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 (fee required)
December 31, 1996 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 (no fee required)
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-0925679
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
5910 Courtyard Drive #300 78731
Austin, Texas (Zip Code)
(Address of principal executive offices)
(512) 343-6912
(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 21, 1997, there were 3,563,101 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 21, 1997, the aggregate market value of the
voting stock of the registrant held by non-affiliates was $8,174,071 based upon
the closing price of the shares of common stock on the American Stock Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibits of a Registration Statement on Form S-18 as filed with the
Commission in April 1988, Registration Statement No. 33-20945-FW, a Registration
Statement on Form S-1 as filed with the Commission in August 1990, Registration
Statement No. 33-36607, a Registration Statement on Form S-8 as filed with the
Commission in October 1992, Registration Statement No. 33-53810, and a
Registration Statement on Form S-3 filed with the Commission in October 1993,
Registration Statement No. 33-69970, are incorporated by reference into Part IV,
Item 14.
<PAGE>
PART I
Item 1. BUSINESS
BACKGROUND
Arrhythmia Research Technology, Inc. ("ART") 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 marketing and manufacturing
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, and cardiac catheterization equipment. ART's patented and
proprietary signal-averaging product line is comprised of the 1200 EPX(TM), the
LP-Pac Q(TM), the PREDICTOR IIc(TM), and the PREDICTOR(R) I. ART is the
exclusive distributor for the Astro-Med, Inc. proprietary K3 Cardiac
Catheterization product line for the United States, Canada, and Eastern Europe.
Additionally, ART was the exclusive distributor for the CardioMapp(TM) and
CardioLab(TM), Prucka Engineering, Inc.'s ("Prucka") electrophysiology products
through December 31, 1996. (See "Electrophysiology Products").
ART continues to aggressively seek to acquire additional products and to
look for acquisition candidates to replace the electrophysiology product sales.
In this process, the Company has developed relationships and possible
collaborations with other companies which could result in opportunities to
offset portions of the electrophysiology products. ART will continue to receive
royalties on such sales of 4% on the first $10,000,000 and 1% on any excess in
1997 and 1998, and a lesser royalty through 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. Micron was incorporated in the Commonwealth of
Massachusetts in 1972 and is located in Fitchburg, Massachusetts.
The following table sets forth for the periods specified, the net sales
derived from the products of ART and its subsidiary Micron (collectively the
"Company"):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------
1996 % 1995 % 1994 %
------------ ----- ------------ ----- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
SAECG equipment............ $ 935,655 4 $ 808,043 3 $ 901,608 5
CardioLab & CardioMapp..... 14,611,720 59 13,671,703 60 8,714,896 50
Sensors & Snaps............ 9,240,474 37 8,448,343 37 7,764,163 45
--------- -- --------- -- --------- --
Total.................. $ 24,787,849 100 $ 22,928,089 100 $ 17,380,667 100
============ ===== ============ ===== ============ ======
</TABLE>
The Company believes that the continued growth in the fields of cardiology
and electrophysiology will result in significant opportunities for the Company
to supply equipment and related disposables to hospitals, clinics and
physicians. The Company is actively seeking to acquire additional product lines
to supply this market.
RECENT DEVELOPMENTS
ACC Expert Consensus Report Released
A report from the American College of Cardiology (ACC) expert panel of
cardiologists, released in January 1996, deemed that the signal-averaged
electrocardiography (SAECG) test employing the bidirectional Butterworth filter
is a valuable tool in several cardiac disease clinical indications. ART holds
the US and international patents for the use of the bidirectional Butterworth
filter. The filtering technique employed in the Simson Method for late potential
analysis of the SAECG is the only method recommended by this recent expert
consensus, as well as by a previous `Standards' paper issued jointly by the
American College of Cardiology, American Heart Association, and the European
Society of Cardiology. The new report stated that the SAECG test is established
as being valuable for identifying patients after a heart attack (approximately
1.5 million per year) who are at high risk for developing sustained ventricular
arrhythmias, and also for identifying patients with ischemic heart disease and
unexplained syncope, who are likely to have inducible ventricular tachycardia.
Furthermore, the SAECG test has been found to be valuable in risk stratifying
nonischemic cardiomyopathy patients who may develop sustained ventricular
arrhythmias, and also for assessment of the success of operations for
ventricular arrhythmias. Other promising indications include the detection of
tissue rejection in heart transplant patients, and the effects of
anti-arrhythmic drugs. The SAECG non-invasive test, which now has its own CPT
code for reimbursement, was shown to be more cost effective than other tests
used for similar type of risk stratification, such as invasive programmed
stimulation, ejection fraction and Holter tests. The consensus paper also said
that Medicare reimbursement for this test has shown an upward trend from 1992 to
1994.
2
<PAGE>
Sales Agency Agreement with Heartlab Inc.
In January 1997, ART signed an agreement with Heartlab Inc. ("Heartlab") to
sell its digital angiographic review system ("DICOMview (TM)") in North America.
The initial three-year term of the agreement may be extended for successive
one-year terms unless it is terminated by either party on sixty days' prior
written notice. DICOMview was designed to provide high performance on
inexpensive PCs and Macs and allows the cardiologist to use his desktop system
instead of dedicated workstations to perform primary diagnosis. Heartlab is a
privately held software company located in Westerly, Rhode Island.
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 arrhythmias are
distinguished from arrhythmias 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 an 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 amplified and enhanced, while
eliminating undesired electrical noise. At the annual American Heart Association
(AHA) Scientific Sessions in November 1995, abstracts of studies were presented
which described potential new areas of effective use of ART's SAECG technology.
Of primary interest were (1) SAECG as a predictor of sudden cardiac death after
coronary arterial bypass surgery; (2) SAECG as a tool for determining the
effectiveness of ACE inhibitor drug therapy; and (3) as a non-invasive method of
detecting rejection after heart transplant surgery. 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. These studies have the
potential to broaden the uses of SAECG technology and applications of ART's
SAECG products. ART's patented technology is considered the standard in medicine
for SAECG. ART's SAECG products are described in detail below.
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
3
<PAGE>
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, characterized
as the "Standard", was pioneered by Michael Simson, MD, and has been built into
each 1200 EPX . Hard copy reports are generated using laserjet printers. See
"EPSoft(TM) Software Library" for post-processing applications available for the
1200 EPX.
LP-Pac Q and PREDICTOR IIc
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
1200EPX. 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". In January 1996, ART received CE mark certification for the
LP-Pac Q. The certification of the CE mark is required to export products to the
European community.
The PREDICTOR IIc is a cart-based patient-isolated system comprised of the
same components as the LP-Pac Q kit, but running PREDICTOR software on a
notebook computer with a docking station. A Hewlett-Packard laserjet printer is
supplied as part of the cart-based system.
PREDICTOR I
The PREDICTOR I is a personal computer-based signal-averaging device that
records and analyzes cardiac late potentials. The PREDICTOR I consists of a
computer, digitizing hardware, programmable amplifiers, QRS detection
hardware/firmware, preamplifiers, and a printer. Software is provided to
facilitate the use of these components. The PREDICTOR I is designed to give the
physician a flexible tool for the research setting as well as for clinical use.
EPSoft(TM) Software Library
ART's research and development staff has recently developed breakthrough
digital signal processing techniques to enhance the overall analytical power of
the SAECG test. Two such new developments are the IntraSpect(TM) and Early
Potential Analysis software packages.
IntraSpect(TM) 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 FFT-Plus(TM) spectral temporal mapping software; and
Heart Rate Variability (HRV) software for the 1200EPX. These 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 I,
PREDICTOR IIc, and LP-Pac Q signal-averaging systems.
Software upgrades are provided at no charge to customers with systems under
warranty. Sales of post-processing software products were not material to the
Company's business in 1996.
K3 Cath-Lab
In November 1995, ART signed a four and one-half year agreement ("the
Agreement") with Astro-Med, Inc. ("Astro-Med"), to exclusively distribute its
family of proprietary K3 Cardiac Catheterization products (K3 Cath-Lab). The
Agreement may be terminated by Astro-Med, at the discretion of Astro-Med on
ninety (90) days' written notice, at the end of a then-current contract year in
the event Buyer does not meet certain minimum sales requirements set forth in
the agreement. Astro-Med is a manufacturer of specialty printer systems and
related equipment which display, monitor, analyze and print data for aerospace,
industrial and medical applications. The Astro-Med K3 Cath-Lab is an advanced
hemodynamics system for use in a standard hospital Cath-Lab. The K3 is designed
to produce complete hemodynamic analysis and comprehensive reports, including
chronological logs, preliminary findings, full inventory control reports, letter
generation and medical records, in a simplified drop-down menu format. The FDA
issued a 510(k) in November 1994, which allows the K3 to be sold to the medical
community in the United States. Astro-Med is a publicly traded company listed on
the NASDAQ National Market System under the symbol ALOT.
