is President
and Chief Executive Officer of Piedmont Enterprises, Inc., a consulting firm,
and has served in such position since March 1994. Mr. Battat served as the
President and Chief Executive Officer of Minemet, Inc., a company engaged in
international trade, from August 1978 until February 1994.
JOHN H. P. MALEY
Mr. Maley, age 62, has been a director since February 1996. Mr. Maley has
been a consultant since January 1995. He is also Chairman of Magister
Corporation, a company which manufactures orthopedic and consumer healthcare
products, and has served in such capacity since July 1995. From 1976 to December
1994 he was Chairman and Chief Executive Officer of Chattanooga Group, Inc., a
manufacturer of physical therapy equipment. He is a director of Rehabilicare,
Inc.
J. KENNETH SMITH
Mr. Smith, age 70, has been a director since 1982. Preceding his retirement
in 1986, Mr. Smith was the Director -- Government Relations of Sun Exploration
and Production Company (later known as Oryx Energy Company), a company engaged
in oil and gas production.
Class II -- Term Ending in 2000
RICHARD O. JACOBSON
Mr. Jacobson, age 61, has been a director since 1992. Mr. Jacobson is
President and Chief Executive Officer of Jacobson Warehouse Company, Inc., a
company engaged in public warehousing and distribution, and has served in such
capacities for 29 years. He is a director of Allied Group, Inc., FelCor Suite
Hotels Inc. and Heartland Express, Inc.
JEROME J. MCGRATH
Mr. McGrath, age 75, has been a director since 1988. Mr. McGrath was Of
Counsel to the law firm of Gallagher, Boland, Meiburger & Brosnan from January
1988 until his retirement in June 1997. From January 1978 through December 1987,
Mr. McGrath served as President of the Interstate Natural Gas Association of
America.
HUGH J. MORGAN, JR.
Mr. Morgan, age 69, has been a director since 1988. Mr. Morgan is Chairman
of the Board of National Bank of Commerce of Birmingham and has served in such
position since February 1990. From May 1987 to February 1990, he was Vice
Chairman of the Board of said bank. Mr. Morgan was employed for many years by
Sonat Inc., a diversified energy holding company, or by Southern Natural Gas
Company, a natural gas pipeline company and a wholly owned subsidiary of Sonat
Inc., and immediately prior to his retirement in
5
<PAGE> 9
1987 served as Vice Chairman of the Board of Sonat Inc. and as Chairman of the
Board of Southern Natural Gas Company.
- ---------------
(a) The Company was formed in 1996 as a wholly-owned subsidiary of ATRION
Corporation, an Alabama corporation (the "Predecessor Corporation"), as a
part of the Predecessor Corporation's plan to reincorporate in Delaware. The
proposal to approve such reincorporation was approved at a special meeting
of shareholders of the Predecessor Corporation on February 21, 1997, and the
reincorporation was completed on February 25, 1997 through the merger of the
Predecessor Corporation with and into the Company, with the Company
continuing as the surviving corporation and the successor to the Predecessor
Corporation. In connection with the reincorporation, all of the directors
and executive officers of the Predecessor Corporation became directors and
executive officers of the Company, serving in the same capacities. Unless
the context otherwise requires, references in this Proxy Statement to the
Company, Board of Directors and executive officers of the Company prior to
February 25, 1997 shall mean the Predecessor Corporation and its Board of
Directors and executive officers.
INFORMATION REGARDING BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors held nine meetings during 1997. Each director
attended at least 75% of the aggregate of the number of meetings of the Board of
Directors and the number of meetings of all committees on which he served held
in 1997 during the time he served as a director or as a member of such
committees.
The Board of Directors has three standing committees, the Executive
Committee, the Compensation Committee and the Audit Committee. The Executive
Committee is currently comprised of Jerry A. Howard, Hugh J. Morgan, Jr. and J.
Kenneth Smith. The Compensation Committee, which is currently comprised of Emile
A. Battat, Richard O. Jacobson, Jerome J. McGrath, John H. P. Maley, Hugh J.
Morgan, Jr., J. Kenneth Smith, Roger F. Stebbing and John P. Stupp, Jr., makes
recommendations to the Board of Directors as to the remuneration of all
executive officers of the Company and administers the Atrion Corporation 1990
Stock Option Plan (the "1990 Stock Option Plan"), the Atrion Corporation 1994
Key Employee Stock Incentive Plan (the "1994 Stock Incentive Plan"), the 1997
Stock Incentive Plan, the Atrion Medical Products, Inc. Short Term Incentive
Compensation Plan, the Atrion Medical Products, Inc. Long Term Incentive
Compensation Plan, the Halkey-Roberts Corporation Short Term Incentive
Compensation Plan and the Halkey-Roberts Corporation Long Term Incentive
Compensation Plan. The Compensation Committee met four times in 1997. The Audit
Committee, the current members of which are John H. P. Maley, Jerome J. McGrath,
Roger F. Stebbing and John P. Stupp, Jr., has the responsibility of reviewing
the Company's financial results, the scope and result of audits and internal
accounting controls. The Audit Committee also recommends to the Board of
Directors the appointment of the Company's independent auditors. The Audit
Committee met three times in 1997.
Until February 1998, the Company paid each outside director of the Company
(a director who is not an employee of the Company or any subsidiary) a fee of
$1,000 per month and $750 for each meeting of the Board of Directors of the
Company at which he was in attendance. Beginning February 1, 1998 and subject to
stockholder approval of the 1998 Directors Plan described herein, the Board of
Directors of the Company suspended the payment of those cash retainers and
meeting fees for so long as options are to be awarded under the 1998 Directors
Plan. If the 1998 Directors Plan is not approved by stockholders, the cash
retainers and meeting fees will continue to be paid. The Company also reimburses
each such director for travel and out-of-pocket expenses incurred in connection
with attending meetings of the Board of Directors. The Company also has had a
deferred compensation plan pursuant to which outside directors could elect to
defer receipt of all or a portion of their monthly fees and meeting fees. Such
election was to be made during certain periods of each year and the percentages
specified in such election could be changed prospectively once each year. The
Company maintains certain bookkeeping accounts to which it credits the amount of
such fees which each outside director elected to defer for each year, together
with interest. The balances in such accounts are payable within 30 days after
the earlier of the date specified by the outside director and the date on which
he ceases to be an outside director.
6
<PAGE> 10
Pursuant to the Company's Restricted Shares Compensation Plan for
Non-Employee Directors (the "Restricted Shares Plan"), the Company is to issue
on July 10 of each year 400 shares of common stock of the Company to each person
who was serving as an outside director of the Company on the day before the
immediately preceding annual meeting of stockholders and who had been elected to
such position at least 11 months prior to such date. The aggregate number of
shares of common stock of the Company that may be awarded pursuant to the
Restricted Shares Plan may not exceed 52,500; however, such number is to be
adjusted to give proper effect to any change in the shares of common stock of
the Company by reason of a recapitalization, stock split, stock dividend or
other change in capitalization affecting the common stock. The Restricted Shares
Plan provides that the shares of common stock awarded to an outside director may
not be sold, assigned, transferred, pledged or otherwise encumbered until the
earliest of (i) the outside director's death, (ii) the outside director's
permanent and total disability or (iii) the date which is 12 months from the
date on which such shares were issued. The Board of Directors of the Company has
determined, subject to stockholder approval of the 1998 Directors Plan described
herein, to suspend the annual issuance of shares of common stock under the
Restricted Shares Plan for so long as options are to be awarded under the 1998
Directors Plan. If the 1998 Directors Plan is not approved by stockholders, the
Company will continue making restricted stock grants under the Restricted Shares
Plan.
Pursuant to the 1997 Stock Incentive Plan, on July 10 of each year each
outside director is granted automatically an option to purchase 2,000 shares of
common stock, at an exercise price equal to the fair market value of the common
stock on the date of grant. Each such option is fully exercisable on the date of
grant and expires on the first to occur of (i) the tenth anniversary of the date
of grant; (ii) six months after the date the outside director ceases to be a
director of the Company other than as a result of his death; or (iii) one year
after the outside director ceases to be a director by reason of his death.
Approval of the 1998 Directors Plan will have no effect on the automatic grants
to outside directors under the 1997 Stock Incentive Plan.
