================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
Form 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
Commission File Number 0-10763
-----------------------
Atrion Corporation
(Exact name of Registrant as specified in its charter)
Delaware 63-0821819
(State of incorporation or organization) (I.R.S. Employer Identification No.)
One Allentown Parkway,
Allen, Texas 75002
(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (972) 390-9800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
Title of Class Name of Each Exchange on Which Registered
-------------- -----------------------------------------
Common Stock, $.10 Par Value NASDAQ
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes |_| No |X|
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange
Act Rule 12b-2Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Exchange Act Rule 12b-2).
Yes |_| No |X|
The aggregate market value of the voting Common Stock held by nonaffiliates of
the Registrant at February 19, 2007 was $135,481,563 based on the last reported
sales price of the common stock on the Nasdaq National Market on such date.
Shares of voting stock held by executive officers, directors and holders of more
than 10% of the outstanding voting shares have been excluded from this
calculation because such persons may be deemed to be affiliates. Exclusion of
such shares should not be construed to indicate that any of such persons
possesses the power, direct or indirect, to control the Registrant, or that such
person is controlled by or under common control of the Registrant
Number of shares of Common Stock outstanding at February 19, 2007: 1,880,607
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information from the Company's definitive proxy statement relating to the 2007
annual meeting of stockholders, to be filed with the Commission not later than
120 days after the end of the fiscal year covered by this report.
================================================================================
ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2006
--------
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I.........................................................................................................1
ITEM 1. BUSINESS.....................................................................................1
ITEM 1A. RISK FACTORS.................................................................................7
ITEM 1B. UNRESOLVED STAFF COMMENTS...................................................................12
ITEM 2. PROPERTIES..................................................................................12
ITEM 3. LEGAL PROCEEDINGS...........................................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................12
EXECUTIVE OFFICERS OF THE COMPANY...........................................................12
PART II.......................................................................................................13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES
OF EQUIRY SECURITIES........................................................................13
ITEM 6. SELECTED FINANCIAL DATA.....................................................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................................15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................................................21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................................................46
ITEM 9A. CONTROLS AND PROCEDURES.....................................................................46
ITEM 9B. OTHER INFORMATION...........................................................................48
PART III......................................................................................................48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................48
ITEM 11. EXECUTIVE COMPENSATION......................................................................48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS................................................................48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................49
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES......................................................49
PART IV.......................................................................................................49
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES..................................................49
SIGNATURES....................................................................................................52
ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2006
PART I
ITEM 1. BUSINESS
General
Atrion Corporation ("Atrion" or the "Company") designs, develops, manufactures,
sells and distributes products and components, primarily for the medical and
healthcare industry. The Company's products range from ophthalmology and
cardiovascular products to fluid delivery devices. The Company has a line of
non-medical components that are sold for use in aviation and marine safety
products. The Company also owns and maintains a gaseous oxygen pipeline that is
small and incidental to the overall operations of the Company.
The Company's fluid delivery products accounted for 32 percent, 28 percent and
26 percent of net revenues for 2006, 2005 and 2004, respectively. The Company
develops, manufactures and markets several specialized intravenous fluid
delivery tubing sets and accessories. The intravenous fluid delivery line
includes more than 80 distinct models used for complex therapy procedures
employed in anesthesia administration, intravenous fluid therapy, critical care
and oncology therapy. The Company is an industry leader in the manufacturing of
medical tubing clamps. These products include clamps offering such features as
six match-to-fit sizes with compatibility to all grades of medical tubing,
molding in a variety of materials, and compatibility with different
sterilization processes. The Company's swabbable luer valve allows needleless
luer connections to luer access devices in IV applications. These valves provide
an economical replacement for needle access ports in drug delivery and IV
applications and maintain a sterile, closed IV system without the need for
replacement caps. The Company has developed a wide variety of luer syringe check
valves and one-way valves designed to fill, hold and release controlled amounts
of fluids or gasses on demand for use in various intubation, catheter and other
applications.
The Company's cardiovascular products accounted for 29 percent, 27 percent and
25 percent of net revenues for 2006, 2005 and 2004, respectively. At the heart
of the Company's cardiovascular products is the MPS2(R) Myocardial Protection
System ("MPS2"), a proprietary technology that delivers essential fluids and
medications to the heart during open-heart surgery. The MPS2 integrates key
functions relating to the delivery of solutions to the heart, such as varying
the rate and ratio of oxygenated blood, crystalloid, potassium and other
additives, and controlling temperature, pressure and other variables to allow
simpler, more flexible management of this process, indicating improved patient
outcomes. New features include an expanded flow range, low volume mode and
cyclic flow mode. The MPS2 is the only device used in open-heart surgery that
allows for the mixing of drugs into the bloodstream without diluting the blood.
The MPS2 employs advanced pump, temperature control and microprocessor
technologies and includes a line of disposable products. The Company also
develops, manufactures and markets other cardiovascular products which consist
principally of the following: cardiac surgery vacuum relief valves;
Retract-O-Tape(R) silicone vessel loops for retracting and occluding vessels in
minimally invasive surgical procedures; inflation devices for balloon catheter
dilation, stent deployment and fluid dispensing; and Clean-Cut(R) rotating
aortic punch and PerfectCut(R) Aortotomy System, both of which are used in heart
bypass surgery to make a precision opening in the heart for attachment of the
bypass vessels.
-1-
The Company's ophthalmic products accounted for 17 percent, 20 percent and 24
percent of net revenues for 2006, 2005 and 2004, respectively. Atrion is a
leading manufacturer of soft contact lens storage and disinfection cases. Atrion
produces a complete line of products which are compatible with all solutions for
use with soft or rigid gas permeable lenses. The Company also works with
customers to provide customized distribution of products. As a registered
pharmaceutical reseller, Atrion provides custom packaging, including component
purchasing as well as labeling. Warehousing as well as inventory management is
included in Atrion's complete kitting services. The Company also designs,
manufactures, sells and distributes the LacriCATH(R) product line, a line of
balloon catheters that is used in the treatment of nasolacrimal duct obstruction
in children and adults. Nasolacrimal duct obstruction can cause a condition
called epiphora (chronic tearing). People affected by this condition experience
excessive and uncontrollable tearing and often encounter infection as a result
of the nasolacrimal blockage. LacriCATH balloon catheters are the only balloon
catheters with Food and Drug Administration ("FDA") approval for use in this
application.
The Company's other medical and non-medical products accounted for 22 percent,
25 percent and 25 percent of net revenues for 2006, 2005 and 2004, respectively.
Atrion is the leading manufacturer of inflation systems and valves used in
marine and aviation safety products. The Company manufactures inflation devices,
oral inflation tubes, right angle connectors, valves, and closures for life
vests, life rafts, inflatable boats, survival equipment, and other inflatable
structures. Atrion also produces many one-way and two-way "Breather" valves for
use on electronics cases, munitions cases, pressure vessels, transportation
container cases, escape slides, and many other medical and non-medical
applications requiring pressure relief. Atrion provides contract manufacturing
services for other major original equipment manufacturers of medical devices.
The Company has the ability to take a product from concept through design,
development and prototype all the way to full-scale production manufacturing.
Core competencies include engineering product design and development,
prototyping, assembly, insert and injection molding, automation, RF-welding,
ultrasonic and heat sealing, and sterile packaging. The Company's ACTester
product line consists of instrumentation and associated disposables used to
measure the activated clotting time of blood. The Company manufactures, sells
and distributes a line of products designed for safe needle and scalpel blade
containment. The Company owns and maintains a 22-mile high-pressure steel
pipeline in north Alabama that is leased to an industrial gas producer that
transports gaseous oxygen to one of its customers.
Marketing and Major Customers
The Company markets components to other equipment manufacturers for
incorporation in their products and sells finished devices to physicians,
hospitals, clinics and other treatment centers. Sales managers working with a
direct sales force, commissioned sales agents, and distributors handle these
sales. The Company's sales managers work closely with major customers in
designing and developing products to meet customer requirements.
Company revenues from sales to parties outside the United States totaled
approximately 30 percent, 27 percent and 30 percent of the Company's net
revenues in 2006, 2005 and 2004, respectively. These sales are made to various
manufacturers and through distributors in over 50 countries outside the United
States. Company revenues from sales to parties in Canada totaled approximately
11 percent, 11 percent and 14 percent of the Company's net revenues in 2006,
2005 and 2004, respectively.
The Company offers customer service, training and education, and technical
support such as field service, spare parts, maintenance and repair for certain
of its products. The Company periodically advertises its products in trade
journals, routinely attends and participates in industry trade shows throughout
the United States and internationally, and sponsors scientific symposia as a
means of disseminating product information. The Company provides supportive
literature on the benefits of its products.
The Company did not have any customers which represented ten percent or more of
its operating revenues in 2006.
-2-
Manufacturing
The Company's medical products and other components are produced at facilities
in Arab, Alabama, St. Petersburg, Florida and Allen, Texas. The facilities in
Arab and St. Petersburg both utilize plastic injection molding and specialized
assembly as their primary manufacturing processes. The Company's other
manufacturing processes consist of the assembly of standard and custom component
parts and the testing of completed products.
The Company devotes significant attention to quality assurance. Its quality
assurance measures begin with the suppliers which participate in the Company's
supplier quality assurance program. It continues at the manufacturing level
where many components are assembled in a "clean room" environment designed and
maintained to reduce product exposure to particulate matter. Products are tested
throughout the manufacturing process for adherence to specifications. Most
finished products are then shipped to outside processors for sterilization by
radiation or ethylene oxide gas. After sterilization, the products are
quarantined and tested before they are shipped to customers.
Skills of assembly workers required for the manufacture of medical products are
similar to those required in typical assembly operations. The Company currently
employs workers with the skills necessary for its assembly operations and
believes that additional workers with these skills are readily available in the
areas where the Company's plants are located.
The Company's medical device operations are ISO13485:2003 certified and are
subject to FDA jurisdiction. The Company's non-medical device operations are
ISO9001-2000 certified.
Research and Development
The Company believes that a well-targeted research and development program is an
essential part of the Company's activities, and the Company is currently engaged
in a number of research and development projects. The objective of the Company's
program is to develop new products in the Company's current product lines,
improve current products and develop new product lines. Recent major development
projects include, but are not limited to, inflation devices for balloon catheter
dilation, stent deployment, tissue displacement and fluid dispensing;
product-line expansion in ophthalmology; product introductions for sinuplasty
applications; products designed for safe needle and scalpel blade containment;
and the integration of needle-free injectable caps with fluid delivery products.
The Company expects to incur additional research and development expenses in
2007 for various projects.
The Company's consolidated research and development expenditures for 2006, 2005
and 2004 were $2,794,000, $2,396,000, and $2,374,000, respectively.
Availability of Raw Materials
The principal raw materials that the Company uses in its products are
polyethylene, polypropylene and polyvinyl chloride resins. The Company's ability
to operate profitably is dependent, in large part, on the market for these
resins. As these resins used by us are derived from petroleum and natural gas,
prices fluctuate substantially as a result of changes in petroleum and natural
gas prices, demand and the capacity of the companies that produce these products
to meet market needs. Instability in the world markets for petroleum and natural
gas could adversely affect the prices of the Company's raw materials and their
general availability.
-3-
The Company subcontracts with various suppliers to provide the quantity of
component parts necessary to assemble the Company's products. Almost all of
these components are available from a number of different suppliers, although
certain components are purchased from single sources that manufacture these
components using the Company's toolings. The Company believes that there are
satisfactory alternative sources for single-sourced components, although a
sudden disruption in supply from one of these suppliers could adversely affect
the Company's ability to deliver finished products on time. The Company owns the
molds used for production of a majority of its components. Consequently, in the
event of supply disruption, the Company would be able to fabricate its own
components or subcontract with another supplier, albeit after a delay in the
production process.
Patents and License Agreements
The commercial success of the Company is dependent, in part, on its ability to
continue to develop patentable products, to preserve its trade secrets and to
operate without infringing or violating the proprietary rights of third parties.
The Company currently has 250 active patents and patent applications pending on
products that are either being sold or are in development. The Company pays
royalties to outside parties for four patents. All of these patents and patents
pending relate to current products being sold by the Company or to products in
evaluation stages.
The Company has developed technical knowledge which, although non-patentable, is
considered to be significant in enabling it to compete. However, the proprietary
nature of such knowledge may be difficult to protect. The Company has entered
into agreements with key employees prohibiting them from disclosing any
confidential information or trade secrets of the Company. In addition, these
agreements also provide that any inventions or discoveries relating to the
business of the Company by these individuals will be assigned to the Company and
become the Company's sole property.
The medical device industry is characterized by extensive intellectual property
litigation, and companies in the medical products industry sometimes use
intellectual property litigation to gain a competitive advantage. Intellectual
property litigation, regardless of outcome, is often complex and expensive, and
the outcome of this litigation is generally difficult to predict.
Competition
Depending on the product and the nature of the project, the Company competes on
the basis of its ability to provide engineering and design expertise, quality,
service, product and price. As such, successful competitors must have technical
strength, responsiveness and scale. The Company believes that its expertise and
reputation for quality medical products have allowed it to compete favorably
with respect to each such factor and to maintain long-term relationships with
its customers.
However, in many of the Company's markets, the Company competes with numerous
other companies in the sale of healthcare products. These markets are dominated
by established manufacturers that have broader product lines, greater
distribution capabilities, substantially greater capital resources and larger
marketing, research and development staffs and facilities than the Company. Many
of these competitors offer broader product lines within the specific product
market and in the general field of medical devices and supplies. Broad product
lines give many of the Company's cardiovascular and fluid delivery competitors
the ability to negotiate exclusive, long-term medical device supply contracts
and, consequently, the ability to offer comprehensive pricing of their competing
products. By offering a broader product line in the general field of medical
devices and supplies, competitors may also have a significant advantage in
marketing competing products to group purchasing organizations, HMOs and other
managed care organizations that are increasingly seeking to reduce costs through
centralization of purchasing functions. Furthermore, innovations in surgical
techniques or medical practices could have the effect of reducing or eliminating
market demand for one or more of the Company's products. In addition, the
Company's competitors may use price reductions to preserve market share in their
product markets.
