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
DECEMBER 31, 2000 1-9731
(FOR THE FISCAL YEAR ENDED) (COMMISSION FILE NUMBER)
[] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 72-0925679
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OF ORGANIZATION) NUMBER)
1101 SOUTH CAPITAL OF TEXAS HIGHWAY 78746
BUILDING G, SUITE 200 (ZIP CODE)
AUSTIN, TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(512) 347-9640
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
NONE
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/
On March 1, 2001, there were 3,072,120 shares of the registrant's
common stock outstanding, par value $.01, which is the only class of common
or voting stock of the registrant. As of March 1, 2001, the aggregate market
value of the voting stock of the registrant held by non-affiliates was
$4,388,540 based upon the closing price of the shares of common stock on the
American Stock Exchange.
PART I
ITEM 1. BUSINESS
BACKGROUND
Arrhythmia Research Technology, Inc. ("ART" or the "Company") was
incorporated under the laws of the State of Louisiana in 1981 and
reincorporated under the laws of the State of Delaware in 1987. ART is
engaged in the sales and licensing of computerized medical instruments, which
acquire data and analyze electrical impulses of the heart to detect and aid
in the treatment of potentially lethal arrhythmias. ART's product line
includes signal-averaging electrocardiographic (SAECG) equipment comprised of
the Tri-Pac, the 1200 EPX(TM), the LP-Pac Q(TM), and the PREDICTOR(R) 7.
Additionally, ART was the exclusive distributor of CardioMapp(TM) and
CardioLab for Prucka Engineering Inc.'s electrophysiology products through
December 31, 1996. Pursuant to a sales commission agreement for CardioLab
systems, ART received commissions in 1999 and 1998. In 2000, ART received
$1,000,000 from Prucka Engineering Inc., now owned by GE Marquette Medical
Systems Inc., ("GE/Prucka") as payment to terminate the sales commission
agreement as of January 1, 2000. The sales commission agreement had been
scheduled to expire on December 31, 2002.
ART's wholly owned subsidiary, Micron Products, Inc. ("Micron"), is a
manufacturer and distributor of silver/silver chloride-plated sensor elements
("sensors") used in the manufacture of disposable electrodes constituting a
part of ECG diagnostic and monitoring instruments. Micron also acts as a
distributor of metal snap fasteners ("snaps"), another component used in the
manufacture of disposable electrodes. In 1997, Micron acquired the rights to
an electrode assembly machine, which it now manufactures and sells or leases
to its sensor and snap customers. Micron was incorporated in the State of
Massachusetts in 1972 and is located in Fitchburg, Massachusetts.
The following table sets forth for the periods specified, the revenue
derived from the products of ART and its subsidiary Micron (collectively the
"Company"):
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
2000 % 1999 % 1998 %
-------------------- --------------------- --------------------
Sensors & Snaps............ $ 8,342,252 88 $ 9,534,569 92 $ 8,444,870 90
Polymers................... 64,788 - 183,839 2 - -
CardioLab & CardioMapp..... 1,000,000 11 384,598 4 485,331 5
SAECG equipment............ 114,823 1 276,578 2 429,300 5
K-3 CathLab - - - - 1,095 -
-------------------- --------------------- --------------------
Total.................. $ 9,521,863 100 $ 10,379,584 100 $ 9,360,596 100
==================== ===================== ====================
The Company believes that recent pronouncements in the fields of
cardiology and electrophysiology, such as those related the Multicenter
Unsustained Tachycardia Trial (MUSTT), will create an increased demand for
ART's patented and proprietary technology. To the extent new legislation or
regulations, if any, are enacted or adopted in the future relating to ART's
business, including greater third-party coverage and reimbursement, the
Company also believes this would have a significant impact on demand for
ART's product line.
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RECENT DEVELOPMENTS
REORGANIZATION OF AUSTIN OPERATIONS
Early in 2000, the direct sales and administrative staff involved in the
marketing and manufacture of ART's product lines were substantially reduced.
The remaining personnel, supplemented by key Micron managers and contract
programmers, were assigned to upgrade ART's signal-averaging products. The
new software is expected to make ART's products more competitive in 2001 and
the Company will be in a better position to generate sales and licensing
revenues as the demand for electrocardiographic technology grows.
TERMINATION OF GE/PRUCKA COMMISSION AGREEMENT
As reported in the second quarter of 2000, the Company received $1,000,000
of revenue attributed to the termination of a commission agreement with
GE/Prucka. The commission agreement covering sales of CardioLab systems was
scheduled to expire on December 31, 2002, however, GE/Prucka negotiated to
buy out the remainder of the contract with no further obligations to either
party. This lump sum payment has all been included in the sales of
CardioLab and CardioMapp for 2000. The Company will not realize additional
revenues or costs related to CardioLab products in future periods.
PURCHASE OF TREASURY STOCK
Purchases of treasury stock were 265,040 shares in 2000 compared to
153,891 in 1999. Periodically, the Board of Directors authorizes the purchase
of the Company's common stock based on the amount of cash not required for
operations or capital expenditures, the market price of ART's common stock
and the availability of the stock for sale. The Board of Directors expects to
continue this policy in the year 2001.
DESCRIPTION OF BUSINESS
SIGNAL-AVERAGING ELECTROCARDIOGRAPHIC (SAECG) PRODUCTS
Sudden cardiac death afflicts over 400,000 individuals in the United
States alone each year. As described in an Expert Consensus on
Signal-Averaged Electrocardiography published in the Journal of the American
College of Cardiology (Vol. 27, No. 1, 1996), these occurrences are due to
sustained ventricular tachycardia (abnormally rapid heartbeat) or ventricular
fibrillation (very fast, completely irregular heartbeat), which severely
affect the capability of the heart's pumping chambers or ventricles.
Ventricular arrhythmia's are distinguished from arrhythmia's affecting the
atrium (the non-pumping chambers of the heart), which generally are not life
threatening. The majority of ventricular arrhythmias occur in patients who
have survived a prior heart attack or have significant coronary artery
disease. However, individuals with primary electrical disturbances of the
heart comprise an additional subset of patients. Thus, various techniques
have evolved to detect and treat individuals at risk of the development of
sustained ventricular arrhythmias which may cause marked interference with
the proper functioning of blood circulation, resulting, in some cases, in
sudden cardiac death.
By analyzing the electrical signals from the hearts of animal and human
survivors of heart attacks, researchers have found that, in contrast to the
relatively discrete, narrow high amplitude signals recorded from normal
subjects, low amplitude, high frequency signals persisted well after the
heartbeats were recorded in approximately 20% to 25% of heart attack
survivors. These latter signals became known as "late potentials." Since
directly recorded late potentials had been documented in subjects with
malignant ventricular arrhythmias, the hypothesis arose that late potentials
would be recorded in subjects with, or at risk of, sustained ventricular
arrhythmias. After successful surgical treatment of ventricular arrhythmias,
these late potential signals disappeared, which indicated an association
between these abnormal signals and the underlying condition.
Signal-averaged surface (non-invasive) electrocardiography has become
well established as a means of evaluating and diagnosing those individuals at
risk for potentially lethal ventricular arrhythmias as documented by the
Expert Consensus on SAECG (noted above). The steps involved in obtaining a
SAECG include: recording, digitization, averaging, amplification, and
filtering. Conventional surface electrocardiography generally cannot detect
late potentials. A major limitation stems from the inability to isolate the
low amplitude signals. Amplification of the standard electrocardiogram to
detect late potentials results in contamination by coincident electrical
noise. The SAECG processes enable late potentials to be
3
amplified and enhanced, while eliminating undesired electrical noise. At the
1996 AHA Sessions, a significant study showed that SAECG could be an
effective diagnostic tool for patients with coronary heart disease (CHD) even
before they have had a heart attack. Patients with CHD approximate 15.0
million. An SAECG study involving 458 patients who had an acute myocardial
infarction was published in the American Heart Journal in 1997. In the
absence of late potentials, the probability of having no arrhythmic event was
99% in the first year, and 96% in five years. On the other hand, the presence
of late potentials found in the SAECG represents the strongest single
predictor of future arrhythmic risk in patients after a first acute
myocardial infarction, with a 4.6-fold increase in the risk of sudden death
or sustained ventricular tachycardia. The results of research presented at a
meeting at the 1999 American College of Cardiology indicate that T-wave
alternans and late potential seem to be independent predictors for
ventricular tachyarrhythmias in patients with post-myocardial infarctions.
Although T-wave alternans had a higher sensitivity, late potentials had a
higher specificity. It was concluded that a combination of both tests could
identify high-risk patients more accurately.
1200 EPX
The 1200 EPX is a specialized high resolution ECG system used to detect
late potentials, which cannot be detected by conventional surface ECG
instruments. The 1200 EPX is used in conjunction with an MS-DOS based
personal computer utilizing the patented Simson bi-directional Butterworth
filtering technique. The 1200 EPX acquires, digitizes, averages and filters
the cardiac signals providing late potential analysis with its time domain
and frequency-domain analysis software. ART has the rights to the use of the
Simson bi-directional Butterworth filtering technique for the detection of
late potentials in the terminal portion of the QRS cycle. This method was
pioneered by Michael Simson, MD, and has been built into each 1200 EPX . Hard
copy reports are generated using laser jet printers. See "EPSoft(TM) Software
Library" for post-processing applications available for the 1200 EPX. In
2000, a substantial portion of surplus 1200 EPX inventory was sold to a large
medical products distributor. Any revenue to ART will be recognized on the
resale of these units to the extent the distributor is able to market this
product.
LP-PAC Q
The LP-Pac Q is a low-cost signal-averaging kit for MS-DOS based personal
computers which consists of a "smart" SAECG pre-amplifier/patient cable, lead
wires, a data acquisition system (DAS) card to receive ECG signals in
real-time, time domain late-potential analysis software and an isolation
safety transformer. The LP-Pac Q uses the patented Simson bi-directional
Butterworth filtering technique, the recognized standard for the detection of
late potentials, and provides results which are substantially equivalent to
the 1200 EPX. All software modules for the 1200 EPX are also available for
the LP-Pac Q, with the exception of Heart Rate Variability analysis. See
"EPSoft(TM) Software Library".
TRI-PAC AND PREDICTOR(R) 7
The TRI-PAC is a system which performs resting ECG, signal averaged ECG
and stress ECG's using the same data acquisition device. The acquisition
device developed by NORAV Medical Ltd. is combined with Predictor(R) 7
software which is a Windows version of signal averaging programs used to
record and analyze cardiac late potentials. Predictor(R) 7 consists of a
computer, digitizing hardware, programmable amplifiers, QSR detection
hardware/firmware and preamplifiers that can be attached to a windows
compliant printer to produce a hard copy of the signal averaged test.
EPSOFT(TM) SOFTWARE LIBRARY
The primary thrust in software development efforts since mid-1997, has
been the conversion and development of DOS-based products into the Windows 95
environment.
The Company believes ART's research and development staff has developed
breakthrough digital signal processing techniques to enhance the overall
analytical power of the SAECG test. Two such developments are the
IntraSpect(TM) and Early Potential Analysis software packages.
IntraSpect(TM), which is protected by a United States patent, permits
visualization and quantification of electrical fragmentation within the
entire QRS complex (entire ventricular depolarization cycle), using
individual-lead Acceleration Spectrum Analysis (ASA). Hence, micropotential
detection is no longer limited to the `late potential' region. Furthermore,
patients with conduction delay problems (i.e. "bundle branch block") can have
SAECG analysis performed on them. This covers 25% of a patient population,
which previously could not be analyzed with SAECG.
The Early Potential Analysis software has been designed specifically for
P wave-triggered SAECG acquisition and analysis and is used as a research
tool in assessing patients at risk for atrial fibrillation and flutter. ART
continues to offer other optional post-processing signal averaging software
packages for the 1200 EPX and LP-Pac Q, including Cal-ABS(TM) Plus software
for individual lead time domain analysis; and Heart Rate Variability (HRV)
software for the 1200 EPX. These
4
optional signal-averaging software packages are not approved by the FDA and
are for research purposes, not clinical diagnosis.
ART also offers the PREDICTOR Heart Rate Variability ECG software
("PREDICTOR HRVECG"), which is marketed under a 510(k) granted by the FDA in
1989. PREDICTOR HRVECG provides time and frequency domain mathematical tools
for the non-invasive assessment of R wave to R wave in sequential QRS
complexes. PREDICTOR HRVECG can be used alone or in conjunction with a
PREDICTOR(R) 7, and the LP-Pac Q signal-averaging systems.
Software upgrades are provided at no charge to customers of ART with
systems under warranty. Sales of post-processing software products were not
material to the Company's business in 2000.
SENSORS AND SNAPS
SILVER/SILVER CHLORIDE-PLATED SENSOR ELEMENTS
Micron is a manufacturer and distributor of silver/silver chloride-plated
sensor elements for use in the manufacture of disposable electrodes for ECG
diagnostic, monitoring and related instrumentation.
The disposable electrode has proven to be more accurate and reliable than
the reusable electrodes available in the market. Additionally, disposable
electrodes are faster and easier to use as compared to reusable electrodes,
which require cleaning after each use. As a result, the disposable electrode
has replaced the reusable electrode in many applications. A disposable
electrode generally consists of an adhesive for attachment to the patient's
body, a gel to insure maximum signal acquisition, a conductor or snap for
attachment to the transfer wires and the sensor element. The type of sensor
element manufactured by Micron consists of a molded plastic substrate plated
with a silver/silver chloride surface, which is a highly sensitive conductor
of electrical signals. Silver/silver chloride-plated disposable electrodes
are utilized in coronary care units and for other monitoring purposes. In
most of these ECG procedures, up to ten electrodes are used and after each
test, all such electrodes are discarded.
In addition to the traditional ECG tests, disposable electrodes
incorporating Micron's sensor elements are used in connection with stress and
"Holter" tests. The Holter test utilizes a portable ECG heart-monitoring
device that is worn by a patient for up to 24 hours during the patient's
normal activity and is designed to record data from the patient's heart. The
stress test monitors the human heart during rest followed by exercise and
again at rest. Both the Holter and stress tests employ silver/silver chloride
disposable electrodes.
METAL SNAP FASTENERS
Metal snap fasteners are used to attach the disposable electrode to the
lead wires of an ECG machine. Micron purchases the metal snap fasteners for
resale from a supplier and performs additional quality control tests,
repackaging and inventory stocking for its customers who can purchase the
snaps along with Micron sensors.