PROPOSAL TO AMEND THE ATRION CORPORATION
1997 STOCK INCENTIVE PLAN
On May 30, 1997, the Company's stockholders approved the Atrion Corporation
1997 Stock Incentive Plan (the "1997 Stock Incentive Plan") pursuant to which
key employees of the Company are eligible for awards of stock options, stock
appreciation rights, restricted stock and performance shares and the Company's
outside directors (directors who are not employees of the Company or any
subsidiary) receive automatic grants of nonqualified stock options. On February
10, 1998, the Board of Directors adopted, subject to stockholder approval,
certain amendments to the 1997 Stock Incentive Plan as described below.
SUMMARY OF AMENDMENTS
The 1997 Stock Incentive Plan presently provides that the aggregate number
of shares of common stock that is available for awards thereunder is the sum of
(i) 300,000 shares and (ii) the shares of common stock reserved for issuance
under the Company's 1990 Stock Option Plan and 1994 Stock Incentive Plan (the
"Prior Plans") in excess of the number of shares of common stock as to which
options had been awarded under such plans as of the effective date of the 1997
Stock Incentive Plan including all shares subject to options previously granted
which lapse, expire, terminate or are canceled. Since adoption of the 1997 Stock
Incentive Plan, awards covering 257,541 shares have been made to key employees
of the Company, including a number of the officers and other key employees of
Company subsidiaries and outside directors of the Company. As of February 28,
1998, only 97,734 shares of common stock were available for future awards under
the 1997 Stock Incentive Plan. In order to ensure the continued availability of
shares of common stock for awards under the 1997 Stock Incentive Plan,
particularly in light of the change in the Company's business, the addition of
new employees in connection with the purchase of assets from Quest Medical, Inc.
and the Compensation Committee's plan to use stock awards to further align
management's and other key employees' interests with those of the stockholders,
on February 10, 1998 the Board of Directors adopted an amendment to the 1997
Stock Incentive Plan, which is subject to stockholder approval, to increase the
number of shares of common stock available under the 1997 Stock Incentive Plan
by 200,000 shares. Also, the 1997 Stock Incentive Plan as approved by the
stockholders provides that no participant can receive awards during any calendar
year
7
<PAGE> 11
covering in the aggregate more than 50,000 shares. The Board of Directors
believes that such limitation may unduly restrict the flexibility of the
Compensation Committee in making awards under the 1997 Stock Incentive Plan in
the future as the Company continues to move toward a greater percentage of
compensation being stock-based. Accordingly, at its meeting on February 10,
1998, the Board of Directors adopted an amendment to the 1997 Stock Incentive
Plan, which is also subject to stockholder approval, to eliminate the limit on
the number of shares of common stock that can be covered by awards to any
participant in any calendar year.
DESCRIPTION OF THE 1997 STOCK INCENTIVE PLAN
The following is a summary of the essential features of the 1997 Stock
Incentive Plan.
Number of Shares. If the February 10, 1998 amendment adding 200,000 shares
is approved, the aggregate number of shares of common stock that will be
available for grants under the 1997 Stock Incentive Plan will be the sum of (i)
500,000 shares and (ii) the shares of common stock reserved for issuance under
the Prior Plans in excess of the number of shares of common stock as to which
options had been awarded on the effective date of the 1997 Stock Incentive Plan
including all shares subject to options previously granted which lapse, expire,
terminate or are canceled. All shares allocated to awards under the 1997 Stock
Incentive Plan that are canceled or forfeited will be available for subsequent
awards. If the amendment deleting the maximum number of shares covered by awards
in any calendar year is approved, there will be no limit on the number of shares
that can be covered by awards to any participant during any calendar year.
Administration; Term of the 1997 Stock Incentive Plan. The 1997 Stock
Incentive Plan is administered by the Compensation Committee, the members of
which are ineligible to receive awards other than automatic grants of
nonqualified stock options ("NQSOs"). It is intended that the Compensation
Committee will at all times be composed of "nonemployee directors" within the
meaning of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act. Under
the 1997 Stock Incentive Plan, the Compensation Committee has full power to (i)
designate the key employees to receive awards from time to time; (ii) determine
the sizes and types of awards (other than with respect to the automatic option
grants to outside directors, as described below); (iii) determine the terms and
provisions of awards as it deems appropriate; (iv) construe and interpret the
1997 Stock Incentive Plan and establish, amend or waive rules and regulations
relating to the administration of the 1997 Stock Incentive Plan; (v) determine
whether awards (other than the automatic option grants to outside directors) are
to be granted singularly, in combination or in tandem; (vi) accelerate or defer
(with the consent of the key employee) the vesting, exercise or payment of an
award or the performance period of an award; (vii) accept the surrender of
awards and the substitution of new or revised awards in exchange therefor;
(viii) amend the terms and provisions of any outstanding award to the extent
such terms and provisions are within the discretion of the Compensation
Committee; and (ix) make all other decisions and determinations necessary or
advisable for the administration of the 1997 Stock Incentive Plan. However, the
Compensation Committee does not have the authority to cancel any options granted
to executive officers of the Company and replace those options with options with
lower option prices. All determinations and decisions made by the Compensation
Committee pursuant to the 1997 Stock Incentive Plan are final, conclusive and
binding. The Board of Directors administers the provisions of the 1997 Stock
Incentive Plan relating to the automatic award of options to outside directors.
The 1997 Stock Incentive Plan is to remain in effect until all shares of
common stock subject to it have been purchased or acquired, unless sooner
terminated by the Board of Directors. Notwithstanding the foregoing, no grants
of incentive stock options ("ISOs") will be made under the 1997 Stock Incentive
Plan after March 12, 2007.
Eligibility. "Key employees" of the Company and its subsidiaries and
outside directors of the Company are eligible to participate in the 1997 Stock
Incentive Plan. The selection of key employees is entirely within the discretion
of the Compensation Committee. As of February 28, 1998, approximately 30
officers and other key employees were eligible to participate in the 1997 Stock
Incentive Plan. The concept of a "key employee" is somewhat flexible and such
factors as the duties and responsibilities of employees, the value of their
services, their present and potential contributions to the success of the
Company and other relevant factors are
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<PAGE> 12
considered. Accordingly, the number of persons who ultimately may be eligible to
participate in the 1997 Stock Incentive Plan is not presently determinable. As
of February 28, 1998, eight outside directors were eligible to participate in
the annual automatic grant of NQSOs.
Awards of Stock Options and Stock Appreciation Rights. The 1997 Stock
Incentive Plan provides for the grant of options to purchase shares of common
stock to key employees at option prices to be determined by the Compensation
Committee as of the date of grant. For stock option awards intended to qualify
as ISOs, the option price may not be less than the fair market value of the
common stock on the date of grant. On April 3, 1998, the closing price of the
common stock of the Company on The Nasdaq Stock Market was $11.0625. Each grant
of options is evidenced by an award agreement which specifies the option price,
the term of the option, the number of shares subject to the option and such
other provisions as the Compensation Committee determines. Options granted under
the 1997 Stock Incentive Plan will expire not more than ten years from the date
of grant. The award agreements also set forth the extent (if any) to which the
participant will have the right to exercise his options following termination of
employment.
Awards of options under the 1997 Stock Incentive Plan, which may be either
ISOs (which qualify for special tax treatment) or NQSOs are to be determined by
the Compensation Committee, in its discretion. Payment for shares issued
pursuant to the exercise of an option may be made either in cash or by tendering
shares of common stock of the Company with a fair market value at the date of
the exercise equal to the portion of the exercise price which is not paid in
cash. A participant granted an option under the 1997 Stock Incentive Plan will
have no rights as a stockholder of the Company with respect to the shares
subject to such option except to the extent shares are actually issued.
The 1997 Stock Incentive Plan also provides for the grant of stock
appreciation rights ("SARs"), either in tandem with stock options or
freestanding, which entitle holders upon exercise to receive either cash or
shares of common stock or a combination thereof as the Compensation Committee,
in its discretion, determines with a value equal to the difference between (i)
the fair market value on the exercise date of the shares of common stock with
respect to which an SAR is exercised and (ii) the fair market value of such
shares on the date of grant or, if different, the exercise price of the related
option in the case of a tandem SAR. With respect to a tandem SAR, the exercise
of the option (or the SAR) will result in the cancellation of the related SAR
(or option) to the extent of the number of shares in respect of which such
option or SAR has been exercised.