4
<PAGE>
Electrophysiology Products
CardioLab
The CardioLab was introduced and received a 510(k) from the FDA in early
1991. The CardioLab is a computerized recording and analysis system used by
electrophysiologists in the diagnosis and treatment of arrhythmias. The
CardioLab is used in conjunction with a stimulator and catheters inserted
through a blood vessel, allowing an electrophysiologist to electronically
induce, monitor, record, analyze and treat arrhythmias under controlled
conditions. The CardioLab records cardiac electrical activity which is
amplified, digitized and transmitted to a computer for real time analysis and
display on a high resolution color graphics monitor or laser printer. Because
the CardioLab can be used to accurately detect the presence and location of
diseased or damaged heart tissue, in some cases, a procedure can be performed
less invasively via catheter, as compared to open heart exploratory surgery, to
treat the condition.
The CardioLab components include an amplifier, computer, monitor and
printer. These hardware components are manufactured by various suppliers and
are, to a large extent, interchangeable. The CardioLab is manufactured by Prucka
Engineering, Inc. of Houston and was distributed exclusively by ART until
December 31, 1996 pursuant to an agreement dated April 1, 1994. During 1997 and
1998, ART will receive a 4% commission on net sales of CardioLab systems and
accessories sold anywhere in the world, up to a ceiling of $10,000,000. ART
receives 25% of the commissions it would otherwise be entitled to receive for
revenues attributable to CardioLab systems that exceed $10,000,000. From January
1, 1999 through December 31, 2002, ART will receive a commission of 3% of the
net sales of CardioLab systems sold anywhere in the world, up to a ceiling of
$10,000,000 in total net sales.
CardioMapp
The CardioMapp was introduced and received a 510(k) from the FDA in
November 1989. The CardioMapp is a computerized cardiac mapping system used
during open heart surgery to assist surgeons in locating and treating electrical
malfunctions of the heart. The system uses several types of electrode arrays
placed on the heart to monitor and record cardiac electrical activity. The
electrical activity is amplified, digitized and transmitted to a computer for
real-time analysis and display in the operating room during surgery on a high
resolution color graphics display or color printer. The graphics display, or
map, is presented to the surgeon within one to two minutes after the data is
recorded.
The CardioMapp components include fiber optic cable and electrodes, an
amplifier, junction box, computer, monitor and printer. The CardioMapp is
manufactured by Prucka and was distributed exclusively by ART until December 31,
1996 pursuant to an agreement dated April 1, 1994. During 1997, ART will receive
4 % commissions on net sales of CardioMapp systems and accessories sold anywhere
in the world, up to a ceiling of $10,000,000 in total net sales. ART receives
25% of the commissions it would otherwise be entitled to receive for revenues
attributable to CardioMapp systems that exceed $10,000,000.
Angiographic Review Station Software
DICOMview is a high-performance desktop x-ray angiographic review station
software package. Available on the Power-Macintosh and Windows 95/WindowsNT 4.0
platforms, DICOMview delivers workstation level performance at low cost and with
ease of use not found on workstation based systems. DICOMview allows physicians
to review angiographic images directly from DICOM (Digital Image Communication
in Medicine) compliant interchange media. Studies can be stored locally allowing
the physician to create a personal catalog of cases. The built in networking
capability allows users to build small inexpensive work-groups which facilitate
information sharing.
Heartlab is currently offering a site license of either the PC or Mac
version of the software for $35,000. Both versions may be purchased for $42,000.
Heartlab will pay to ART a commission of twenty percent (20%) of Heartlab's net
sales of the DICOMview software which have been generated by ART. ART is also
entitled to a commission, calculated on a sale-by-sale basis, with respect to
sales of computer hardware related to DICOMview.
5
<PAGE>
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 the 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 disposable silver/silver chloride
disposable electrodes.
Metal Snap Fasteners
In February, 1991, Micron entered into a non-exclusive world-wide
distribution agreement with a manufacturer of metal snap fasteners used to
attach the disposable electrode to the lead wires of the ECG machine. As a
component of the finished silver/silver chloride disposable electrode, the snaps
are sold to some of the same customers that use Micron's sensor elements. Micron
purchases finished snap fasteners from its supplier, performs quality control
procedures and repackages the snaps for shipment to customers. Snap shipments
are often included along with Micron's sensor shipment to a customer. While
Micron is attempting to increase the market penetration of this product, there
can be no guarantee that the snap fastener product line will produce increased
revenues or profits in future periods.
The following table shows sales of sensors and snaps by Micron for the years
ended December 31:
<TABLE>
<CAPTION>
1996 % 1995 % 1994 %
------------- ---- ------------- ---- -------------- ----
<S> <C> <C> <C> <C> <C> <C>
Sensors.......... $ 7,838,438 85 $ 7,296,163 86 $ 6,620,729 85
Snaps............ 1,402,036 15 1,152,180 14 1,143,434 15
------------- ---- ------------- ---- -------------- ----
Total......... $ 9,240,474 100 $ 8,448,343 100 $ 7,764,163 100
============= ==== ============= ==== ============== ====
</TABLE>
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 21-E Site Assessment. A 21-E Site Assessment includes an
analysis of ground water samples for the presence of certain petroleum based
products, metals and solvents. The analysis detected levels of petroleum
products and metals in excess of the minimum 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.
6
<PAGE>
On January 21, 1993, Micron filed its Phase I Limited Site Investigation
and Waiver Application ("Application"). The Application contained an historical
overview of past uses of the site and its surrounding area. The facility is
located in the center of a heavily developed industrial area and use of the site
and surrounding properties predates the early 1900's. Micron has occupied the
site from 1982 to the present. 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.
During February, 1993, the representatives of the DEP visited the site. 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.
Using the results of the evaluation, Micron was required to prepare a
five-year plan of remediation for the property. Micron retained an environmental
consulting firm to organize, design, and implement a plan of remediation and to
represent Micron in its dealings with the regulatory authorities. Upon the
completion of Phase II activities Micron will apply for final approval and
clearance from the DEP. The Massachusetts Contingency Plan allows closure of
sites only after a condition of "no significant risk" is demonstrated. If the
DEP determines that the Company needs to implement the last phase of remediation
(Phase III), the Company could incur approximately $150,000 to $200,000 of
clean-up costs to remove contaminated property as estimated by the environmental
engineering firm hired to represent the Company in its dealings with the DEP.
Although the ultimate outcome is uncertain until Phase II is completed, as of
December 31, 1996, the engineering firm and management of the Company believe
that Phase III remediation will not be required.
During 1996, 1995, and 1994 Micron spent approximately $25,700, $24,900,
and $14,000, respectively, for site assessment, monitoring and remediation. At
December 31, 1996, the accrued liabilities include approximately $95,000 to
cover the estimated future costs associated with site monitoring and
remediation. Management estimates that these costs could approximate from
$95,000 to $225,000 depending upon the final decision by the DEP.
Micron may seek recovery from other responsible parties if the source of
the ground water pollution can be identified. However the likelihood of the
collection of damages cannot be evaluated at this time.
Operations
During 1996 and 1995, Micron spent approximately $137,000 and $139,000 on
an extensive program to evaluate its manufacturing process, employee training,
health and safety programs, air and waste water treatment systems, and to ensure
compliance with current and future federal, state and local regulations, as well
as to evaluate the adequacy of such systems to facilitate future growth. The
nature of certain above expenses are non-recurring, while others are normal
recurring expenses associated with industrial producers in the Commonwealth of
Massachusetts. In 1994, costs related to expenditures to improve the efficiency
of the manufacturing process and to help mitigate or prevent possible future
environmental contamination were capitalized. Such costs are amortized over
their estimated useful lives of five years. No costs were capitalized in 1996
and 1995.
GENERAL
Customers and Sales
ART sells its electrocardiographic, cardiac catheterization, and
electrophysiology products primarily to hospitals where purchasing decisions are
typically made on the advice of physicians affiliated with such hospitals. ART's
sales cycle, 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. ART generally fills orders within approximately 30 days of receipt of
customer orders for electrocardiographic products and within approximately 60-90
days for cardiac catheterization and electrophysiology products. Because orders
are filled shortly after receipt, backlog is not usually material to ART's
business.