-4-
Depending on the product and the nature of the project, the Company competes in
contract manufacturing on the basis of its ability to provide engineering and
design expertise as well as on the basis of product and price. The Company
frequently designs products for a customer or potential customer prior to
entering into long-term development and manufacturing agreements with that
customer. Because these products are somewhat limited in number and normally are
only a component of the ultimate product sold by its customers, the Company is
dependent on its ability to meet the requirements of those major healthcare
companies and must continually be attentive to the need to manufacture such
products at competitive prices and in compliance with strict manufacturing
standards. The Company competes with a number of contract manufacturers of
medical products. Most of these competitors are small companies that do not
offer the breadth of services offered by the Company to its customers.
The Company also competes in the market for inflation devices used in marine and
aviation equipment. The Company is the dominant provider in this market area.
Government Regulation
Products
--------
The manufacture and sale of medical products are subject to regulation by
numerous United States governmental authorities, principally the FDA, and
corresponding foreign agencies. The research and development, manufacturing,
promotion, marketing and distribution of medical products in the United States
are governed by the Federal Food, Drug and Cosmetic Act and the regulations
promulgated thereunder ("FDC Act and Regulations"). All manufacturers of medical
devices must register with the FDA and list all medical devices manufactured by
them. The list must be updated annually. The Company's medical product
subsidiaries and certain of their customers are subject to inspection by the FDA
for compliance with such regulations and procedures. The Company's medical
products manufacturing facilities are subject to regulation by the FDA.
The FDA has traditionally pursued a rigorous enforcement program to ensure that
regulated entities comply with the FDC Act and Regulations. A company not in
compliance may face a variety of regulatory actions, including warning letters,
product detentions, device alerts, mandatory recalls or field corrections,
product seizures, total or partial suspension of production, injunctive actions
or civil penalties and criminal prosecutions of the company or responsible
employees, officers and directors. The Company's medical products subsidiaries
and certain of their customers are subject to these inspections. The Company
believes that it has met all FDA requirements.
Under the FDA's requirements, if a manufacturer can establish that a
newly-developed device is "substantially equivalent" to a legally marketed
device, the manufacturer may seek marketing clearance from the FDA to market the
device by filing a 510(k) premarket notification with the FDA. The 510(k)
premarket notification must be supported by data establishing the claim of
substantial equivalence to the satisfaction of the FDA. The process of obtaining
a 510(k) clearance typically can take several months to a year or longer. If
substantial equivalence cannot be established or if the FDA determines that the
device requires a more rigorous review, the FDA will require that the
manufacturer submit a premarket approval ("PMA") that must be reviewed and
approved by the FDA prior to marketing and sale of the device in the United
States. The process of obtaining a PMA can be expensive, uncertain and lengthy,
frequently requiring anywhere from one to several years from the date of FDA
submission. Both a 510(k) and a PMA, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. FDA
enforcement policy strictly prohibits the promotion of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for failure
to comply with regulatory requirements or the occurrence of unforeseen problems
following initial marketing. The Company believes that it is in compliance with
these rules.
-5-
Certain aviation and marine safety products are also subject to regulation by
the United States Coast Guard and the Federal Aviation Administration and
similar organizations in foreign countries which regulate the safety of marine
and aviation equipment.
Third-Party Reimbursement and Cost Containment
----------------------------------------------
In the United States, healthcare providers, including hospitals and physicians,
that purchase medical products for treatment of their patients generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or a part of the costs and fees
associated with the procedures performed using these products.
Reimbursement systems in international markets vary significantly by country and
by region within some countries, and reimbursement approvals must be obtained on
a country-by-country basis. Many international markets have government-managed
healthcare systems that control reimbursement for new products and procedures.
In most markets, there are private insurance systems as well as
government-managed systems. Market acceptance of the Company's products in
international markets depends, in part, on the availability and level of
reimbursement.
Medicare and Medicaid reimbursement for hospitals is generally based on a fixed
amount for admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals may seek to use less costly methods in treating
Medicare and Medicaid patients. Frequently, reimbursement is reduced to reflect
the availability of a new procedure or technique, and as a result hospitals are
generally willing to implement new cost saving technologies before these
downward adjustments take effect. Likewise, because the rate of reimbursement
for certain physicians who perform certain procedures has been and may in the
future be reduced, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Third-party payors may
challenge the prices charged for medical products and services and may deny
reimbursement if they determine that a device was not used in accordance with
cost-effective treatment methods as determined by the payor, was experimental or
was used for an unapproved application.
The Company anticipates that Congress, state legislatures and the private sector
will continue to review and assess alternative healthcare delivery and payment
systems. Potential approaches that have been considered include mandated basic
healthcare benefits, controls on healthcare spending through limitations on the
growth of private health insurance premiums and Medicare and Medicaid spending,
the creation of large insurance purchasing groups, price controls and other
fundamental changes to the healthcare delivery system. The Company cannot
predict what impact the adoption of any federal or state healthcare reform
measures, future private sector reform or market forces may have on its
business.
Product Liability and Insurance
The design, manufacture and marketing of products of the types the Company
produces entail an inherent risk of product liability claims. A problem with one
of the Company's products could result in product liability claims or a recall
of, or safety alert or advisory notice relating to, the product.
Advisory Board
Several physicians and perfusionists with substantial expertise in the field of
myocardial protection serve as Clinical Advisors for the Company. These Clinical
Advisors have assisted in the identification of the market need for myocardial
protection systems and the subsequent design and development of the Company's
MPS2 and its predecessor. Members of the Company's management and scientific and
technical staff from time to time consult with these Clinical Advisors to better
understand the technical and clinical requirements of the cardiovascular
surgical team and product functionality needed to meet those requirements. The
Company anticipates that these Clinical Advisors will play a similar role with
respect to other products and may assist the Company in educating other
physicians in the use of the MPS2 and related products.
-6-
Certain of the Clinical Advisors are employed by academic institutions and may
have commitments to, or consulting or advisory agreements with, other entities
that may limit their availability to the Company. The Clinical Advisors may also
serve as consultants to other medical device companies. The Clinical Advisors
are not expected to devote more than a small portion of their time to the
Company.
People
At January 31, 2007, the Company had 486 full-time employees. Employee relations
are good and there has been no work stoppage due to labor disagreements. None of
the Company's employees is represented by any labor union.
Available Information
The Company's website address is www.atrioncorp.com. All of the Company's
filings with the U. S. Securities and Exchange Commission ("SEC"), including the
Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, are available free of charge through its website.
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Form 10-K, the following
risk factors should be considered carefully in evaluating our business. Our
business, financial condition or results of operations could be materially
adversely affected by any of these risks. Additional risks and uncertainties
that we do not currently know about or that we currently believe are immaterial,
or that we have not predicted, may also harm our business operations or
adversely affect us.
o Our business is dependent on the price and availability of resins and
our ability to pass on resin price increases to our customers.
The principal raw materials that we use in our products are
polyethylene, polypropylene and polyvinyl chloride resins. Our ability
to operate profitably is dependent, in large part, on the market for
these resins. The resins used by us are derived from petroleum and
natural gas; therefore; prices fluctuate substantially as a result of
changes in petroleum and natural gas prices, demand and the capacity
of the companies that produce these products to meet market needs.
Instability in the world markets for petroleum and natural gas could
adversely affect the prices of our raw materials and their general
availability.
Our ability to maintain profitability is heavily dependent upon
our ability to pass through to our customers the full amount of
any increase in raw material costs. If resin prices increase and
we are not able to fully pass on the increases to our customers,
our results of operations and our financial condition will be
adversely affected.
o The loss of a key supplier of raw materials could lead to increased
costs and lower profit margins.
The loss of a key supplier would force us to purchase raw materials in
the open market, which may be at higher prices, until we could secure
another source and such higher prices may not allow us to remain
competitive. If we are unable to obtain raw materials in sufficient
quantities, we may not be able to manufacture our products. Even if we
were able to replace one of our raw material suppliers through another
supply arrangement, there is no assurance that the terms that we enter
into with such alternate supplier will be as favorable as the supply
arrangements that we currently have.
-7-
o A substantial portion of our customer relationships are open
short-term purchase commitments and, as a result, many of our
customers may unilaterally reduce the purchase of our products.
A substantial portion of our customer relationships are based on open
short-term purchase commitments. As a result, many of our customers
may unilaterally reduce the purchase of our products or, in certain
cases, terminate existing orders for which we may have incurred
significant production costs. A loss of a major customer or a number
of our smaller customers could materially adversely affect our
operations and financial condition.
o Product liability claims could adversely affect our financial
condition and results of operations.
We may be subject to product liability claims involving claims of
personal injury or property damage. Our product liability insurance
coverage may not be adequate to cover the cost of defense and the
potential award in the event of a claim. Also, a well-publicized
actual or perceived problem could adversely affect our reputation and
reduce the demand for our products.
o Our success is dependent on our ability to develop patentable
products, to preserve our trade secrets and operate without infringing
or violating the proprietary rights of third parties.
Others may challenge the validity of any patents issued to us, and we
could encounter legal and financial difficulties in enforcing our
patent rights against infringers. In addition, there can be no
assurance that other technologies cannot or will not be developed or
that patents will not be obtained by others which would render our
patents less valuable or obsolete. Although we do not believe that
patents are the sole determinant in the commercial success of our
products, the loss of a significant percentage of our patents or of
our patents relating to a specific major product line could have a
material adverse effect on our business, financial condition and
results of operations.
We have developed technical knowledge which, although non-patentable,
we consider to be significant in enabling us to compete. However, the
proprietary nature of such knowledge may be difficult to protect.
The medical device industry is characterized by extensive intellectual
property litigation, and companies in the medical products industry
sometimes use intellectual property litigation to gain a competitive
advantage. Intellectual property litigation, regardless of outcome, is
often complex and expensive, and the outcome of this litigation is
generally difficult to predict.
An adverse determination in any such proceeding could subject us to
significant liabilities to third parties or require us to seek
licenses from third parties or pay royalties that may be substantial.
Furthermore, there can be no assurance that necessary licenses would
be available to us on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from
manufacturing or selling certain of our products, which could have a
material adverse effect on our business, financial condition and
results of operations.
o New lines of business or new products and services may subject us to
additional risks.
From time to time, we may implement new lines of business or offer new
products and services within existing lines of business. There are
substantial risks and uncertainties associated with these efforts,
particularly in instances where the markets are not fully developed.
In developing and marketing new lines of business or new products and
services, we may invest significant time and resources. Initial
timetables for the introduction and development of new lines of
business and new products or services may not be achieved and price
and profitability targets may not prove feasible. External factors,
such as compliance with regulations, competitive alternatives, and
shifting market preferences, may also impact the successful
implementation of a new line of business or a new product or service.
Furthermore, any new line of business or new product or service could
have a significant impact on the effectiveness of our system of
internal controls. Failure to successfully manage these risks in the
development and implementation of new lines of business or new
products or services could have a material adverse effect on our
business, results of operations and financial condition.
-8-
o Our competitors have significantly greater resources than we do, and
it may be difficult for us to compete against them.
In many of our markets, we compete with numerous other companies that
have substantially greater financial resources and engage in
substantially more research and development activities than we do.
Furthermore, innovations in surgical techniques or medical practices
could have the effect of reducing or eliminating market demand for one
or more of our products.
Some of the markets in which we compete are dominated by established
manufacturers that have broader product lines, greater distribution
capabilities, substantially larger marketing, research and development
staffs and facilities than we do. Many of these competitors offer
broader product lines within the specific product market and in the
general field of medical devices and supplies. Broad product lines
give many of our cardiovascular and fluid delivery competitors the
ability to negotiate exclusive, long-term medical device supply
contracts and, consequently, the ability to offer comprehensive
pricing of their competing products. By offering a broader product
line in the general field of medical devices and supplies, competitors
may also have a significant advantage in marketing competing products
to group purchasing organizations. In addition, our competitors may
use price reductions to preserve market share in their product
markets.
o We are subject to substantial governmental regulation and our failure
to comply with applicable governmental regulations could subject us to
numerous penalties, any of which could adversely affect our business.
We are subject to numerous governmental regulations relating to, among
other things, our ability to sell our products, third-party
reimbursement and fraud and abuse of Medicare or Medicaid. If we do
not comply with applicable governmental regulations, governmental
authorities could do any of the following:
o impose fines and penalties on us;
o prevent us from manufacturing our products;
o bring civil or criminal charges against us;
o delay the introduction of our new products into the market;
o recall or seize our products;
o disrupt the manufacture or distribution of our products; or
o withdraw or deny approvals for our products.
Any one of these results could materially adversely affect our
revenues and profitability and harm our reputation.
-9-
o We will be unable to sell our products if we fail to comply with
manufacturing regulations.
To commercially manufacture our products, we must comply with
government manufacturing regulations that govern design controls,
quality systems and documentation policies and procedures. The FDA and
equivalent foreign governmental authorities periodically inspect our
manufacturing facilities and the manufacturing facilities of our OEM
medical device customers. If we or our OEM medical device customers
fail to comply with these manufacturing regulations or fail any FDA
inspections our marketing or distribution of our products may be
prevented or delayed, which would negatively impact our business.
o Our products are subject to product recalls even after receiving
regulatory clearance or approval, and any such recalls would
negatively affect our financial performance and could harm our
reputation.
Any of our products may be found to have significant deficiencies or
defects in design or manufacture. The FDA and similar governmental
authorities in other countries have the authority to require the
recall of any such defective product. A government-mandated or
voluntary recall could occur as a result of component failures,
manufacturing errors or design defects. We do not maintain insurance
to cover losses incurred as a result of product recalls. Any product
recall would divert managerial and financial resources and negatively
affect our financial performance, and could harm our reputation with
customers and end-users.
o We may not receive regulatory approvals for new product candidates or
approvals may be delayed.