HIGH SPEED ELECTRODE ASSEMBLY MACHINE
Pursuant to an asset purchase agreement, dated March 5, 1997, Micron
acquired from Newmark, Inc. substantially all its assets used in the business
of manufacturing, assembling, marketing, leasing and selling medical stud and
eyelet application machines. At the same time it entered into the asset
purchase agreement, Micron executed a manufacturing agreement with Newmark
pursuant to which Newmark would continue to manufacture and service the
machines on behalf of Micron for a period of one year for a specified price.
The manufacturing of the machines was taken over by Micron at the start of
2000. Electrode assembly machines provide Micron with a complimentary
product, which it can lease or sell to existing sensor and snap customers.
5
POLYMER OPERATION
During 1999 the Company had a trial polymer operation utilizing some
existing equipment, which resulted in approximately $184,000 of sales in 1999
and sales of $65,000 in 2000, prior to the discontinuation of this operation.
The Company decided not to pursue the operation so as not to deviate from the
core business and has sold all existing polymer equipment.
The following table shows the revenues derived from the products of
Micron for the years ended December 31:
2000 % 1999 % 1998 %
------------------- ------------------- ------------------
Sensors................... $ 6.827,178 81 $ 7,583,530 78 $ 6,817,112 81
Snaps..................... 1,389,432 17 1,797,008 18 1,514,521 18
Snap Machines............. 125,642 2 154,031 2 113,237 1
Polymer..................... 64,788 - 183,839 2 - -
------------------ ------------------- ------------------
Total.................. $ 8,407,040 100 $ 9,718,408 100 $ 8,444,870 100
================== =================== ==================
ENVIRONMENTAL REGULATION
Like many industrial processes, the Micron manufacturing process utilizes
hazardous and non-hazardous chemicals, the treatment and disposal of which
are subject to federal and state regulation. Since its inception, Micron has
expended significant funds to train its personnel, install waste treatment
and recovery equipment and to retain an independent environmental consulting
firm to constantly review, monitor and upgrade its air and waste water
treatment activities. As a result, Micron believes that the operation of its
manufacturing facility is in compliance with currently applicable safety,
health and environmental laws and regulations.
GROUNDWATER
During September 1992, as a requirement for obtaining a mortgage to
repurchase its Fitchburg, Massachusetts manufacturing facility, Micron
performed an environmental site assessment, including an analysis of
groundwater samples for the presence of certain petroleum-based products,
metals and solvents. The site assessment indicated levels of petroleum
products and metals in excess of the maximum allowable standards. Micron
filed a release report and a Preliminary Assessment and Interim Site
Classification form with the Massachusetts Department of Environmental
Protection ("DEP"). The DEP classified the site as a disposal site within the
meaning of the Massachusetts Oil and Hazardous Material Release Prevention
and Response Act and identified Micron as a potentially responsible party
with liability.
On January 21, 1993, Micron filed its Phase I Limited Site Investigation
and Waiver Application ("Application"). The Application identified several
potential off-site sources for the discharge and demonstrated that none of
the types of chemicals found on the property are used in the Micron
manufacturing process. On February 18, 1993, the DEP classified the site as a
non-priority disposal site and granted Micron's waiver application with the
stipulation that Micron evaluate the upgradient off-site sources which may
have caused the contamination.
During 1999, a Method 3 Risk Characterization was performed demonstrating
that a condition of "No-Significant Risk" exists at the site. Based on this
and prior work characterizing the source and extent of the contamination, a
Downgradient Property Status Submittal and a Notice of Activity and
Limitation Use (AUL) on the part of the property were filed. The completion
of the Phase II and Response Action Outcome was filed on February 28, 2000.
The Phase II report included a Massachusetts Contingency Plan (MCP) Method 3
Risk Characterization and Response Action Outcome Statement that demonstrated
a condition of "No Significant Risk" at the site. The site has been closed
out under the MCP and is now awaiting a mandatory audit by the DEP.
ATTORNEY GENERAL OF MASSACHUSETTS INVESTIGATION
In response to an anonymous phone call, all Micron records related to its
wastewater treatment operation and expenses were subpoenaed by the Attorney
General of Massachusetts for investigation in 1997. In 2000, the Company
received notification by the Attorney General's office that the investigation
had been concluded with no adverse action.
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GENERAL
CUSTOMERS AND SALES
ART historically has sold its electrocardiographic products to hospitals
where purchasing decisions are typically made on the advice of physicians
affiliated with such hospitals. The electrocardiographic products are also
marketed to individual physicians and clinics. ART's sales cycle, with
respect to hospitals, which generally commences at the time a hospital issues
a request for proposal and ends upon submission of a purchase order, may take
up to nine months. The sales cycle with respect to physicians and clinics is
significantly shorter, typically 30 to 60 days.
Micron manufactures its sensor elements against specific customer purchase
orders, some in accordance with supply agreements between Micron and the
electrode manufacturers. There are approximately 40 significant manufacturers
of silver/silver chloride-plated disposable electrodes worldwide. Micron
sells its sensor elements to most of these manufacturers. During the year
ended December 31, 2000, three major customers accounted for 36%, 25% and 14%
of net sales of Micron. Sales backlog is not material to Micron's business.
The following table sets forth, for the periods indicated, the approximate
consolidated revenues and percentages of revenues derived from the sales of
the Company's products in its geographic markets:
REVENUES FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2000 % 1999 % 1998 %
------------- ------- -------------- ------- ------------- -------
United States.......................... $ 2,422,711 29 $ 3,349,427 32 $ 4,898,191 52
Europe................................. 2,987,559 35 2,951,797 28 2,678,710 28
Canada, Mexico & South America......... 2,840,434 33 3,679,873 36 1,557,356 17
Pacific Rim............................ 248,343 3 315,256 3 173,966 2
Other.................................. 22,816 - 83,231 1 52,373 1
------------- ------- -------------- ------- ------------- -------
Sub Total.......................... $ 8,521,863 100 $ 10,379,584 100 $ 9,360,596 100
========= === ============== === ============= ===
GE/Prucka termination payment.......... 1,000,000
---------
Total.............................. $ 9,521,863
=========
The lower percentage of U.S. sales in 2000 reflects the transfer of a
major Micron customer who closed a U.S. plant and moved its volume to Canada.
In 1999, the U.S. plant had approximately $526,000 in United States sales
that were transferred to its Canadian plant. In late 2000, another major
Micron customer announced its intentions to also transfer production from a
U.S. plant to a Canadian plant.
INSTALLATION AND SERVICE
ELECTROCARDIOGRAPHIC
WARRANTY AND MAINTENANCE. ART provides a one-year warranty, which covers
parts and labor for all of its SAECG software and hardware products.
Customers may renew the warranty annually at a cost of approximately $1,000
to $2,700 depending on the service level and type of system.
SENSORS AND SNAPS
Micron sells its sensors and snaps to original equipment manufacturers of
disposable electrodes that assemble the finished product. Micron sales,
manufacturing and customer service personnel provide the electrode
manufacturers with technical support as a value added service.
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PRODUCT SUPPLIERS AND MANUFACTURING
ELECTROCARDIOGRAPHIC
ART currently has limited manufacturing capabilities for its signal
averaging products and relies upon established inventories to fill current
sales orders. When additional units are required, ART plans to sub-contract
the basic unit production and perform final assembly and quality control
testing in-house.
SENSORS AND SNAPS
Micron manufactures its sensor elements at its Fitchburg, Massachusetts
facility employing a proprietary non-patented multi-step process. The raw
materials used by Micron in its sensors are (1) plastic resins used to mold
the substrates and (2) silver/silver chloride chemical solutions for plating
the molded plastic substrates. Both the plastic used by Micron and the
silver/silver chloride solutions are in adequate supply. Fluctuations in the
price of silver are contractually passed on to customers.
Micron's medical snap fasteners are currently manufactured by Newmark,
Inc. and Scovill Fasteners Inc. Micron buys the snaps in bulk, performs
additional quality control tests, repackages and stocks inventory for its
customers who can purchase the snaps along with Micron sensors.
MARKETING AND COMPETITION
ART engages independent sales representatives and distributors of medical
instruments in various regions throughout the United States and foreign
distributors to market all of ART's products. Sales representatives, who are
paid on a commission basis, are generally responsible for identifying
customers and demonstrating products in their respective geographic markets.
ART has arrangements with foreign as well as domestic distributors who sell
ART's products in most of the significant foreign markets.
SAECG PRODUCTS
ART's marketing efforts with respect to SAECG products have focused
primarily on those hospitals with an electrophysiology laboratory and
electrophysiologists with the ability to apply the late potential test in a
clinical environment. ART believes that this market segment is a relatively
small percentage of the potential market for signal-averaging instruments. In
the United States there are approximately 9,000 cardiologists certified by
the American Board of Internal Medicine. ART markets its SAECG products at
regional and national trade shows in the United States and Europe.
ART is aware of certain other companies, which have developed or are
developing technologies and products, which are competitive with ART's
products. Other technologies or products, which are functionally similar to
ART's signal-averaging products, are currently available from a number of
competitors, including Del Mar Avionics, Marquette Electronics, Inc., and
Agilent Technologies. Most are well established, have substantially greater
financial and other resources and have established reputations for success in
the development, sale and service of products. ART believes that its
competitive advantage is based on a number of factors, including the price,
ease of use, and clinical acceptance of the methodology employed in ART's
signal-averaging products, as well as the patented Simson Bi-directional
Butterworth filter.
SENSORS AND SNAPS
Micron sells its sensor elements to many manufacturers of disposable
silver/silver chloride ECG electrodes. Micron employs one full-time
salesperson for sensors and snaps. The Company believes that it has one major
competitor for sensors and that its sales of sensors greatly exceed those of
its competition.
ENGINEERING AND RESEARCH AND DEVELOPMENT
Beginning in mid-1997, ART's engineering and research and development
efforts focused primarily on moving DOS software packages in the SAECG
product lines into the Windows environment. ART currently employs one
programmer engaged in software development and one technician for customer
telephone support, warranty repairs, and limited manufacturing. For the
fiscal years ended December 31, 2000, 1999, and 1998, ART had research and
development expenses of approximately $229,000, $298,000, and $343,000,
respectively, in connection with engineering, regulatory, and research and
development activities, which consisted principally of the salaries of its
employees and programming consultants.
GOVERNMENT REGULATION
Diagnostic products such as those marketed by ART are subject to an
extensive regulatory clearance process by the FDA and comparable agencies in
other countries. ART believes that the products currently marketed in the
United States have all necessary governmental clearances required for the
sale of such products in the United States and each of the countries in which
its products are presently sold. The regulatory process for diagnostic
devices, which sometimes includes the
8
requirements for pre-clinical and clinical testing, can take many years and
requires the expenditure of substantial amounts of money. In the event ART
seeks to market new products or significantly modify a product currently in
commercial distribution, ART would be required to obtain regulatory clearance.
Federal legislation relating to medical devices could potentially cause
compliance with the pre-market clearance and approval processes to be more
time consuming, difficult and expensive. It is not anticipated that ART's
products will be subject to special controls or regulation, but there can be
no assurance that the FDA will not impose special controls or regulation.
THIRD-PARTY REIMBURSEMENT
Hospitals, physicians and other health care providers that purchase
capital or other equipment, such as the products sold by ART, for use in
furnishing care to their patients typically rely on third-party payers,
principally Medicare, Medicaid, and private health insurance plans, to
reimburse all or part of the costs or fees associated with the medical
procedures performed with such equipment, and of the capital costs of
acquiring such equipment. Cost control measures adopted by third-party payers
in recent years and reductions in Medicare payments for hospital outpatient
services and capital costs have had and may continue to have a significant
effect on the purchasing practices of many such providers, generally causing
them to be more selective in the purchase of medical equipment and to place
increasing emphasis on maximizing the return on investment in new equipment.
The Medicare statute prohibits payment for any items or services that are
not reasonable and necessary for the diagnosis or treatment of illness or
injury. SAECG medical tests are reimbursed under Part B Medicare in all 50
states. While third-party payers generally make their own decisions regarding
which items and services to cover, Medicaid and other third-party payers
often apply standards similar to Medicare's in determining whether to provide
coverage for a particular medical procedure.
ART is unable to predict the impact of additional legislation or
regulations, if any, which may be enacted or adopted in the future relating
to ART's business or the health care industry, including third-party coverage
and reimbursement.
INSURANCE
The Company may be exposed to potential product liability claims by
patients who use the Company's products. ART maintains a general liability
insurance policy, which includes product liability coverage of $1,000,000 per
occurrence and $2,000,000 per year in the aggregate. ART has also increased
its umbrella policy to $5,000,000. Micron also maintains a general liability
insurance policy which includes product liability coverage of $2,000,000. To
date, there have been no asserted or threatened claims against the Company.
Although Company management believes the present insurance coverage is
adequate for the types of products marketed by the Company, there can be no
assurance that such insurance will be sufficient to cover potential claims or
that the present level of coverage will be available in the future at a
reasonable cost.
ART has a directors and officers' liability insurance policy with
coverage in the amount of $3,000,000 per occurrence and $3,000,000 per year
in the aggregate.
PATENTS AND PROPRIETARY TECHNOLOGY
ART
ART holds an exclusive license under the Simson Patent, which covers the
signal-averaging and filtering technologies, which are utilized in the 1200
EPX, LP-Pac Q, and PREDICTOR(R) 7. The Simson Patent was issued in December
1983. ART is the assignee of three other U. S. Patents, two of which expire
in July 2001 and the other in January 2002. ART holds foreign patents issued
in Austria, Australia, Belgium, Canada, France, United Kingdom, Holland,
Italy, Liechtenstein, Spain, Sweden, Switzerland and Germany. ART believes
that patent protection is important to its business and anticipates that it
will apply for additional patents or extensions as deemed appropriate.
As part of the acquisition of substantially all the Corazonix assets in
1993, including those pertaining to high resolution ECG, ART acquired three
additional patents related to time and frequency domain analysis of
electrocardiogram signals. ART acquired U.S. Patent No. 5,117,833 entitled
"BI-SPECTRAL FILTERING OF ELECTROCARDIOGRAM SIGNALS TO DETERMINE SELECTED QRS
POTENTIALS," (the "Bi-Spec Patent") which expires in 2009. The Bi-Spec
Patent, which has been licensed to Agilent Technologies, Inc. (formerly a
business of Hewlett Packard Company) on a non-exclusive basis, may provide
ART with a superior means of detecting late potentials. ART also acquired
three additional patents, which were granted in 1990 and 1991 by the U.S.
Patent Office, and cover the spectral-temporal, mapping post-processing
software packages sold by ART.