Additional Provisions Regarding ISOs. ISOs may be granted only to persons
who are employees of the Company or a subsidiary on the date of an award. In
addition, no ISO may be exercised after the expiration of ten years from the
date the award is granted. The aggregate fair market value (determined on the
date of the award) of the shares of common stock with respect to which ISOs are
exercisable for the first time by any key employee during any calendar year
(under all plans of the Company and its subsidiaries) may not exceed $100,000.
In addition, no ISO may be exercised more than three months after termination of
employment for any reason other than disability or death, unless (i) the
participant dies during such three-month period and (ii) the award agreement or
the Compensation Committee permits later exercise.
Awards of Restricted Stock and Performance Shares. The 1997 Stock
Incentive Plan provides for the award of shares of restricted stock to such key
employees and on such terms and conditions as determined from time to time by
the Compensation Committee. The restricted stock award agreements entered into
with the participant contain the terms of the award, including the number of
shares of restricted stock granted and the applicable period of restriction.
Additional restrictions may include the continued service of the participant
with the Company, the attainment of specified performance goals or any other
conditions deemed appropriate by the Compensation Committee. The award agreement
also sets forth the extent, if any, to which the participant will have the right
to receive unvested restricted stock following termination of employment.
In addition to restricted stock, the Compensation Committee may award
performance shares to key employees. The value of a performance share will equal
the fair market value of a share of common stock. The number of performance
shares granted or the vesting of granted performance shares can be contingent on
the attainment of certain performance goals or other conditions over a period of
time (the "performance period"), all as determined by the Compensation Committee
and evidenced by an award agreement to be entered into
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<PAGE> 13
with the participant. During the performance period, the Compensation Committee
will determine whether any performance shares have been earned. Earned
performance shares may be paid in cash, shares of common stock or a combination
thereof having an aggregate fair market value equal to the value of the
performance shares as of the payment date. Common stock used to pay earned
performance shares may have additional restrictions as determined by the
Compensation Committee. In addition, the Compensation Committee may cancel any
earned performance shares and replace them with stock options determined by the
Compensation Committee to be of equivalent value based on a conversion formula
specified in the participant's performance share award agreement.
Awards to Outside Directors. The 1997 Stock Incentive Plan contains a
provision for the automatic grant of NQSOs annually to outside directors of the
Company. On July 10 of each year while the 1997 Stock Incentive Plan is in
effect, each outside director is granted automatically an option to purchase
2,000 shares at an exercise price equal to the fair market value of the common
stock on the date of grant. Each such option is fully exercisable on the date of
grant and expires on the first to occur of (i) the tenth anniversary of the date
of grant; (ii) six months after the date the outside director ceases to be a
director of the Company other than as a result of his death; or (iii) one year
after the outside director ceases to be a director by reason of his death. The
Compensation Committee may not provide for an extended exercise period beyond
such stated periods.
Changes in Capitalization; Change in Control. In the event of any change
in the outstanding shares of common stock of the Company by reason of any stock
dividend, stock split, spin-off, recapitalization, merger, consolidation,
combination, exchange of shares or otherwise, the aggregate number and class of
shares of common stock with respect to which awards may be made under the 1997
Stock Incentive Plan, and the number, class and price of shares subject to
outstanding awards under the 1997 Stock Incentive Plan, are to be adjusted by
the Compensation Committee as it determines to be appropriate and equitable in
its discretion.
The 1997 Stock Incentive Plan provides that in the event of a change in
control of the Company, all options, other than NQSOs granted to outside
directors, and all SARs will become and remain fully exercisable as of the date
of the change in control. Outstanding awards of restricted stock and performance
shares will become immediately vested and any applicable performance conditions
shall be deemed satisfied (at the target performance condition, if applicable)
as of the date of the change in control. To the extent set forth in any award
agreement (other than with respect to options granted automatically to outside
directors) a participant will be permitted to surrender for cancellation within
60 days after such change in control any outstanding options, SARs, restricted
stock or performance shares and will be entitled to receive 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 exercise 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.
For purposes of the 1997 Stock Incentive Plan, a "change in control" is
deemed to occur when (i) any person acquires securities of the Company
representing 25% or more of the combined voting power of the Company's
then-outstanding securities; (ii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than
(A) 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) 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 (B) a merger or consolidation
effected to implement a recapitalization of the Company (or similar transaction)
in which no person acquired 25% or more of the combined voting power of the
Company's then outstanding securities; (iii) when, during any period of two
consecutive years, individuals who, at the beginning of such period, constitute
the directors of the Company cease for any reason to constitute at least a
majority thereof unless each director who was not a director at the beginning of
such period was elected by, or on the recommendation of, at least 67% of the
directors at the beginning of such period; or (iv) the stockholders 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.
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<PAGE> 14
The "change in control price" means the highest price per share (i) paid
for shares of common stock of the Company 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 (ii) paid or offered in any transaction related to a change
in control of the Company, in either event at any time during the preceding 60
day period, as determined by the Compensation Committee.
Amendment and Termination of the 1997 Stock Incentive Plan. The Board of
Directors may alter, amend, discontinue, suspend or terminate the 1997 Stock
Incentive Plan at any time in whole or in part. However, stockholder approval is
required for any change to the material terms of the 1997 Stock Incentive Plan,
and no amendment or modification of the 1997 Stock Incentive Plan may materially
and adversely affect any award previously granted without the consent of the
participant.
FEDERAL INCOME TAX CONSEQUENCES
The general principles of federal income tax law that apply to the 1997
Stock Incentive Plan are summarized in the following discussion. All provisions
of federal income tax law are subject to change. Currently, the maximum tax rate
applicable to capital gain income of individuals is less than the maximum tax
rate applicable to ordinary income. The following material, therefore, discusses
the characterization of income under the various 1997 Stock Incentive Plan
features as ordinary income or capital gain or loss. With respect to ISOs, NQSOs
and restricted stock, long-term gains are subject to tax at the rate of 28% if
the shares are held for more than one year but less than 18 months or at the
rate of 20% if the shares are held for more than 18 months. State and local tax
consequences are beyond the scope of this summary.
Incentive Stock Options. ISOs granted under the 1997 Stock Incentive Plan
are subject to the applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), including Section 422 thereof. If no "disqualifying
disposition" of shares of common stock issued to an optionee upon the exercise
of an ISO is made within one year after the exercise date or within two years
after the date the ISO was granted, then (i) no income will be recognized by the
optionee at the time of the grant of the ISO, (ii) no income will be recognized
by the optionee at the date of exercise, (iii) upon sale of the shares acquired
by exercise of the ISO, any amount realized in excess of the option price will
be taxed to the optionee as a long-term capital gain and any loss sustained will
be a long-term capital loss and (iv) no deduction will be allowed to the Company
for federal income tax purposes. If a "disqualifying disposition" of such shares
is made, the optionee will recognize taxable ordinary income in an amount equal
to the excess of the fair market value of the shares purchased at the time of
exercise over the option price (the "bargain purchase element") and the Company
will be entitled to a federal income tax deduction equal to such amount. The
amount of any gain in excess of the bargain purchase element realized upon a
"disqualifying disposition" will be taxable as capital gain to the holder (for
which the Company will not be entitled to a federal income tax deduction). Upon
exercise of an ISO, the optionee may be subject to alternative minimum tax.
Nonqualified Stock Options. With respect to NQSOs granted under the 1997
Stock Incentive Plan, (i) no income is recognized by the optionee at the time
the NQSO is granted, (ii) at exercise, ordinary income is recognized by the
optionee in an amount equal to the difference between the option price and the
fair market value of the shares on the date of exercise, and the Company
receives a tax deduction for the same amount and (iii) on disposition, the net
appreciation or depreciation after the date of exercise is treated as either
short-term or long-term capital gain or loss depending on whether the shares
have been held for more than one year.
Stock Appreciation Rights. Upon the grant of an SAR, the participant
recognizes no taxable income and the Company receives no deduction. The
participant will recognize ordinary income and the Company will receive a
deduction at the time of exercise equal to the cash and fair market value of
shares payable upon such exercise.
Restricted Stock. Because restricted stock awarded under the 1997 Stock
Incentive Plan is restricted as to transferability and subject to a substantial
risk of forfeiture for a period of time after being awarded, the recipient
generally will not be subject to taxation at the time of the award but will
recognize ordinary income in an amount equal to the fair market value of the
shares at the end of the applicable restriction period.