Regulation by government authorities in the United States and foreign
countries is a significant factor in the development, manufacture and
marketing of our proposed products and in our ongoing research and
product development activities. Any failure to receive the regulatory
approvals necessary to commercialize our product candidates, or the
subsequent withdrawal of any such approvals, would harm our business.
The process of obtaining these approvals and the subsequent compliance
with federal and state statutes and regulations require spending
substantial time and financial resources. If we fail to obtain or
maintain, or encounter delays in obtaining or maintaining, regulatory
approvals, it could adversely affect the marketing of any products we
develop, our ability to receive product revenues, and our liquidity
and capital resources.
o We rely on technology to operate our business and any failure of these
systems could harm our business.
We rely heavily on communications and information systems to conduct
our business, enhance customer service and increase employee
productivity. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in our customer
relationship management, general ledger, inventory, manufacturing and
other systems. There is no assurance that any such failures,
interruptions or security breaches will not occur or, if they do
occur, that they will be adequately addressed by our policies and
procedures that are intended to safeguard our systems. The occurrence
of any failures, interruptions or security breaches of our information
systems could damage our reputation, result in a loss of customer
business, subject us to additional regulatory scrutiny, or expose us
to civil litigation and possible financial liability, any of which
could have a material adverse effect on our financial condition and
results of operations.
-10-
o We sell many of our products to healthcare providers that rely on
Medicare, Medicaid and private health insurance plans to reimburse the
costs associated with the procedures performed using our products and
these third party payors may deny reimbursement for use of our
products.
We are dependent, in part, upon the ability of healthcare providers to
obtain satisfactory reimbursement from third-party payors for medical
procedures in which our products are used. Third-party payors may deny
reimbursement if they determine that a prescribed product has not
received appropriate regulatory clearances or approvals, is not used
in accordance with cost-effective treatment methods as determined by
the payor, or is experimental, unnecessary or inappropriate. Failure
by hospitals and other users of our products to obtain reimbursement
from third-party payors, or adverse changes in government and private
third-party payors' policies toward reimbursement for procedures
employing our products, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Major third-party payors for medical services in the United States and
other countries continue to work to contain healthcare costs. The
introduction of cost containment incentives, combined with closer
scrutiny of healthcare expenditures by both private health insurers
and employers, has resulted in increased discounts and contractual
adjustments to charges for services performed. Further implementation
of legislative or administrative reforms to the United States or
international reimbursement systems in a manner that significantly
reduces reimbursement for procedures using our products or denies
coverage for such procedures would have an adverse effect on our
business, financial condition and results of operations. Hospitals or
physicians may respond to these cost-containment pressures by
substituting lower cost products or other therapies for our products.
o We may not be able to attract and retain skilled people
Our success depends, in large part, on our ability to attract and
retain key people. Competition for the best people in most activities
we engage in can be intense and we may not be able to hire people or
to retain them. The unexpected loss of services of one or more of our
key personnel could have a material adverse impact on our business
because of their skills, knowledge of our market, years of industry
experience and the difficulty of promptly finding qualified
replacement personnel.
o Severe weather, natural disasters, acts of war or terrorism or other
external events could significantly impact our business.
We currently conduct all our development, manufacturing and management
at three locations. Severe weather, natural disasters, acts of war or
terrorism and other adverse external events at any one or more of
these locations could have a significant impact on our ability to
conduct business. Our disaster recovery policies and procedures may
not be effective and the occurrence of any such event could have a
material adverse effect on our business, which, in turn, could have a
material adverse effect on our financial condition and results of
operations. The insurance we maintain may not be adequate to cover our
losses.
o Our stock price can be volatile.
Stock price volatility may make it more difficult for our stockholders
to sell their common stock when they want and at prices they find
attractive. Our stock price can fluctuate significantly in response to
a variety of factors including, among other things:
o Actual or anticipated variations in quarterly results of
operations.
o Recommendations by securities analysts
o Operating and stock price performance of other companies that
investors deem comparable to the Company.
o Perceptions in the marketplace regarding the Company and our
competitors
o New technology used, or services offered, by competitors.
o Significant acquisitions or business combinations, strategic
partnerships, joint ventures or capital commitments by or
involving the Company or our competitors.
o Failure to integrate acquisitions or realize anticipated benefits
from acquisitions
o Changes in government regulations
o Geopolitical conditions such as acts or threats of terrorism or
military conflicts.
General market fluctuations, industry factors and general economic and
political conditions and events, such as economic slowdowns or
recessions, interest rate changes or credit loss trends, could also
cause our stock price to decrease regardless of operating results.
-11-
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company is headquartered in Allen, Texas, and maintains operations at that
location (108,000 square feet on 19 acres) as well as in Arab, Alabama (112,000
square feet on 67 acres), and St. Petersburg, Florida (178,000 square feet on 11
acres). Each facility houses administrative, engineering, manufacturing, and
warehousing operations. All operational facilities are Company owned.
The Company owns and maintains a 22-mile high-pressure steel pipeline that
transports gaseous oxygen between Decatur and Courtland, Alabama.
ITEM 3. LEGAL PROCEEDINGS
The Company has no pending legal proceedings of the type described in Item 103
of Regulation S-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2006, no matters were submitted to a vote of
security holders.
Executive Officers of the Company
Name Age Title
---- --- -----
Emile A. Battat 68 Chairman, President and Chief Executive Officer of
the Company and Chairman or President of all
subsidiaries
Jeffery Strickland 48 Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company and Vice
President or Secretary-Treasurer of all subsidiaries
The persons who are identified as executive officers of the Company currently
serve as officers of the Company and all subsidiaries. The officers of the
Company and its subsidiaries are elected annually by the respective Boards of
Directors of the Company and its subsidiaries at the first meeting of such
Boards of Directors held after the annual meetings of stockholders of such
entities. Accordingly, the terms of office of the current officers of the
Company and its subsidiaries will expire at the time such meetings of the Board
of Directors of the Company and its subsidiaries are held, which is anticipated
to be in May 2007.
There are no arrangements or understandings between any officer and any other
person pursuant to which the officer was elected. There are no family
relationships between any of the executive officers or directors.
-12-
There have been no events under any bankruptcy act, no criminal proceedings and
no judgments or injunctions material to the evaluation of the ability and
integrity of any executive officers during the past five years.
Brief Account of Business Experience During the Past Five Years
Mr. Battat has been a director of the Company since 1987 and has served as
Chairman of the Board of the Company since January 1998. Mr. Battat has served
as President and Chief Executive Officer of the Company and as Chairman or
President of all subsidiaries since October 1998.
Mr. Strickland has served as Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company since February 1, 1997 and has served as
Vice President or Secretary-Treasurer for all the Company's subsidiaries since
January 1997. Mr. Strickland was employed by the Company or its subsidiaries in
various other positions from September 1983 through January 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the Nasdaq National Market (Symbol
ATRI). As of February 20, 2007, the Company had approximately 1,100
stockholders, including beneficial owners holding shares in nominee or "street"
name. The high and low closing prices as reported by Nasdaq for each quarter of
2005 and 2006 are shown below.
Year Ended
December 31, 2005: High Low
------------------ ---- ---
First Quarter $ 53.56 $ 45.27
Second Quarter $ 74.55 $ 47.52
Third Quarter $ 81.28 $ 64.33
Fourth Quarter $ 69.43 $ 61.02
Year Ended
December 31, 2006: High Low
------------------ ---- ---
First Quarter $ 78.99 $ 66.30
Second Quarter $ 80.96 $ 64.31
Third Quarter $ 77.50 $ 67.37
Fourth Quarter $ 79.52 $ 75.13
In September 2003, the Company announced that its Board of Directors had
approved a policy for the payment of regular quarterly cash dividends on the
Company's common stock. The Company began paying a quarterly cash dividend of
$.12 per share starting in September of 2003. The quarterly dividend was
increased to $.14 per share in September of 2004, to $.17 per share in September
2005 and to $.20 per share in September 2006. The Company paid quarterly
dividends totaling $1.4 million to its stockholders in 2006.
The following table provides certain information about securities authorized for
issuance under the Company's equity compensation plans as of December 31, 2006:
-13-
Number of
securities to be Number of securities
issued upon Weighted-average remaining available for
exercise of exercise price of future issuance under
outstanding outstanding equity compensation plans
options, warrants options, warrants (excluding securities
and rights and rights reflected in column (a))
Plan Category (a) (b) (c)
-------------------------------------- --------------------- ------------------- ---------------------------
Equity compensation plans approved
by security holders 183,750 $32.31 68,534(1)
Equity compensation plans not
approved by security holders(2) 7,600 $12.25 -
--------------------- ------------------- ---------------------------
Total 191,350 $31.52 68,534
===================== =================== ===========================
(1) Consists of shares of the Company's common stock authorized for
issuance under (i) the Company's 1997 Stock Incentive Plan, which
provides for the grant of nonqualified stock options, incentive stock
options, stock appreciation rights, restricted stock and performance
shares and (ii) the Company's 2006 Equity Incentive Plan which provides
for the grant to key employees and consultants of incentive and
nonqualified stock options, restricted stock, restricted stock units,
deferred stock units, stock appreciation rights and performance shares.
The number of shares available for issuance under both plans is subject
to equitable adjustment by the Compensation Committee of the Board of
Directors in the event of any change in the Company's capitalization,
including, without limitation, a stock dividend or stock split.
(2) Consists of shares of the Company's common stock authorized for
issuance upon exercise of nonqualified options granted to certain of the
Company's clinical advisors on February 10, 1998. All such options are
now vested and expire ten years from the grant date. The exercise price
of the options is the closing price on the Nasdaq National Market of the
Company's common stock on the grant date.
The Company has a Common Share Purchase Rights Plan, which is intended to
protect the interests of stockholders in the event of a hostile attempt to take
over the Company. The rights, which are not presently exercisable and do not
have any voting powers, represent the right of the Company's stockholders to
purchase at a substantial discount, upon the occurrence of certain events,
shares of common stock of the Company or of an acquiring company involved in a
business combination with the Company. This plan, which was adopted in August of
2006, expires in August of 2016.
During the year ended December 31, 2006, the Company did not sell any equity
securities that were not registered under the Securities Act of 1933, and during
the fourth quarter of 2006 did not repurchase any of its equity securities.
-14-
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
(In thousands, except per share amounts)
--------------------------------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Operating Results for the Year ended December 31,
Revenues $ 81,020 $ 72,089 $ 66,081 $ 62,803 $ 59,533
Operating income 14,338 12,698 8,596 6,923 5,782
Income from continuing operations
10,600 8,793 6,305 4,892 4,065
Net income 10,765 8,958 6,470 5,057 2,589(b)
Depreciation and amortization 5,005 5,389 4,830 4,783 4,418
Per Share Data:
Income from continuing
operations, per diluted share 5.43 4.57 3.41 2.66 2.18
Net income per diluted share 5.51 4.66 3.50 2.75 1.39(b)
Cash dividends per common share
.74 .62 .52 .24(a) --
Average diluted shares outstanding
1,953 1,924 1,850 1,839 1,863
Financial Position at December 31,
Total assets 95,772 78,470 67,408 60,050 60,807
Long-term debt 11,399 2,529 2,936 4,287 10,337
--------------------------------------------------------------------------------------------------------------------------
(a) Dividends on outstanding shares of common stock paid in the 3rd and 4th
quarters at $.12 per share
(b) Includes a $1.6 million after-tax goodwill impairment charge ($ .88 per
diluted share)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company designs, develops, manufactures, sells and distributes products and
components, primarily for the medical and healthcare industry. The Company
markets components to other equipment manufacturers for incorporation in their
products and sells finished devices to physicians, hospitals, clinics and other
treatment centers. The Company's medical products primarily serve the fluid
delivery, cardiovascular, and ophthalmology markets. The Company's other medical
and non-medical products include instrumentation and disposables used in
dialysis, contract manufacturing and valves and inflation devices used in marine
and aviation safety products. In 2006 approximately 30 percent of the Company's
sales were outside the United States.
The Company's products are used in a wide variety of applications by numerous
customers. The Company encounters competition in all of its markets and competes
primarily on the basis of product quality, price, engineering, customer service
and delivery time.
-15-
The Company's strategy is to provide a broad selection of products in the areas
of its expertise. Research and development efforts are focused on improving
current products and developing highly-engineered products that meet customer
needs and have the potential for broad market applications and significant
sales. Proposed new products may be subject to regulatory clearance or approval
prior to commercialization and the time period for introducing a new product to
the marketplace can be unpredictable. The Company also focuses on controlling
costs by investing in modern manufacturing technologies and controlling
purchasing processes. The Company has been successful in consistently generating
cash from operations and has used that cash to reduce indebtedness, to fund
capital expenditures, to repurchase stock and, starting in 2003, to pay
dividends.
The Company's strategic objective is to further enhance its position in its
served markets by:
o Focusing on customer needs;
o Expanding existing product lines and developing new products;
o Maintaining a culture of controlling cost; and
o Preserving and fostering a collaborative, entrepreneurial management
structure.
For the year ended December 31, 2006, the Company reported revenues of $81.0
million, income from continuing operations of $10.6 million and net income of
$10.8 million, up 12 percent, 21 percent and 20 percent, respectively, from
2005.
During the third quarter of 2006, the Company completed the construction of a
new facility in St. Petersburg, Florida for a subsidiary, Halkey-Roberts
Corporation ("Halkey-Roberts"). The relocation of the Halkey-Roberts operations
to its new facility was completed in 2006.