United States Patent No. 5,609,158 entitled "Apparatus and Method for
Predicting Cardiac Arrhythmia by Detection of Micropotentials and Analysis of
all ECG Segments and Intervals," which covers a frequency domain analysis
technique for SAECG data, was granted by the U.S. Patent Office in March
1997. This technique is embodied in the IntraSpect software product, and has
been found to compliment the Simson methodology by increasing the overall
predictive value of the
9
SAECG test. Additionally, patients with conduction delay problems (i.e.,
"bundle branch block") can have SAECG analysis performed on them. This
includes 25% of the patient population, which previously could not be
analyzed with SAECG.
Rapid technological development in the medical industry results in
extensive patent filings and a rapid rate of issuance of new patents.
Although the Company believes that ART's products do not and will not
infringe on patents or violate proprietary rights of others, it is possible
that its existing patent rights may not be valid or that infringement on
existing or future patents or proprietary rights may occur. In the event that
ART's products infringe patents or proprietary rights of others, ART may be
required to modify the design of its products or obtain a license. There can
be no assurance that ART will be able to do so in a timely manner upon
acceptable terms and conditions. In addition, there can be no assurance that
ART will have the financial or other resources necessary to enforce or defend
a patent infringement or proprietary rights violation action. Moreover, if
ART's products infringe patents or proprietary rights of others, ART could,
under certain circumstances, become liable for damages, which could have a
material adverse effect on ART.
ART also relies on proprietary know-how and employs various methods to
protect the source codes, concepts, ideas and documentation of its
proprietary software. However, such methods may not afford complete
protection and there can be no assurance that others will not independently
develop such know-how or obtain access to ART's know-how or software codes,
concepts, ideas and documentation. Furthermore, although ART has
confidentiality agreements with its employees and appropriate vendors, there
can be no assurance that such arrangements will adequately protect ART's
trade secrets.
MICRON
Micron employs a highly complex, proprietary non-patented multi-step
manufacturing process for its silver/silver chloride-plated sensor elements.
Key employees have executed nondisclosure and non-competition agreements. To
maintain its leadership as a major supplier of sensors and snaps to the
manufacturers of disposable silver/silver chloride ECG electrodes, Micron
received a patent for a radiographically translucent snap that is
manufactured from a flexible electrically conductive thermoplastic polymeric
compound in 1995.
EMPLOYEES
ART has three full-time employees, including one administrative and two
programming personnel. Micron employs forty-four full time employees and two
part-time employees, including thirteen administrative, sales and supervisory
personnel, twelve quality control personnel and nineteen production
personnel. None of the employees of either company are represented by a union.
ITEM 2. PROPERTIES
ART leases approximately 1,500 square feet of new office space in Austin
from an unaffiliated landlord, with monthly rental payments of $2,657.
The manufacturing facility and offices of Micron are located in an
industrial area in Fitchburg, Massachusetts. The facility consists of two
buildings. The first building, which was purchased in April 1994, consists of
a 22,000 square foot, six story building. The second building, which was
purchased in September 1996, is a 94,000 square foot, two story building.
ITEM 3. LEGAL PROCEEDINGS
As further discussed under Environmental Regulation, Micron has been
identified as a potentially responsible party with liability by the DEP. On
February 18, 1993, the site was classified as a non-priority site and
Micron's waiver application was approved. As a condition of the waiver,
Micron was required to prepare a five-year plan of remediation for the
property. Micron has retained an environmental consulting firm, and in 1995
hired an internal consultant, to organize and implement the remediation plan
and to represent Micron in its dealings with the regulatory authorities.
During 2000, Micron filed its Phase II Report with the DEP. The Phase II
Report included a Massachusetts Contingency Plan (MCP) Method 3 Risk
Characterization and Response Action Outcome Statement that demonstrated a
condition of "No Significant Risk" at the site. The site has been closed out
under the MCP and is now awaiting a mandatory audit by the DEP.
10
In 1997, ART acquired assets from Astro-Med Inc. relating to a
hemodynamics system for cardiac catherization monitoring (Cath Lab Systems).
Included as part of the purchase price of $350,000 was a Promissory Note for
$300,000. In 1999, ART discontinued the sales of the Cath Lab Systems due to
major deficiencies in the Astro-Med products and subsequently stopped
payments under the Note. In 2000, Astro-Med filed a complaint in the Rhode
Island Superior Court which was removed by ART to the United States District
Court in Rhode Island to have the Note enforced. ART is contesting the
complaint claiming breach of obligations under the Asset Purchase Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. Annual meeting of shareholders was held on December 15, 2000
b. Paul F. Walter was elected as director of the Company at the meeting.
Russell C. Chambers, E. P. Marinos, and Julius Tabin continued to serve
as directors.
Paul F. Walter, MD 2,890,663 FOR, 1,374 WITHHELD
c. BDO Seidman, LLP, was appointed to audit the consolidated financial
statements of the Company for the year ended December 31, 2000.
2,890,677 FOR, 1,360 WITHHELD
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ART's Common Stock was listed on the American Stock Exchange on March 3,
1992 and trades under the ticker symbol HRT. Prior to that, ART's stock was
listed on NASDAQ .
The following table sets forth, for the period indicated, the high and
low closing prices per share for ART's Common Stock as quoted by the American
Stock Exchange.
HIGH LOW
-------- --------
Year Ended December 31, 1999
1st Quarter.....................$ 1 5/16 $ 1 1/8
2nd Quarter..................... 1 3/8 1 3/16
3rd Quarter..................... 2 7/16 1 3/16
4th Quarter..................... 2 3/8 1 3/8
Year Ended December 31, 2000
1st Quarter.....................$ 4 1/2 $ 1 1/2
2nd Quarter..................... 2 5/8 1 7/8
3rd Quarter..................... 2 3/8 1 3/4
4th Quarter..................... 2 1 7/16
As of March 1, 2001 the number of record holders of ART's common stock
was estimated to be 1300. On March 1, 2001 the closing price for the common
stock on the American Stock Exchange was $1.95.
DIVIDEND POLICY
To date, ART has not paid any dividends on its Common Stock. The
Company's long-term debt agreements contain various restrictions and
conditions including restrictions regarding the payment of dividends. ART
does not intend to declare any dividends in the foreseeable future, but
instead intends to retain all earnings, if any, for use in the Company's
business.
11
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data presented below for each of the years ended
December 31 has been derived from the Company's audited consolidated
financial statements. The data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements, including the notes thereto,
appearing elsewhere in this report.
STATEMENTS OF OPERATIONS DATA: YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net sales $ 8,522 $ 9,995 $ 8,875 $ 10,555 $ 24,788
Commissions and related revenues 1,000 385 485 1,332 --
-------- -------- -------- -------- --------
Total revenue 9,522 10,380 9,360 11,887 24,788
Cost of sales 5,988 6,758 6,127 7,932 20,115
-------- -------- -------- -------- --------
Gross profit 3,534 3,622 3,233 3,955 4,673
Selling and marketing 193 393 247 499 610
General and administrative 2,169 2,143 2,141 2,491 2,420
Research and development 229 298 343 371 173
Amortization of goodwill 130 130 130 134 115
Write-down of assets -- -- 192 -- --
-------- -------- -------- -------- --------
Income from operations 813 658 180 460 1,355
Interest and other expenses, net (148) (213) (117) (378) (278)
-------- -------- -------- -------- --------
Income before income taxes 665 445 63 82 1,077
Income tax expense 45 20 199 50 460
-------- -------- -------- -------- --------
Net income (loss) $ 620 $ 425 $ (136) $ 32 $ 617
======== ======== ======== ======== ========
Net income (loss) per share - basic $ .19 $ .12 $ (.04) $ .01 $ .17
======== ======== ======== ======== ========
- diluted $ .18 $ .12 $ (.04) $ .01 $ .17
======== ======== ======== ======== ========
Weighted average number
of shares outstanding - basic 3,333 3,489 3,561 3,563 3,608
======== ======== ======== ======== ========
- diluted 3,430 3,549 3,561 3,563 3,608
======== ======== ======== ======== ========
BALANCE SHEET DATA: DECEMBER 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Total assets $ 9,919 $ 9,702 $ 9,990 $ 11,832 $ 12,965
Long-term obligations (including current portion) $ 602 $ 808 $ 1,000 $ 1,466 $ 928
Working capital $ 3,671 $ 2,174 $ 2,282 $ 2,293 $ 2,891
Shareholders' equity $ 8,560 $ 8,222 $ 7,959 $ 8,087 $ 8,012
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentages
of the net sales represented by certain items reflected in the Company's
statements of operations.
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------------------------------
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of sales...................................... 70.3 65.1 65.5
Gross profit....................................... 29.7 34.9 34.5
Selling and marketing.............................. 2.3 3.8 2.6
General and administrative......................... 25.4 20.6 22.9
Research and development........................... 2.7 2.9 3.7
Amortization of goodwill........................... 1.5 1.3 1.4
Write-down of assets............................... - - 2.0
Other, net......................................... (1.7) (2.0) (1.3)
GE/Prucka lump sum termination payment............. 11.7 - -
-------------------------------
Income before income taxes.......................... 7.8 4.3 0.6
Income tax provision............................... (0.5) (0.2) ( 2.1)
------------------------------
Net income (loss)............................ 7.3% 4.1% (1.5%)
===============================
REVENUE
Revenues in 2000 included a $1,000,000 lump sum payment from GE/Prucka to
terminate a commission agreement for the sales of CardioLab systems. The
agreement was scheduled to expire December 31, 2002. Commissions earned under
the GE/Prucka agreement were approximately $385,000 and $485,000 in 1999 and
1998, respectively.
Excluding revenues attributed to the GE/Prucka commission agreement, the
revenues from ongoing operations decreased $1,473,132 or 15% for the year
ended December 31, 2000 compared to 1999. Revenues from 2000 from the sales
of Micron Products sensors and metal snaps decreased $1,192,000 or 13%
compared to 1999. Sales in 1999 related to (Y2K) concerns were abnormally
high for Micron, especially at year-end. As a result, orders for sensors
dropped in the first half of 2000 but have resumed to more normal rates in
the second half of 2000. Orders for metal snaps decreased approximately
$400,000 or 23% in 2000 and the lower sales volume is projected to continue
due to the loss of a major customer.
Revenues for 2000 that are derived from sales of ART's SAECG equipment
were $114,823 compared to $276,578 in 1999. During 2000, ART began marketing
a new Predictor(R) Windows based software with its patented signal averaging
technology. Until more of ART's proprietary software is modified and
re-introduced to the cardiology and electrophysiology fields in 2001, the
Company expects revenues for these ART products will not be material.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
2000 % 1999 % 1998 %
-------------------- --------------------- --------------------
Sensors & Snaps............ $ 8,342,252 88 $ 9,534,569 92 $ 8,444,870 90
Polymers................... 64,788 - 183,839 2 - -
CardioLab & CardioMapp..... 1,000,000 11 384,598 4 485,331 5
SAECG equipment............ 114,823 1 276,578 2 429,300 5
K-3 Cath-Lab - - - - 1,095 -
-------------------- --------------------- --------------------
Total.................. $ 9,521,863 100 $ 10,379,584 100 $ 9,360,596 100
-------------------- --------------------- --------------------
COST OF SALES
Cost of sales as a percent of revenues excluding the effect of GE/Prucka
commissions and termination payment was 70.3% in 2000 compared to 67.6% in
1999. The increase as a percent of revenue was primarily due to unabsorbed
fixed
13
manufacturing expenses, such as depreciation, utilities and salaried
employees, associated with the lower volume of sensor sales. In 1998, cost of
sales as a percent of revenues excluding GE/Prucka commissions was 69%.
SELLING AND MARKETING
Selling and marketing expenses as a percent of sales decreased from 3.8%
in 1999 to 2.3% in 2000. The decrease reflects reductions in direct sales
staff and marketing support for ART products until a new generation of
signal-average ECG products is available for market introduction now
scheduled to commence mid-year 2001.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses as a percent of sales was 25.4% in
2000 compared to 20.6% in 1999. As general and administrative expenses only
increased $26,610 in 2000 over 1999, the higher percent than 1999 is strictly
a function of the lower sales in 2000. Included in expenses in 2000 are
$137,500 of severance costs related to two executives of the Company, and
approximately $120,000 of legal expenses which were incurred in connection
with an environmental investigation of Micron by the Attorney General's
office of Massachusetts. Micron has been informed the investigation has
concluded in 2000 with no adverse actions. These one-time costs were mostly
offset by the continuing reduction in costs associated with the Austin
headquarters operation.
RESEARCH AND DEVELOPMENT
Research and development costs decreased from $298,000 in 1999 to
$229,000 in 2000. The decrease was due to fewer full time employees engaged
in ART's R&D activities, somewhat replaced by outside programming services.
Ongoing research and development for Micron's products and manufacturing
processes is part of its manufacturing overhead.
INTEREST EXPENSE
Interest expense was $91,477 in 2000 compared to $132,919 in 1999. The
Company had no bank borrowings of its credit line during 2000 and interest
expense in 2000 was accrued on Bonds Payable and Long Term Debt. Bank
borrowings were not required in 2000 due to approximately $2,377,000 of cash
generation from operations which included the $1,000,000 for the termination
of the GE/Prucka commission agreement, $295,000 from the sale of a polymer
extruder and $229,000 from the refund of prior year's income taxes. Interest
expense in 1998 was $220,000.
INCOME TAXES
For the year ended December 31, 2000, income tax as a percent of income
before taxes was 6.8%, primarily due to the state tax of 9.5% on Micron's
Massachusetts earnings, similar to 1999 and 1998. The low Federal income tax
reflects the higher than estimated utilization of deferred tax deductions
available for 2000 and future periods that generate taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $3,671,443 at December 31, 2000
compared to $2,173,947 at December 31, 1999. The increase of $1,497,496 is
basically the result of two events:
(1) The receipt from GE/Prucka of a $1,000,000 termination payment related to a
commission agreement and
(2) The classification of $580,000 of bonds that were included in current
liabilities in 1999 and now are included in long term debt. The bonds were
originally scheduled to mature in May, 2000 have been renewed to mature in
May 2002.
In August 1995, the Company completed a $600,000 private bond placement.
The bonds carried an 11% interest rate and the bondholders received an
aggregate of 279,000 warrants to purchase ART stock at $3.00 per share. The
bond proceeds were used to help ART meet common stock repurchase commitments
and to provide working capital for new product acquisitions and development.
In early 2000, $550,000 of the bonds were extended until May 31, 2002 as well
as 254,980 warrants to purchase ART stock at $1.50 per share.