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<PAGE> 15
However, a recipient who makes an election under Section 83(b) of the Code
within 30 days of the date of the grant will recognize ordinary taxable income
on the date of the grant equal to the fair market value of the shares of
restricted stock as if the shares were unrestricted and could be sold
immediately. If the shares subject to such election are subsequently forfeited,
the recipient will not be entitled to any deduction, refund or loss for tax
purposes. Upon sale of the shares after the restriction period has expired, the
holding period to determine whether the recipient has long-term or short-term
capital gain or loss begins when the restriction period expires, and the tax
basis will be the fair market value of the shares at that time. However, if the
recipient timely elects to be taxed as of the date of grant, the holding period
commences on the date of the grant and the tax basis will be the fair market
value of the shares on the date of the grant as if the shares were then
unrestricted and could be sold immediately. The Company generally will be
entitled to a deduction, equal to the amount that is taxable as ordinary
compensation income to the recipient, for the Company's taxable year in which
the recipient recognizes such income.
Performance Shares. A participant who is awarded performance shares will
not recognize income and the Company will not be allowed a deduction at the time
the award is made. When a participant receives payment for performance shares in
cash or shares of common stock of the Company, the amount of the cash and the
fair market value of the shares received will be ordinary income to the
participant and will be allowed as a deduction for federal income tax purposes
to the Company. However, if there is a substantial risk that any shares used to
pay out earned performance shares will be forfeited (for example, because the
Compensation Committee conditions such shares on the performance of future
services), the taxable event is deferred until the risk of forfeiture lapses. In
that case, the participant can elect to make a Section 83(b) election as
previously described. The Company can take the corresponding deduction at the
time the income is recognized by the participant.
PARTICIPATION IN AND BENEFITS UNDER THE 1997 STOCK INCENTIVE PLAN
The following table sets forth the stock options awarded in 1997 pursuant
to the 1997 Stock Incentive Plan. Awards to key employees are within the
discretion of the Compensation Committee. Thus, the 1997 awards to key employees
as shown below may not be indicative of any future awards which might be granted
to such persons. Outside directors annually receive formula-based NQSOs for a
fixed number of shares pursuant to the provisions of the 1997 Stock Incentive
Plan. Accordingly, the awards made in 1997 to outside directors are reflective
of the number of shares to be awarded annually in the future.
ATRION CORPORATION 1997 STOCK INCENTIVE PLAN
<TABLE>
<CAPTION>
NAME NO. OF SHARES
- ---- -------------
<S> <C>
Jerry A. Howard............................................. 48,000
Chairman of the Board, President and Chief Executive
Officer
Jeffery Strickland.......................................... 18,000
Vice President and Chief Financial Officer, Secretary and
Treasurer
Dick Rabenau................................................ 9,000
President, Atrion Medical Products, Inc.
Charles S. Gamble........................................... 7,500
President, Halkey-Roberts Corporation
Executive Officers as a Group............................... 82,500
Outside Directors as a Group................................ 16,000
All Employees, as a Group,.................................. 14,700
Excluding Executive Officers and Directors
</TABLE>
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENTS TO THE 1997 STOCK INCENTIVE PLAN.
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<PAGE> 16
PROPOSAL TO APPROVE THE ATRION CORPORATION
1998 OUTSIDE DIRECTORS STOCK OPTION PLAN
In 1997, each of the Company's outside directors (directors who are not
employees of the Company or any subsidiary) who attended all of the meetings of
the Board of Directors received compensation in cash and restricted stock of the
Company, valued as of the date of the grant, totaling $23,350, plus an option to
purchase 2,000 shares of common stock at $14.875 per share. In recognition of
the change in the Company's business and the increased opportunities for the
Company to reinvest capital, and to further align the long term interests of the
directors with those of the stockholders, the Board of Directors has adopted,
subject to stockholder approval, the Atrion Corporation 1998 Outside Directors
Stock Option Plan ("1998 Directors Plan") which provides for the grant to
outside directors of stock options that take the place of cash retainers and
meeting fees and restricted stock grants. Under the 1998 Directors Plan, each
outside director is granted options to purchase 10,000 shares of common stock
annually and an outside director serving as Chairman of the Board receives an
option to purchase an additional 10,000 shares of common stock annually. If the
1998 Directors Plan is approved by stockholders, outside directors will, in
effect, receive no compensation unless the market price of the Company's common
stock increases. The Board of Directors believes that the 1998 Directors Plan
will help attract and retain highly qualified persons to serve as directors of
the Company and will provide additional incentives to enhance the long-term
performance of the Company. A summary of the essential features of the 1998
Directors Plan is set forth below.
ELIGIBILITY
Pursuant to the 1998 Directors Plan, only directors of the Company who are
not also employees of the Company or any subsidiary are eligible to receive
awards of stock options. Currently, there are eight directors eligible to
participate in the 1998 Directors Plan.
ADMINISTRATION
The 1998 Directors Plan is to be administered by either the Board of
Directors or a committee appointed by the Board of Directors (the "Committee").
The Committee or, in the event a Committee is not appointed, the Board of
Directors, subject to the provisions of the 1998 Directors Plan, has the power
to construe the 1998 Directors Plan, to determine all questions thereunder and
to adopt and amend such rules and regulations for the administration of the 1998
Directors Plan as it may deem desirable. All determinations and decisions made
by the Committee or, in the event a Committee is not appointed, the Board of
Directors, pursuant to the provisions of the 1998 Directors Plan shall be final,
conclusive and binding.
SHARES SUBJECT TO THE 1998 DIRECTORS PLAN
The aggregate number of shares of common stock for which options may be
granted under the 1998 Directors Plan is 270,000 shares. If any options granted
under the 1998 Directors Plan are surrendered before exercise or lapse without
exercise, such shares will not be available for subsequent grants. In the event
of any change in the outstanding shares of common stock of the Company by reason
of any stock dividend, stock split, spin-off, recapitalization, merger,
consolidation, combination, exchange of shares or otherwise, the aggregate
number and class of shares of common stock reserved under the 1998 Directors
Plan and the number, class and price of shares subject to the unexercised
portion of outstanding options granted under the 1998 Directors Plan are to be
adjusted by the Board of Directors as it determines to be appropriate and
equitable in its discretion.
ANNUAL GRANTS OF OPTIONS; OPTION PRICE
On February 1, 1998, each person who was then serving on the Board of
Directors and who was an outside director, other than the Chairman of the Board,
was automatically granted, without any action by the Committee, an option to
purchase 10,000 shares of common stock. The Chairman of the Board was
automatically granted an option to purchase 20,000 shares of common stock on
such date. All of such grants were made subject to the approval of the 1998
Directors Plan by the stockholders of the Company. On each of
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<PAGE> 17
February 1, 1999 and February 1, 2000, each person who is then serving on the
Board of Directors and who is an outside director, other than the Chairman of
the Board, is to be automatically granted, without any action by the Committee,
an option to purchase 10,000 shares of common stock, and the person who is then
serving as the Chairman of the Board, if he is an outside director, is to be
automatically granted an option to purchase 20,000 shares of common stock. The
purchase price of the common stock subject to each option granted is to be the
fair market value of the common stock on the date of grant, which is equal to
the closing sales price of a share of common stock on such date as reported by
(i) any national securities exchange on which the common stock of the Company is
actively traded or (ii) The Nasdaq Stock Market or, if no shares of common stock
are traded on such exchange or system on such date, then on the next preceding
date on which any shares of common stock were traded on such exchange or system.
On January 30, 1998, which was the trading date next preceding February 1, 1998,
the closing sales price of a share of common stock as reported by The Nasdaq
Stock Market was $13.25. On April 3, 1998, the closing sales price of a share of
common stock as reported by The Nasdaq Stock Market was $11.0625.