Micron manufactures its sensor elements against specific customer purchase
orders in accordance with supply agreements between Micron and the electrode
manufacturers. There are approximately 50 significant manufacturers of
silver/silver chloride-plated disposable electrodes world-wide. Micron sells its
sensor elements to most of these manufacturers. During the year ended December
31, 1996, three major customers accounted for 32%, 23% and 11% of net sales of
Micron.
7
<PAGE>
The following table sets forth, for the periods indicated, the approximate
consolidated net sales and percentages of net sales derived from sales of the
Company's products in its geographic markets:
<TABLE>
<CAPTION>
Net Sales Year ended December 31,
-------------------------------------------------------------------
1996 % 1995 % 1994 %
-------------- ----- -------------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
United States......................... $ 15,935,126 64 $ 16,380,540 71 $ 11,813,557 68
Europe................................ 4,829,713 20 4,325,860 19 2,938,187 17
Canada, Mexico & South America........ 1,587,372 6 1,078,263 5 1,210,068 7
Far East.............................. 2,303,520 9 1,101,085 5 1,349,310 8
Other................................. 132,118 1 42,341 - 69,545 -
------- - ------ ------
Total............................. $ 24,787,849 100 $ 22,928,089 100 $ 17,380,667 100
============== ===== ============== ===== ============= =====
</TABLE>
Installation and Service
Electrocardiographic, Cardiac Catheterization and Electrophysiology
Products
Installation. When a purchase order is received for SAECG products,
independent sales representatives or distributors are responsible for
installation of the systems. ART records the revenue at shipment in these cases,
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, this revenue is not recognized until that time. The
period from the time of execution of the purchase order until completion of
installation of such system typically ranges from one to four weeks. Astro-Med
is responsible for installation of the K3 Cath-Lab at the customer location. The
period from the time of execution of the purchase order until completion of
installation of a K3 Cath-Lab is approximately 30-45 days. Prucka is responsible
for installation of the CardioMapp and CardioLab systems at the customer
location. The period from the time of execution of the purchase order until
completion of installation of the electrophysiology system is approximately
90-120 days. With respect to DICOMview(TM) 1 to 2 days installation is usually
required.
Training. Ordinarily, the sales representative provides training to
customers in the use of SAECG products. ART personnel are sometimes used to
provide additional training support, as necessary. Generally one day of training
is provided on-site on the day of installation. ART provides training for both
the operation and use of the hardware and of all standard applications of the
software. When a K3 Cath-Lab is installed, two to four days of training is
provided by Astro-Med and ART personnel. In connection with the installation of
CardioMapp and CardioLab systems, three days of training are provided by
Prucka's personnel. With respect to DICOMview, 1 to 2 days training is usually
required.
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. The K3 comes with a standard
one-year labor and parts warranty included in the purchase price. All K3 repairs
are made by Astro-Med personnel. The CardioMapp and CardioLab systems and
components are serviced by Prucka personnel. CardioLab and CardioMapp systems
are warranted for the first year with annual renewals available for a fee.
Heartlab, Inc. warrants all DICOMview software for one year. ART provides a
one-year labor and parts warranty for all DICOMview hardware it provides.
Sensors and Snaps
Micron sells its sensors and snaps to original equipment manufacturers of
disposable electrodes who assemble the finished product. Micron sales,
manufacturing and customer service personnel provide the electrode manufacturers
with technical support whenever necessary.
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.
8
<PAGE>
Cardiac Catheterization Systems
ART is dependent upon Astro-Med as the sole supplier of the K3.
Electrophysiology
ART is dependent upon Prucka as the sole supplier of CardioMapp and
CardioLab systems. Under the distribution agreement between ART and Prucka, ART
exclusively distributed the CardioLab and CardioMapp systems and accessories
(the "Products") through December 31, 1996. ART will receive commissions on
products sales from January 1, 1997 through December 31, 2002.
Sensors and Snaps
Micron manufactures its sensor elements at its Fitchburg, Massachusetts
facility employing a proprietary non-patented seven-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.
During February, 1991, Micron entered into a non-exclusive world-wide
distribution agreement for medical snap fasteners manufactured by TRW Inc.
("TRW"). TRW later sold its entire fastener operation and Micron's medical snap
fasteners are currently manufactured by Scovill, Inc. ("Scovill"). The agreement
allows Micron to buy the various snap fasteners in bulk and to repackage and
resell them to its customers. The agreement has a provision for annual renewals
and Micron and its supplier are cooperating to increase market penetration of
the Scovill snap products.
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 17 independent sales organizations in the United States, which
sell ART's products. ART has arrangements with 34 foreign distributors who sell
ART's products in most of the significant foreign markets. To date, ART's
independent sales organization has accounted for substantially all of ART's
sales. ART believes that the use of independent representatives and
distributors, which typically specialize in specific products and areas and,
accordingly, have specific knowledge of and contacts in particular markets,
enhances the quality and scope of ART's marketing and sales efforts and permits
ART to avoid the significant costs associated with creating a direct
distribution network. Pursuant to agreements with independent sales
representatives and distributors, such sales force is prohibited from engaging
in the promotion or sale of products that compete with ART's products. The
Prucka changes with respect to CardioLab and CardioMapp will not affect existing
sales representatives and distributors.
ART directly employs sales, marketing and management personnel who are
responsible for making sales presentations and working in conjunction with
independent sales representatives in marketing and selling products to doctors
and hospitals. ART's staff prepares advertising copy, full-color sales
brochures, technical bulletins, reimbursement documentation, and sponsors
training programs. In addition, the in-house marketing department sets sales
goals and manages the independent sales organizations as well as making
marketing decisions with respect to present and future products.
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. ART
is expanding its marketing focus to include buying groups, cardiologists, and
other physicians involved in the diagnosis of heart problems. 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. In addition, ART markets
its SAECG products through the use of direct mail campaigns to selected
cardiologists.
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 Hewlett-Packard
Company, most of which are well established, have substantially greater
financial and other resources than ART 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 price, ease of
use, and clinical acceptance of the methodology employed in ART's
signal-averaging products.
9
<PAGE>
Cardiac Catheterization Products
The K3 Cath-Lab product is marketed through national trade shows in the
United States. Additionally, ART has placed full-page advertisements in trade
journals that have drawn an excellent response to the K3 which has certain major
advantages over other, like products currently available. Competitors for the K3
include the Midas system from E for M Corp., the MAC-Lab/Cath Lab Manager from
Marquette, Inc., the Horizon 9000 WS from Mennen Medical, the Q-Cath-DS from
Quinton Instrument, the Cathcor C & T from Siemens Medical, and the Series II
from Witt Biomedical. Most of these competitors are well established and have
substantially greater financial and other resources than ART. ART believes that
its competitive advantage is based on a number of factors, including price, ease
of use, and clinical acceptance of the methodology employed in the K3.
DICOMview Angiographic Review Station Software
The DICOMviewo review station software and related hardware is marketed
through ART's telemarketing efforts as well as the company's independent sales
representatives and through national trade shows. The product is unique in that
it offers many enhanced features not available on other more complex and
considerably more expensive systems. In addition, DICOMview is installed on
fairly simple and more affordable PC's and does not require proprietary high
dollar workstations. The products nearest competitors include Philips CD-Medical
Review Station, Siemens ACOM, Camtronics Archium, and Kodak's Digital Science
CRS 2000. None of the systems provided by other competitors offers the full
range of features available with DICOMview and the competitor's products are
higher priced than DICOMview.
Sensors and Snaps
Micron sells its sensor elements to most major manufacturers of disposable
silver/silver chloride ECG electrodes. Micron employs one full-time salesperson
for sensors and snaps. The Company believes that it has two competitors for
sensors and that its sales of sensors greatly exceed those of its competition.
Engineering and Research and Development
During 1996, ART's engineering and research and development efforts focused
primarily on enhancing and improving the post-processing software used for SAECG
equipment. ART currently employs two engineers engaged in software and hardware
development and one technician for customer telephone support, warranty repairs,
and limited manufacturing. ART also engages outside consultants for specific
projects. For the fiscal years ended December 31, 1996, 1995 and 1994, ART
expensed approximately $173,000, $183,000, and $235,000, respectively, in
connection with engineering and research and development activities, which
consisted principally of the salaries of its employees and 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 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.