During 2000, the Company had an $800,000 line of credit with a bank that
is due to expire in June 2001. This replaced a similar line, which had
expired December, 1999. There were no borrowings under the line of credit in
2000. The maximum amount of borrowings under the line of credit for 1999 and
1998 was $10,000 and $723,000 respectively at a weighted average interest
rate of 9% for both years. The Company anticipates the line of credit will be
renewed in 2001.
Net cash provided by operating activities for 2000, 1999 and 1998 was
approximately $2,377,000, $919,000 and $1,839,000 respectively. The major
source of cash provided by operations is the net income of the Company and
the significant non-cash items of depreciation and amortization.
Cash and cash equivalents were $1,999,292 and $455,674 at December 31,
2000 and 1999, respectively. Substantially all these funds are invested in
fixed rate bank instruments that are highly liquid.
14
Net cash used in investing activities was $255,508 in 2000, $583,110 in
1999 and $523,694 in 1998. The majority of these expenditures were for
capital equipment at Micron's manufacturing facility in Massachusetts and the
Company plans to expend approximately $350,000 for capital equipment in 2001.
During 2000, 1999 and 1998, net cash used in financing activities totaled
$578,231, $438,098 and $972,320 respectively. Included in the net cash used
in financing activities were purchases of treasury stock of $502,772 in 2000,
$238,808 in 1999 and $34,297 in 1998. In January 2000, the Company announced
it had acquired in excess of five percent (5%) of its Common Stock in the
belief that its stock is undervalued. The Company intends to continue this
stock buy back program from time to time throughout 2001. The Company used
$75,459, $238,567 and $980,880, in 2000, 1999 and 1998, respectively, to pay
down credit facilities and long-term debt.
INFLATION
The Company does not believe that inflation in the United States or
international markets in recent years has had a significant effect on its
results of operations.
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Cautionary statements under the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995: This Form 10-K contains certain
statements of a forward-looking nature relating to future events or the
future financial performance of the Company. Such forward-looking statements
are only predictions and are subject to risks and uncertainties that could
cause actual results or events to differ materially and adversely from the
results discussed in the forward-looking statements. When used in this Form
10-K, the words or phrases "believes," "anticipates," "expects," intends,"
"will likely result," "estimates," "projects" or similar expressions are
intended to identify predictions and the actual events or results may differ
materially from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, risks regarding demand for new and existing products; the
success of new product development efforts; the uncertainty as to whether
certain products will receive approval for sale in the United States; the
Company's highly competitive industry and rapid technological change within
the industry and the fact that the industry is dominated by large companies
with much greater resources than the Company; and the reliance on key
personnel.
The Company cautions investors and others to review the cautionary
statements set forth in this Form 10-K and cautions that other factors may
prove to be more important in affecting the Company's business and results of
operations. These forward-looking statements speak only as of the date of
this report. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made
to reflect events or circumstances after the date of this report or to
reflect the occurrence of anticipated events.
ITEM 7A. QUANTIFICATION AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to foreign currency exchange risk as all
business is conducted based on U.S. Dollars.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS 17
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 18
Statements of operations 19
Statements of changes in shareholders' equity 20
Statements of cash flows 21
Notes to consolidated financial statements 22-38
16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Arrhythmia Research Technology, Inc.
We have audited the accompanying consolidated balance sheets of Arrhythmia
Research Technology, Inc. and Subsidiary as of December 31, 2000 and 1999,
and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ending December 31, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arrhythmia
Research Technology, Inc. and Subsidiary as of December 31, 2000 and 1999,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ending December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/BDO Seidman, LLP
Gardner, Massachusetts
February 16, 2001
17
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 2000 1999
----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,999,292 $ 455,674
Trade and other accounts receivable, net of allowance
for doubtful accounts of $52,827 and $83,203 1,604,141 1,653,098
Inventories (Note 4) 860,161 1,082,517
Deposits, prepaid expenses and other current assets 62,728 52,172
Income taxes recoverable 100,000 329,408
----------------------------------------------------------------------------------------------------------------------
Total current assets 4,626,322 3,572,869
PROPERTY, PLANT AND EQUIPMENT, net (Notes 5 and 7) 3,310,958 3,835,831
GOODWILL, net of accumulated amortization (Note 6) 1,456,833 1,586,723
OTHER INTANGIBLES, net of accumulated amortization (Note 6) 48,030 122,887
DEFERRED INCOME TAXES, net (Note 8) 444,923 423,923
OTHER ASSETS 31,518 159,453
----------------------------------------------------------------------------------------------------------------------
Total assets $ 9,918,584 $ 9,701,686
----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 23,882 $ 23,811
Current maturities of bonds payable and other
long-term debt (Note 7) 178,279 711,464
Accounts payable 344,821 412,933
Accrued expenses 407,897 250,714
----------------------------------------------------------------------------------------------------------------------
Total current liabilities 954,879 1,398,922
BONDS PAYABLE AND OTHER LONG-TERM DEBT, net of current maturities (Note 7) 399,490 46,815
CAPITAL LEASE OBLIGATIONS, net of current portion - 25,530
DEFERRED REVENUE 4,621 8,680
----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,358,990 1,479,947
----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 7, 9, 10 and 13):
SHAREHOLDERS' EQUITY (Note 13):
Preferred stock, $1 par value; 2,000,000 shares authorized,
none issued - -
Common stock, $.01 par value; 10,000,000 shares authorized;
3,729,681 and 3,711,883 issued, respectively 37,297 37,119
Additional paid-in-capital 9,166,615 8,946,293
Common stock held in treasury, 563,446 and 298,406 shares at cost (1,654,664) (1,151,892)
Retained earnings 1,010,346 390,219
----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,559,594 8,221,739
----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,918,584 $ 9,701,686
----------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
NET SALES $ 8,521,863 $ 9,994,986 $8,875,265
COMMISSIONS AND RELATED REVENUE (Note 10) 1,000,000 384,598 485,331
------------------------------------------------------------------------------------------------------------------------
Total Revenue (Note 14) 9,521,863 10,379,584 9,360,596
COST OF SALES 5,987,579 6,757,519 6,127,451
------------------------------------------------------------------------------------------------------------------------
Gross profit 3,534,284 3,622,065 3,233,145
------------------------------------------------------------------------------------------------------------------------
SELLING AND MARKETING 192,862 392,851 247,340
GENERAL AND ADMINISTRATIVE 2,169,217 2,142,607 2,140,804
RESEARCH AND DEVELOPMENT 229,659 297,568 342,914
AMORTIZATION OF GOODWILL 129,889 130,519 129,890
LOSS FROM IMPAIRMENT OF LONG-LIVED ASSETS (Note 3) - - 192,201
------------------------------------------------------------------------------------------------------------------------
Income from operations 812,657 658,520 179,996
OTHER INCOME (EXPENSE):
Interest expense (91,477) (132,919) (219,627)
Other income (expense), net (56,053) (80,243) 102,776
------------------------------------------------------------------------------------------------------------------------
Total other expense, net (147,530) (213,162) (116,851)
------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 665,127 445,358 63,145
INCOME TAX PROVISION (Note 8):
Current 66,000 69,313 115,583
Deferred (21,000) (49,000) 84,000
------------------------------------------------------------------------------------------------------------------------
45,000 20,313 199,583
------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 620,127 $ 425,045 $ (136,438)
------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE (Note 2):
Basic $ 0.19 $ 0.12 $ (0.04)
Diluted $ 0.18 $ 0.12 $ (0.04)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NOTES 9 AND 13)
Retained
Additional Unearned Earnings
Paid-in Treasury ESOP (Accumulated
Shares Amount Capital Stock Compensation Deficit) Total
-----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 3,679,216 $ 36,792 $ 8,909,307 $ (878,787) $(82,134) $ 101,612 $8,086,790
Treasury stock purchase of
28,400 shares - - - (34,297) - - (34,297)
ESOP payments - - - - 42,857 - 42,857
Net loss - - - - - (136,438) (136,438)
-----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 3,679,216 36,792 8,909,307 (913,084) (39,277) (34,826) 7,958,912
Issuance of common stock 32,667 327 36,986 - - - 37,313
Treasury stock purchase of
153,891 shares - - - (238,808) - - (238,808)
ESOP payments - - - - 39,277 - 39,277
Net income - - - - - 425,045 425,045
----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 3,711,883 37,119 8,946,293 (1,151,892) - 390,219 8,221,739
Issuance of common stock 17,798 178 26,322 - - - 26,500
Treasury stock purchase of
265,040 shares - - - (502,772) - - (502,772)
Value of warrants issued
with bond renewal - - 194,000 - - - 194,000
Net income - - - - - 620,127 620,127
----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 3,729,681 $ 37,297 $ 9,166,615 $(1,654,664) $ - $1,010,346 $8,559,594
----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 11)
YEARS ENDED DECEMBER 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 620,127 $ 425,045 $ (136,438)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Director fees paid in stock 26,500 37,313 -
Depreciation 771,531 693,648 683,418
Provision for doubtful accounts (30,376) 11,011 10,874
Amortization 277,087 194,092 198,500
Loss from impairment of long-lived assets - - 192,201
Deferred income tax provision (21,000) (49,000) 84,000
Deferred revenue (4,059) (18,356) (26,860)
Changes in assets and liabilities:
Trade and other accounts receivable 79,333 (356,441) 1,078,727
Inventories 222,356 390,209 528,397
Deposits, prepaid expenses and other assets 117,379 (1,147) (19,562)
Income taxes recoverable 229,408 (66,598) -
Accounts payable and accrued expenses 89,071 (340,427) (754,648)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,377,357 919,349 1,838,609
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (246,658) (540,713) (477,017)
Other intangibles (8,850) (42,397) (46,677)
-------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (255,508) (583,110) (523,694)
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under credit facilities - - (467,135)
Principal payments on long-term debt and capital leases (75,459) (238,567) (513,745)
Purchase of treasury stock (502,772) (238,808) (34,297)
Reduction of unearned ESOP compensation - 39,277 42,857
-------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (578,231) (438,098) (972,320)
-------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,543,618 (101,859) 342,595
CASH AND CASH EQUIVALENTS, beginning of year 455,674 557,533 214,938
-------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 1,999,292 $ 455,674 $ 557,533
-------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF Arrhythmia Research Technology, Inc.
BUSINESS ("ART"), a Delaware corporation, is engaged
in marketing computerized medical
instruments for monitoring, analyzing and
treating heart disease. Micron Products,
Inc. ("Micron"), a Massachusetts
corporation, a wholly-owned subsidiary of
ART, is a manufacturer of silver/silver
chloride-plated sensor elements, a component
used in the manufacture of disposable
medical electrodes designed for
electrocardiograph ("ECG") and other
instrumentation. Additionally, Micron also
acts as a distributor of metal snap
fasteners, another component used in the
manufacture of disposable medical
electrodes. Micron manufactures and leases
high speed electrode assembly machines to
its sensor and snap customers.
2. ACCOUNTING POLICIES
PRINCIPLES OF The consolidated financial statements
CONSOLIDATION include the accounts of ART and Micron
(collectively the "Company"). All
intercompany balances and transactions
have been eliminated in consolidation.
REVENUE RECOGNITION Revenue from product sales is recognized
upon shipment of the product when
independent sales representatives or
distributors are responsible for
installation of systems, as the title and
risk of loss passes to the customer at the
time of shipment. However, in cases where
ART personnel are scheduled to perform this
in-service/installation, the revenue is not
recognized until completion of such
obligations. Revenue from the sale of
extended warranties is deferred and
amortized ratably over the life of the
warranty.
CASH AND CASH
EQUIVALENTS Cash and cash equivalents consist of cash on
hand and on deposit in high quality
financial institutions. The Company
considers highly liquid investments that can
be readily converted to cash at par value to
be cash equivalents.
INVENTORIES Inventories are stated at the lower of cost
or market. Cost of inventories is determined
by the first-in, first-out method.
CONCENTRATION OF
CREDIT RISK Financial instruments, which potentially
expose the Company to concentrations of
credit risk, as defined by SFAS No. 105,
consist primarily of trade accounts
receivable, cash and cash equivalents.
ART's customer base for ECG and
electrophysiology products is primarily
comprised of hospitals and to a much lesser
extent of cardiologists and office based
practitioners. Micron products are sold to
manufacturers of disposable electrodes, who
are typically large diversified medical
product manufacturers. The Company does not
generally require collateral for its sales;
however, the Company believes that its terms
of sale provide adequate protection against
significant credit risk.
22
2. ACCOUNTING POLICIES
(Continued)
CONCENTRATIONS OF
CREDIT RISK
(CONTINUED) It is the Company's policy to place its
cash and cash equivalents in high quality
financial institutions. The Company does not
believe significant credit risk exists with
respect to these institutions.
ADVERTISING
EXPENSES Advertising expenses consist primarily of
costs incurred in promoting the Company's
products, printed brochures and other
activities. The Company expenses advertising
costs as incurred. The Company's advertising
expense was approximately $16,000, $52,000
and $72,000 in 2000, 1999 and 1998,
respectively.
PROPERTY, PLANT
AND EQUIPMENT Property, plant and equipment are recorded
at cost and include expenditures which
substantially extend their useful lives.
Depreciation on property, plant and
equipment is calculated using the
straight-line method over the estimated
useful lives of the assets. Expenditures for
maintenance and repairs are charged to
earnings as incurred. When equipment is
retired or sold, the resulting gain or loss
is reflected in earnings.
GOODWILL The excess of the aggregate purchase price
over the fair value of net assets of
businesses acquired is amortized over 20
years using the straight-line method. The
Company periodically reviews goodwill of
acquired businesses to assess recoverability
based on future operating projections.
Impairments would be recognized in operating
results if a permanent diminution in value
were to occur on an undiscounted basis.
OTHER INTANGIBLES Direct costs to acquire patent technology
and legal costs associated with securing and
defending patents are capitalized and
amortized using the straight-line method
over the remaining useful life of the
patents. The Company periodically reviews
its patent assets to assess recoverability
based on future undiscounted projected
earnings from operations. Impairments are
recognized in operating results when a
permanent diminution in value occurs.
Certain software development costs incurred
subsequent to establishment of technological
feasibility are capitalized and amortized
using the straight-line method over the
estimated economic life of the related
product, generally three years. Amortization
commences when the product is available for
general release. Costs to establish the
technological feasibility of the product are
expensed as research and development.
LONG-LIVED The Company reviews the carrying values
ASSETS of its long-lived and identifiable
intangible assets for possible impairment
whenever events or changes in
circumstances indicate that the carrying
amount of the assets may not be
recoverable.