VESTING; TERMINATION OF OUTSIDE DIRECTORSHIP
Options granted under the 1998 Directors Plan vest and become exercisable
in four equal quarterly installments on the May 1, August 1, November 1 and
February 1 next succeeding the date of grant; provided, however, that in order
for each installment to vest, the optionee must be serving as an outside
director on the vesting date. Each option will expire ten years from the date of
the grant, unless it is terminated sooner. If an optionee ceases to be an
outside director for any reason other than death or disability, he will have the
right to exercise his options at any time within six months after the date on
which he ceased to be an outside director to the extent of the full number of
shares vested on the date on which he ceased being an outside director. If the
optionee ceases to be an outside director by reason of his death or disability,
then the options may be exercised at any time within 12 months after the date on
which he ceased to be an outside director by the optionee or his legal
representative, in the case of disability, or by his heir or legatee or the
personal representative, administrator or executor of his estate, in the case of
death, to the extent of the full number of shares vested on the date on which he
ceased being an outside director. However, no option is to be exercisable after
the expiration of the ten-year term described above.
RESTRICTIONS ON TRANSFERABILITY
Options may not be transferred by an optionee except by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order,
and during the optionee's lifetime his options can be exercised only by the
optionee or the transferee pursuant to a qualified domestic relations order,
except as otherwise specifically provided in the case of disability. The 1998
Directors Plan provides that the Compensation Committee may impose such
restrictions on the transfer of shares acquired pursuant to the exercise of
options as it deems advisable including, without limitation, restrictions under
applicable federal securities laws, under the requirements of any stock exchange
or market upon which the common stock of the Company is then listed or traded
and under any state securities laws applicable to such shares.
AMENDMENT, MODIFICATION AND TERMINATION
The Board of Directors may at any time alter, amend, discontinue, suspend
or terminate the 1998 Directors Plan in whole or in part; provided, however,
that no amendment or modification made without stockholder approval may (i)
increase the number of shares of common stock subject to the 1998 Directors
Plan, (ii) materially modify the requirements as to eligibility to receive
options or (iii) materially increase benefits accruing to outside directors. No
termination, amendment or modification of the 1998 Directors Plan may adversely
affect in any material way any option previously granted without the written
consent of the optionee.
FEDERAL INCOME TAX CONSEQUENCES
The options granted and to be granted under the 1998 Directors Plan are
NQSOs pursuant to the Code. Accordingly, (i) no income is recognized by the
optionee at the time the option is granted; (ii) at exercise,
14
<PAGE> 18
ordinary income is recognized by the optionee in an amount equal to the
difference between the option price and the fair market value of the shares on
the date of exercise, and the Company receives a tax deduction for the same
amount; and (iii) on disposition, the net appreciation or depreciation after the
date of exercise is treated as either short-term or long-term capital gain or
loss depending on whether the shares have been held for more than one year.
Long-term gains are subject to tax at the rate of 28% if the shares are held for
more than one year but less than 18 months or at the rate of 20% if the shares
are held for more than 18 months.
PARTICIPATION IN AND BENEFITS UNDER THE 1998 DIRECTORS PLAN
The following table sets forth the number of shares of common stock
underlying the options which are to be granted annually to the outside directors
pursuant to the 1998 Directors Plan.
NEW PLAN BENEFITS
ATRION CORPORATION 1998 OUTSIDE DIRECTORS STOCK OPTION PLAN
<TABLE>
<CAPTION>
NO. OF SHARES
UNDERLYING
POSITION OR GROUP OPTION GRANTS
- ----------------- -------------
<S> <C>
Outside Directors as a Group................................ 90,000(a)
</TABLE>
- ---------------
(a) Based upon eight outside directors serving on the Board of Directors, and
assuming that the Chairman of the Board is an outside director.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE 1998 DIRECTORS
PLAN.
RATIFICATION OF APPOINTMENT OF AUDITORS
Subject to stockholder ratification, the Board of Directors, upon
recommendation of the Audit Committee, has appointed the firm of Arthur Andersen
LLP as independent accountants to audit the financial statements of the Company
for the year 1998. Arthur Andersen LLP has audited the Company's financial
statements for many years. A representative of Arthur Andersen LLP will attend
the annual meeting, will have an opportunity to make a statement, and will be
available to respond to appropriate questions. If the stockholders do not ratify
the appointment of Arthur Andersen LLP, the selection of independent auditors
will be reconsidered by the Board of Directors.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY
THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT ACCOUNTANTS TO
AUDIT THE FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR 1998.
15
<PAGE> 19
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the annual
and long-term compensation for services in all capacities to the Company and its
subsidiaries for the years ended December 31, 1997, 1996 and 1995 of those
persons during 1997 who were (i) the Chief Executive Officer of the Company and
(ii) the other executive officers of the Company whose salary and bonus for the
year ended December 31, 1997 exceeded $100,000 (such officers are referred to
herein as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------------------------
AWARDS
ANNUAL COMPENSATION -----------------------
-------------------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS OPTIONS(2) COMPENSATION
- --------------------------- ---- -------- ------- --------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jerry A. Howard................... 1997 $400,000(3) $50,000 $ -- $ -- 48,000 $35,913(4)
Chairman of the 1996 400,000 91,000 -- -- 5,400 34,748
Board, President 1995 400,000 74,400 -- -- 9,000 34,707
and Chief Executive Officer
Jeffery Strickland................ 1997 $135,000 $40,000 $ -- $ -- 18,000 $11,605(4)
Vice President and 1996 97,500 29,080 -- -- 2,700 8,648
Chief Financial 1995 90,000 10,170 -- -- 2,700 8,092
Officer, Secretary and Treasurer
Dick Rabenau...................... 1997 $150,000 $48,560 $ -- $ -- 9,000 $ 8,307(4)
President -- 1996 125,658 42,232 -- -- 2,700 6,916
Atrion Medical 1995 122,185 53,874 19,936(5) -- 9,000 6,748
Products, Inc.
Charles S. Gamble................. 1997 $150,000 $28,800 $ -- $ -- 7,500 $ 9,256(4)
President -- 1996 88,440 29,265 -- -- -- 5,470
Halkey-Roberts Corporation(6)
</TABLE>
- ---------------
(1) Excludes perquisites and other benefits, unless the aggregate amount of such
compensation is at least the lesser of $50,000 or 10% of the total annual
salary and bonus reported for the Named Executive Officer.
(2) For 1996 and 1995, options granted represent incentive stock options granted
under the 1994 Stock Incentive Plan. For 1997, options granted represent
incentive stock options or, with respect to Mr. Howard and Mr. Strickland,
both incentive and nonqualified stock options granted under the 1997 Stock
Incentive Plan.
(3) For additional information regarding Mr. Howard's base salary, see
"Compensation Committee Report on Executive Compensation -- Compensation of
Chief Executive Officer."
(4) Includes the following paid by the Company or one or more of its
subsidiaries: (i) matching contributions to the Atrion Corporation Thrift
Plan or the Halkey-Roberts Corporation Profit Sharing Plan, as the case may
be (Mr. Howard, $9,500; Mr. Strickland, $7,550; Mr. Rabenau, $7,500; and Mr.
Gamble, $9,163); (ii) payment of life insurance premiums (Mr. Howard,
$10,913; Mr. Strickland, $3,250; Mr. Rabenau, $807; and Mr. Gamble, $93);
and (iii) contributions to the Atrion Corporation Supplemental Executive
Thrift Plan (Mr. Howard, $15,500; and Mr. Strickland, $805).
(5) Comprised of club membership fee and dues, and reimbursement for federal
income tax liability resulting from income associated therewith, aggregating
$10,936 and automobile allowance of $9,000.
(6) The Company acquired Halkey-Roberts Corporation ("Halkey-Roberts") in May
1996. Accordingly, Mr. Gamble was not an executive officer of the Company at
any time prior to May 1996 and, in accordance with the Commission's rules on
executive compensation disclosure, information for 1995 is not included for
Mr. Gamble.