10
<PAGE>
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
or to improve the functioning of a malformed body member. SAECG medical tests
are reimbursed under Part B Medicare in all 50 states. The procedures performed
utilizing the K3 Cath-Lab, CardioLab and CardioMapp systems are reimbursed under
Part B Medicare in all 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. 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 currently 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 $2,000,000.
Patents and Proprietary Technology
ART
The Simson Patent, which covers the core technology, including the
signal-averaging and filtering technologies, on which the 1200 EPX, LP-Pac Q,
and PREDICTOR I are based, is of material importance to ART. ART holds an
exclusive license for the Simson Patent, which expires in December 2000. In
connection with the 1200 EPX, ART is the assignee of three other U. S. Patents,
two of which expire in July 2001 and the other in January 2002. ART currently
holds a non-exclusive license to a fifth U. S. patent and has three patent
applications pending. 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 as deemed appropriate.
As part of the acquisition of substantially all Corazonix assets in 1993,
including those pertaining to high resolution ECG, ART acquired four additional
patents related to time and frequency domain analysis of electrocardiogram
signals. These patents were allowed in 1993 by the U.S. Patent Office, and cover
the spectral-temporal mapping post-processing software packages sold by ART. ART
currently holds a non-exclusive license to a fifth U. S. patent and has three
patent applications pending. 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 as deemed appropriate.
Rapid technological development in the medical industry results in
extensive patent filings and a rapid rate of issuance of new patents. Although
ART believes that ART's products do not and will not infringe patents or violate
proprietary rights of others, it is possible that its existing patent rights may
not be valid or that infringement of 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 does not own or
have any license to any patents relating to the K3 technology and is not aware
of any patent or licenses to patents that Astro-Med may hold. ART does not own
or have any license to any patents relating to the CardioMapp or CardioLab
instruments or technology incorporated in such instruments and it is not aware
of any patents or licenses to patents that Prucka may hold.
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.
11
<PAGE>
ART is not aware of any new copyright registration or application for the
software incorporated in the 1200 EPX, LP-Pac Q, PREDICTOR I, K3, CardioMapp, or
CardioLab.
Micron
Micron employs a highly complex, proprietary non-patented seven 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
submitted a patent application for a radiographically translucent snap that is
manufactured from a flexible electrically conductive thermoplastic polymeric
compound in 1995. In early 1996, the patent for this innovative product was
granted to Micron. Micron has begun marketing and manufacturing this product.
Future increased acceptance for this product and its potential applications is
expected.
Employees
ART has eleven full-time employees, including eight administrative, sales,
marketing and supervisory personnel, and three engineering personnel. Micron
employs forty-three full time employees, including twelve administrative, sales
and supervisory personnel, thirteen quality control personnel and eighteen
production personnel.
Item 2. PROPERTY
During 1996 ART leased approximately 4,900 square feet of space in an
office building in Austin, Texas from an unaffiliated landlord with monthly
rental payments of approximately $6,100.
The manufacturing facility and offices of Micron are located in an
industrial area in Fitchburg, Massachusetts. The facility consists of a 22,000
square foot, six story building which was repurchased in April, 1994. In August
1993, Micron entered into a lease for molding and quality control space from an
unaffiliated landlord. During 1995, the average monthly rent was approximately
$6,300 per month for a total of 18,800 square feet. During 1996, Micron rented
the 18,800 square feet at approximately $7,100 per month. Micron acquired the
building located immediately adjacent to its six-story manufacturing facility in
1996 for $480,000.
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. Initial Phase II
activities have been completed, including drilling two borings and installing
three monitoring wells. Additional Phase II activities will likely include
further site history data collection, review and evaluation; evaluation of
upgradient potential sources as required by the DEP waiver; additional soil
sample collection to further redefine source areas; groundwater monitoring;
report and required document preparation; a risk assessment; and regulatory
agency coordination. Upon the completion of Phase II activities Micron will
apply for final approval and clearance from the DEP. The Massachusetts
Contingency Plan allows closure of sites only after a condition of "no
significant risk" is demonstrated.
While the waiver application has been approved, the DEP still retains
jurisdiction and will oversee the remediation. Should Micron not comply with the
terms of the remediation plan, the DEP may institute a lawsuit to enforce a site
clean-up. Micron believes that it is currently in compliance with the terms of
the remediation plan.
In October 1996, plaintiffs Susan and Kevin McGann filed suit in the
Philadelphia Court of Common Pleas naming 216 defendants, including ART and
Micron Medical Products Inc. ("MMPI"). Plaintiff Susan McGann claims to be
suffering Type-1 latex allergy as a result of having worn latex gloves in
connection with her duties as an emergency room nurse from June, 1990. A
dissolved subsidiary of MMPI at one time distributed latex gloves. MMPI was
merged with and into Micron in 1993. The complaint involves allegations of
negligence, strict liability, breach of implied warranty of merchantability,
breach of implied warrant of fitness for a particular purpose, breach of express
warranty, misrepresentation, fraudulent concealment, and violation of unfair
trade practice/consumer protection laws. At this time, ART and MMPI are not
required to respond to the complaint and have been granted an extension until
informed by plaintiffs counsel that all 216 defendants have been served. The
presiding judge has indicated that the suit may be discontinued with respect to
such defendants as are able to execute a form of affidavit indicating a
sufficient lack of involvement with the matters alleged in the suit. ART and
MMPI will submit such affidavits. ART's and MMPI's attorneys have stated that it
is not possible to express an opinion with respect to whether the action will be
discontinued or, if it is not discontinued, as to the likelihood of the outcome
of the matter.
12
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. Annual meeting of shareholders was held on October 23, 1996.
b. Russell C. Chambers, M.D., Anthony A. Cetrone and Robert A. Simms were
elected as directors of the Company at the meeting. E..P. Marinos,
Julius Tabin, Ph.D., Robert A. Simms, Lawrence S. Black, Michael A.
McManus, Jr., and Paul F. Walter, M.D. continued to serve as
directors.
Russell C. Chambers, M.D. 3,125,433 FOR, 23,120 WITHHELD
Anthony A. Cetrone 3,128,782 FOR, 19,731 WITHHELD
Robert A. Simms 3,128,133 FOR, 20,430 WITHHELD
c. Not applicable
d. Not applicable
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 and the high and low bid prices as quoted by the National Quotation
Bureau, Inc. and the National Association of Securities Dealers, Inc. The NASDAQ
quotations reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
High Low
------ ------
Year Ended December 31, 1995
1st Quarter.................... 3 1/4 1 7/8
2nd Quarter.................... 4 2 5/8
3rd Quarter.................... 6 1/4 2 3/4
4th Quarter.................... 6 3 3/4
Year Ended December 31, 1996
1st Quarter.................... 4 7/8 3 1/4
2nd Quarter.................... 3 5/8 2 3/4
3rd Quarter.................... 3 9/16 2 3/8
4th Quarter.................... 3 9/16 2 3/8
As of March 21, 1997 the number of recordholders of ART's common stock was
estimated to be 1,500. On March 21, 1997 the closing price for the common stock
on the American Stock Exchange was $2 7/16.
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.
13
<PAGE>
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 financial statements.
The financial statements include the results of operations of Micron from
November 1, 1992 (the acquisition date). 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.