Results of Operations
The Company's net income was $10.8 million, or $5.82 per basic and $5.51 per
diluted share, in 2006, compared to net income of $9.0 million, or $4.99 per
basic and $4.66 per diluted share, in 2005 and $6.5 million, or $3.78 per basic
and $3.50 per diluted share, in 2004. Revenues were $81.0 million in 2006,
compared with $72.1 million in 2005 and $66.1 million in 2004. The 12 percent
revenue increase in 2006 over the prior year was primarily attributable to a 26
percent increase in the revenues from the Company's fluid delivery products, a
21 percent increase from the Company's cardiovascular products, and a 2 percent
increase from the Company's other medical and non-medical products. These
revenue increases were generally attributable to higher sales volumes. These
increases were partially offset by a 5 percent decrease in revenues from the
Company's ophthalmic products. The 9 percent revenue increase in 2005 over the
prior year was primarily attributable to a 19 percent increase in the revenues
from the Company's fluid delivery products, a 16 percent increase from the
Company's cardiovascular products, and a 7 percent increase from the Company's
other medical and non-medical products. These revenue increases were generally
attributable to higher sales volumes but were partially offset by a 7 percent
decrease in revenues from the Company's ophthalmic products.
Annual revenues by product lines were as follows (in thousands):
2006 2005 2004
--------------- ---------------- ----------------
Fluid Delivery $ 25,809 $ 20,447 $ 17,192
Cardiovascular 23,290 19,307 16,577
Ophthalmology 13,744 14,514 15,690
Other 18,177 17,821 16,622
--------------- ---------------- ----------------
Total $ 81,020 $ 72,089 $ 66,081
=============== ================ ================
The Company's cost of goods sold was $48.6 million in 2006, compared with $43.1
million in 2005 and $40.8 million in 2004. The 13 percent increase in cost of
goods sold for 2006 over 2005 was primarily related to the revenue increase
discussed above. The 6 percent increase in cost of goods sold for 2005 over 2004
was primarily related to the revenue increase discussed above, an improved mix
of product sales toward products with lower costs and favorable manufacturing
efficiencies brought on by increased volumes and continued manufacturing cost
improvement projects.
-16-
Gross profit in 2006 increased $3.4 million to $32.4 million, compared with
$29.0 million in 2005 and $25.3 million in 2004. The Company's gross profit was
40 percent of revenues in both 2006 and 2005 and 38 percent of revenues in 2004.
The increase in gross profit percentage in 2005 from the prior year was
primarily due to the favorable shift in product mix mentioned above,
productivity improvements and improved manufacturing efficiencies.
Operating expenses were $18.1 million in 2006, compared with $16.3 million in
2005 and $16.7 million in 2004. The increase in operating expenses in 2006 from
2005 was primarily related to increased research and development ("R&D"),
selling ("Selling") and general and administrative ("G&A") expenses. R&D
expenses consist primarily of salaries and other related expenses of the
research and development personnel as well as costs associated with regulatory
expenses. R&D expenses increased $398,000 in 2006, primarily due to increased
legal, prototype supplies and compensation costs. Selling expenses consist
primarily of salaries, commissions and other related expenses for sales and
marketing personnel, marketing, advertising and promotional expenses. Selling
expenses increased $430,000 in 2006, primarily as a result of increased
compensation costs, commissions, outside services, promotion and advertising.
G&A expenses consist primarily of salaries and other related expenses of
administrative, executive and financial personnel and outside professional fees.
In 2006, G&A expenses increased $1.0 million, primarily due to outside services,
taxes, compensation and benefits and costs associated with the relocation to the
new facility for Halkey-Roberts. The decrease in operating expenses in 2005 from
2004 was primarily related to decreased G&A expenses. The decrease in G&A was
primarily attributable to reduced legal costs partially offset by increases in
compensation and costs related to information technology enhancements.
The Company's operating income for 2006 was $14.3 million, compared with $12.7
million in 2005 and $8.6 million in 2004. The previously mentioned increase in
gross profit, partially offset by the previously mentioned increase in operating
expenses, was the major contributor to the operating income improvement in 2006.
The previously mentioned increase in gross profit along with cost containment
and cost reduction activities were the major contributors to the operating
income improvements in 2005.
Interest expense was $253,000 in 2006 compared to $61,000 in 2005 and $93,000 in
2004. The increase in 2006 was primarily related to higher average borrowings
and increased interest rates..
Income tax expense in 2006 totaled $3.6 million, compared with $3.9 million in
2005 and $2.3 million in 2004. The effective tax rates for 2006, 2005 and 2004
were 25.2 percent, 30.7 percent and 26.6 percent, respectively. Benefits from
tax incentives for exports and R&D expenditures totaled $1,476,000 in 2006,
$534,000 in 2005 and $516,000 in 2004. The lower effective tax rate in 2006 is
primarily a result of a review and documentation of the Company's R&D tax
credits for 2005 and prior-year tax returns which indicated that the Company was
entitled to higher credits than had been claimed. The higher effective tax rate
in 2005 is primarily a result of benefits from tax incentives for exports and
R&D expenditures being a lesser percentage of taxable income in 2005 than in
2004. The Company expects the effective tax rate for 2007 to return to
approximately 31.0 percent.
The Company believes that 2007 revenues will be higher than 2006 revenues and
that the cost of goods sold, gross profit, operating income and net income will
each be higher in 2007 than in 2006. As a result of the relocation to the new
St. Petersburg facility, the Company expects annual operating expenses,
primarily depreciation, property taxes and utility costs, to increase by
approximately $1.0 million compared to rent and operating costs at the prior
facility. The growth of net income in 2007 will also be impacted by an increase
in the Company's tax rate and the absence of income from discontinued operations
in future years. The Company further believes that in 2007 the Company will have
continuing volume growth in most of its product lines, complemented by the
introduction of new products, and will achieve continued growth in operating
income.
-17-
Discontinued Operations
During 1997, the Company sold all of its natural gas operations. The financial
statements presented herein reflect the Company's natural gas operations as
discontinued operations for all periods presented. The financial statements also
reflect an after-tax gain on disposal of these discontinued operations of $0.2
million in each of 2006, 2005 and 2004. These gains represented $.09 per basic
share in each of 2006 and 2005 and $.10 per basic share in 2004, and $.08 per
diluted share in 2006, and $.09 per diluted share in each of 2005 and 2004.
In addition to the initial consideration received in 1997 upon the sale of the
natural gas operations, certain annual contingent deferred payments of up to
$250,000 per year were to be paid to the Company over an eight-year period which
began in 1999, with the amount paid each year to be dependent upon revenues
received by the purchaser from certain gas transportation contracts. The Company
received deferred payments of $250,000 each, before tax, from the purchaser in
April 2006, 2005 and 2004 which are reflected in each year as a gain from
discontinued operations of $165,000, net of tax. No additional payments are due
in future periods under the terms of the 1997 agreement pursuant to which the
Company sold its natural gas operations.
Liquidity and Capital Resources
The Company has a $25.0 million revolving credit facility (the "Credit
Facility") with a money center bank to be utilized for the funding of operations
and for major capital projects or acquisitions, subject to certain limitations
and restrictions (see Note 4 of Notes to Consolidated Financial Statements).
Borrowings under the Credit Facility bear interest that is payable monthly at
30-day, 60-day or 90-day LIBOR, as selected by the Company, plus one percent. At
December 31, 2006, the Company had $13.6 million available for borrowing under
the Credit Facility.
At December 31, 2006, the Company had cash and cash equivalents of $333,000
compared with $525,000 at December 31, 2005. The Company had outstanding
borrowings of $11.4 million under its Credit Facility at December 31, 2006 and
$2.5 million at December 31, 2005. The Credit Facility, which expires November
11, 2009, and may be extended under certain circumstances, contains various
restrictive covenants, none of which is expected to impact the Company's
liquidity or capital resources. At December 31, 2006, the Company was in
compliance with all financial covenants.
Cash flows from continuing operations generated $12.6 million in 2006 as
compared to $9.9 million in 2005. The primary contributors to this were the
improved operating results for the 2006 period and the absence of the cash-flow
impact from increased inventory in the 2005 period. Cash provided by operating
activities consists primarily of net income adjusted for certain non-cash items
and changes in working capital items. Non-cash items include depreciation and
amortization and deferred income taxes. Working capital items consist primarily
of accounts receivable, accounts payable, inventories and other current assets
and other current liabilities.
At December 31, 2006, the Company had working capital of $23.7 million,
including $333,000 in cash and cash equivalents. The $4.0 million increase in
working capital during 2006 was primarily related to an increase in accounts
receivable, and a decrease in accounts payable partially offset by a decrease in
inventories. The increase in accounts receivable is primarily related to the
increase in revenues for the fourth quarter of 2006 as compared to the fourth
quarter of 2005. The decrease in accounts payable is related to one-time items
associated with the construction of the Halkey-Roberts facility that were
included in the 2005 accounts payable balance. The decrease in inventories is
related to increased sales in the fourth quarter of 2006.
-18-
Capital expenditures for property, plant and equipment totaled $20.9 million in
2006, compared with $10.6 million in 2005 and $5.6 million in 2004. Of the $20.9
million expended for the addition of property, plant and equipment during 2006,
the Company expended $15.5 million toward the construction of its new St.
Petersburg facility for its Halkey-Roberts operation. Of the $10.6 million
expended for the addition of property, plant and equipment during 2005, the
Company expended $4.5 million toward the construction of its new St. Petersburg
facility for its Halkey-Roberts operation. In 2004, the Company expended $3.8
million for the purchase of eleven acres of land being used for this
construction. The Company completed the construction of its new St. Petersburg
facility and moved the Halkey-Roberts operation into the new facility during the
third quarter of 2006. The total cost of the new facility was $20.0 million and
the cost of the land was $3.8 million.
During 2006, the Company increased its outstanding borrowings under the Credit
Facility by $8.9 million. The Company reduced its outstanding borrowings under
the Credit Facility by $407,000 during 2005. During 2006, the Company
repurchased 24,000 shares of its common stock for approximately $1.6 million.
In September 2003, the Company announced that its Board of Directors had
approved a policy for the payment of regular quarterly cash dividends on the
Company's common stock. During 2006, the Company paid dividends totaling $1.4
million to its stockholders and received $1.2 million from the exercise of stock
options.
The table below summarizes debt, lease and other contractual obligations
outstanding at December 31, 2006:
Payments due by period
--------------------------------------------------------------------------
2012 and
Contractual Obligations Total 2007 2008 - 2009 2010 - 2011 thereafter
--------------------------------------------------------------------------
(In thousands)
Credit Facility $ 11,399 -- $ 67 $ 11,332 $ --
Purchase Obligations $ 8,816 $ 7,933 $ 883 -- --
--------------------------------------------------------------------------
Total $ 20,215 $ 7,933 $ 950 $ 11,332 $ --
============== ============== ============== ============== ==============
The payment schedule for the Credit Facility assumes at maturity, November 2009,
the Company will convert this outstanding debt to a two-year term note as
permitted by the terms of the agreement.
The Company believes that its existing cash and cash equivalents, cash flows
from operations and borrowings available under the Company's Credit Facility,
supplemented, if necessary, with equity or debt financing, which the Company
believes would be available, will be sufficient to fund the Company's cash
requirements for at least the foreseeable future.
Off Balance Sheet Arrangements
The Company has no off-balance sheet financing arrangements.
Impact of Inflation
The Company experiences the effects of inflation primarily in the prices it pays
for labor, materials and services. Over the last three years, the Company has
experienced the effects of moderate inflation in these costs. At times, the
Company has been able to offset a portion of these increased costs by increasing
the sales prices of its products. However, competitive pressures have not
allowed for full recovery of these cost increases.
-19-
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in income taxes recognized in financial statements.
FIN 48 requires the impact of a tax position to be recognized in the financial
statements if that position is more likely than not of being sustained by the
taxing authority. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company is currently evaluating the requirements of FIN 48. Based
on the Company's computations, the FIN 48 adjustment to the Company's retained
earnings during the first quarter of 2007 is expected to be less than $100,000.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which provides guidance for measuring the fair value of assets and
liabilities, as well as requires expanded disclosures about fair value
measurements. SFAS 157 indicates that fair value should be determined based on
the assumptions marketplace participants would use in pricing the asset or
liability, and provides additional guidelines to consider in determining the
market-based measurement. The Company will be required to adopt SFAS 157 on
January 1, 2008. The Company is currently evaluating the impact of adopting SFAS
157 on its consolidated financial statements.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement No.
115" ("SFAS 159"), which allows measurement at fair value of eligible financial
assets and liabilities that are not otherwise measured at fair value. If the
fair value option for an eligible item is elected, unrealized gains and losses
for that item shall be reported in current earnings at each subsequent reporting
date. SFAS 159 also establishes presentation and disclosure requirements
designed to draw comparison between the different measurement attributes the
Company elects for similar types of assets and liabilities. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. Early adoption is
permitted. The Company is currently assessing the impact of SFAS 159 on its
financial statements.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of
operations are based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. In the preparation of these financial
statements, the Company makes estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. The Company believes the following
discussion addresses the Company's most critical accounting policies and
estimates, which are those that are most important to the portrayal of the
Company's financial condition and results and require management's most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Actual
results could differ significantly from those estimates under different
assumptions and conditions.
During 2006, the Company accrued for legal costs associated with certain
litigation. The Company believes these accruals are adequate to cover the legal
fees and expenses associated with litigating these matters. However, the time
and cost required to litigate these matters as well as the outcomes of the
proceedings may vary from what the Company has projected.
The Company assesses the impairment of its long-lived identifiable assets,
excluding goodwill which is tested for impairment pursuant to SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), as explained below,
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. This review is based upon projections of anticipated future
cash flows. While the Company believes that its estimates of future cash flows
are reasonable, different assumptions regarding such cash flows or future
changes in the Company's business plan could materially affect its evaluations.
No such changes are anticipated at this time.
-20-
The Company assesses goodwill for impairment pursuant to SFAS No. 142 which
requires that goodwill be assessed whenever events or changes in circumstances
indicate that the carrying value may not be recoverable, or, at a minimum, on an
annual basis by applying a fair value test.