16
<PAGE> 20
INFORMATION CONCERNING STOCK OPTIONS
The following tables summarize certain information concerning grants to and
exercises by the Named Executive Officers during the year ended December 31,
1997 of options and the value of all unexercised options held by such persons as
of December 31, 1997.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
PERCENTAGE
OF TOTAL POTENTIAL REALIZABLE VALUE
NO. OF OPTIONS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(2)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------------
NAME GRANTED(1) YEAR PER SHARE(1) DATE 5% 10%
- ---- ---------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jerry A. Howard............. 6,200 5% $13.44 5/27/07 $ 52,405 $132,800
41,800 37 13.25 5/28/07 348,316 882,671
Jeffery Strickland.......... 15,300 14 13.44 5/27/07 129,322 327,716
2,700 2 13.25 5/28/07 22,499 57,015
Dick Rabenau................ 9,000 8 13.44 5/27/07 76,072 192,774
Charles S. Gamble........... 7,500 7 13.44 5/27/07 63,393 160,645
</TABLE>
- ---------------
(1) The options granted in 1997 are incentive stock options or, with respect to
Mr. Howard and Mr. Strickland, incentive stock options and nonqualified
stock options, granted pursuant to the 1997 Stock Incentive Plan and the
applicable provisions of the Code. The exercise price of the options granted
is equal to (i) with respect to incentive stock options, the average of the
high and low price per share of common stock on the date of grant, as
reported by The Nasdaq Stock Market and (ii) with respect to nonqualified
stock options, the closing price per share of common stock on the date of
grant, as reported by The Nasdaq Stock Market. Options are exercisable in
whole or in part during each relevant time period, with one-third
exercisable one year after grant, an additional one-third two years after
grant and the remaining one-third three years after grant. The options are
not transferable by the optionee except by will or by the laws of descent
and distribution, and each option is exercisable during the lifetime of the
optionee, only by the optionee or, in the event of disability, by the
optionee's guardian or representative. All options terminate three months
after the optionee's termination of employment except in case of death or
disability, in which case the options terminate one year after termination
of employment. The number of options granted, the term thereof and the
manner in which options are to be exercised are determined by the
Compensation Committee.
(2) Potential realizable value is based upon the assumption that the market
price of the common stock of the Company will appreciate at the compounded
annual rate shown from the date of grant until the end of the option term.
The dollar amounts in the foregoing table have been calculated based upon
the requirements in the rules on executive compensation disclosure adopted
by the Commission and do not reflect the Company's estimate of future growth
in the price of the Company's common stock.
17
<PAGE> 21
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR END AT YEAR END(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jerry A. Howard..................... -- $ -- 45,000 66,450 $91,604 $51,333
Jeffery Strickland.................. 1,000 5,833 17,300 25,350 33,049 17,504
Dick Rabenau........................ -- -- 3,900 16,800 5,625 15,165
Charles S. Gamble................... -- -- -- 7,500 -- 3,263
</TABLE>
- ---------------
(1) Such value is equal to the product of (i) the closing price of the common
stock of the Company on December 31, 1997 ($13.875 per share) less the
exercise price and (ii) the number of shares subject to in-the-money
options.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
The following table sets forth certain information respecting each Named
Executive Officer who received awards in 1997 under the Atrion Medical Products,
Inc. Long Term Incentive Compensation Plan and the Halkey-Roberts Corporation
Long Term Incentive Compensation Plan:
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
SHARES, UNITS OTHER PERIOD NON-STOCK PRICE-BASED PLANS(2)
OR OTHER UNTIL MATURATION ------------------------------
NAME RIGHTS(1) OR PAYOUT THRESHOLD TARGET MAXIMUM
- ---- ------------- ---------------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Dick Rabenau................. -- 1997 - 1999 $45,000 $90,000 $180,000
Charles S. Gamble............ -- 1997 - 1999 45,000 90,000 180,000
</TABLE>
- ---------------
(1) Two subsidiaries of the Company, Atrion Medical Products and Halkey-Roberts,
have long term incentive plans covering designated employees of those
subsidiaries or the Company. Awards consist of the designation of
percentages of annual base salary in effect at the beginning of a three-year
performance period which is to be paid at the end of such performance period
to each participant if the financial performance goals for Atrion Medical
Products or Halkey-Roberts are met or exceeded. At the beginning of each
three-year performance period, the Compensation Committee designates the key
employees of Atrion Medical Products, Halkey-Roberts or the Company who are
to participate, sets the percentage of annual base salary then in effect to
be paid for each participant, the performance criteria and the threshold,
target and maximum performance levels. The financial performance goals which
were specified in 1997 are based upon cumulative earnings for the
performance period, before overhead allocations, interest, bonus accruals
and income taxes.
(2) There is no assurance that results will be achieved that will result in
payments being made for any performance period. No payout occurs unless the
threshold performance goal is met or exceeded.
RETIREMENT PLANS
During 1997 the Company maintained a non-contributory pension plan (the
"Pension Plan") for all employees of the Company and its subsidiaries, including
officers, meeting certain age and service requirements. The Pension Plan,
together with the Company's supplemental non-contributory pension plan (the
"Supplemental Executive Retirement Plan") for eligible employees, including
officers, provide benefits for retirement at age 65, for early retirement and
for disability retirement, and provide for death benefits under certain
circumstances. The amounts payable under the Supplemental Executive Retirement
Plan are reduced by amounts payable under the Pension Plan. The benefits payable
under the Pension Plan and the Supplemental Executive Retirement Plan are not
subject to Social Security or other offset.
The following table illustrates the total estimated maximum annual benefits
payable under the Pension Plan and the Supplemental Executive Retirement Plan to
Mr. Howard and Mr. Strickland, who are covered by both plans, under the life
annuity option, assuming retirement in 1997 at age 65, and without considering
18
<PAGE> 22
any additional benefits for years of credited service in excess of 30. The
annual benefits set forth below are calculated in accordance with the formula in
effect during 1997.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------
FINAL AVERAGE ANNUAL COMPENSATION 5 10 15 20 25 30
- --------------------------------- ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$100,000........................ 9,150 18,300 27,451 36,601 45,751 54,901
150,000........................ 14,150 28,300 42,451 56,601 70,751 84,901
200,000........................ 19,150 38,300 57,451 76,601 95,751 114,901
250,000........................ 24,150 48,300 72,451 96,601 120,751 144,901
300,000........................ 29,150 58,300 87,451 116,601 145,751 174,901
350,000........................ 34,150 68,301 102,451 136,601 170,751 204,901
400,000........................ 39,150 78,300 117,451 156,601 195,751 234,901
450,000........................ 44,150 88,300 132,451 176,601 220,751 264,901
500,000........................ 49,150 98,300 147,451 196,601 245,751 294,901
550,000........................ 54,150 108,300 162,451 216,601 270,751 324,901
600,000........................ 59,150 118,300 177,451 236,601 295,751 354,901
</TABLE>
The compensation used to calculate the retirement benefits under the
Pension Plan and the Supplemental Executive Retirement Plan is to be determined
on the basis of salary and bonus as shown in the Summary Compensation Table. As
of December 31, 1997, Messrs. Howard and Strickland had 13 1/12 years and 14 1/4
years, respectively, of credited service.
With respect to employees of Atrion Medical Products and Halkey-Roberts,
the Pension Plan provided during 1997 that an employee of such subsidiaries
would be entitled to receive a monthly benefit equal to the product of $10 and
his years of credited service. As of December 31, 1997, Mr. Rabenau and Mr.
Gamble had 3 1/2 years and 1/2 year, respectively, of credited service. Assuming
retirement at age 65, the benefits payable to Mr. Rabenau and Mr. Gamble under
the Pension Plan would be approximately $130 and $90 per month, respectively.
Effective January 1, 1998, the Pension Plan was converted into a "cash
balance" retirement plan, pursuant to which the Company is to make annual
contributions to a participant's cash balance account in an amount equal to 5%
of the participant's compensation up to the Social Security wage base and 10% in
excess thereof. Generally, each participant becomes fully vested in the benefits
under such plan after five years of employment. Benefits may be paid, subject to
certain limitations under the Code, upon termination of employment, retirement
or death. The Pension Plan specifies various options that participants may
select for the distribution of their accrued balance, including forms of annuity
payments and lump sum distributions, and benefits payable under the Pension Plan
will no longer be determined in accordance with the foregoing table. All
executive officers participate in the Pension Plan. In addition, Messrs. Howard
and Strickland continue to participate in the Supplemental Executive Retirement
Plan. Benefits payable for Messrs. Howard and Strickland under the Supplemental
Executive Retirement Plan will continue to be determined in accordance with the
foregoing table and will be reduced by amounts payable under the Pension Plan;
however, if the amount payable under the Pension Plan exceeds the benefits
payable under the Supplemental Executive Retirement Plan, benefits will be
payable solely pursuant to the Pension Plan.