23
2. ACCOUNTING POLICIES
(Continued)
INCOME TAXES The Company accounts for income taxes in
accordance with SFAS No. 109, "Accounting
for Income Taxes," which requires
recognition of deferred tax liabilities and
assets for the expected future tax
consequences of events that have been
included in the financial statements or tax
returns. Under this method, deferred tax
liabilities and assets are determined based
on the difference between the financial
statement and tax basis of assets and
liabilities using enacted tax rates in
effect for the year in which the differences
are expected to reverse.
NET INCOME (LOSS)
PER SHARE DATA The Company follows the provisions of SFAS
No. 128 "Earnings Per Share", which requires
the Company to present its basic earnings
per share and diluted earnings per share,
and certain other earnings per share
disclosures for each year presented. Basic
earnings per share is computed by dividing
income available to common shareholders by
the weighted average number of common shares
outstanding. The computation of diluted
earnings per share is similar to the
computation of basic earnings per share
except that the denominator is increased to
include the number of additional common
shares that would have been outstanding if
the dilutive potential common shares had
been issued. In addition, the numerator is
adjusted for any changes in income or loss
that would result from the assumed
conversions of those potential shares.
Basic and diluted EPS computation for the
years ended December 31, 2000, 1999, and
1998 are as follows:
YEARS ENDED DECEMBER 31, 2000 1999 1998
--------------------------------------------------------------------------------------
Net income (loss) available
to common shareholders $ 620,127 $ 425,045 $ (136,438)
=========== =========== ===========
Weighted average common
shares outstanding 3,333,317 3,488,650 3,560,713
============ =========== ===========
Basic EPS $ 0.19 $ 0.12 $ (0.04)
=========== =========== ===========
Diluted EPS:
Net income (loss) available
to common shareholders $ 620,127 $ 425,045 $ (136,438)
=========== =========== ===========
Weighted average common
share outstanding 3,333,317 3,488,650 3,560,713
Assumed conversion of
common shares issuable
under stock option plan 97,084 60,544 -
------------ ------------- ------------
Weighted average common
and common equivalent
shares outstanding 3,430,401 3,549,194 3,560,713
=========== =========== ===========
Diluted EPS $ 0.18 $ 0.12 $ (0.04)
=========== =========== ===========
24
2. ACCOUNTING POLICIES
(Continued)
NET INCOME (LOSS)
PER SHARE DATA
(Continued) The following table summarizes securities
that were outstanding but not included in
the calculation of diluted earnings per
share because their effect would have been
antidilutive:
DECEMBER 31, 2000 1999 1998
--------------------------------------------------------------------------------------
Stock options 7,000 14,000 209,000
Stock warrants - 279,000 279,000
USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make estimates and assumptions that affect
the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported
amounts of revenue and expenses during the
reporting periods. Actual results could
differ from those estimates.
FAIR VALUE OF
FINANCIAL
INSTRUMENTS The carrying amount reported in the balance
sheets for cash and cash equivalents,
accounts receivable, accounts payable and
accrued liabilities approximate their fair
value due to the immediate or short-term
maturity of such instruments. The carrying
amounts reported for the promissory note and
bonds payable approximate fair value based
on the Company's incremental borrowing
rates.
COMPREHENSIVE
INCOME The Company follows the provisions of
Statement of Financial Accounting Standards
No. 130, REPORTING COMPREHENSIVE INCOME,
("SFAS No. 130") which establishes standards
for reporting and display of comprehensive
income, its components, and accumulated
balances. Comprehensive income is defined to
include all changes in equity except those
resulting from investments by owners and
distributions to owners. Among other
disclosures, SFAS No. 130 stipulates that
all items that are required to be recognized
under current accounting standards as
components of comprehensive income be
reported in a financial statement that is
displayed with the same prominence as other
financial statements. The Company did not
have any components of comprehensive income
for the years ended December 31, 2000, 1999
and 1998.
INDUSTRY SEGMENTS The Company follows the provisions of
Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS
No. 131") which requires reporting of
selected information about operating
segments in interim financial statements
issued to the public. It also establishes
standards for disclosures regarding products
and services, geographic areas, and major
customers. SFAS No. 131 defines operating
segments as components of an enterprise
about which separate financial information
is available that is evaluated regularly by
the chief operating decision maker in
deciding how to allocate resources and in
assessing performance.
25
2. ACCOUNTING POLICIES
(Continued)
SHIPPING AND
HANDLING COSTS Shipping and handling costs include
primarily freight and are classified as a
cost of sales in the consolidated statements
of operations.
NEW ACCOUNTING
STANDARD NOT
YET ADOPTED In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS
No. 133 requires companies to recognize all
derivatives contracts as either assets or
liabilities in the balance sheet and to
measure them at fair value. If certain
conditions are met, a derivative may be
specifically designated as a hedge, the
objective of which is to match the timing of
gain or loss recognition on the hedging
derivative with the recognition of (i) the
changes in the fair value of the hedged
assets or liability or (ii) the earnings
effect of the hedged forecasted transaction.
For a derivative not designated as a hedging
instrument, the gain or loss is recognized
in income in the period of change. SFAS No.
133, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
Historically, the Company has not entered
into derivative contracts either to hedge
existing risks or for speculative
purposes. Accordingly, the Company does
not expect adoption of the new standard to
affect its financial statements.
3. ACQUISITION
ACTIVITY On April 14, 1997, ART acquired from
Astro-Med, Inc. substantially all of the
assets related to the following products (i)
the basic cardiac catheterization monitoring
system (the "K3-I"), (ii) the stand-alone
hemodynamic analysis package (the "K3-II"),
(iii) the network ready hemodynamic analysis
package (the K3-III"), and (iv) the control
work station (the K3-WI") (collectively, the
"K3 Products"). The purchase price for the
assets was $350,000, with $50,000 paid at
closing and a promissory note issued in the
amount of $300,000 (see Note 7).
During the year ended December 31, 1998,
the Company recorded an impairment loss on
the long-lived assets related to the
Astro-Med acquisition. The impairment was
the result of the K3 Products technology
failing to meet competitive demands.
Included in the 1998 results of operations
is an impairment loss of $192,201 which
was due primarily to the reduction of the
goodwill carrying value to zero. The
Company also recorded a charge in 1998 of
approximately $261,000 in cost of sales
for the write-down of the related
inventory to its net realizable value.
4. INVENTORIES Inventories consist of the following:
DECEMBER 31, 2000 1999
--------------------------------------------------------------------------------------
Raw materials $ 123,962 $ 252,237
Work-in-process 197,254 233,966
Finished goods 538,945 596,314
--------------------------------------------------------------------------------------
Total $ 860,161 $ 1,082,517
======================================================================================
26
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY, PLANT Property, plant and equipment consist of the following:
AND EQUIPMENT
Asset
DECEMBER 31, Lives 2000 1999
--------------------------------------------------------------------------------------
Machinery and equipment 5 to 15 years $ 4,481,941 $ 4,355,011
Equipment held for lease 10 years 403,708 539,222
Building and improvements 20 years 1,856,585 1,903,221
Vehicles 3 to 5 years 28,855 28,855
Furniture and fixtures 3 to 5 years 568,825 708,804
--------------------------------------------------------------------------------------
7,339,914 7,535,113
Less accumulated
depreciation (4,028,956) (3,699,282)
--------------------------------------------------------------------------------------
Net property, plant and
equipment $ 3,310,958 $ 3,835,831
--------------------------------------------------------------------------------------
The Company had $87,770 and $135,400 of
assets under capital leases, included in
machinery and equipment, at December 31,
2000 and 1999. Accumulated depreciation on
these assets was $24,868 and $33,307 at
December 31, 2000 and 1999, respectively.
EQUIPMENT
LEASING The Company leases attaching machines to
customers under operating leases for periods
of up to one year with renewable terms. The
cost of the leased equipment is depreciated
on a straight-line basis over ten years.
Accumulated depreciation on leased equipment
was $113,936 and $106,721 at December 31,
2000 and 1999.
6. GOODWILL AND OTHER Goodwill and other intangibles consist of
INTANGIBLES the following:
DECEMBER 31, 2000 1999
--------------------------------------------------------------------------------------
Goodwill $ 2,473,326 $ 2,661,073
Accumulated amortization (1,016,493) (1,074,350)
--------------------------------------------------------------------------------------
Net goodwill $ 1,456,833 $ 1,586,723
--------------------------------------------------------------------------------------
Other intangibles $ 606,449 $ 597,599
Accumulated amortization (558,419) (474,712)
--------------------------------------------------------------------------------------
Net other intangibles $ 48,030 $ 122,887
--------------------------------------------------------------------------------------
27
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEBT
REVOLVING CREDIT
FACILITY The Company has available $800,000 from a
revolving credit facility with a bank, which
is renewable in June 2001. The agreement
provides for borrowings up to 85% of
eligible accounts receivable plus 40% of raw
material and finished goods inventories.
There were no outstanding borrowings on the
working capital line of credit as of
December 31, 2000 and 1999 and no borrowings
during 2000.
The agreement contains covenants that, among
various matters, restrict further borrowings
and security interests, merger or
consolidation, acquisitions, guarantees,
sales of assets other than in the normal
course of business, leasing, changes in
ownership and payment of dividends.
LONG-TERM DEBT Long-term borrowings, excluding capital lease
obligations, consist of:
DECEMBER 31, 2000 1999
--------------------------------------------------------------------------------------
Bonds payable $399,490 $580,000
$300,000 promissory note bearing interest at 8%
per annum, payable in monthly installments of
$9,551 through May 2001, collateralized by
equipment purchased. 178,279 178,279
-------------------------------------------------------------------------------------
577,769 758,279
Less current maturities 178,279 711,464
-------------------------------------------------------------------------------------
Long-term bonds payable and debt $ 399,490 $ 46,815
=======================================================================================
BONDS PAYABLE In August 1995, the Company completed a
$600,000 private bond placement. The bonds
carried an 11% interest rate and matured in
May 2000. In connection with the private
bond placement, ART issued an aggregate of
279,000 warrants to the bondholders to
purchase ART common stock at $3.00 per
share. The warrants were exercisable upon
issuance and expired in five years. The
Company recorded the allocation between the
detachable warrants and debt securities
based on their relative fair values. The
$202,000 related to the warrants was
reported as additional paid-in capital and a
discount on the bonds payable which was
amortized to interest expense over the
five-year term of the bonds. In 2000, the
Company renewed $550,000 of the private
placement bonds for a two-year period
maturing May 31, 2002. New warrants were
issued to the bondholders for 254,980 shares
of the Company's stock at $1.50 per share.
The warrants also expire May 31, 2002. The
fair-value allocated to the warrants was
$194,000 which is reported as additional
paid-in capital and a discount on the debt
securities being amortized to interest
expense over the two year term of the bonds.
For the years 2000, 1999 and 1998, the
Company recorded amortization of bond
discount of $63,490, $46,065 and $48,000,
respectively and interest expense of $63,250
in 2000 and $66,000 in 1999 and 1998. The
unamortized bond discount remaining as of
December 31, 2000 and 1999 was $150,510 and
$20,000, respectively.
28
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEBT
(Continued)
NOTE PAYABLE On April 14, 1997, ART incurred a promissory
note in the amount of $300,000, bearing
interest of 8% per annum, through the
acquisition of property and equipment from
a manufacturer. No payments were made during
2000 as payment of the note is being
contested. The unpaid principal is included
in current liabilities.
8. INCOME TAXES The income tax provision for each of the
three years in the period ended December 31,
2000 consists of the following:
2000 1999 1998
--------------------------------------------------------------------------------------
Current:
Federal $ - $ - $ -
State 66,000 69,313 115,583
--------------------------------------------------------------------------------------
Total 66,000 69,313 115,583
Deferred (21,000) (49,000) 84,000
--------------------------------------------------------------------------------------
Total income tax expense $ 45,000 $ 20,313 $ 199,583
--------------------------------------------------------------------------------------
The Company's federal net operating loss
("NOL") carryforwards were approximately
$1,500,000 at December 31, 2000. During the
three years ended December 31, 2000, the
Company utilized approximately $482,000, $0
and $137,000, of its NOL carryforwards. The
NOL carryforwards expire through 2007. The
use of the loss carryforwards to reduce
future income tax obligations are limited in
any given year due to restrictions defined
in the Internal Revenue Code related to a
change in ownership control.
The components of deferred income taxes were
as follows as of December 31:
2000 1999
--------------------------------------------------------------------------------------
Deferred income taxes:
Inventories $ 66,164 $ 218,560
Property, plant and equipment 61,000 124,215
Patents 288,238 294,560
Other 265,741 162,024
Net operating loss carryforwards 513,016 680,680
Valuation allowance (749,236) (1,056,116)
--------------------------------------------------------------------------------------
Deferred income taxes $ 444,923 $ 423,923
--------------------------------------------------------------------------------------
29
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
(Continued) Deferred tax assets are recognized by
reducing the valuation allowance as the
Company generates income, or when, in the
opinion of management, significant positive
evidence exists that the Company will be
more likely than not to realize the tax
benefits related to temporary differences
which give rise to deferred tax assets.
The Company files a consolidated federal
income tax return. For financial statement
purposes, the actual effective consolidated
tax rates have been applied to the income
before income taxes when calculating the tax
provision. The actual income tax provision
differs from the statutory income tax rate
(34%) as follows:
2000 1999 1998
--------------------------------------------------------------------------------------
Tax provision computed at
statutory rate $ 226,143 $ 151,422 $ 21,470
Increases (reductions) due to:
Nondeductible expenses 5,358 3,850 2,034
Amortization of goodwill 39,054 39,054 39,054
State income taxes net of
federal benefit 43,560 45,747 76,285
Changes in valuation
allowance estimates (306,880) (240,172) 112,309
Other 37,765 20,412 (51,569)
--------------------------------------------------------------------------------------
Income tax expense $ 45,000 $ 20,313 $ 199,583
--------------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT
PLANS Micron established an Employee Stock
Ownership Plan ("ESOP") as a result of a
previous plan of reorganization. The ESOP is
non-contributory on the part of its
participants. All employees of the Company
are eligible for participation in the ESOP.
The ESOP borrowed $300,000 to purchase the
Company's shares. The proceeds were used to
pay creditors electing to receive cash under
the ESOP plan. The shares issued by the
Company to the ESOP are reflected as a
reduction in shareholders' equity. The
Company accounts for its ESOP in accordance
with Statement of Position 76-3.