Forward-looking Statements
The statements in this Management's Discussion and Analysis and elsewhere in
this annual report on Form 10-K that are forward-looking are based upon current
expectations, and actual results or future events may differ materially.
Therefore, the inclusion of such forward-looking information should not be
regarded as a representation by the Company that the objectives or plans of the
Company will be achieved. Such statements include, but are not limited to, the
Company's expectations regarding future revenues, cost of goods sold, gross
profit, operating income, income from continuing operations, cash flows from
operations, growth in product lines, and availability of equity and debt
financing. Words such as "anticipates," "believes," "intends," "expects,"
"should" and variations of such words and similar expressions are intended to
identify such forward-looking statements. Forward-looking statements contained
herein involve numerous risks and uncertainties, and there are a number of
factors that could cause actual results or future events to differ materially,
including, but not limited to, the following: changing economic, market and
business conditions; acts of war or terrorism; the effects of governmental
regulation; the impact of competition and new technologies;
slower-than-anticipated introduction of new products or implementation of
marketing strategies; implementation of new manufacturing processes or
implementation of new information systems; the Company's ability to protect its
intellectual property; changes in the prices of raw materials; changes in
product mix; intellectual property and product liability claims and product
recalls; the ability to attract and retain qualified personnel and the loss of
any significant customers. In addition, assumptions relating to budgeting,
marketing, product development and other management decisions are subjective in
many respects and thus susceptible to interpretations and periodic review which
may cause the Company to alter its marketing, capital expenditures or other
budgets, which in turn may affect the Company's results of operations and
financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates
--------------
Borrowings under the Credit Facility bear interest at 30-day, 60-day or 90-day
LIBOR, as selected by the Company, plus one percent. The Company is subject to
interest rate risk based on an adverse change in the 30-day, 60-day or the
90-day LIBOR. At December 31, 2006, the Company had borrowings under the Credit
Facility of $11.4 million. A one percent increase in the market interest rate
would reduce the Company's annual pretax income by approximately $114,000 at the
current borrowing level.
-21-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Board of Directors and
Stockholders of Atrion Corporation
We have audited the accompanying consolidated balance sheets of Atrion
Corporation and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Atrion
Corporation and subsidiaries as of December 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment." Also as
discussed in Note 1 to the consolidated financial statements, effective December
31, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension
and other Postretirement Plans."
Our audit was conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is presented for
the purposes of additional analysis and is not a required part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Atrion
Corporation and subsidiaries' internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 9, 2007, expressed an unqualified
opinion on both management's assessment of Atrion Corporation's internal control
over financial reporting and on the effectiveness of Atrion Corporation's
internal control over financial reporting.
/s/ Grant Thornton LLP
Dallas, Texas
March 9, 2007
-22-
CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 2006, 2005 and 2004
----------------------------------------------------------------------- -------------- --------------- --------------
2006 2005 2004
----------------------------------------------------------------------- -------------- --------------- --------------
(In thousands, except per share amounts)
Revenues $ 81,020 $ 72,089 $ 66,081
Cost of Goods Sold 48,572 43,119 40,804
---------------------------------------------------------------------------------------------------------------------
Gross Profit 32,448 28,970 25,277
---------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling 6,067 5,637 5,676
General and administrative 9,249 8,239 8,631
Research and development 2,794 2,396 2,374
---------------------------------------------------------------------------------------------------------------------
18,110 16,272 16,681
---------------------------------------------------------------------------------------------------------------------
Operating Income 14,338 12,698 8,596
Interest Income 91 37 45
Interest Expense (253) (61) (93)
Other Income (Expense), net (4) 10 46
---------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Provision
for Income Taxes 14,172 12,684 8,594
Income Tax Provision (3,572) (3,891) (2,289)
---------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 10,600 8,793 6,305
Gain on Disposal of Discontinued Operations,
net of tax 165 165 165
---------------------------------------------------------------------------------------------------------------------
Net Income $ 10,765 $ 8,958 $ 6,470
=====================================================================================================================
Income Per Basic Share:
Continuing operations $ 5.73 $ 4.90 $ 3.68
Discontinued operations .09 .09 .10
---------------------------------------------------------------------------------------------------------------------
Net Income Per Basic Share $ 5.82 $ 4.99 $ 3.78
=====================================================================================================================
Weighted Average Basic Shares Outstanding 1,851 1,794 1,711
=====================================================================================================================
Income Per Diluted Share:
Continuing operations $ 5.43 $ 4.57 $ 3.41
Discontinued operations .08 .09 .09
---------------------------------------------------------------------------------------------------------------------
Net Income Per Diluted Share $ 5.51 $ 4.66 $ 3.50
=====================================================================================================================
Weighted Average Diluted Shares Outstanding 1,953 1,924 1,850
=====================================================================================================================
Dividends Per Common Share $ .74 $ .62 $ .52
=====================================================================================================================
The accompanying notes are an integral part of these statements.
-23-
CONSOLIDATED BALANCE SHEETS
As of December 31, 2006 and 2005
---------------------------------------------------------------------------------------------------------------------
Assets: 2006 2005
---------------------------------------------------------------------------------------------------------------------
(In thousands)
Current Assets:
Cash and cash equivalents $ 333 $ 525
Accounts receivable, net of allowance for doubtful accounts
of $149 and $65 in 2006 and 2005, respectively 10,542 8,291
Inventories 17,115 17,705
Prepaid expenses and other current assets 1,530 832
Deferred income taxes 1,138 620
---------------------------------------------------------------------------------------------------------------------
Total Current Assets 30,658 27,973
------------------------------------------------------------------------------------------------------ --------------
Property, Plant and Equipment 82,536 63,041
Less accumulated depreciation and amortization 31,094 27,787
---------------------------------------------------------------------------------------------------------------------
51,442 35,254
---------------------------------------------------------------------------------------------------------------------
Other Assets and Deferred Charges:
Patents and licenses, net of accumulated amortization of $9,195 and
$8,877 in 2006 and 2005, respectively 2,264 2,331
Goodwill 9,730 9,730
Other 1,678 3,182
---------------------------------------------------------------------------------------------------------------------
13,672 15,243
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
$ 95,772 $ 78,470
=====================================================================================================================
The accompanying notes are an integral part of these statements.
-24-
CONSOLIDATED BALANCE SHEETS
As of December 31, 2006 and 2005
----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity: 2006 2005
----------------------------------------------------------------------------------------------------------------------
(In thousands)
Current Liabilities:
Accounts payable $ 3,387 $ 4,501
Accrued liabilities 2,654 2,627
Accrued income and other taxes 882 1,098
----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 6,923 8,226
----------------------------------------------------------------------------------------------------------------------
Line of credit 11,399 2,529
----------------------------------------------------------------------------------------------------------------------
Other Liabilities and Deferred Credits:
Deferred income taxes 5,074 4,344
Other 1,481 1,476
----------------------------------------------------------------------------------------------------------------------
6,555 5,820
----------------------------------------------------------------------------------------------------------------------
Total Liabilities 24,877 16,575
----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.10 per share, authorized
10,000 shares, issued 3,420 shares 342 342
Additional paid-in capital 14,140 12,508
Accumulated other comprehensive loss (892) --
Retained earnings 91,708 82,318
Treasury shares, 1,546 shares in 2006 and 1,586 shares
in 2005, at cost (34,403) (33,273)
----------------------------------------------------------------------------------------------------------------------
70,895 61,895
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
$ 95,772 $ 78,470
======================================================================================================================
The accompanying notes are an integral part of these statements.
-25-
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2006, 2005 and 2004
----------------------------------------------------------------------------------------------------------------------
2006 2005 2004
----------------------------------------------------------------------------------------------------------------------
(In thousands)
Cash Flows From Operating Activities:
Net income $ 10,765 $ 8,958 $ 6,470
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of discontinued operations (165) (165) (165)
Depreciation and amortization 5,005 5,389 4,830
Deferred income taxes 693 500 487
Tax benefit related to stock options -- 1,168 90
Stock-based compensation 116 -- --
Other 10 10 20
----------------------------------------------------------------------------------------------------------------------
16,424 15,860 11,732
Changes in operating assets and liabilities:
Accounts receivable (2,250) (703) (1,362)
Inventories 590 (3,692) (2,698)
Prepaid expenses and other current assets (698) 196 866
Other non-current assets (119) (1,863) 542
Accounts payable and accrued liabilities (1,087) (18) 1,109
Accrued income and other taxes (216) (223) 670
Other non-current liabilities 4 337 165
----------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 12,648 9,894 11,024
Net cash provided by discontinued operations (Note 3) 165 165 165
----------------------------------------------------------------------------------------------------------------------
12,813 10,059 11,189
----------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Property, plant and equipment additions (20,889) (10,569) (5,570)
Deposit on land purchase -- -- (3,750)
Property, plant and equipment sales 3 21 --
----------------------------------------------------------------------------------------------------------------------
(20,886) (10,548) (9,320)
----------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Line of credit advances 38,186 25,599 22,834
Line of credit repayments (29,316) (26,006) (24,185)
Exercise of stock options 1,228 2,285 414
Purchase of treasury stock (1,594) -- (84)
Tax benefit related to stock options 752 -- --
Dividends paid (1,375) (1,119) (891)
----------------------------------------------------------------------------------------------------------------------
7,881 759 (1,912)
----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (192) 270 (43)
Cash and cash equivalents, beginning of year 525 255 298
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 333 $ 525 $ 255
======================================================================================================================
Cash paid for:
Interest (net of capitalization) $ 199 $ 62 $ 96
Income taxes 3,272 2,508 716
----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
-26-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the year ended December 31, 2006, 2005 and 2004
(In thousands)
--------------------------------------------------------------------------------------------------------------------------
Common Stock Treasury Stock Accum-
--------------------------------------------------------------------------- ulated
Addit- Other
Shares ional Compre-
Out- Paid-in hensive Retained
standing Amount Shares Amount Capital Loss Earnings Total
------------------------------------------------------------------------------------------
Balance, January 1, 2004 1,700 $ 342 1,720 $(34,311) $ 9,673 -- $ 68,900 $ 44,604
------------------------------------------------------------------------------------------
Net income ~ ~ ~ ~ ~ ~ 6,470 6,470
Tax benefit from exercise
of stock options ~ ~ ~ ~ 90 ~ ~ 90
Exercise of stock options 21 ~ (21) 164 250 ~ ~ 414
Purchase of treasury stock (2) ~ 2 (84) ~ ~ ~ (84)
Dividends ~ ~ ~ ~ ~ ~ (891) (891)
------------------------------------------------------------------------------------------
Balance, December 31, 2004 1,719 342 1,701 (34,231) 10,013 -- 74,479 50,603
Net income ~ ~ ~ ~ ~ ~ 8,958 8,958
Tax benefit from exercise
of stock options ~ ~ ~ ~ 1,168 ~ ~ 1,168
Exercise of stock options 115 ~ (115) 958 1,327 ~ ~ 2,285
Dividends ~ ~ ~ ~ ~ ~ (1,119) (1,119)
------------------------------------------------------------------------------------------
Balance, December 31, 2005 1,834 342 1,586 (33,273) 12,508 -- 82,318 61,895
Net income ~ ~ ~ ~ ~ ~ 10,765 10,765
Tax benefit from exercise
of stock options ~ ~ ~ ~ 752 ~ ~ 752
Stock options and
restricted stock 66 ~ (66) 597 880 ~ ~ 1,477
Shares surrendered
in option exercises (2) ~ 2 (133) ~ ~ ~ (133)
Purchase of treasury stock (24) ~ 24 (1,594) ~ ~ ~ (1,594)
Dividends ~ ~ ~ ~ ~ ~ (1,375) (1,375)
Adjustment for initial
application of SFAS
158, net of tax
(Notes 1 and 11) ~ ~ ~ ~ ~ (892) ~ (892)
------------------------------------------------------------------------------------------
Balance, December 31, 2006 1,874 $ 342 1,546 $(34,403) $ 14,140 $ (892) $ 91,708 $ 70,895
------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-27-
Atrion Corporation
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Atrion Corporation ("Atrion") and its subsidiaries (collectively, the
"Company") design, develop, manufacture, sell and distribute products
primarily for the medical and healthcare industry. The Company markets its
products throughout the United States and internationally. The Company's
customers include hospitals, distributors, and other manufacturers. The
principal subsidiaries of Atrion through which these operations are
conducted are Atrion Medical Products, Inc. ("Atrion Medical Products"),
Halkey-Roberts Corporation ("Halkey-Roberts") and Quest Medical, Inc.
("Quest Medical").
Principles of Consolidation
The consolidated financial statements include the accounts of Atrion and
its subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation.
Fair Value
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term nature of
these items. The carrying amount of debt approximates fair value as the
interest rate is tied to market rates.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the dates of the financial statements and the reported
amount of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are securities with original maturities of 90 days or
less.
Trade Receivables
Trade accounts receivable are recorded at the original sales price to the
customer. The Company maintains an allowance for doubtful accounts to
reflect estimated losses resulting from the inability of customers to make
required payments. On an ongoing basis, the collectibility of accounts
receivable is assessed based upon historical collection trends, current
economic factors and the assessment of the collectibility of specific
accounts. The Company evaluates the collectibility of specific accounts
and determines when to grant credit to its customers using a combination
of factors, including the age of the outstanding balances, evaluation of
customers' current and past financial condition, recent payment history,
current economic environment, and discussions with appropriate Company
personnel and with the customers directly. Accounts are written off when
it is determined the receivable will not be collected.