CERTAIN SEVERANCE ARRANGEMENTS
Since 1987, the Company has been a party to an agreement with Mr. Howard
that provides that if, following a change in control of the Company (as defined
in the agreement), Mr. Howard's employment with the Company is terminated either
by the Company other than for cause or permanent disability or by Mr. Howard for
good reason (as defined in the agreements), then Mr. Howard will receive (a) a
lump sum
19
<PAGE> 23
payment equal to three times the greater of (i) the highest annual salary plus
bonus paid by the Company to Mr. Howard in the five fiscal years of the Company
preceding the year in which the termination of employment occurs and (ii) Mr.
Howard's "annualized includable compensation" as defined in the Code, (b)
certain other payments respecting, among other things, the Company's retirement
plans and relocation costs or losses and (c) various welfare benefits for a
specified period of time after termination of employment. The agreement also
provides that, while Mr. Howard is employed by the Company for a period up to
four years following the change in control, Mr. Howard is to continue to receive
(i) annual compensation in an amount not less than his annual fixed or base
salary as in effect immediately prior to the change in control, (ii) an annual
amount not less than the aggregate annual bonus or incentive pay made to him for
the calendar year preceding the year in which the change in control occurs, and
(iii) full participation in all employee retirement income and welfare benefit
policies and programs of the Company. Notice of termination of the agreement has
been given by the Company, and the agreement will terminate early in 1999.
The Supplemental Executive Retirement Plan and the Atrion Corporation
Supplemental Executive Thrift Plan provide that upon a change in control of the
Company, participants therein whose employment terminates may elect to receive
immediately their benefits thereunder and account balances therein,
respectively. Under the 1990 Stock Option Plan and the 1994 Stock Incentive
Plan, in the event of a change in control of the Company all outstanding options
are to become fully exercisable and all restricted shares are to become fully
vested, and the value of the outstanding options and restricted shares is to be
cashed out, unless otherwise determined by the Compensation Committee. Under the
1997 Stock Incentive Plan, in the event of a change in control of the Company,
all options, other than nonqualified options granted to outside directors, and
all stock appreciation rights ("SARs") will become and remain fully exercisable
as of the date of the change in control. Outstanding awards of restricted stock
and performance shares will become immediately vested and any applicable
performance conditions shall be deemed satisfied (at the target performance
condition, if applicable) as of the date of the change in control. In addition,
to the extent set forth in any award agreement under the 1997 Stock Incentive
Plan (other than with respect to options granted automatically to outside
directors as described above) a participant will be permitted to surrender for
cancellation within 60 days after such change in control any outstanding
options, SARs, restricted stock or performance shares and will be entitled to
receive 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 exercise 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. None of the award
agreements for the Company's executive officers provides for such cancellation
and payment.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, which is currently comprised of all of the
directors of the Company who are not employed by the Company or any subsidiary,
establishes the overall executive compensation program for the Company and makes
recommendations for base salaries, salary increases and bonuses for the
Company's executive officers. In addition, the Compensation Committee
administers the Company's incentive programs. The executive compensation
program, which is periodically reviewed and modified, as necessary, by the
Compensation Committee, is designed to attract, retain and motivate management
personnel and includes compensation that is tied to enhanced stockholder value.
With the change in the Company's business, the Compensation Committee is placing
even greater emphasis on executive compensation being closely linked to the
Company's performance and returns to stockholders.
Compensation Policies
Base salary, cash incentive compensation and stock awards are the principal
components of compensation for the Company's executive officers. Base salaries
of the Company's executive officers are reviewed annually and adjustments made
on the basis of the Company's performance as measured by certain financial and
non-financial criteria, various survey information respecting compensation of
executive officers, compensation levels for executive officers in a broad range
of companies (which range is broader than the group of
20
<PAGE> 24
companies included in the peer group indices used in comparing cumulative
stockholder return), cost-of-living information and individual performance of
the particular executive officer. The Compensation Committee has not assigned
relative weights or values to any of such criteria. With respect to all
executive officers other than Mr. Howard, the Compensation Committee takes into
consideration a review of individual performance provided by Mr. Howard and
recommendations regarding adjustments to compensation provided by him. With
respect to the financial performance of the Company, the Compensation Committee
takes into consideration the Company's operating income, net income (both
inclusive and exclusive of one-time items), return on invested capital and total
stockholder return. The Compensation Committee has also concluded that in
evaluating the Company's performance it will give consideration to certain
non-financial criteria including customer relations, safety record, corporate
citizenship and environmental awareness. A new executive's base salary is
determined on the basis of the responsibilities of the position, the experience
of the new executive and the competitive marketplace for management talent. The
Compensation Committee has also acknowledged that, in fixing base salaries and
adjustments, consideration is to be given to the cost of living in the area
where the executive will be located.
One of the cash incentive programs developed by the Compensation Committee
provides a mechanism for the payment of annual and three year incentive
compensation tied to the attainment of annual and three-year financial goals for
Atrion Medical Products. A similar incentive compensation program is tied to the
performance of Halkey-Roberts. The Compensation Committee believes that these
plans, which were adopted in 1995 and 1996, provide incentives for those key
employees who are in a position to impact directly the performance of Atrion
Medical Products and Halkey-Roberts to maximize the growth and financial
performance of those units. Under these plans, the Compensation Committee
designates the persons who are to participate, sets financial performance levels
and sets the cash bonuses, as a percentage of base salary, to be paid to each
participant if the financial performance goals are met or exceeded. Although
executive officers of the Company who are not directly employed by those
subsidiaries are, by the terms of those programs, eligible to participate, the
Compensation Committee decided in 1996 that the executive officers of the
Company who are not directly employed by Atrion Medical Products or
Halkey-Roberts would not continue to participate in new performance periods
under those programs but, instead, a new incentive compensation program covering
those executive officers would be developed. That decision did not, however,
affect the participation of those executive officers, including Mr. Howard, in
one of the plans for Atrion Medical Products with respect to a three-year
incentive compensation cycle which was approved in 1995 and that could have
resulted in the payment of incentive compensation for the period 1995-1997.
However, as a result of the nonrecurring charge for revaluation of assets taken
in the fourth quarter of 1997, Atrion Medical Products did not achieve the
threshold target for 1995-1997 established by the Compensation Committee in 1995
and no incentive compensation was paid under the plan for that three year
period. Executive officers of the Company, including those who participate in
the incentive compensation plans for Atrion Medical Products and Halkey-Roberts,
are also eligible for discretionary bonuses as determined by the Compensation
Committee.
Stock awards are designed to motivate executives to improve the long-term
performance of the Company's common stock in the market, to encourage them to
achieve superior results over the long term and to align the interests of
executive officers with those of stockholders. Decisions respecting restricted
stock awards are made on the basis of the criteria referred to above, and
decisions respecting the grant of stock options are made using the same criteria
as well as the number of unexercised options held by key employees. The
Compensation Committee generally staggers the exercise dates for options over a
period of time so that the key employee receiving stock option awards will be
rewarded only if he remains with the Company for an extended period and in order
to emphasize the significance of the Company's long-term performance.
Compensation of Chief Executive Officer
In reaching its decisions respecting Mr. Howard's cash compensation in 1997
and stock option awards, the Compensation Committee reviewed Mr. Howard's base
salary, bonuses and stock option and restricted stock awards in the 1992-1996
period, the changes in such compensation made during such period and certain of
the factors considered when those changes in compensation were made.
Additionally, the Compensation Committee took into consideration the Company's
performance measured by the Company's operating
21
<PAGE> 25
income, net income (both inclusive and exclusive of one-time items), return on
invested capital and total stockholder return, both compared to the Edward D.
Jones Diversified Natural Gas Index and on a stand-alone basis, but did not
assign relative weights or values to any of such criteria in assessing the
Company's performance. The Compensation Committee noted that operating income in
1996 was up 19.72% from 1995, net income including one-time items was up 21.29%
from 1995, net income excluding one-time items was up 15.66%, return on invested
capital in 1996 was 18.45% and total stockholder return in 1996 was 22.33% as
compared to total stockholder return of 25.90% reflected by the Edward D. Jones
Diversified Natural Gas Index. In addition, the Compensation Committee
considered surveys of executive officer compensation, information respecting the
compensation levels for chief executive officers in various industries, Mr.
Howard's individual performance and the number of unexercised stock options held
by Mr. Howard. The Compensation Committee also took into consideration the
planned transition of the Company from its origin as a regulated natural gas
pipeline company to a growth oriented business in the highly competitive medical
products field. The Compensation Committee concluded that Mr. Howard's overall
compensation should be restructured so that a large proportion of his total
compensation would be tied to the Company's performance and returns to
stockholders but that his base salary should remain unchanged until the
Company's transition to a medical products company had been completed.