<TABLE>
<CAPTION>
Statements of Operations Data: Year ended December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue............................................. $ 24,788 $ 22,928 $ 17,381 $ 17,797 $ 10,735
Cost of sales....................................... 20,115 17,947 13,389 11,188 6,395
--------- ---------- --------- --------- ---------
Gross profit.................................... 4,673 4,981 3,992 6,609 4,340
Selling and marketing............................... 610 474 1,128 2,285 2,345
General and administrative.......................... 2,420 2,150 2,393 1,870 852
Research and development............................ 173 183 235 196 164
Amortization of goodwill............................ 115 115 115 127 33
Write-down of assets................................ - - 3,751 - -
--------- ---------- --------- --------- ---------
Income (loss) from operations................... 1,355 2,059 (3,630) 2,131 946
Acquisitions expense................................ - - (164) 86 37
Interest and other expenses, net.................... (278) (116) 10 43 63
--------- ---------- --------- --------- ---------
Income (loss) before income tax and cumulative
effect of accounting change......................... 1,077 1,943 (3,784) 2,088 972
Income tax benefit (expense)........................ (460) (818) 309 (843) (362)
--------- ---------- --------- --------- ---------
Income (loss) before cumulative effect of
accounting change................................... 617 1,125 (3,475) 1,245 610
Cumulative effect of accounting change - - - - 22
--------- ---------- --------- --------- ---------
Net income (loss)............................... $ 617 $ 1,125 $ (3,475) $ 1,245 $ 632
========= ========== ========= ========= =========
Income (loss) per share before cumulative effect of
accounting change................................... $ .17 $ .31 $ (.95) $ .34 $ .19
Cumulative effect of accounting change - - - - .01
--------- ---------- --------- --------- ---------
Net income (loss) per share...................... $ .17 $ .31 $ (.95) $ .34 $ .20
========= ========== ========= ========= =========
Weighted average number of shares outstanding........ 3,563 3,683 3,653 3,716 3,225
========= ========== ========= ========= =========
Balance Sheet Data: December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------- ---------- --------- --------- ---------
Total assets........................................ $ 12,964 $ 12,968 $ 12,711 $ 15,835 $ 13,417
Long term obligations (including current portion)... $ 928 $ 1,089 $ 1,018 $ 1,274 $ 1,363
Redeemable common stock............................. $ - $ 10 $ 637 $ 1,241 $ 1,817
Working capital..................................... $ 2,891 $ 2,803 $ 1,149 $ 3,149 $ 2,290
Shareholders' equity................................ $ 8,012 $ 7,353 $ 5,845 $ 8,965 $ 6,281
</TABLE>
14
<PAGE>
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 revenue represented by certain items reflected in the Company's statements of
operations.
Year ended December 31,
----------------------------
1996 1995 1994
----------------------------
Revenue.................................... 100.0 100.0 100.0
Cost of sales.............................. 81.0 78.3 77.0
Gross profit............................... 19.0 21.7 23.0
Selling and marketing...................... 2.5 2.1 6.5
General and administrative................. 9.8 9.4 13.8
Research and development................... .7 .8 1.3
Amortization of goodwill................... .5 .5 .7
Write-down of assets....................... - - 21.6
Acquisitions expense....................... - - .9
Other, net................................. (1.1) (.5) -
----------------------------
Income (loss) before income taxes.......... 4.4 8.5 (21.8)
Income tax (provision) benefit............. (1.9) (3.6) 1.8
============================
Net income (loss).................... 2.5 4.9 (20.0)
============================
Revenue
Revenue increased by approximately $1,860,000 or 8% for the year ended
December 31, 1996 as compared to 1995. The increase in revenues is attributable
primarily to increased electrophysiology system sales in the domestic market and
an increase in sales of sensors by Micron.
Revenue increased by approximately $5,547,000 or 32% from the year ended
December 31, 1995 as compared to the year ended December 31, 1994. The increase
in revenues is attributable primarily to increased electrophysiology system
sales in the domestic market and, to a lesser extent, an increase in sales of
sensors by Micron.
Sales of signal averaging products have represented a declining percentage
of the Company's revenue since the introduction of the CardioLab in 1991 and the
acquisition of Micron in 1992, which resulted in a change in product mix. Sales
of signal-averaging products had declined in absolute dollars since the year
ended December 31, 1990 and through 1995, however, there was an increase of
approximately $130,000 in 1996. The Company believes that the current primary
market for the 1200 EPX, hospitals with an electrophysiology laboratory, has
been saturated and is looking to sell to non-traditional markets, primarily
physician's offices and clinics, to increase revenues. There appears to be
renewed interest in SAECG products.
Pursuant to an agreement signed April 1, 1994, ART became the exclusive
distributor for both the CardioMapp and CardioLab product lines which are
manufactured by Prucka Engineering of Houston, Texas. Under the agreement, ART
was obligated to purchase CardioMapp and CardioLab from Prucka which are resold
to the customers. The current fiscal year ending 1996 was the final year in
which ART was the exclusive distributor under the Prucka contract. Beginning in
1997, ART will no longer be responsible for marketing, selling, invoicing and
collecting for Prucka products. During 1997 and 1998, ART will receive a 4%
commission on net sales of CardioLab systems and accessories sold anywhere in
the world, up to a ceiling of $10,000,000 in total annual net sales. From
January 1, 1999 through December 31, 2002, ART will receive a commission of 3%
of net sales of CardioLab systems sold anywhere in the world, up to a ceiling of
$10,000,000 in total annual net sales. ART will receive a 4% commission on net
sales of CardioMapp products and accessories sold anywhere in the world, up to a
ceiling of $10,000,000 in total annual net sales for the year 1997, the final
year in which ART will receive commissions for CardioMapp products. ART will
receive 25% of the commissions it would otherwise be entitled to receive for
revenues attributable to Prucka products that exceed $10,000,000.
15
<PAGE>
Unaudited pro forma results of operations for the Company, as if the
aforementioned activity had been consummated on January 1, 1996 are as follows
(in thousands):
Actual Proforma
---------------------- ----------------------
For the Year For the Year
Ending Dec. 31, 1996 Ending Dec. 31, 1996
--------------- -----------------
Net Revenues............ $ 24,788 $ 10,627
Cost of Sales........... 20,115 6,660
=============== ===============
Gross Profit............ $ 4,673 $ 3,967
=============== ===============
Cost of Sales
Cost of sales as a percentage of revenue increased from 78% in 1995 to 81%
in 1996. The increase is due primarily to a contractual price increase by Prucka
to ART for the electrophysiology products exclusively sold and distributed by
ART on behalf of Prucka. 1996 was the final year in which ART was the exclusive
distributor under the Prucka contract. In 1997, the Company will not report the
gross revenues or the related cost of sales for CardioLab and CardioMapp
products which approximated $14,612,000 and $13,455,000, respectively, for the
year ended December 31, 1996, and $13,672,000 and $12,139,000, respectively, for
the year ended December 31, 1995.
Selling and Marketing
Selling and marketing expenses remained consistent as a percentage of sales
in 1996 as compared to 1995. The decline from 1994 to 1995 is attributable to
the large increase in electrophysiology sales under the Prucka contract without
any associated selling or marketing overhead costs. ART restructured its
marketing department in late 1994, which resulted in significant dollar savings
in 1995. Additionally, during part of 1995 several key marketing positions were
vacant for several months.
General and Administrative Expenses
General and administrative expenses increased $270,000 but remained
consistent as a percentage of sales for the year ended December 31, 1996
compared to the year ended December 31, 1995. In 1995, the decrease in terms of
dollars from 1994 is due principally to the fulfillment of an employment
agreement with a former officer of the corporation in December 1994, and a
decline in bad debt and legal expenses. The percentage decline is due to the
large increase in electrophysiology sales without any additional overhead
incurred by the Company as noted above. The Company expects 1997 general and
administrative expenses to remain consistent with 1996.
Research and Development
Research and Development costs as a percent of sales have remained
comparable for the years ended December 31, 1996, 1995, and 1994, respectively.
The decrease in gross dollars from 1995 as compared to 1994 is due to the
Company's termination of payments for consultants under old agreements. Research
and development costs are expected to increase in the coming year. Research and
development costs have not been material to the operations of Micron.
Write-down of Assets
In September, 1994, the Company recorded a charge against earnings of
approximately $2,973,000, consisting principally of the write-down of certain
intangibles and allowance for slow-moving inventory. The write-down of
intangibles of approximately $1,690,000, consisted primarily of patent costs
related to the acquisition of substantially all of the assets of Corazonix in
November, 1993 and patent infringement litigation incurred by ART to defend its
signal-averaging patents. In general, sales of signal-averaging products have
declined since 1990. The Company's management believes that the primary market
for its signal-averaging patented products has become saturated. The Company is
focusing its marketing efforts on secondary markets; however, the ultimate
ability of the Company to successfully sell its signal-averaging products within
such markets is unknown. As a result, the patent acquisition and defense costs
were written-off to an amount that is recoverable over the remaining life of the
patents based on estimated sales levels and undiscounted operating income
projections. These projections are management's best estimates based on
historical data and trends. Other charges total approximately $1,283,000
consisting primarily of allowance for slow-moving inventories of
signal-averaging products, principally those purchased under the Corazonix
manufacturing agreement (see below), certain parts inventory and other inventory
deemed to be significantly impaired. No further write-downs to patent assets or
increases in inventory reserves were made in 1996 and none are expected in the
foreseeable future.