Inventories
Inventories are stated at the lower of cost (including materials, direct
labor and applicable overhead) or market. Cost is determined by using the
first-in, first-out method. The following table details the major
components of inventory (in thousands):
December 31,
2006 2005
---------------------------------------------------------------------
Raw materials $ 7,194 $ 6,898
Work in process 4,084 4,291
Finished goods 5,837 6,516
---------------------------------------------------------------------
Total inventories $ 17,115 $ 17,705
---------------------------------------------------------------------
-28-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
Income Taxes
The Company utilizes the asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
reporting basis and the tax basis of the Company's other assets and
liabilities. These amounts are based on tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income. In assessing the realizability of deferred income tax assets,
management considers whether it is more likely than not that the deferred
income tax assets will be realized. A valuation allowance is provided
where the realization of the deferred tax asset is not likely.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets. Expenditures for repairs and maintenance are charged to expense as
incurred. The following table represents a summary of property, plant and
equipment at original cost (in thousands):
December 31,
------------------------- Useful
2006 2005 Lives
---------------------------------------------------------------------------
Land $ 5,260 $ 5,260 --
Buildings 28,945 14,006 30-40 yrs
Machinery and equipment 48,331 43,775 3-10 yrs
---------------------------------------------------------------------------
Total property, plant and equipment $ 82,536 $ 63,041
---------------------------------------------------------------------------
Depreciation expense of $4,685,000, $4,365,000 and $4,408,000 was recorded
for the years ended December 31, 2006, 2005 and 2004, respectively.
Capitalized interest related to the construction of a new facility at
Halkey-Roberts in the amount of $325,839 and $26,850 was recorded during
2006 and 2005, respectively.
Patents and Licenses
Cost for patents and licenses acquired is determined at acquisition date.
Patents and licenses are amortized over the useful lives of the individual
patents and licenses, which are from 7 to 19 years. Patents and licenses
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Goodwill
Goodwill represents the excess of cost over the fair value of tangible and
identifiable intangible net assets acquired. Annual impairment testing for
goodwill is done using a fair value-based test. Goodwill is also reviewed
periodically for impairment whenever events or changes in circumstances
indicate a change in value may have occurred. The Company has identified
three reporting units where goodwill was recorded for purposes of testing
goodwill impairment annually: (1) Atrion Medical Products (2)
Halkey-Roberts and (3) Quest Medical. The carrying amount for goodwill in
each of the three years ended December 31, 2006, 2005 and 2004 was
$9,730,000.
-29-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
Current Accrued Liabilities
The items comprising current accrued liabilities are as follows (in
thousands):
December 31,
2006 2005
------------------------------------------------------------------------
Accrued payroll and related expenses $ 1,272 $ 1,277
Accrued vacation 227 261
Accrued professional fees 567 427
Other accrued liabilities 588 662
------------------------------------------------------------------------
Total accrued liabilities $ 2,654 $ 2,627
------------------------------------------------------------------------
Revenues
The Company recognizes revenue when its products are shipped to its
customers and distributors, provided an arrangement exists, the fee is
fixed and determinable and collectibility is reasonably assured. All risks
and rewards of ownership pass to the customer upon shipment. Net sales
represent gross sales invoiced to customers, less certain related charges,
including discounts, returns and other allowances. Revenues are recorded
exclusive of taxes. Returns, discounts and other allowances have been
insignificant historically.
Shipping and Handling Policy
Shipping and handling fees charged to customers are reported as revenue
and all shipping and handling costs incurred related to products sold are
reported as cost of goods sold.
Research and Development Costs
Research and development costs relating to the development of new products
and improvements of existing products are expensed as incurred.
Advertising
Advertising production costs are expensed as incurred. Media for print
placement costs are expensed in the period the advertising appears. Total
advertising expenses were approximately $198,000, $219,000 and $161,000
for the years ended December 31, 2006, 2005 and 2004, respectively.
Stock-Based Compensation
At December 31, 2006, the Company had three stock-based employee
compensation plans which are described more fully in Note 8. Prior to
January 1, 2006, the Company accounted for those plans under the
recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations. No stock-based employee compensation cost was
reflected in net income prior to January 1, 2006, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), using the
modified-prospective transition method and the disclosures that follow are
based on applying SFAS No. 123R. Under this transition method,
compensation expense recognized during 2006 included compensation expense
for all share-based awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). In accordance with the
modified-prospective transition method, results for the prior periods have
not been restated. In 2006 the Company recorded compensation expense under
its three plans in the amount of approximately $116,000 and recognized tax
benefits of approximately $35,000 related to such expense.
-30-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
As a result of the adoption of SFAS No. 123R, the financial results of the
Company were lower than the results would have been under the previous
accounting method for stock-based compensation by the following amounts:
Year ended
December 31, 2006
(in thousands , except per
share amounts)
--------------------------
Income from continuing operations before income taxes $ 71
----------------
Income from continuing operations and net income $ 51
----------------
Basic and diluted earnings per share $ 0.03
----------------
Prior to the adoption of SFAS No. 123R all tax benefits resulting from the
exercise of stock options were reflected as operating cash flows in the
Consolidated Statements of Cash Flows. SFAS No. 123R requires that cash
flows from the exercise of stock-based compensation resulting from tax
benefits in excess of recognized compensation cost (excess tax benefits)
be classified as financing cash flows. In 2006, $752,000 of such excess
tax benefits was classified as financing cash flows. In 2005 and 2004,
$1,168,000 and $90,000, respectively of such excess tax benefits were
recorded as operating cash flows, as was prescribed prior to the adoption
of SFAS No. 123R.
Upon adoption of SFAS No. 123R, we have elected the "long form" method of
calculating the tax effects of stock-based compensation pursuant to SFAS
No. 123R, paragraph 81. Under the "long form" method, we determine the
beginning balance of the additional paid-in capital pool related to the
tax effects of the employee stock-based compensation "as if" we had
adopted the recognition provisions of SFAS No. 123 since its effective
date of January 1, 1995.
Pension Plan
Pension plan benefits are expensed as applicable employees earn benefits.
The recognition of expenses is significantly impacted by estimates made by
management such as discount rates used to value certain liabilities and
expected return on assets. The Company uses third-party specialists to
assist management in appropriately measuring the expense associated with
pension plan benefits.
On December 31, 2006, the Company adopted SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). As
is further described in Note 11, the funded status of the Company's
pension is recorded as a noncurrent asset and all unrecognized losses, net
of tax, are recorded as accumulated other comprehensive loss within
stockholders' equity at December 31, 2006. As required by SFAS 158,
results for prior periods have not been restated.
-31-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
The incremental effects of applying SFAS 158 on line items in the
consolidated balance sheet at December 31, 2006 were as follows (amounts
in thousands):
Before Adjustments After
Application Application
---------------------------------------------------------------------------------------------
Other Assets and Deferred Charges: Other $ 3,051 ($ 1,373) $ 1,678
Deferred income tax liability 5,555 ( 481) 5,074
Accumulated other comprehensive loss -- ( 892) ( 892)
The adoption of SFAS 158 had no effect on net earnings or cash flows.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in income taxes recognized in financial
statements. FIN 48 requires the impact of a tax position to be recognized
in the financial statements if that position is more likely than not of
being sustained by the taxing authority. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company is currently
evaluating the requirements of FIN 48. Based upon the Company's
computations, the FIN 48 adjustment to the Company's retained earnings
during the first quarter of 2007 is expected to be less than $100,000.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which provides guidance for measuring the fair value of
assets and liabilities, as well as requires expanded disclosures about
fair value measurements. SFAS 157 indicates that fair value should be
determined based on the assumptions marketplace participants would use in
pricing the asset or liability, and provides additional guidelines to
consider in determining the market-based measurement. The Company will be
required to adopt SFAS 157 on January 1, 2008. The Company is currently
evaluating the impact of adopting SFAS 157 on its consolidated financial
statements.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115" ("SFAS 159"), which allows measurement at fair
value of eligible financial assets and liabilities that are not otherwise
measured at fair value. If the fair value option for an eligible item is
elected, unrealized gains and losses for that item shall be reported in
current earnings at each subsequent reporting date. SFAS 159 also
establishes presentation and disclosure requirements designed to draw
comparison between the different measurement attributes the company elects
for similar types of assets and liabilities. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. Early adoption is
permitted. The Company is currently assessing the impact of SFAS 159 on
its financial statements.
-32-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
(2) Patents and Licenses
Purchased patents and licenses paid for the use of other entities' patents
are amortized over the useful life of the patent or license. Patents and
licenses are as follows (dollars in thousands):
December 31, 2006 December 31, 2005
-------------------------------------------------------- -------------------------------------------------
Weighted Average Gross Weighted Average Gross
Original Life Carrying Accumulated Original Life Carrying Accumulated
(years) Amount Amortization (years) Amount Amortization
--------------------- ------------------ --------------- ------------------ --------------- --------------
14.72 $ 11,459 $ 9,195 14.74 $ 11,208 $ 8,877
Aggregate amortization expense for patents and licenses was $318,000 for
2006, $1,024,000 for 2005 and $422,000 for 2004. Estimated future
amortization expense for each of the years set forth below ending December
31, is as follows (in thousands):
2007 $ 312
2008 $ 295
2009 $ 276
2010 $ 262
2011 $ 262
(3) Discontinued Operations
During 1997, the Company sold all of its natural gas operations. The
consolidated financial statements presented herein reflect the Company's
natural gas operations as discontinued operations for all periods
presented. The consolidated financial statements reflect a gain on
disposal of these discontinued operations of $165,000 in each of 2006,
2005 and 2004. These amounts are net of income tax expense of $85,000 in
each of the three years.
In addition to the initial consideration received in 1997 upon the sale of
the natural gas operations, certain annual contingent deferred payments of
up to $250,000 per year were to be paid to the Company over an eight-year
period which began in 1999, with the amount paid each year to be dependent
upon revenues received by the purchaser from certain gas transportation
contracts. The Company received deferred payments of $250,000 each, before
tax, from the purchaser in April 2006, 2005 and 2004 which are reflected
in each year as a gain from discontinued operations of $165,000, net of
tax. The eight-year period expired when the final payment was received in
April 2006.
(4) Line of Credit
The Company has a revolving credit facility ("Credit Facility") with a
money center bank. Under the Credit Facility, the Company and certain of
its subsidiaries have a line of credit of $25 million which is secured by
substantially all inventories, equipment and accounts receivable of the
Company. Interest under the Credit Facility is assessed at 30-day, 60-day
or 90-day LIBOR, as selected by the Company, plus one percent (6.38
percent at December 31, 2006) and is payable monthly. At December 31, 2006
and 2005, $11.4 million and $2.5 million, respectively, were outstanding
under the line of credit. The Credit Facility expires November 12, 2009
and may be extended under certain circumstances. At any time during the
term, the Company may convert any or all outstanding amounts under the
Credit Facility to a term loan with a maturity of two years. The Company's
ability to borrow funds under the Credit Facility from time to time is
contingent on meeting certain covenants in the loan agreement, the most
restrictive of which is the ratio of total debt to earnings before
interest, income tax, depreciation and amortization. At December 31, 2006,
the Company was in compliance with all financial covenants.
-33-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
(5) Income Taxes
The items comprising income tax expense for continuing operations are as
follows (in thousands):
Year ended December 31,
----------------------------------------------------
2006 2005 2004
----------------------------------------------------------------------------------------------------
Current -- Federal $ 2,705 $ 3,189 $ 1,807
-- State 230 257 91
----------------------------------------------------------------------------------------------------
2,935 3,446 1,898
----------------------------------------------------------------------------------------------------
Deferred -- Federal 607 408 380
-- State 30 37 11
----------------------------------------------------------------------------------------------------
637 445 391
----------------------------------------------------------------------------------------------------
Total income tax expense $ 3,572 $ 3,891 $ 2,289
----------------------------------------------------------------------------------------------------
Temporary differences and carryforwards which have given rise to deferred
income tax assets and liabilities as of December 31, 2006 and 2005 are as
follows (in thousands):
2006 2005
---------------------------------
Deferred tax assets:
Benefit plans $ 629 $ 471
Inventories 446 448
Other 194 63
---------------------------------
Total deferred tax assets $ 1,269 $ 982
=================================
Deferred tax liabilities:
Property, plant and equipment $ 4,259 $ 3,930
Pensions 143 488
Patents and goodwill 803 288
---------------------------------
Total deferred tax liabilities $ 5,205 $ 4,706
=================================
Net deferred tax liability $ 3,936 $ 3,724
=================================
Balance Sheet classification:
Non-current deferred income tax liability $ 5,074 $ 4,344
Current deferred income tax asset 1,138 620
---------------------------------
Net deferred tax liability $ 3,936 $ 3,724
=================================
-34-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
Total income tax expense for continuing operations differs from the amount
that would be provided by applying the statutory federal income tax rate
to pretax earnings as illustrated below (in thousands):
Year ended December 31,
--------------------------------------------
2006 2005 2004
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Income tax expense at the statutory
federal income tax rate $ 4,960 $ 4,313 $ 2,922
Increase (decrease) resulting from:
State income taxes 210 210 67
R&D credit (1,322) (100) (75)
Foreign sales benefit (154) (434) (441)
Other, net (122) (98) (184)
---------------------------------------------------------------------------------------
Total income tax expense $ 3,572 $ 3,891 $ 2,289
---------------------------------------------------------------------------------------
The 2006 amount for R&D credit includes $1,022,000 representing the
results of a review and documentation of the Company's R&D tax credits for
2005 and prior-year tax returns. This review indicated that the Company
was entitled to higher credits than had been claimed and amended returns
were filed.
(6) Stockholders' Equity
The Board of Directors of the Company has at various times authorized
repurchases of Company stock in open-market or negotiated transactions at
such times and at such prices as management may from time to time decide.
In 2006, the Company repurchased 24,000 shares at a price of $66.41 per
share. The Company repurchased 1,900 shares at a price of $44.16 per share
in 2004. As of December 31, 2006, authorization for the repurchase of up
to 68,100 additional shares remained.