Accordingly, all shares held by the ESOP,
allocated or unallocated, are treated as
outstanding in the earnings per share
calculation. The Company has elected to
recognize compensation expense based on
contributions made. There are no repurchase
obligations by the Company. The Company
contributed and recorded compensation
expense of $0, $39,277 and $42,857 during
the years ended December 31, 2000, 1999 and
1998, respectively.
The Company sponsors an Employee Savings and
Investment Plan under Section 401(k) of the
Internal Revenue Code covering all eligible
employees of the Company. Employees can
contribute up to 20% of their eligible
compensation or up to the maximum allowable
by the IRS. The Company's matching
contributions are at the discretion of
management. The Company did not make any
contributions for the years ended December
31, 2000, 1999 and 1998, respectively.
30
10. COMMITMENTS AND
CONTINGENCIES
ROYALTIES ART licenses its signal-averaging
technology from an unrelated entity for a
royalty fee of 4.5% of gross sales, less
certain allowances for selling commissions
and discounts. Costs of obtaining patents
are offset against royalties due. To
retain an exclusive license for the
technology, ART is obligated to pay a
minimum royalty of $30,000 annually. The
royalties paid were $30,000, $30,000 and
$35,000 for 2000, 1999 and 1998,
respectively.
ELECTROPHYSIOLOGY
PRODUCTS CONTRACT ART and Prucka Engineering, Inc. ("Prucka"),
the manufacturer of the CardioLab and
CardioMapp products (the "Products") had an
agreement related to ART's exclusive
distribution of the Products. The agreement
provided for ART to receive a 3% commission
on CardioLab sales through December 31,
2002. The commissions earned for the years
1999 and 1998 were approximately $385,000,
and $485,000, respectively. In 2000, Prucka
(now owned by GE Marquette) negotiated to
buy out the remainder of the agreement for
$1,000,000 with no further obligations to
either party.
ENVIRONMENTAL Like many industrial processes, the Micron
GROUNDWATER manufacturing process utilizes hazardous
and non-hazardous chemicals, the treatment
and disposal of which are subject to
federal and state regulation. Since its
inception, Micron has expended significant
funds to train its personnel, install waste
treatment and recovery equipment and to
retain an independent environmental
consulting firm to constantly review,
monitor and upgrade its air and waste water
treatment activities. As a result, Micron
believes that the operations of its
manufacturing facility are in compliance
with currently applicable safety, health and
environmental laws and regulations.
Micron has been identified as a "potential
responsible party" (PRP) under the
Comprehensive Environmental Response and may
be required to share in the cost of cleanup
with respect to its Fitchburg, Massachusetts
manufacturing facility. In January 1998,
Micron filed information with the
Massachusetts Department of Environmental
Protection (DEP) to allow further subsurface
investigation and a subsequent risk
assessment to be performed. During 2000,
Micron filed it's Phase II Report with the
DEP. The Phase II Report included a
Massachusetts Contingency Plan (MCP) Method
3 Risk Characterization and Response Action
Outcome Statement that demonstrated a
condition of "No Significant Risk" at the
site. The site has been closed out under the
MCP and is now awaiting a mandatory audit by
the DEP. At December 31, 2000 and 1999, the
consolidated balance sheets include an
accrual for these costs of $50,000.
Based on the Company's analyses and subject
to the difficulty in estimating these future
costs, the Company expects that any sum it
may be required to pay in connection with
environmental matters is not reasonably
likely to exceed the amounts disclosed in an
amount which would have a material adverse
effect on financial condition, result of
operations or liquidity.
31
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND
CONTINGENCIES
(Continued)
OPERATING LEASES The Company leases certain office
space, facilities, vehicles and equipment
under non-cancelable lease arrangements.
Rent expense under all operating leases was
approximately $117,000, $115,000 and
$106,000 in 2000, 1999 and 1998,
respectively.
Future minimum operating lease payments as
of December 31, 2000 are approximately as
follows:
Operating
YEAR Leases
--------------------------------------------------------------------------------------
2001 $ 74,447
2002 36,896
2003 13,549
2004 7,491
--------------------------------------------------------------------------------------
Total $ 132,383
--------------------------------------------------------------------------------------
11. SUPPLEMENTAL Cash paid for income taxes and interest for the
CASH FLOWS years ended December 31 is as follows:
INFORMATION
2000 1999 1998
--------------------------------------------------------------------------------------
Income taxes $ 59,091 $ 110,172 $ 94,860
Interest $ 68,889 $ 139,060 $ 218,447
Non-cash activities:
Bond discount resulting
from bond and stock
warrant renewal $ 194,000 $ - $ -
Directors fees paid in stock $ 26,500 $ 37,313 $ -
12. RELATED PARTY
TRANSACTIONS The Company obtains legal services with
respect to its patents from a law firm, a
partner of which is a shareholder and
Director of the Company. Fees for services
and patent prosecution costs paid to this
firm were approximately $37,700, $41,000 and
$3,300 for years 2000, 1999 and 1998,
respectively. The amounts owed to this firm
at December 31, 2000 and 1999 were
approximately $4,000 and $31,000,
respectively.
Cardio Digital Inc. ("CDI") has four
shareholders who are also shareholders of
the Company. Royalties paid CDI were $6,100,
$15,700 and $19,000 for years 2000, 1999 and
1998, respectively. The amounts owed to CDI
at December 31, 2000 and 1999 were $300 and
$5,350, respectively.
32
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED PARTY
TRANSACTIONS During the years 2000, 1999 and 1998
healthcare coverage premiums of
approximately $11,670, $8,500 and $8,300,
respectively, were paid on behalf of a
Director of the (Continued) Company in
exchange for consulting services.
The Company obtains consulting services from
a shareholder and Director of the Company
related to acquisitions and other
negotiations. No fees for services were paid
to this Director for the years 2000, 1999
and 1998, respectively.
13. STOCK OPTIONS
OPTION PLAN The Company has reserved 250,000 shares of
its common stock for issuance to officers
and key employees pursuant to an Incentive
Stock Option Plan (the "Option Plan"). Under
the Option Plan, options become exercisable
commencing one year from the date of grant
at the rate of 20% of the total granted per
year and expire ten years from the date of
grant. The exercise price is the fair market
value of the common stock on the date of
grant. The range of exercise prices was
$1.06 to $6.00 per share for all options
outstanding and granted under the Option
Plan with a weighted average exercise price
of $1.63 per share and weighted average
remaining life of 4.7 years. In September
1998, the Board of Directors repriced
options outstanding to Directors and
Officers under the Option Plan to reflect
the fair market value on the effective date
of $1.06 per share.
The plan is no longer qualified for deferred
tax treatment for future option grants
unless amended by the Board of Directors.
Transactions under the Option Plan are
summarized as follows:
2000 1999 1998
--------------------------------------------------------------------------------------
Options outstanding at
Beginning of year 107,500 110,000 163,000
Granted - - -
Cancelled/expired (56,500) (2,500) (53,000)
--------------------------------------------------------------------------------------
Options outstanding at
end of year 51,000 107,500 110,000
--------------------------------------------------------------------------------------
Options exercised to date 4,500 2,000 2,000
--------------------------------------------------------------------------------------
Available for grant at
end of year 194,500 140,500 138,000
--------------------------------------------------------------------------------------
Exercisable at end of year 51,000 102,700 95,400
--------------------------------------------------------------------------------------
Weighted-average fair value
of options granted $ - $ - $ -
--------------------------------------------------------------------------------------
33
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS
(Continued)
NON-PLAN OPTIONS During 1994, non-plan options for
144,000 shares, expiring in 2004, at an
exercise price of $3.00, were granted to
eight Directors. At December 31, 2000,
90,000 options remain outstanding.
During September 1998, the Board of
Directors repriced options outstanding to
Directors and Officers. All options were
repriced to reflect the fair market value on
the effective date of $1.06 per share.
As of December 31, 2000 the exercise price
for all non-plan options outstanding was
$1.06 per share with a weighted average
remaining life of 3.3 years.
Transactions relative to non-plan options
are summarized as follows:
2000 1999 1998
--------------------------------------------------------------------------------------
Options outstanding at
Beginning of year 99,000 99,000 177,000
Granted - - -
Cancelled/expired (9,000) - (78,000)
--------------------------------------------------------------------------------------
Options outstanding at
end of year 90,000 99,000 99,000
--------------------------------------------------------------------------------------
Exercisable at end of year 90,000 99,000 96,750
--------------------------------------------------------------------------------------
34
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS
(Continued)
NON-PLAN OPTIONS
(CONTINUED) The Company accounts for stock options at
intrinsic value in accordance with
Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations. Accordingly, no
compensation expense has been recognized for
the plans. Had compensation cost for the
Company's stock options been determined
based upon the fair value at the grant date
for awards under the plans consistent with
the methodology prescribed under Statement
of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's net income (loss) would have been
adjusted to the pro forma amounts indicated
below:
2000 1999 1998
--------------------------------------------------------------------------------------
MC
Net income (loss) - as reported $ 620,127 $ 425,045 $ (136,438)
Net income (loss) - pro forma $ 614,685 $ 414,161 $ (269,539)
Basic income (loss)
per share - as reported $ 0.19 $ 0.12 $ (0.04)
Diluted income (loss) per
share - as reported $ 0.18 $ 0.12 $ (0.04)
Basic and diluted income (loss)
per share - pro forma $ 0.18 $ 0.12 $ (0.08)
The fair value of each stock option granted
is estimated on the date of grant using the
Black-Scholes option-pricing model. The
model uses assumptions for dividend yield,
expected volatility, and the risk-free
interest rate.
In August 1995, warrants were issued to
bondholders to purchase an aggregate of
279,000 shares of common stock at $3.00 per
share which expire five years from the date
of the bond. In 2000, the warrants were
extended to bondholders to purchase an
aggregate of 254,980 shares of common stock
at $1.50 per share which expire May 31,
2002.
35
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INDUSTRY AND
GEOGRAPHIC
SEGMENTS The Company's operations are classified into
two business segments: medical electrode
components and computerized medical
instruments.
The following table shows sales, operating
income (loss) and other financial
information by industry segment as of and
for the years ended December 31, 2000, 1999
and 1998:
Medical Computerized
Electrode Medical
Components Instruments Corporate Consolidated
----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
Sales $ 8,407,040 $ 1,114,823 (A) $ - $ 9,521,863
----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 589,402 $ 353,144 $ (129,889) $ 812,657
----------------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 246,658 $ - $ - $ 246,658
Depreciation and Amortization $ 777,576 $ 12,778 $ 258,264 $ 1,048,618
Identifiable assets at
December 31, 2000 $ 6,079,844 $ 227,819 $3,610,921 $ 9,918,584
----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
Sales $ 9,718,408 $ 661,176 $ - $10,379,584
----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 1,529,928 $ (740,889) $ (130,519) $ 658,520
----------------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 504,817 $ - $ 35,896 $ 540,713
Depreciation and Amortization $ 637,381 $ 13,975 $ 236,384 $ 887,740
Identifiable assets at
December 31, 1999 $ 7,076,354 $ 473,374 $2,151,958 $ 9,701,686
----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Sales $ 8,444,870 $ 915,726 $ - $ 9,360,596
----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 1,263,650 $ (953,764) $ (129,890) $ 179,996
----------------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 453,112 $ - $ 23,905 $ 477,017
Depreciation and Amortization $ 650,705 $ 27,053 $ 204,160 $ 881,918
Identifiable assets at
December 31, 1998 $ 6,188,950 $ 574,019 $3,227,175 $ 9,990,144
----------------------------------------------------------------------------------------------------------------------------
(A) Includes a $1,000,000 buyout of Prucka commission agreement.
36
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INDUSTRY AND The following table sets forth the
GEOGRAPHIC geographic distribution of the Company's
SEGMENTS net sales:
(Continued)
REGION 2000 1999 1998
--------------------------------------------------------------------------------------
United States $ 3,422,711(A) $ 3,349,427 $ 4,898,191
Europe 2,987,559 2,951,797 2,678,710
Canada, Mexico &
South America 2,840,434 3,679,873 1,557,356
Pacific Rim 248,343 315,256 173,966
Other 22,816 83,231 52,373
--------------------------------------------------------------------------------------
Net Sales $ 9,521,863 $ 10,379,584 $ 9,360,596
--------------------------------------------------------------------------------------
(A) Includes a $1,000,000 buyout of Prucka
commission agreement.
The following table sets forth the percentage of net
sales to significant customers of the medical
electrode components segment in relation to total
segment sales:
CUSTOMERS 2000 1999 1998
--------------------------------------------------------------------------------------
A 36% 37% 32%
B 25% 28% 15%
C 14% 11% 11%
D - - 25%
The only single significant customer for the
computerized medical instruments segment was
revenue from the Prucka commission
agreement, which was terminated in 2000. For
the years ended December 31, 2000, 1999 and
1998, this was 90%, 58% and 53% of
computerized medical instrument net sales,
respectively.
37
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. QUARTERLY
FINANCIAL DATA
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------
2000
Revenues $ 2,543,826 $ 2,863,091 $ 2,108,247 $ 2,006,699
Gross profit 867,192 1,582,495 588,157 496,440
Net income(loss) 101,731 644,842 21,933 (148,379)
Net income(loss) per share .03 .19 .01 (.04)
1999
Revenues $ 2,441,683 $ 2,922,771 $ 2,609,674 $ 2,405,456
Gross profit 712,589 1,110,376 1,135,071 664,029
Net income(loss) (1,131) 197,382 175,938 52,856
Net income(loss) per share (.00) .06 .05 .01
The second quarter results in 2000 include
$1,000,000 of revenue associated with the
termination of a commission agreement with
Prucka. During the fourth quarter of 2000,
the Company determined that $90,000 of costs
related to a previous version of ART
software had no future value and was charged
to expense. In addition, $106,000 of
severance costs was provided for in the
fourth quarter of 2000.
38
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
----------------------------------------------------------------------------------------
E.P. Marinos 59 Chairman of the Board of Directors, Director
Julius Tabin, Ph.D 81 Director
Paul F. Walter, MD 63 Director
Russell C. Chambers, MD 57 Director
Richard A. Campbell 58 Vice President of Finance
James E. Rouse 46 Vice President/General Manager
The Directors are divided into three classes with rotating three-year
terms. Dr.Walter has been elected to serve until the 2003 annual meeting of
shareholders while Dr. Chambers was elected to serve as a Director until the
2002 annual meeting of shareholders. Mr. Marinos and Dr. Tabin were elected
to serve until the 2001 annual meeting of shareholders. The Company's
executive officers are appointed by the Board of Directors and serve at the
pleasure of the Board.
Each non-employee director receives compensation of $1,000 per quarter.