16
<PAGE>
In connection with the Company's ongoing acquisition program, the Company
advanced $545,000 to or on behalf of Phoenix Polymers, Inc. ("Phoenix") as of
December 31, 1994. The advances were supported by two promissory notes with
interest accruing at 8% per annum. The notes were collateralized by a first lien
and security interest in all business assets and technology of the entity. The
notes are convertible, at the Company's option, into 40% of Phoenix's
outstanding common stock. In 1993, the Company had entered into certain capital
lease obligations on behalf of Phoenix for equipment used by Phoenix totaling
approximately $291,000. In December 1994, the Company's Board of Directors voted
to terminate its potential acquisition of Phoenix. The Company recorded a charge
against 1994 earnings of approximately $778,000 as an allowance for losses
related to the advances and equipment lease obligations, net of estimated
proceeds to be obtained from the sale of the equipment. In August 1995, Phoenix
was put into receivership by its creditors and ceased operations. As a secured
creditor, Micron obtained possession of Phoenix's primary assets including the
leased equipment and certain patents relating to Phoenix's proprietary plastics
manufacturing processes. Micron management is currently searching for a buyer
for the assets. No further write-downs are contemplated as management believes
the current allowance is adequate.
Interest Expense
Interest expense for 1996 was comparable to 1995. Interest expense was
approximately $268,000 in 1996 as compared to $263,000 in 1995. The majority of
the interest costs incurred by the Company stem from its borrowings under its
line(s) of credit with a financial institution used to finance inventory and
accounts receivable with a bank.
Acquisitions Expense
In August 1994, the Company elected to terminate acquisition discussions
with Lite Tech, L.P. In connection with the potential acquisition, the Company
had deferred advances and related costs. Due to the termination of acquisition
negotiations, the Company expensed approximately $164,000 to write-off the
previously deferred advances and related acquisition costs.
Income (Loss) and Taxes on Income
The Company had income before taxes of approximately $1,077,000 for the
year ended December 31, 1996 as compared to $1,943,000 in 1995. The decrease in
income in 1996 was due to lower margins on electrophysiology and sensor sales
and increased marketing expense for the new K-3 Cath Lab product lines and
increased environmental maintenance fees related to programs to evaluate its
manufacturing process, employee training, health and safety programs, air and
waste water treatment systems, and to ensure compliance with current and future
federal, state and local regulations as well as to evaluate the adequacy of such
systems to facilitate future growth at the sensor operation.
The Company had income before income taxes of approximately $1,943,000 for
the year ended December 31, 1995 as compared to a loss before income tax benefit
of $3,784,000 for the year ended December 31, 1994. The increase in income in
1995 is due primarily to the restructuring of the ART operations in late 1994
and the lack of significant write-downs of assets that the company experienced
in 1994.
For the year ended December 31, 1996 taxes on income approximate the
statutory rate paid by the Company. The rate is higher than the federal maximum
rate of 34% due to the Massachusetts state income tax of 9% on Micron's
earnings. For the year ended December 31, 1994 the Company received a tax
benefit of approximately $309,000. The Company did not record a current benefit
on the write-down of assets related to the intangible assets and inventory
reserves due to the specific tax rules governing such write-downs and reserves.
Liquidity and Capital Resources
The Company had working capital of approximately $2,891,000 and $2,803,000
and cash and cash equivalents of approximately $232,000 and $398,000 at December
31, 1996 and 1995, respectively. The Company improved its liquidity and working
capital due primarily to the restructuring of the ART operations in late 1994
which significantly helped the Company's return to profitability in 1995. During
1996, working capital decreased primarily due to capital expenditures and
repayments of debt.
In November 1995, the Company obtained funding for a consolidated $3.5
million working capital line of credit and a $375,000 term loan with a bank. The
line of credit is collateralized by the accounts receivable and inventory of ART
and Micron and bears interest at prime plus .75%. The consolidated working
capital line of credit replaced the individual lines of credit maintained by ART
and Micron. Previously, the individual lines of credit maintained by the parent
and its subsidiary hampered the Company's ability to maximize its
credit-worthiness to meet its liquidity needs. The new working capital line of
credit originally matured October 31, 1996, however, the maturity has been
extended to September 30, 1997. The Company is currently negotiating and expects
to obtain an extension on the line of credit.
17
<PAGE>
In August 1995, the Company completed a $600,000 private bond placement.
The bonds are subordinated to the bank, carry an 11% interest rate, and are
payable in 5 years. ART issued the bondholders an aggregate of 279,000 warrants
to purchase ART stock at $3.00 per share as part of the private placement. The
warrants expire 5 years from the date of the bond. 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 September 1995, ART repurchased 48,958 shares of its common stock at
$7.90 a share from a shareholder pursuant to a settlement agreement in
connection with the purchase of Micron by the Company in 1992. The funds
required to meet the repurchase obligation were obtained from cash on hand from
the bond proceeds. The Company intends to hold the shares in treasury at this
time. An additional 16,566 shares were repurchased in the fourth quarter at a
price of $7.13 per share. The funds required to repurchase the shares were drawn
under the Company's working capital line of credit. The shares are held in
treasury and are not expected to be retired.
Net cash provided by operating activities for 1996, 1995 and 1994 was
approximately $2,012,000, $1,252,000 and $62,000 respectively. The changes in
cash provided by operations was due primarily to the changes in net income,
reduction of inventories and increase in accounts payables, during 1996 and
1995.
Net cash used in investing activities in 1996 was approximately $1,141,000,
principally as a result of expenditures on capital equipment for Micron's
manufacturing facility partially offset by the proceeds received from the sales
of investments and capital equipment. Net cash used in investing activities in
1995 was approximately $310,198 as a result of Micron's expenditures for capital
equipment offset by proceeds from the sale of investments.
Capital expenditures during 1996 and 1995 were due primarily to Micron's
need to upgrade and maintain its manufacturing equipment and facilities. During
1996, the Company's capital expenditures were funded from operating cash flows.
Additionally, during 1997 Micron expects to enter into a significant equipment
capital financing for a new water filtration system due to increased
environmental requirements.
As discussed under Environmental Regulation, Micron had approximately
$95,000 and $75,000 accrued at December 31, 1996 and 1995, respectively, to
cover estimated costs to be incurred related to site assessment, monitoring, and
remediation. Management estimates that these costs could approximate from
$95,000 to $225,000 depending upon the final decision by the DEP.
During 1996 and 1995, Micron spent approximately $137,000 and $139,000, on
an extensive program to evaluate its manufacturing process, employee training,
health and safety programs, air and waste water treatment systems, and to ensure
compliance with current and future federal, state and local regulations as well
as to evaluate the adequacy of such systems to facilitate future growth. The
capitalized expenditures are related to future benefits as described below,
whereas the other environmental costs expensed during 1996 and 1995 are normal
recurring expenses associated with industrial producers in the Commonwealth of
Massachusetts. Using the results of the study, Micron expects to undertake a
manufacturing process and air and waste water treatment redesign. The actual
redesign, which will take place over the next year will require the purchase of
capital equipment to upgrade, augment or replace existing manufacturing and
waste treatment equipment. All such expenditures are expected to be funded from
operating cash flow. The Company expects to spend approximately $480,000 for
such capital improvements. It is expected that Micron will benefit from a
certain level of improved efficiency and savings related to recovery and
recycling of water, silver and other chemicals to help offset some of the costs
of the improvements. (See Environmental Regulation and Note 12 to the Financial
Statements).
During 1996, net cash used in financing activities totaled approximately
$1,036,000, principally to pay down credit facilities and long-term debt.
Net cash used in financing activities during 1995 totaled approximately
$567,000, principally as a result of repurchases of redeemable common stock
totaling approximately $505,000 and repayment of debt of approximately $773,000
offset by the receipt of proceeds from a $600,000 private bond placement and
$68,000 in cash received from the exercise of stock options.
For information on the impact of future changes in accounting principles,
see Note 2 to the Consolidated Financial Statements, appearing elsewhere herein.
Inflation
The Company does not believe that inflation in the domestic United States
or international markets in recent years has had a significant effect on its
results of operations.
18
<PAGE>
Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
Forward looking statements made herein are based on current expectations of
the Company that involves a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are made under
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. The factors that could cause actual results to differ materially include:
interruptions or cancellation of existing contracts, impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks and an inability to arrange additional
debt or equity financing.