In September 2003, the Company announced that it had adopted a policy for
the payment of regular quarterly cash dividends on the Company's common
stock. The Company began paying a quarterly cash dividend of $.12 per
share starting in September of 2003. The quarterly dividend was increased
to $.14 per share in September of 2004 and to $.17 per share in September
of 2005 and to $.20 per share in September of 2006.
The Company has a Rights Plan, which is intended to protect the interests
of stockholders in the event of a hostile attempt to take over the
Company. The rights, which are not presently exercisable and do not have
any voting powers, represent the right of the Company's stockholders to
purchase at a substantial discount, upon the occurrence of certain events,
shares of common stock of the Company or of an acquiring company involved
in a business combination with the Company. This plan, which was adopted
in August of 2006, expires in August of 2016.
-35-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
(7) Income Per Share
The following is the computation for basic and diluted income per share
from continuing operations:
Year ended December 31,
----------------------------------------------
2006 2005 2004
----------------------------------------------
(In thousands, except per share amounts)
Income from continuing operations $ 10,600 $ 8,793 $ 6,305
------------------------------------------------------------------------------------------------
Weighted average basic shares outstanding 1,851 1,794 1,711
Add: Effect of dilutive securities 102 130 139
------------------------------------------------------------------------------------------------
Weighted average diluted shares outstanding 1,953 1,924 1,850
------------------------------------------------------------------------------------------------
Income per share from continuing operations:
Basic $ 5.73 $ 4.90 $ 3.68
Diluted $ 5.43 $ 4.57 $ 3.41
------------------------------------------------------------------------------------------------
In 2006, 7,500 shares of restricted stock were excluded from the
calculation of weighted average basic shares outstanding, but incremental
shares of restricted stock were included in the calculation of weighted
average diluted shares outstanding. For the year ended December 31, 2004,
options to purchase approximately 26,000 shares of common stock were not
included in the computation of diluted income per share because their
effect would have been antidilutive.
(8) Stock Option Plans
The Company's 1997 Stock Incentive Plan provides for the grant to key
employees of incentive and nonqualified stock options, stock appreciation
rights, restricted stock and performance shares. In addition, under the
1997 Stock Incentive Plan, outside directors (directors who are not
employees of the Company or any subsidiary) received automatic annual
grants of nonqualified stock options to purchase 2,000 shares of common
stock. The 1997 Stock Incentive Plan was amended in 2005 to provide that
no additional stock options may be granted to outside directors
thereunder. Under the 1997 Stock Incentive Plan, 624,425 shares, in the
aggregate, of common stock were reserved for grants. The purchase price of
shares issued on the exercise of incentive options must be at least equal
to the fair market value of such shares on the date of grant. The purchase
price for shares issued on the exercise of nonqualified options and
restricted and performance shares is fixed by the Compensation Committee
of the Board of Directors. The options granted become exercisable as
determined by the Compensation Committee and expire no later than 10 years
after the date of grant.
During 1998, the Company's stockholders approved the adoption of the
Company's 1998 Outside Directors Stock Option Plan which, as amended,
provided for the automatic grant on February 1, 1998 and February 1, 1999
of nonqualified stock options to the Company's outside directors. Although
no additional options may be granted under the 1998 Outside Directors
Stock Option Plan, all outstanding options under this plan continue to be
governed by the terms and conditions of the plan and the existing option
agreements for those grants.
During 2006, the Company's stockholders approved the adoption of the
Company's 2006 Equity Incentive Plan which provides for the grant to key
employees and consultants of incentive and nonqualified stock options,
restricted stock, restricted stock units, deferred stock units, stock
appreciation rights and performance shares. Under the 2006 Equity
Incentive Plan, 100,000 shares, in the aggregate, of common stock were
reserved for awards. The purchase price of shares issued on the exercise
of options must be at least equal to the fair market value of such shares
on the date of grant. The purchase price for restricted and performance
shares is fixed by the Compensation Committee of the Board of Directors.
The options granted become exercisable and expire as determined by the
Compensation Committee except that incentive options expire no later than
10 years after the date of grant.
-36-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
Option transactions for the three years in the period ended December 31,
2006 are as follows:
Shares Weighted Average
Exercise Price
--------------------------------------------------------------------------------
Options outstanding at January 1, 2004 287,600 $17.38
Granted in 2004 62,000 $44.39
Exercised in 2004 (21,100) $19.63
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Options outstanding at December 31, 2004 328,500 $22.33
Granted in 2005 12,500 $46.05
Expired in 2005 (1,000) $31.39
Exercised in 2005 (114,900) $19.88
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Options outstanding at December 31, 2005 225,100 $24.86
Granted in 2006 25,000 $71.86
Exercised in 2006 (58,750) $23.16
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Options outstanding at December 31, 2006 191,350 $31.52
--------------------------------------------------------------------------------
Exercisable options at December 31, 2004 287,250 $22.32
Exercisable options at December 31, 2005 206,350 $24.26
Exercisable options at December 31, 2006 166,350 $25.45
--------------------------------------------------------------------------------
-37-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
During 2006, the Company made one award of restricted stock, the
restrictions as to which lapse generally over a five-year period. Under
the 2006 Equity Incentive Plan, during the vesting period, holders of the
restricted stock have voting rights and earn dividends, but the shares may
not be sold, assigned, transferred, pledged or otherwise encumbered.
Nonvested shares are forfeited on termination of employment. Changes in
restricted stock for the year ended December 31, 2006 were as follows:
Weighted Average
Award Date Fair Value
Shares Per Share
------------------------------------------
Nonvested shares at the beginning of the period - $ -
Awarded 7,500 $ 71.86
Vested - $ -
Forfeited - $ -
------------------
Nonvested shares at the end of the period 7,500 $ 71.86
==================
During 2006, $45,000 was charged to expense for the amortization of this
restricted stock award over its vesting period.
As of December 31, 2006, there remained 68,534 shares for which options
may be granted in the future under the 1997 Stock Incentive Plan and the
2006 Equity Incentive Plan. The following table summarizes information
about stock options outstanding at December 31, 2006:
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life price exercisable price
------------------------------- ------------- ---------------- ---------- -------------- ------------
$6.875-$14.063 81,900 2.2 years $11.47 81,900 $11.47
$14.875-$22.50 6,000 3.2 years $19.96 6,000 $19.96
$26.13-$31.39 22,350 2.4 years $30.07 22,350 $30.07
$43.75-$71.86 81,100 3.2 years $53.01 56,100 $44.62
------- -------
191,350 2.7 years $31.52 166,350 $25.45
======= =======
The Company estimates the fair value of stock options granted using the
Black-Scholes option-pricing formula and a single option award approach.
This fair value is then amortized on a straight-line basis over the
requisite service periods of the entire awards, which is generally the
vesting period. The expected life represents the period that the Company's
stock-based awards are expected to be outstanding and was determined based
on historical experience of similar awards, giving consideration to the
contractual terms of the stock-based awards, vesting schedules and
expectations of future employee behavior. Stock-based payments made prior
to January 1, 2006 were accounted for using the intrinsic value method
under APB 25. The fair value of stock-based payments made subsequent to
January 1, 2006 are valued using the Black-Scholes valuation method with a
volatility factor based on the Company's historical stock trading history.
The Company bases the risk-free interest rate using the Black-Scholes
valuation method on the implied yield currently available on U. S.
Treasury securities with an equivalent term. The Company bases the
dividend yield used in the Black-Scholes valuation method on the Company's
stock dividend history.
-38-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
The fair value for the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2006, 2005 and 2004:
2006 2005 2004
-------------------------------------------------------------------------
Risk-free interest rate 4.9% 3.4% 2.1%
Dividend yield 1.0% 1.3% 1.1%
Volatility factor 25.0% 31.3% 47.7%
Expected life 4 years 3 years 2.8 years
-------------------------------------------------------------------------
The weighted average fair values of the options granted in 2006, 2005 and
2004 were $18.02, $10.51 and $13.45, respectively. The total fair values
of shares vested during 2006, 2005 and 2004 were $243,000, $131,000 and
$1,077,000, respectively.
The total intrinsic values of options exercised during 2006, 2005 and 2004
were $2.8 million, $3.7 million and $.5 million, respectively. The total
intrinsic values of options outstanding and options currently exercisable
at December 31, 2006, were $8.8 million and $8.7 million, respectively.
The total intrinsic value of restricted stock awards at December 31, 2006
was $539,000. The weighted-average remaining contractual term for
restricted stock awards at December 31, 2006 was 4.6 years.
As of December 31, 2006 there was $404,000 in unrecognized compensation
cost related to nonvested stock options granted under the plans and
$494,000 in unrecognized compensation cost related to nonvested restricted
stock awards. The unrecognized compensation costs related to nonvested
stock options will be recognized over a period of 3.6 years. The
unrecognized compensation cost related to nonvested stock awards will be
recognized over a period of 4.6 years. At December 31, 2006 there were
25,000 nonvested stock options and 7,500 shares of nonvested restricted
stock.
The Company has a policy of utilizing existing treasury shares to satisfy
stock option exercises and restricted stock awards.
The following table illustrates the effect on net income and income per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123R to stock-based employee compensation in the 2005 and 2004
periods (in thousands, except per share amounts):
Year ended December 31,
2005 2004
------------ ------------
Net income, as reported $ 8,958 $ 6,470
Deduct: Total stock-based
employee compensation expense
determined under fair value-based
methods for all awards,
net of tax effects 129 658
------------ ------------
Pro forma net income $ 8,829 $ 5,812
============ ============
Income per share:
Basic - as reported $ 4.99 $ 3.78
============ ============
Basic - pro forma $ 4.92 $ 3.40
============ ============
Diluted - as reported $ 4.66 $ 3.50
============ ============
Diluted - pro forma $ 4.59 $ 3.14
============ ============
-39-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
(9) Revenues From Major Customers
The Company did not have any customers which represented ten percent or
more of its operating revenues in 2006.
The Company had one major customer which represented approximately $7.8
million (10.8 percent) and $9.6 million (14.5 percent) of the Company's
operating revenues during the years 2005 and 2004, respectively.
(10) Industry Segment and Geographic Information
The Company operates in one reportable industry segment: designing,
developing, manufacturing, selling and distributing products for the
medical and healthcare industry and has no foreign operating subsidiaries.
The Company has other product lines which include pressure relief valves
and inflation systems, which are sold primarily to the aviation and marine
industries. Due to the similarities in product technologies and
manufacturing processes, these products are managed as part of the medical
products segment. The Company recorded incidental revenues from its oxygen
pipeline, which totaled approximately $955,000 in each of the years of
2006, 2005 and 2004. Pipeline net assets totaled $2.3 and $2.4 million at
December 31, 2006 and 2005, respectively. Company revenues from sales to
parties outside the United States totaled approximately 30 percent, 27
percent and 30 percent of the Company's total revenues in 2006, 2005 and
2004, respectively. No Company assets are located outside the United
States. A summary of revenues by geographic territory, based on shipping
destination, for the three years 2006, 2005 and 2004 is as follows (in
thousands):
Year ended December 31,
-------------------------------------------
2006 2005 2004
----------------------------------------------------------------------------
United States $ 56,784 $ 52,283 $ 46,375
Canada 9,235 8,232 9,113
United Kingdom 1,897 1,984 1,883
Japan 2,763 1,824 1,739
Germany 1,827 1,183 1,235
Other countries less than $1
million 8,514 6,583 5,736
----------------------------------------------------------------------------
Total $ 81,020 $ 72,089 $ 66,081
----------------------------------------------------------------------------
A summary of revenues by product line for the three years 2006, 2005 and
2004 is as follows (in thousands):
2006 2005 2004
--------------- ---------------- ----------------
Fluid Delivery $ 25,809 $ 20,447 $ 17,192
Cardiovascular 23,290 19,307 16,577
Ophthalmology 13,744 14,514 15,690
Other 18,177 17,821 16,622
---------------------------------------------------------------------------
Total $ 81,020 $ 72,089 $ 66,081
===========================================================================
-40-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
(11) Employee Retirement and Benefit Plans
A noncontributory cash balance defined benefit retirement plan is
maintained for all regular employees of the Company except those of Quest
Medical. This plan was amended effective May 1, 2005 to discontinue the
addition of newly-hired employees to the plan after that date. The
Company's funding policy is to make the annual contributions required by
applicable regulations and recommended by its actuary. The Company uses a
December 31 measurement date for the plan.