Accordingly, in 1997 there was no change in Mr. Howard's base salary. In early
1998, the Compensation Committee determined that, with the completion of the
acquisition of the Quest Medical product lines on January 30, 1998, Mr. Howard's
base salary should be adjusted and, effective February 1, 1998, his annual base
salary was reduced from $400,000 to $250,000. The Compensation Committee
believes that Mr. Howard's base salary is now fixed at an appropriate level
based on the salaries of chief executive officers of companies of comparable
size in the medical products industry. In addition, given Mr. Howard's superior
performance in negotiating the sale of the Company's pipeline assets and in the
expansion of the Company's operations in the medical products industry, the
Compensation Committee awarded Mr. Howard a discretionary cash bonus for 1997 of
$50,000.
As a part of the restructuring of Mr. Howard's compensation to link it more
closely with the Company's performance and returns to stockholders over the long
term, the Compensation Committee awarded Mr. Howard options for 48,000 shares in
mid-1997 and options for an additional 50,000 shares in early 1998, with those
options vesting at various dates in the future. In doing so, the Compensation
Committee significantly increased the number of options held by Mr. Howard. The
Compensation Committee believes that, with the grant of those options, Mr.
Howard has a greater incentive to improve the long-term performance of the
Company and returns to stockholders and that his interests are now even more
aligned with those of the stockholders.
MEMBERS OF THE COMPENSATION COMMITTEE
Emile A. Battat Hugh J. Morgan, Jr.
Richard O. Jacobson J. Kenneth Smith
Jerome J. McGrath Roger F. Stebbing
John H.P. Maley John P. Stupp, Jr.
22
<PAGE> 26
PERFORMANCE OF COMMON STOCK
The following graph compares the cumulative total return on investment (the
change in year-end stock price plus reinvestment of dividends), for each of the
last five fiscal years, assuming that $100 was invested on December 31, 1992 in
each of (i) the Company, (ii) a group of stocks consisting of all companies
whose stocks are included in the S&P 500 Composite Index and (iii) a group of
stocks consisting of companies in the Media General Index of Medical Instruments
and Supplies. For years prior to 1997, the Company's peer group index consisted
of natural gas companies in the Edward D. Jones Diversified Natural Gas Index.
As a result of the Company's disposition of its natural gas subsidiaries in May
1997 and the Company's continued expansion in the medical products industry, the
Company has determined to utilize the Media General Index of Medical Instruments
and Supplies for future stockholder return comparisons. For purposes of making
the transition from the Edward D. Jones Diversified Natural Gas Index to the
Media General Index of Medical Instruments and Supplies, both are included in
the following graph.
<TABLE>
<CAPTION>
Measurement Period Atrion Media General Edward D.
(Fiscal Year Covered) Corporation S & P 500 Index Jones Index
<S> <C> <C> <C> <C>
1992 100 100 100 100
1993 93.9 110.1 84.6 115.3
1994 81.5 111.5 93.0 102.3
1995 111.5 153.3 150.0 135.1
1996 136.6 188.6 157.5 170.1
1997 119.8 251.6 186.8 213.3
</TABLE>
STOCKHOLDER PROPOSALS
STOCKHOLDER PROPOSALS IN THE COMPANY'S PROXY STATEMENT
In order for proposals by stockholders to be considered for inclusion in
the Company's proxy material relating to the 1999 annual meeting of
stockholders, such proposals must be received by the Company on or before
December 9, 1998.
STOCKHOLDER PROPOSALS TO BE PRESENTED AT ANNUAL MEETINGS
The Company's Bylaws provide that a stockholder who desires to propose any
business at an annual meeting of stockholders must give the Company written
notice of such stockholder's intent to bring such business before such meeting.
Such notice is to be delivered to, or mailed, postage prepaid, and received by,
23
<PAGE> 27
the Secretary of the Company at the principal executive offices of the Company
not later than 60 days nor earlier than 90 days prior to the first anniversary
of the preceding year's annual meeting of stockholders; provided, however, that
in the event that the date of the annual meeting is more than 30 days before or
more than 60 days after such anniversary date, notice by the stockholder to be
timely must be so delivered not earlier than 90 days prior to such annual
meeting and not later than the 60 days prior to such annual meeting and the 10th
day following the issuance by the Company of a press release announcing the
meeting date. The stockholder's written notice must set forth (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting; (b) the name and address of
the stockholder who intends to propose such business; (c) a representation that
the stockholder is a holder of record of shares of common stock of the Company
entitled to vote at such meeting and intends to appear in person or by proxy at
such meeting to propose such business; and (d) any material interest of the
stockholder in such business. The Chairman of the meeting may refuse to transact
any business presented at any meeting without compliance with the foregoing
procedure.
STOCKHOLDER NOMINATIONS FOR DIRECTORS
The Company's Bylaws provide that a stockholder who desires to nominate
directors at a meeting of stockholders must give the Company written notice,
within the same time period described above, setting forth (a) the name and
address of the stockholder who intends to make the nomination and of the person
or persons to be nominated; (b) a representation that the stockholder is a
holder of record of shares of common stock of the Company entitled to vote at
such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by such stockholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Commission had each nominee been nominated, or intended to be
nominated, by the Board of Directors; and (e) the consent of each nominee to
serve as a director of the Company if so elected. The Chairman of the meeting
may refuse to acknowledge the nomination of any person if a stockholder has
failed to comply with the foregoing procedure.
OTHER BUSINESS
The Board of Directors does not intend to bring any business before the
meeting other than that stated herein and is not aware of any other matters that
may be presented for action at the meeting. However, if any other matters should
properly come before the meeting, or any adjournments thereof, it is the
intention of the persons named in the accompanying proxy to vote on such matters
as they, in their discretion, may determine.
By Order of the Board of Directors
Jeffery Strickland
Vice President and Chief Financial
Officer, Secretary and Treasurer
April 8, 1998
24
<PAGE> 28
APPENDIX
ATRION CORPORATION PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints Richard
O. Jacobson, John H. P. Maley and J. Kenneth Smith, or any of them, proxies of
the undersigned, with full power of substitution, to represent and to vote all
shares of common stock of Atrion Corporation which the undersigned would be
entitled to vote at the annual meeting of stockholders of Atrion Corporation to
be held at the offices of the Company, One Allentown Parkway, Allen, Texas, on
Tuesday, May 12, 1998 at 10:00 a.m., Central Time, and at any adjournment or
postponement thereof, in the following manner:
1. ELECTION OF DIRECTORS.
<TABLE>
<S> <C> <C> <C>
[ ] FOR all nominees listed below [ ] AUTHORITY WITHHELD to
(except as otherwise instructed below) vote for all nominees listed below
</TABLE>
Jerry A. Howard, Roger F. Stebbing and John P. Stupp, Jr.
To withhold authority to vote for any nominee, write that nominee's name in the
space provided below.
- --------------------------------------------------------------------------------
2. PROPOSAL TO APPROVE CERTAIN AMENDMENTS TO THE COMPANY'S 1997 STOCK INCENTIVE
PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO APPROVE THE COMPANY'S 1998 OUTSIDE DIRECTORS STOCK OPTION PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be dated and signed on reverse side)
(Continued from other side)
4. PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT
ACCOUNTANTS OF THE COMPANY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. IN THEIR DISCRETION, UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE
MEETING.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1, 2, 3 AND 4. IF THIS
PROXY IS PROPERLY SIGNED AND RETURNED, THE SHARES REPRESENTED WILL BE VOTED
"FOR" ITEMS 1, 2, 3 AND 4 UNLESS YOU OTHERWISE SPECIFY HEREIN.
DATED: , 1998
----------------------
------------------------------
SIGNATURE
------------------------------
SIGNATURE
PLEASE SIGN THIS PROXY EXACTLY
AS YOUR NAME APPEARS HEREON.
WHEN SIGNING AS EXECUTOR,
ADMINISTRATOR, TRUSTEE,
CORPORATE OFFICER, ETC.,
PLEASE GIVE FULL TITLE. IN
CASE OF JOINT OWNERS, EACH
JOINT OWNER SHOULD SIGN.
Please Date, Sign and Return TODAY in the Enclosed Envelope.
No Postage Required if Mailed in the United States.