19
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.............................................21
Consolidated Balance Sheets as of December 31, 1996 and 1995..................22
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994...........................................23
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994.......................24
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994...........................................25
Notes to Consolidated Financial Statements....................................26
20
<PAGE>
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, 1996 and 1995, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arrhythmia
Research Technology, Inc. and Subsidiary as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 21, 1997
21
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
----------- -----------
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .............................................................. 232,135 397,799
Trade and other accounts receivable, net of allowance for doubtful accounts
of $29,864 and $18,820 ............................................................... 4,447,624 3,739,046
Inventories ............................................................................ 2,238,436 2,991,346
Deposits, prepaid expenses and other current assets .................................... 164,879 341,184
------- -------
Total current assets ............................................................. 7,083,074 7,469,375
----------- -----------
Property, plant and equipment, net ........................................................ 3,177.862 2,591.888
Goodwill, net ............................................................................. 1,818,625 1,933,489
Other intangibles, net .................................................................... 99,613 116,365
Deferred income taxes, net ................................................................ 493,767 670,683
Other assets .............................................................................. 291,298 186,235
----------- -----------
Total assets ........................................................................... 12,964,239 12,968,035
=========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Revolving credit facilities ............................................................ 1,158,660 1,938,972
Current maturities of capital lease obligations ........................................ 107,197 81,174
Current maturities of other long-term debt ............................................. 149,130 118,292
Accounts payable ....................................................................... 2,390,188 2,105,928
Income taxes payable ................................................................... 34,161 --
Payable to affiliates .................................................................. -- 30,899
Accrued expenses ....................................................................... 353,101 390,981
------- -------
Total current liabilities ........................................................... 4,192,437 4,666,246
Bonds payable and other long-term debt .................................................... 484,090 672,484
Capital lease obligations, net of current portion ......................................... 187,825 217,466
Deferred revenue .......................................................................... 87,706 49,048
----------- -----------
Total liabilities .................................................................... 4,952,058 5,605,244
----------- -----------
Commitments and contingencies (Note 12) ................................................... -- --
Redeemable common stock ................................................................... -- 10,046
------ ------
Shareholders equity: ..................................................................... -- --
Preferred stock, $1 par value; 2,000,000 shares authorized, none issued ................ -- --
Common stock, $.01 par value; 10,000,000 share authorized;
3,679,216 issued ....................................................................... 36,792 36,792
Additional paid-in-capital ................................................................ 8,909,307 8,899,261
Treasury stock, 116,115 shares at cost .................................................... (878,786) (868,740)
Unearned ESOP compensation (Note 11) ...................................................... (124,991) (167,848)
Retained earnings (accumulated deficit) ................................................... 69,859 (546,720)
----------- -----------
Total shareholders equity ........................................................... 8,012,181 7,352,745
Total liabilities and shareholders equity ........................................... 12,964,239 12,968,035
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-------------- -------------------- ---------------------
1996 1995 1994
-------------- -------------------- ---------------------
<S> <C> <C> <C>
Net sales 24,787,849 22,928,089 17,380,667
Cost of sales 20,114,557 17,947,294 13,388,548
-------------- -------------------- ---------------------
Gross Profit 4,673,292 4,980,795 3,992,119
Selling and marketing 610,352 473,990 1,128,384
General and administrative 2,419,777 2,150,251 2,392,528
Research and development 173,120 182,524 235,274
Amortization of goodwill 114,864 114,864 114,864
Write-down of assets - - 3,751,007
-------------- -------------------- ---------------------
Income (loss) from operations 1,355,179 2,059,166 (3,629,938)
Other income (expense):
Interest expense (268,015) (263,493) (244,044)
Acquisitions expense - - (163,993)
Other, net (9,930) 147,624 253,750
-------------- -------------------- ---------------------
Income (loss) before income taxes 1,077,234 1,943,297 (3,784,225)
Income tax (provision) benefit:
Current (283,739) (359,202) 175,263
Deferred (176,916) (458,869) 133,802
-------------- -------------------- ---------------------
(460,655) (818,071) 309,065
-------------- -------------------- ---------------------
Net income (loss) 616,579 1,125,266 (3,475,160)
============== ==================== =====================
Per share amounts:
Net income (loss) per share 0.17 0.31 (0.95)
============== ==================== =====================
Weighted average number of common and dilutive common
equivalent shares outstanding 3,607,614 3,683,371 3,653,186
============== ==================== =====================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net Retained
Additional Unrealized Unearned Earnings
Common Shares Paid-In Treasury Securities ESOP (Accumulate
----------------------------------------------------------------------------------------------------
Number Amount Capital Stock Gains Compensation Deficit) Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1994 ........... 3,657,216 36,572 7,378,486 (253,564) 1,803,214 8,964,708
Exercise of options ....... 5,000 50 19,950 20,000
Maturity and repurchases of
redeemable common stock . 603,863 603,863
ESOP payments ............. 42,859 42,859
Treasury stock purchase ... (49,181) (363,939) (363,939)
Unrealized securities gain 53,130 53,130
Net loss .................. (3,475,160) (3,475,160)
---------- ---------- ---------- ---------- --------- ---------- ---------- -----------
December 31, 1994 ......... 3,613,035 36,622 8,002,299 (363,939) 53,130 (210,705) (1,671,946) 5,845,461
Exercise of options ....... 17,000 170 67,830 68,000
Issuance of warrants ...... 202,000 202,000
Maturity and repurchases of
redeemable common stock . 627,132 627,132
ESOP Payments ............. 42,857 42,857
Treasury stock purchase ... (65,524) (504,801) (504,801)
Sale of securities ........ (53,130) (53,130)
Net income ................ 1,125,226 1,125,226
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
December 31, 1995 ......... 3,564,511 36,792 8,899,261 (868,740) -- (167,848) (546,720) 7,352,745
Maturity and repurchases of
redeemable common stock . 10,046 10,046
Treasury stock purchase ... (1,410) (10,046) (10,046)
ESOP Payments ............. 42,857 42,857
Net income ................ -- 616,579 616,579
---------- ------- ------- --------- ---------- ---------- ---------- ----------
December 31, 1996 ......... 3,563,101 36,792 8,909,307 (878,786) -- (124,991) 69,859 8,012,181
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... 616,579 1,125,226 (3,475,160)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Write-down of assets ............................................. -- -- 3,751,007
Depreciation ..................................................... 514,123 474,571 501,264
Amortization ..................................................... 152,483 173,414 289,666
Gain on sales of investments ..................................... -- (72,912) (306,210)
(Gain) loss on sales of equipment ................................ 3,291 (62,820) 13,719
Deferred income tax provision (benefit) ......................... 176,916 458,869 (133,802)
Deferred revenue ................................................. 38,658 (36,207) (39,742)
Changes in assets and liabilities (net of effects of write-down of assets):
Trade and other accounts receivable .............................. (708,578) (207,048) 588,313
Inventories ...................................................... 752,910 (434,550) (1,295,482)
Accounts payable, income taxes payable and accrued expenses ...... 280,542 (194,884) 118,071
Payable to affiliates ............................................ (30,899) (16,773) (65,066)
Bonds payable .................................................... 39,935 -- --
Deposits, prepaid expenses and other current assets .............. 176,305 45,472 115,537
--------- --------- ----------
Net cash provided by operating activities ........................ 2,012,265 1,252,358 62,115
--------- --------- ----------
Cash flows from investing activities
Proceeds from sale of investments ...................................... -- 119,787 399,960
Proceeds from sale of equipment ........................................ 6,435 77,822 43,250
Funding of note receivable ............................................. -- -- (108,710)
Capital expenditures ................................................... (1,022,053) (404,229) (534,903)
Changes in other assets ................................................ (105,063) (77,734) (50,118)
Other intangibles ...................................................... (20,867) (25,844) (76,978)
---------- ---------- ----------
Net cash (used in) investing activities ............................ (1,141,548) (310,198) (327,499)
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit facilities .......... (780,312) (193,942) 588.895
Proceeds from (repayments) notes payable ............................... 100,000 (253,000) 253,000
Proceeds from issuance of bonds payable ................................ -- 600,000 --
Principal payments on long-term debt and capital lease obligations ..... (388,879) (325,265) (442,034)
Proceeds from issuance of common stock under stock option plan ......... -- 68,000 20,000
Purchase of treasury stock ............................................. (10,047) (504,801) (363,939)
Reduction of unearned ESOP compensation ................................ 42,857 42,857 42,859
---------- ---------- ----------
Net cash provided by (used in) financing activities ................. (1,036,381) (567,151) 98,781
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ...................... (165,664) 375,009 (166,603)
Cash and cash equivalents at beginning of year ............................ 397,799 22,790 189,393
========== ========== ==========
Cash and cash equivalents at end of year .................................. 232,135 397,799 22,790
======= ======= ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
================================================================================
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
================================================================================
NOTES TO FINANCIAL STATEMENTS
1. Description of Business
Arrhythmia Research Technology, Inc. ("ART") is engaged in marketing
computerized medical instruments for monitoring, analyzing and treating heart
disease. Micron Products Inc. ("Micron"), a wholly-owned subsidiary, 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. Micron also acts as a
distributor of metal snap fasteners, another component used in the manufacture
of disposable medical electrodes.