See Note 1 regarding the adoption of SFAS 158 and its effect on
presentation of pension balances on the consolidated balance sheet. The
following table summarizes amounts recognized in accumulated other
comprehensive loss at December 31, 2006 (in thousands):
Unrecognized net actuarial loss $ 1,762
Unrecognized prior service cost (389)
----------------------------------------------------------------------
Total $ 1,373
Tax benefit recognized (481)
----------------------------------------------------------------------
Net amount $ 892
----------------------------------------------------------------------
Estimated amounts that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost during 2007 are as
follows (in thousands):
Net actuarial loss $81
Prior service cost (38)
----------------------------------------------------------------------
Total $43
======================================================================
-41-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
The following is a reconciliation of the beginning and ending balances of
the benefit obligation and the fair value of plan assets as of year end
(in thousands):
2006 2005
-------------- --------------
Actuarial Present Value of Benefit Obligation:
Accumulated Benefit Obligation $ 5,806 $ 5,571
Projected Benefit Obligation 5,905 5,655
Change in Projected Benefit Obligation:
Projected benefit obligation, January 1 $ 5,655 $ 5,539
Service cost 278 267
Interest cost 334 322
Actuarial (gain)/loss 12 (61)
Benefits paid (374) (412)
--------------------------------------------------------------------------------
Projected benefit obligation, December 31 $ 5,905 $ 5,655
--------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets, January 1 $ 5,676 $ 5,661
Actual return on plan assets 761 227
Employer contributions 250 200
Benefits paid (374) (412)
--------------------------------------------------------------------------------
Fair value of plan assets, December 31 $ 6,313 $ 5,676
--------------------------------------------------------------------------------
Funded Status of Plan at Year End $ 408 $ 21
--------------------------------------------------------------------------------
-42-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
The amount recognized as other assets in the consolidated balance sheet at
December 31, 2006 equals the funded status of the Company's pension plan
of $408,000. For the year ended December 31, 2005, the following table
shows the reconciliation of the funded status of the Company's pension
plan with the amounts recorded in the consolidated balance sheets (in
thousands):
Funded status of plan at year end $ 21
Unrecognized actuarial loss 2,182
Unrecognized prior service cost (427)
-------------------------------------------------------------------
Net prepaid pension cost 1,776
Other comprehensive loss --
-------------------------------------------------------------------
Net amount recognized as other assets $ 1,776
-------------------------------------------------------------------
The components of net periodic pension cost for 2006, 2005 and 2004 were
as follows (in thousands):
Year ended December 31,
------------------------------------------
2006 2005 2004
------------- -------------- -------------
Components of Net Periodic
Pension Cost:
Service cost $ 278 $ 267 $ 241
Interest cost 334 322 311
Expected return on assets (445) (456) (423)
Prior service cost amortization (37) (37) (37)
Actuarial loss 116 107 103
Transition amount amortization -- (44) (44)
----------------------------------- ------------- -------------- -------------
Net periodic pension cost $ 246 $ 159 $ 151
----------------------------------- ------------- -------------- -------------
Actuarial assumptions used to determine benefit obligations at
December 31 were as follows:
2006 2005
---------------- ----------------
Discount rate 6.00% 6.00%
Rate of compensation increase 5.00% 5.00%
Actuarial assumptions used to determine net periodic pension cost were
as follows:
Year ended December 31,
----------------------------------------
2006 2005 2004
------------- ------------ -------------
Discount rate 6.00% 6.00% 6.50%
Expected long-term return on assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00%
The Company's expected long-term rate of return assumption is based upon
the plan's actual long-term investment results as well as the long-term
outlook for investment returns in the marketplace at the time the
assumption is made.
-43-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
The Company's pension plan assets at December 31, 2006 and 2005 were
invested in the following asset categories:
2006 2005
--------------- ---------------
Asset Category:
Equity securities 77% 70%
Debt securities 19% 29%
Other 4% 1%
---------------------------------------------- ---------------
Total 100% 100%
---------------------------------------------- ---------------
It is the Company's investment policy to maintain 66 percent to 79 percent
of the plan's assets in equity securities and 19 percent to 31 percent of
the plan's assets in debt securities with the balance invested in a money
market account to meet liquidity requirements for distributions. The asset
allocation at December 31, 2006 represents the targeted asset allocation.
Based upon the plan's current funded position, the Company expects to make
$250,000 in contributions to its pension plan in 2007, and the Company's
estimated future benefit payments under the plan are as follows (in
thousands):
2007 $ 480
2008 $ 270
2009 $ 280
2010 $ 280
2011 $ 300
2012-2016 $ 1,690
The Company also sponsors a defined contribution plan for all employees.
Each participant may contribute certain amounts of eligible compensation.
The Company makes a matching contribution to the plan. The Company's
contribution under this plan was $244,000, $223,000 and $214,000 in 2006,
2005 and 2004, respectively.
(12) Commitments and Contingencies
From time to time and in the ordinary course of business, the Company may
be subject to various claims, charges and litigation. In some cases, the
claimants may seek damages, as well as other relief, which, if granted,
could require significant expenditures. The Company accrues the estimated
costs of settlement or damages when a loss is deemed probable and such
costs are estimable, and accrues for legal costs associated with a loss
contingency when a loss is probable and such amounts are estimable.
Otherwise, these costs are expensed as incurred. If the estimate of a
probable loss or defense costs is a range and no amount within the range
is more likely, the Company accrues the minimum amount of the range. As of
December 31, 2006, the Company had accrued $384,000 for legal fees and
expenses that it expected to incur in connection with the litigation or
arbitration of two such matters.
The Company has arrangements with its executive officers (the
"Executives") pursuant to which the termination of their employment under
certain circumstances would result in lump sum payments to the Executives.
Termination under such circumstances in 2007 could result in payments
aggregating $1.4 million excluding any excise tax that may be reimbursable
by the Company.
During 2004, the Company began planning for the construction of a new
facility for its Halkey-Roberts operation to be located approximately four
miles from its leased facility. In 2004, the Company made a $3.75 million
deposit required in connection with a proposed purchase of eleven acres of
land to be used for the construction of this new facility. During 2005,
this property was acquired and construction of the new facility commenced.
The Company completed the construction of this new facility and moved the
Halkey-Roberts operation into the new facility during the third quarter of
2006. The Company terminated its lease for the Halkey-Roberts facility in
St. Petersburg, Florida which was vacated in October of 2006. This lease
was being accounted for as an operating lease, and the rental expense for
the years ended December 31, 2006, 2005 and 2004 was $363,000, $422,000
and $409,000, respectively. There is no future rental commitment under
this lease.
-44-
Atrion Corporation
Notes to Consolidated Financial Statements - (continued)
(13) Quarterly Financial Data (Unaudited)
The following table shows selected unaudited quarterly financial data for
2006 and 2005:
Quarter Operating Operating Income Income
Ended Revenue Income Net Income Per Basic Share Per Diluted Share
----------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
03/31/06 $ 19,503 $ 3,052 $ 2,106 $ 1.15 $ 1.08
06/30/06 20,849 4,125 2,985 1.62 1.53
09/30/06 19,290 3,186 2,696 1.45 1.38
12/31/06 21,379 3,974 2,979 1.60 1.52
----------------------------------------------------------------------------------------------------------------
03/31/05 $ 18,645 $ 3,418 $ 2,294 $ 1.33 $ 1.23
06/30/05 18,102 3,131 2,272 1.27 1.18
09/30/05 18,338 3,111 2,241 1.23 1.15
12/31/05 17,003 3,037 2,149 1.17 1.10
----------------------------------------------------------------------------------------------------------------
The quarterly information presented above reflects, in the opinion of
management, all adjustments necessary for a fair presentation of the results for
the interim periods presented.
-45-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and its Chief Financial Officer, evaluated the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of December 31, 2006. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective. There were no changes in the
Company's internal control over financial reporting for the fourth fiscal
quarter ended December 31, 2006 that have materially affected or are reasonably
likely to materially affect the Company's internal control over financial
reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended. The Company's internal control
system is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. All
internal control systems, no matter how well designed, have inherent
limitations. A system of internal control may become inadequate over time
because of changes in conditions or deterioration in the degree of compliance
with the policies or procedures. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
The Company's management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006 using the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on this assessment, the
Company's management concluded that, as of December 31, 2006, the Company's
internal control over financial reporting was effective.
The financial statements for each of the years covered in this Annual Report on
Form 10-K have been audited by an independent registered public accounting firm,
Grant Thornton LLP. Additionally, Grant Thornton LLP has provided an attestation
report on management's assessment of the Company's internal control over
financial reporting as of December 31, 2006.
Report of Independent Registered Public Accounting Firm
Board of Directors and
Stockholders of Atrion Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Atrion
Corporation and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Atrion Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
-46-
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Atrion Corporation and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on criteria
established in Internal Control-Integrated Framework issued by COSO. Also in our
opinion, Atrion Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control-Integrated Framework
issued by COSO.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Atrion Corporation and subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2006,
and our report dated March 9, 2007, expressed an unqualified opinion on those
financial statements.
/s/ Grant Thornton LLP
Dallas, Texas
March 9, 2007
-47-
ITEM 9B. OTHER INFORMATION
There was no information required to be disclosed in a report on Form 8-K during
the three months ended December 31, 2006 that was not reported.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information for this item relating to directors of the Company is
incorporated by reference from the Company's definitive proxy statement for its
2007 annual meeting of stockholders.
Executive Officers
The information for this item relating to executive officers of the Company is
set forth in Part I of this report.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the Company's definitive proxy statement for its 2007 annual
meeting of stockholders.
The Company has adopted a Code of Ethics and Business Conduct that applies to
all of the Company's directors, officers and employees. The Code of Ethics and
Business Conduct will be provided to any person, without charge, upon request
addressed to: Corporate Secretary, Atrion Corporation, One Allentown Parkway,
Allen, Texas 75002.
ITEM 11. EXECUTIVE COMPENSATION
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2007 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2007 annual meeting of stockholders.
Security Ownership of Management
The information for this item is incorporated by reference from the Company's
definitive proxy statement for its 2007 annual meeting of stockholders.
Changes in Control
The Company knows of no arrangements that may at a subsequent date result in a
change in control of the Company.
-48-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information for this item is incorporated by reference form the Company's
definitive proxy statement for its 2007 annual meeting of stockholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report on Form
10-K:
1. Financial Statements of the Company:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statement of Changes in Stockholders Equity
2. Financial Statement Schedules:
Schedule II - Consolidated Valuation and Qualifying Accounts
Allowance for Doubtful Receivables
December 31,
-----------------------------------------
2006 2005 2004
---- ---- ----
(in thousands)
Beginning balance $ 65 $ 118 $ 104
Additions charged to expense 106 (34) 41
Deductions from reserve (22) (19) (27)
------------------------------------------------------------------------------
Ending balance $ 149 $ 65 $ 118
------------------------------------------------------------------------------
All other financial statement schedules have been omitted since the
required information is included in the consolidated financial
statements or the notes thereto or is not applicable or required.
-49-
3. Exhibits. Reference as made to Item 15(b) of this report on Form
10-K.
(b) Exhibits
Exhibit
Numbers Description
------- -----------
2a Asset Purchase Agreement, dated March 19, 1997, between Atrion Corporation and Midcoast Energy Resources, Inc. (1)
3a Certificate of Incorporation of Atrion Corporation, dated December 30, 1996(2)
3b Amended and Restated Bylaws of Atrion Corporation (3)
10a* Atrion Corporation 1997 Stock Incentive Plan (4)
10b* Form of Award Agreement for Incentive Stock Option (5)
10c* Form of Award Agreement for Nonqualified Stock Option for Key Employee (6)
10d* Form of Award Agreement for Nonqualified Stock Option for Director (7)
10e* Atrion Corporation 1998 Outside Directors Stock Option Plan (8)
10f* Form of Stock Option Agreement (9)
10g* Severance Plan for Chief Financial Officer (1(0))
10h* Atrion Corporation Incentive Compensation Plan for Chief Financial Officer (1(1))
10i* Chief Executive Officer Amended and Restated Employment Agreement (1(2))
10j* Atrion Corporation 2006 Equity Incentive Plan (1(3))
10k* Form of Award Agreement for Incentive Stock Option under the Atrion Corporation 2006 Equity Incentive Plan (1(4))
10l* Form of Award Agreement for Non-Qualified Stock Option under the Atrion Corporation 2006 Equity Incentive Plan (1(5))
10m* Form of Award Agreement for Restricted Stock under the Atrion Corporation 2006 Equity Incentive Plan (1(6))
21 Subsidiaries of Atrion Corporation as of December 31, 2006 (17)
23 Consent of Grant Thornton LLP (1(7))
31.1 Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer (1(7))
31.2 Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer (1(7))
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes - Oxley
Act Of 2002 (1(7))
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes - Oxley
Act Of 2002 (17)
Notes
-----
(1) Incorporated by reference to Appendix A to the Definitive Proxy
Statement of the Company dated April 23, 1997.
(2) Incorporated by reference to Appendix B to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(3) Incorporated by reference to Appendix C to the Definitive Proxy
Statement of the Company dated January 10, 1997.
(4) Incorporated by reference to Exhibit 4.4(b) to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No.333-56509).
-50-
(5) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(6) Incorporated by reference to Exhibit 4.6 to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(7) Incorporated by reference to Exhibit 4.7 to the Form S-8 of Atrion
Corporation filed June 10, 1998 (File No. 333-56509).
(8) Incorporated by reference to Exhibit 4.4 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(9) Incorporated by reference to Exhibit 4.5 to the Form S-8 of Atrion
Corporation, filed June 10, 1998 (File No. 333-56511).
(10) Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion
Corporation dated May 12, 2000.
(11) Incorporated by reference to Exhibit 10k to Form 10-K of Atrion
Corporation dated March 30, 2001.
(12) Incorporated by reference to Exhibit 10.1 to Form 10-Q of Atrion
Corporation dated November 6, 2006.
(13) Incorporated by reference to Appendix A to Definitive Proxy Statement
of Atrion Corporation dated April 6, 2006
(14) Incorporated by reference to Exhibit 10.2 to Form 10-Q of Atrion
Corporation dated August 8, 2006.
(15) Incorporated by reference to Exhibit 10.3 to Form 10-Q of Atrion
Corporation dated August 8, 2006.
(16) Incorporated by reference to Exhibit 10.4 to Form 10-Q of Atrion
Corporation dated August 8, 2006.
(17) Filed herewith.
* Management Contract or Compensatory Plan or Arrangement
-51-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Atrion Corporation
By: /s/ Emile A. Battat
-------------------
Emile A. Battat
Chairman,
President and Chief
Executive Officer
Dated: March 9, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Emile A. Battat Chairman, President and Chief Executive March 9, 2007
---------------------------------------- Officer (Principal Executive Officer)
Emile A. Battat
/s/ Jeffery Strickland Vice President, Chief Financial Officer and March 9, 2007
---------------------------------------- Secretary-Treasurer (Principal Financial
Jeffery Strickland and Accounting Officer)
/s/ Hugh J. Morgan, Jr. Director March 9, 2007
----------------------------------------
Hugh J. Morgan, Jr.
/s/ Roger F. Stebbing Director March 9, 2007
----------------------------------------
Roger F. Stebbing
/s/ John P. Stupp, Jr. Director March 9, 2007
----------------------------------------
John P. Stupp, Jr.
Director March 9, 2007
----------------------------------------
Ronald N. Spaulding
-52-