Additionally, each non-employee director receives $500 for each meeting at
which such director is present in person and $250 for each meeting at which
such director is present by telephone. Employee directors do not receive
compensation.
E.P. (LOU) MARINOS was appointed President and Chief Executive Officer of
the Company in March 1995 and resigned in May, 1997. Mr. Marinos, until he
resigned, also served in the capacity of Chief Financial Officer and Chief
Operating Officer since joining the Company in May, 1994. Prior to joining
the Company Mr. Marinos held senior executive management or Director
positions with Intermedics, Inc., Carbon Implants, Inc., Bio-International,
Inc. and Endevco, Inc. He was also a senior partner with Deloitte & Touche.
Mr. Marinos is presently Chairman of the Board of Midcoast Interstate
Transmission, Inc. and President and Chief Executive Officer of Kansas
Pipeline Co. Mr. Marinos was appointed Chairman of the Board of Directors of
ART in July, 2000 and has been a director of the Company since March, 1996.
JULIUS TABIN, PH.D. has been a director of the Company since its
inception. Since 1949, Dr. Tabin has been a partner in the law firm of Fitch,
Even, Tabin & Flannery.
PAUL F. WALTER, MD. has been a director of the Company since its
inception. Dr. Walter is a Professor of Medicine at Emory University where he
has been on the faculty since 1971.
RUSSELL C. CHAMBERS, MD. has been a director of the Company since its
inception and served as the Company's Chairman of the Board until August
1990. For more than the past five years, Dr. Chambers has been primarily
engaged in the management of his personal investments.
RICHARD A. CAMPBELL was appointed Vice President of Finance of the
Company in June, 2000.
JAMES E. ROUSE WAS appointed Vice President/General Manager of the
Company in December, 2000.
39
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain information concerning
compensation of and stock options held by the Company's President and Chief
Executive Officer and the President of the Company's subsidiary, Micron:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------------------------
STOCK LONG-TERM ALL
NAME AND PRINCIPAL POSITION OPTIONS INCENTIVE OTHER
YEAR SALARY BONUS OPTIONS (SH) PAYOUTS COMPENSATION
----------------------------------------------- -------- --------- ----------------------------------------------------------
Anthony A. Cetrone, President, Micron 2000 $ 66,353 - - - - -
Products Inc. (1)
Nancy C. Arnold, President 2000 $ 72,188 - - - - -
Arrhythmia Research Technology, Inc (2)
Anthony A. Cetrone, President, Micron 1999 $110,000 15,651 - - - -
Products Inc.
Nancy C. Arnold, President, Arrhythmia
Research Technology, Inc. 1999 $ 82,500 500 - - - -
Anthony A. Cetrone, President, Micron 1998 $ 98,000 5,282 - - - -
Products Inc.
Sidney M. Barbanel, President and Chief 1998 $ 70,833 - - - - -
Executive Officer
(1) Mr. Cetrone retired from the Company and resigned his position as Chairman
of the Board and Chief Executive Officer of the Company in July, 2000. The
Company has not named a replacement Chief Executive Officer for the Company and
the Board of Directors has served in this capacity since the resignation of Mr.
Cetrone. The Company has an arrangement to compensate directors for time spent
on these responsibilities. No amounts were paid in 2000.
(2) Ms. Arnold terminated her employment with the Company in November, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
There were no options granted during fiscal year 2000.
40
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTIONS VALUES TABLE
The realized value of aggregated option exercises during 2000 and the
value of unexercised in-the-money options at December 31, 2000 held by the
Named Executive Officers are shown in the following table:
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
VALUE REALIZED DECEMBER 31, 2000 DECEMBER 31, 2000(1)
SHARES (MARKET PRICE AT ------------------------------- ----------------------------------
ACQUIRED EXERCISE LESS
NAME ON EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------ ------------- ------------------ ------------- ----------------- ---------------- -----------------
E. P. Marinos - $ - 42,000 - $ 23,625 $ -
(1) Calculated on the basis of the closing price per share for the Common
Stock on the American Stock Exchange of $1.625 on December 31, 2000.
REPORT OF THE COMPENSATION COMMITTEE
The following report of the Compensation Committee (the "Committee" ), as
well as the Performance Table set forth herein, are not soliciting materials,
are not deemed filed with the Securities and Exchange Commission (the "SEC")
and are not incorporated by reference in any filing of the Company under the
Securities Act of 1933, as amended (the "Securities Act"), or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), whether made before or
after the date of this Form 10-K and irrespective of any general
incorporation language in any such filing.
The Compensation Committee is responsible for establishing and reviewing
the Company's executive compensation policies, advising the full Board of
Directors on all compensation matters and administering the Company's stock
option plans. The Committee relating to compensation of the President and
Chief Executive Officer are reviewed and approved by the other non-employee
Directors.
COMPENSATION POLICY
The Company's executive compensation policies are designed to foster the
Company's business goals of achieving profitable growth and premium returns
to Stockholders. The principal objectives of these policies are as follows:
(1) to attract, motivate and retain executives of outstanding ability and
character; (2) to provide rewards that are closely related to the performance
of the Company and the individual executive by placing a portion of
compensation at risk; and (3) to align the interests of executives and
Stockholders through long-term, equity-based incentives and programs to
encourage and reward stock ownership.
This report discusses the manner in which base salaries, short-term
incentive compensation and long-term, equity-based incentives for the
Company's President and Chief Executive Officer and other executive officers
were determined for the 2000 fiscal year.
EXECUTIVE COMPENSATION
The key components of executive compensation are base salary, short-term
incentive compensation and long-term, equity-based incentives. Base salaries
are generally targeted to be competitive with the average salaries paid at
other companies of similar size and complexity both within and outside the
medical device distribution and manufacturing industries.
BASE SALARY
Salary level targets are established so that the Company can attract and
retain the most qualified employees. The Compensation Committee approves the
individual salaries of executive officers. In determining an executive
officer's salary, the Compensation Committee considers, but does not assign
specific weights to, the following factors: internal factors involving the
executive's level of responsibility, experience, individual performance, and
equity issues relating to pay for other Company executives, as well as
external factors involving competitive positioning, overall corporate
performance, and general economic conditions. No specific formula is applied
to determine the weight of each factor.
41
INCENTIVE COMPENSATION PROGRAM
The Company maintains an incentive compensation program for substantially
all officers and executives designed to reward such individuals for their
contributions to corporate and individual objectives. In the past, the
programs have provided additional compensation based on performance and
profits of those operations for which the various executives have
responsibility. No bonuses were earned by any executive officers named in the
Summary Compensation Table, in 2000.
LONG-TERM INCENTIVE COMPENSATION
The Company also grants stock options and other equity incentives in
order to link compensation to the Company's long-term growth and performance
and to increases in Stockholder value. The Committee has broad discretion to
establish the terms of such grants. The Company grants awards to designated
employees upon commencement of employment or following a significant change
in an employee's responsibility or title. Awards are based on guidelines
relating to the employee's position in the Company which are set by the
Committee, as well as the employee's current performance and anticipated
future contributions. The Committee also considers the amount and terms of
stock options previously granted to each of the employees. The Committee
individually evaluates these factors with respect to each executive and then
the Committee reaches a consensus on the appropriate award. During fiscal
year 2000, the Committee did not recommend the grant of any options to any
Executive Officers.
COMPENSATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
Anthony A. Cetrone served as President and Chief Executive Officer of the
Company until November, 1999, however, he continued as Chairman of the Board
and Chief Operating Officer of Micron. Mr. Cetrone retired from the Company
and resigned his position as Chairman of the Board and Chief Operating
Officer of the Company in July, 2000. Prior to his retirement, his annual
rate of base compensation was $110,000. Nancy C. Arnold was named President
in November, 1999. Ms. Arnold served as President and General Counsel until
she terminated her employment with the Company in November, 2000. Prior to
her termination, her annual rate of compensation was $82,500.
This report on executive compensation is made by and on behalf of the
Company's Compensation Committee.
Russell C. Chambers, M.D.
STOCK PERFORMANCE INFORMATION
The following Performance Table compares the Company's cumulative total
shareholder return on its Common Stock for a five-year period (from December
31, 1995 to December 31, 2000), with the cumulative total return of the
Standard & Poor's 500 Stock Index ("S&P 500") (which does not include the
Company), and the Standard & Poor's Medical Products and Supplies Stock Index
(which includes the Company) ("S&P Med"). Dividend reinvestment has been
assumed. The Performance Table assumes $100 invested in December 31, 1995 in
the Company's Common Stock, S&P 500, and S&P Med.
-------------------------------------------------------
CUMULATIVE TOTAL RETURN
-------------------------------------------------------
12/95 12/96 12/97 12/98 12/99 12/00
--------- -------- -------- -------- --------- --------
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. 100.00 58.82 36.76 30.88 38.24 38.24
S & P 500 100.00 122.96 163.98 210.84 255.22 231.98
S & P HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) 100.00 114.77 143.09 206.25 191.03 275.56
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Based solely upon the Company's review of the copies of such forms it has
received, the Company believes that all its officers, directors and greater
than ten percent beneficial owners complied with the filing requirements
applicable to them pursuant to Section 16(a) of the Securities Exchange Act
during 2000.
42
STOCK OPTIONS
1987 INCENTIVE STOCK OPTION PLAN
In 1987, the Company adopted a stock option plan (the "Option Plan")
pursuant to which 250,000 shares of Common Stock have been reserved for
issuance to officers and other key employees and to certain other persons who
are employed or engaged by the Company. Options are designated as "incentive
stock options" within the meaning of the Internal Revenue Code of 1986, as
amended. The purpose of the Option Plan is to encourage stock ownership by
persons instrumental to the success of the Company, in order to give them a
greater personal interest in the Company's business. The exercise price of
any stock option granted to an eligible employee may not be less than 100% of
the fair market value of the shares underlying such option on the date of
grant, unless such employee owns more than 10% of the outstanding Common
Stock, in which case the exercise price of any incentive stock option may not
be less than 110% of such fair market value. The term of each option and the
manner in which it may be exercised is determined by the Board of Directors
provided that no option may be exercisable more than 10 years after the date
of grant and, in the case of a stock option granted to an eligible employee
owning more than 10% of the Common Stock, no more than five years. Generally,
options become exercisable one year from the date of grant and each year
thereafter at a rate of 20% per year. Options are not transferable, except
upon death of the option holder. The 1987 ISO Plan has expired.
Options to purchase an aggregate of 229,000 shares of Common Stock at an
exercise price of $2.25 to $6.50 per share have been granted under the Option
Plan to twenty current and former employees. Of these, options for 4,500
shares were exercised and options to purchase 141,500 shares granted to
eleven former employees were canceled due to termination of employment or
death of the employees. In September 1998, the Board of Directors adjusted
the exercise price of the options granted to the Directors and officers of
the company to reflect the current fair market value of the stock, which was
$1.06. During the years ended December 31, 2000 and 1999, no options were
granted. During the year ended December 31, 2000, options to purchase 2,500
shares were exercised and options to purchase 54,000 shares were cancelled
due to retirement or termination of employment.
OTHER OPTIONS
In addition, options to purchase an aggregate of 518,450 shares of Common
Stock have been granted at exercise prices ranging from $2.00 to $4.00; such
options were not granted under the Option Plan. At December 31, 2000, options
for 55,251 shares have been exercised and options for 302,700 shares have
been terminated/forfeited.
In October 1994, options for 144,000 shares, expiring in 2004, at an
exercise price of $3.00, were granted to eight Directors. The shares were
immediately exercisable. Options for 72,000 shares have been terminated or
forfeited.
In November 1995, options to purchase 29,000 shares, expiring in 2005, at
an exercise price of $3.00, were granted to two Officers and Directors of the
Company. All options were forfeited upon the resignations of both Officers
and Directors.
In September 1998, the Board of Directors adjusted the exercise price of
the options granted to the Directors and Officers of the Company to reflect
the current market value of the stock, which was $1.06 per share.
MEDICAL CONSULTANTS
From time to time, the Company consults with medical advisors who report
on advances in technology and on developments in their respective fields.
During 2000, 1999 and 1998, the Company used consultants on a specific
project basis. Amounts paid to consultants during 2000, 1999 and 1998 were
not material.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 1, 2001 based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by
the Company to be the owner of more than five percent of the outstanding
shares of Common Stock, (ii) each director of the Company and (iii) all
officers and directors as a group.
BENEFICIAL
OWNERSHIP (1)
--------------------
NAME OF BENEFICIAL OWNER (4) NUMBER PERCENT
--------------------------------------------------------------------------------------------
Russell C. Chambers, M.D. (2).......................................... 487,691 15.39
Julius Tabin, Ph.D..................................................... 138,824 4.38
Paul F. Walter, M.D.................................................... 82,055 2.59
E.P. Marinos........................................................... 60,426 1.91
All officers and directors as a group (3) ............................. 821,587 25.93
1. Unless otherwise noted, each person has sole voting and investment power
with respect to the shares of Common Stock beneficially owned.
2. Excludes Company shares owned by two trusts of which Dr. Chambers' son
and Dr. Chambers' wife have a beneficial interest. Dr. Chambers is
neither a beneficiary of trustee of the two trusts and disclaims any
beneficial ownership of the common stock held by the trusts. Includes
2,500 shares over which Dr. Chambers has voting power pursuant to an
agreement, 12,500 shares held as custodian for his son and 2,500 shares
held as custodian for a niece.
3. Includes 52,591 shares held by the Micron Employee Stock Ownership Plan
over which an Officer of the Company has power as Trustee.
4. Includes options to purchase shares of Common Stock, all of which are
exercisable at December 31, 2000, as follows:
NAME NUMBER
-------------------------------------------- ------------------
E.P. Marinos.............................. 42,000
Russell C. Chambers, M.D.................. 18,000
Julius Tabin.............................. 18,000
Paul F. Walter, M.D....................... 18,000
------------------
Total................................ 96,000
==================
44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To date, all transactions between the Company and its officers,
directors, or their affiliates have been approved or ratified by a majority
of the directors who did not have an interest in, and who were not employed
by the Company at the time of, such transaction. The Company's Board of
Directors adopted resolutions providing that any transaction between the
Company and its officers, directors or their affiliates must be approved by a
majority of the Board of Directors who do not have an interest in, and who
are not employed by the Company at the time of, such transaction. The Company
believes that all transactions entered into with affiliates of the Company
were on terms no less favorable than could have been obtained from
unaffiliated third parties.
In May 1983, ART entered into an agreement with Cardiodigital Industries,
Inc., a Texas corporation ("CDI"), pursuant to which ART granted an exclusive
license to CDI to use the technology covered by the Simson Patent in
connection with research and development of signal-averaging devices. In
consideration for the license, CDI provided $175,000 of financing and granted
ART an option to acquire any technology developed by CDI on an exclusive
basis at a price of either $1,250,000 or a royalty fee of $150 per cardiac
signal-averaging device sold by ART, up to a maximum of $1,250,000. ART
exercised its option to purchase such technology at the fee of $150 per
signal-averaging device sold by ART. Dr. Julius Tabin, is a director of ART
and a shareholder of CDI. In addition, the estate of G. Russell Chambers (Dr.
Chambers' father), is a principal shareholder of CDI. Royalty fees paid for
the years ended December 31, 2000, 1999 and 1998 were $6,100, $15,700 and
$19,000, respectively.
Dr. Julius Tabin, a member of the law firm of Fitch, Even, Tabin &
Flannery, the Company's patent counsel, has been a director of the Company
since its inception and he and other members of the firm are shareholders of
the Company. For the years ended December 31, 2000, 1999 and 1998, the law
firm billed the Company approximately $19,300, $40,638 and $3,286,
respectively, for legal services rendered and patent prosecution costs. The
amounts owed to the firm at December 31, 2000, 1999 and 1998 were
approximately $4,000, $31,000, and $18,000, respectively.
Dr. Russell C. Chambers, a director and shareholder of the Company, is
engaged as a consultant to the Company. For the years ended December 31,
2000, 1999 and 1998, health insurance premiums paid on Dr. Chambers behalf
amounted to approximately $11,670, $8,500, and $8,300, respectively.
The Company obtains consulting services, with respect to acquisitions and
other negotiations, from Mr. E. P. Marinos, a shareholder and Director of the
Company. No fees for services were paid to this Director for years 2000, 1999
and 1998, respectively. The amounts owed to the Director were approximately
$4,275, $0, and $0 for December 31, 2000, 1999 and 1998, respectively.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as a part of this report:
(1) All Financial Statements
See index to financial statements on page 16 for a list of all financial
statements filed as part of this report.
(2) Financial Statement Schedules
(A) Schedule II
All schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission not included here are omitted as the
required information is inapplicable or the information is presented in the
financial statements or related notes.
(3) Exhibits
The following exhibits, required by Item 601 of Regulation S-K are
submitted herewith:
DESCRIPTION OF EXHIBITS
-------------------------------------------------------------------------------------------------
10.34 Asset Purchase Agreement, dated March 5, 1997, between Micron Products, Inc. and Newmark, Inc...
10.35 Manufacturing Agreement, dated March 5, 1997, between Micron Products, Inc. and Newmark, Inc....
10.36 Asset Purchase Agreement, dated April 14, 1997, between Arrhythmia Research Technology, Inc.
and Astro-Med, Inc....................................................................................
10.37 Manufacturing Agreement, dated April 14, 1997, between Arrhythmia Research Technology, Inc. and
Astro-Med, Inc........................................................................................
10.38 Software Conversion Agreement, dated April 21, 1997, between Arrhythmia Research Technology,
Inc. and Softheart, Inc. .......................................................................
10.39 License Agreement, dated April 21, 1997, between Arrhythmia Research Technology, Inc. and
Softheart, Inc. ................................................................................
(b) Reports filed in the fourth quarter on Form 8-K:
None
46
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.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
BY: /s/ E. P. Marinos
-----------------------------------
E. P. Marinos
Chairman of the Board of Arrhythmia Research Technology, Inc.
and Acting Chief Executive Officer
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 CAPACITY DATE
------------------------------------------------------ ----------------------------------------- ----------------------------
/s/ E. P. Marinos Chairman of the Board and March 28, 2001
------------------------------------------------------ Acting Chief Executive Officer
E. P. Marinos
/s/ Russell C. Chambers Director March 28, 2001
------------------------------------------------------
Russell C. Chambers
/s/ Julius Tabin Director March 28, 2001
------------------------------------------------------
Julius Tabin
/s/ Paul F. Walter Director March 28, 2001
------------------------------------------------------
Paul F. Walter
47
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------------ ---------------------------------------------------------------------------------------------------- -------
3.0 Articles of Incorporation......................................................................... (A)
3.1 By-laws........................................................................................... (A)
3.2 Certificate of Agreement of Merger of Arrhythmia Research Technology, Inc., a Louisiana
Corporation, and Arrhythmia Research Technology, Inc., a Delaware Corporation..................... (A)
3.3 Articles of Merger of Arrhythmia Research Technology, Inc., a Louisiana Corporation, and
Arrhythmia Research Technology, Inc., a Delaware corporation...................................... (A)
4.0 Form of Certificate evidencing shares of the Company's Common Stock............................... (A)
4.1 Form of Non-plan Options to purchase Company Common Stock......................................... (C)
4.2 Form of Options to purchase Company Common Stock under the 1987 Incentive Stock Option Plan.......
(A)
4.3 Form of Underwriter's Warrant..................................................................... (C)
4.4 Bond Indenture and Bond Form.......................................................................
4.5 Form of Option for E.P. (Lou) Marinos under 1995 Key Employees Stock Option Plan...................
4.6 Form of Option for Anthony A. Cetrone under 1995 Key Employees Stock Option Plan...................
10.0 Distribution Agreement by and between Prucka Engineering, Inc. and ART, dated November 20, 1989...
(B)
10.1 Amendment to Distribution Agreement dated November 20, 1989....................................... (B)
10.2 Lockup Agreement.................................................................................. (A)
10.3 Manufacturing Agreement by and between ART and Mortara Instrument, Inc. dated March 8, 1987.......
(A)
10.4 Amendment to Manufacturing agreement dated June 15, 1987.......................................... (A)
10.5 Letter agreement by and between ART and Mortara Instrument, Inc. dated October 26, 1989........... (C)
10.6 Letter agreement by and between ART and Mortara Instrument, Inc. dated February 21, 1990.......... (C)
10.7 Letter agreement by and between ART and Mortara Instrument, Inc. dated February 21, 1990......... (C)
10.8 Letter agreement by and between ART and Mortara Instrument, Inc. dated July 31, 1990.............. (C)
10.9 License Agreement dated November 15, 1981 by and between University Patents, Inc., and ART........
10.10 Amendment to License Agreement dated June 1, 1985................................................. (A)
10.11 License of Cardiac Signal Average and Base Technology by ART to Cardiodigital Industries, Inc. to
ART............................................................................................... (A)
10.12 Grant of Option to Acquire Exclusive License for Use of Signal Averaging Technology from
Cardiodigital Industries, Inc. to ART............................................................. (A)
10.13 Agreement and Plan of Merger executed by ART and Arrhythmia Research Technology, Inc., a
Louisiana corporation............................................................................. (A)
10.14 Settlement Agreement, dated February 23, 1990, by and among Baylor College of Medicine, The
Methodist Hospital Foundation and The Methodist Hospital and Matthew W. Prucka, Delphi Computer
Systems Inc., Prucka Engineering, Inc., Dr. Christopher Wyndham and Arrhythmia Research
Technology, Inc................................................................................... (C)
10.15 Form of Employment Agreement dated June 1, 1991, by and between the Company and David A. Jenkins..
(C)
10.16 Amendment No. 2 to License Agreement between ART and University Patents, Inc. dated February 6,
1991.............................................................................................. (B)
10.17 O E M Agreement by and between Vascor Medical Corporation, Vascomed and ART dated December 14,
1991.............................................................................................. (D)
10.18 Amendment to O E M Agreement dated December 14, 1991.............................................. (D)
10.19 O E M agreement by and between Professional Catheter Corporation and ART dated September 11, 1992.
(F)
10.20 Distribution Agreement by and between Prucka Engineering, Inc. and ART, dated May 28, 1992........ )
10.21 Employment Agreement, dated November 24, 1992, between the Company and Anthony A. Cetrone........
(F)
10.22 Asset Purchase Agreement, dated February 17, 1993, by and among Hubbard, Thurman,
Tucker & Harris, L.L.P. and ART.................................................................. (F)
48
Agreement and Plan of Merger, dated November 25, 1992, among Arrhythmia Research Technology, Inc.,
10.23 ART Merger Subsidiary II, Inc., Micron Products Inc. and Micron Medical Products Inc............. (E)
10.24 Merger Agreement, dated November 25, 1992, between ART Merger Subsidiary II, Inc. and Micron
Products Inc..................................................................................... (E)
10.25 Asset Purchase Agreement, dated July 9, 1993, between Arrhythmia Research Technology, Inc. and
Corazonix Corporation............................................................................ (G)
10.26 Amendment to Asset Purchase Agreement, dated November 5, 1993, between Arrhythmia Research
Technology, Inc. and Corazonix Corporation....................................................... (I)
10.27 Manufacturing and Equipment Lease Agreement, dated November 5, 1993, between Arrhythmia Research
Technology, Inc. and Corazonix Corporation....................................................... (I)
10.28 Letter of Intent dated September 28, 1993, between Arrhythmia Research Technology, Inc. and Lite
Tech, L. P....................................................................................... (I)
10.29 Letter of Intent, dated September 28, 1993 by and between Arrhythmia Research Technology, Inc. and
Mr. John Curley and Mr. Thomas Krug.............................................................. (I)
10.30 Agreement by and between Arrhythmia Research Technology, Inc. and Prucka Engineering, Inc., dated
August 1994...................................................................................... (J)
10.31 First and Second Amendments to Manufacturing and Equipment Lease, dated August 31, 1994 and
October 6, 1994, respectively, between Arrhythmia Research Technology, Inc. and Corazonix
Corporation...................................................................................... (J)
10.32 Agreement and Modification of Second Amendment to Manufacturing and Equipment Lease Agreement
dated November 4, 1994, between Arrhythmia Research Technology, Inc. and Corazonix Corporation...
(J)
10.33 Employment Agreement, dated March 1, 1996, between the Company and E. P. Marinos.................
10.34 Asset Purchase Agreement, dated March 5, 1997, between Micron Products, Inc. and Newmark, Inc.
10.35 Manufacturing Agreement, dated March 5, 1997, between Micron Products, Inc. and Newmark, Inc.
10.36 Asset Purchase Agreement, dated April 14, 1997, between Arrhythmia Research Technology, Inc. and
Astro-Med, Inc.
10.37 Manufacturing Agreement, dated April 14, 1997, between Arrhythmia Research Technology, Inc. and
Astro-Med, Inc.
10.38 Software Conversion Agreement, dated April 21,1 997, between Arrhythmia Research Technology, Inc.
and Softheart, Inc.
10.39 License Agreement, dated April 21, 1997, between Arrhythmia Research Technology, Inc. and
Softheart, Inc.
22.0 Subsidiaries..................................................................................... (F)
28.0 1987 Incentive Stock Option Plan................................................................. (A)
28.1 Option Agreement, dated March 18, 1991, between the Company and Julius Tabin..................... (F)
28.2 Option Agreement, dated March 18, 1991, between the Company and Robert A. Simms.................. (F)
28.3 Option Agreement, dated March 18, 1991, between the Company and Tom Podl......................... (F)
28.4 Option Agreement, dated March 18, 1991, between the Company and Paul F. Walter................... (F)
28.5 Option Agreement, dated March 18, 1991 between the Company and Russell C. Chambers............... (F)
28.6 Option Agreement, dated August 21, 1990, between the Company and Robert A. Simms................. (F)
28.7 Option Agreement, dated March 8, 1993, between the Company and Anthony A. Cetrone....... (I)
28.8 Option Agreement, dated March 8, 1993, between the Company and Wayne Schroeder. ........... (I)
28.9 Merger Agreement, dated December 26, 1993, between Micron Products Inc. and Micron Medical
Products Inc....................................................................................... (I)
28.10 Articles of Merger of Parent and Subsidiary........................................................ (I)
28.11 Consent Judgment signed by Arrhythmia Research Technology, Inc. and Corazonix Corporation and
entered on November 15, 1993....................................................................... (H)
49
(A) Incorporated herein by reference from a Registration Statement on Form S-18 as filed with the
Commission in April 1988, Registration Statement No. 33-20945-FW.
(B) Incorporated herein by reference from a Form 10-K as filed with the Commission in March 1990.
(C) Incorporated herein by reference from a Registration Statement on Form S-1 as filed with the
Commission in August 1990, Registration Statement No. 33-36607.
(D) Incorporated herein by reference from a Form 10-K as filed with the Commission in March 1992.
(E) Incorporated by reference from Form 8-K as filed with the Commission on December 10, 1992.
(F) Incorporated herein by reference from a Form 10-K as filed with the Commission in March 1993.
(G) Incorporated by reference from Form 8-K as filed with the Commission on July 15, 1993.
(H) Incorporated by reference from Form 8-K as filed with the Commission on November 22, 1993.
(I) Incorporated by reference from Form 8-K as filed with the Commission of June 30, 1998.
(J) Incorporated by reference from Form 8-K-A as filed with the Commission of July 10, 1998.
(K) Incorporated by reference from Form 8-K as filed with the Commission September 29, 1998.
(L) Incorporated by reference from Form 10-K as filed with the Commission in March 1994.
(M) Incorporated by reference from Form 10-K as filed with the Commission in March 1995.
50
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
SCHEDULE II
REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE
To the Shareholders
Arrhythmia Research Technology, Inc.
The audits referred to in our report dated February 16, 2001 relating to
the consolidated financial statements of Arrhythmia Research Technology, Inc.
and Subsidiary, which is contained in Item 8 of this form 10-K included the
audit of the financial statements schedule for the years ended December 31,
2000, 1999 and 1998 listed in Item 14 (a)(2). This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein for the years ended
December 31, 2000, 1999 and 1998.
Gardner, Massachusetts /s/ BDO Seidman LLP
February 16, 2001 -----------------------
51
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance
Beginning of Costs and at End
Period Expenses Deductions of Period
------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
2000 $ 83,203 $ 56,918 $ 87,294 $ 52,827
------------------------------------------------------------------------------------------------------------------------
1999 $ 72,192 $ 48,375 $ 37,364 $ 83,203
------------------------------------------------------------------------------------------------------------------------
1998 $ 61,318 $ 21,518 $ 10,644 $ 72,192
------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR SLOW-MOVING INVENTORIES:
2000 $ 458,500 $ 24,433 $332,446 $ 150,487
------------------------------------------------------------------------------------------------------------------------
1999 $1,022,835 $ - $564,335 $ 458,500
------------------------------------------------------------------------------------------------------------------------
1998 $ 820,610 $ 202,225 $ - $ 1,022,835
------------------------------------------------------------------------------------------------------------------------
52