2. Accounting Policies
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of ART and Micron (collectively the "Company"). All intercompany
balances and transactions have been eliminated in consolidation.
REVENUE 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 that time. 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 at local banks. The Company considers highly liquid investments
with original maturities of three months or less to be cash equivalents.
INVESTMENTS In May, 1993, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". A significant provision
of this statement is the change in accounting and reporting for certain
investments in debt and equity securities. These securities are classified into
one of three categories: held-to-maturity, available-for-sale, or trading.
Held-to-maturity securities are measured at amortized cost and
available-for-sale and trading securities are measured at fair value. Unrealized
holding gains and losses for trading securities are included in earnings.
Unrealized holding gains and losses for available-for-sale securities are
excluded from earnings and reported net of deferred taxes in a separate
component of shareholders' equity until realized. Realized gains and losses are
computed on a specific identified cost basis and included in current period
income. The Company adopted and implemented SFAS No. 115 effective January 1,
1994.
INVENTORIES Inventories are stated at the lower of cost or market. Cost of
finished goods inventory of ECG products is determined using the specific
identification method. Cost of inventories at Micron is determined by the
first-in, first-out method.
CONCENTRATIONS 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.
It is the Company's policy to place its cash and cash equivalents in high
quality mutual funds, marketable equity securities and municipal revenue bonds.
The Company does not believe significant credit risk exists with respect to
these securities.
ADVERTISING EXPENSES. Advertising expenses consist primarily of costs
incurred in promoting the Company's products, printed brochures and other
activities. The company expenses advertising as incurred. The Company's
advertising expense was approximately $89,000, $20,000 and $37,000 in 1996, 1995
and 1994 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 AND OTHER INTANGIBLES 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.
26
<PAGE>
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 (see Note 6).
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. Amortization of software development costs amounted to
$16,047, $42,409, and $47,904 for the years ended December 31, 1996, 1995, and
1994, respectively.
ACQUISITION EXPENSES Acquisition costs are deferred until the related
acquisition is completed, at which time such costs are included in the total
acquisition costs which are allocated to the net assets acquired. Deferred
acquisition costs related to unsuccessful acquisitions are charged to expense in
the period such acquisition is considered terminated.
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 Earnings per share is calculated by dividing
the net income (loss) by the weighted average number of common shares and common
share equivalents outstanding during the year.
RECLASSIFICATIONS Certain prior year financial statement items of the
Company have been reclassified to conform to the current year presentation.
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 In 1995, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 107, "Disclosure about Fair Value
of Financial Instruments," which requires disclosures of fair value information
about financial instruments, whether or not recognized in the balance sheet.
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable and 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 term note, mortgage payable
and bonds payable approximate fair value based on the Company's incremental
borrowing rates.
FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In February 1997, the FASB issued SFAS No. 128, Earnings per Share. This
statement simplifies the computation of earnings per share amounts and specifies
the presentation and disclosure requirements. The Company will be required to
adopt SFAS No. 128 for its fiscal year ended January 31, 1998. Adoption of SFAS
No. 128 is not expected to have a significant effect on the financial
statements.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. This statement consolidates the existing requirements
to disclose certain information about an entity's capital structure. The Company
will be required to adopt SFAS No. 129 for its fiscal year ended January 31,
1998. Adoption of SFAS No. 129 is not expected to have a significant effect on
the financial statements.
3. Acquisitions Activity
Lite Tech, L.P.
In August 1994, the Company elected to terminate acquisition discussions
with Lite Tech, L.P. The Company had entered into a letter of intent with Lite
Tech, L.P. to acquire certain assets for cash and common stock and assume
certain liabilities in a transaction valued at approximately $2,000,000. Due to
the termination, the Company expensed approximately $164,000 during 1994 to
write-off previously deferred advances and related acquisition costs. As of
December 31, 1996, the Company, through its Micron subsidiary, has a net note
receivable from Lite-Tech in the amount of $54,000 for the return of an initial
good-faith deposit. The note receivable is collateralized by a first lien and
security interest in Lite-Tech's accounts receivable. Management believes that
the advances are adequately collateralized and fully recoverable.
27
<PAGE>
4. Inventories
Inventories consist of the following:
December 31,
-------------------------------
1996 1995
----------- ------------
Raw Materials............................ $ 320,736 $ 467,895
Work-in-process.......................... 354,838 277,296
Finished goods........................... 2,475,814 3,359,407
----------- ------------
3,151,388 4,104,598
Allowance for slow-moving inventories.... (912,952) (1,113,252)
----------- ------------
Total................................ $ 2,238,436 $ 2,991,346
=========== ============
Allowance for slow-moving inventories relates principally to finished goods.
5. Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31,
----------------------------
Asset lives 1996 1995
---------------- ------------- ------------
Machinery and equipment........ 5 to 15 years $ 2,984,230 $ 2,170,874
Building and Leaseholds........ 20 years 1,745,354 1,355,814
Furniture and fixtures......... 3 to 4 years 192,580 328,564
------------- ------------
4,922,164 3,855,252
Accumulated depreciation....... (1,744,302) (1,263,364)
============= ============
Total...................... $ 3,177,862 $ 2,591,888
============= ============
The Company had approximately $244,000 and $156,000 of assets under capital
leases, included in machinery and equipment, at December 31, 1996 and 1995,
respectively. Accumulated depreciation on these assets was approximately $29,000
and $25,300 at December 31, 1996 and 1995, respectively. During 1994, equipment
leased by the Company for Phoenix Polymers, Inc. ("Phoenix"), totaling $290,535,
with related accumulated depreciation of $14,527, was written-down to its net
realizable value of $80,000 and is included in other assets as of December 31,
1996 and 1995.
6. Goodwill and Other Intangibles
Goodwill and other intangibles consist of the following:
December 31,
----------------------------
1996 1995
------------- -------------
Goodwill........................ $ 2,323,073 $ 2,323,073
Accumulated amortization........ (504,448) (389,584)
============ ============
$ 1,818,625 $ 1,933,489
============ ============
Patents $ 276,317 $ 257,949
Software development costs...... 217,418 214,918
Accumulated amortization........ (394,122) (356,502)
============ ============
$ 99,613 $ 116,365
============ ============
28
<PAGE>
7. Debt
In November 1995, the Company obtained a new credit facility from a bank
which includes a $3,500,000 working capital line of credit and a $375,000 term
loan. The line of credit is collateralized by the accounts receivable and
inventory of the Company and bears interest at prime plus .75% (9.00% at
December 31, 1996). The working capital line of credit replaced the individual
lines of credit maintained by ART and Micron and matures September 30, 1997. The
balance of the working capital line of credit as of December 31, 1996 and
December 31, 1995 was $1,158,660 and $1,938,972, respectively.
The weighted average interest rate during the year for the Company's credit
facilities was 9%. The new loan agreement contains routine covenants which
require ART to maintain certain specific financial ratios and limit asset
acquisitions to $50,000 or less for ART and $500,000 or less for Micron without
prior written approval. The Company obtained a waiver for exceeding the limit
for asset acquisitions during 1996.
Long-term borrowings, excluding capital lease obligations (See Note 12),
consist of:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
$375,000 term note payable to a bank, bearing interest at
9.00% per annum, payable in monthly installments of $7,820
through, maturity, September 1997, collateralized by Micron
equipment and unallocated ESOP shares........................... $ 84,375 $ 367,188
Bonds payable (see Note 8)......................................... 437,935 398,000
Mortgage payable, bearing interest at 9.25% per annum,
payable in monthly installments of $6,253 through maturity,
August 1998, secured by mortgage on land and building............ 100,000
Other obligations.................................................. 10,910 25,568
Less current maturities............................................ (149,130) (118,292)
----------- ----------
Total bonds and long-term debt............................... $ 484,090 $ 672,464
=========== ==========
</TABLE>
8. Bonds payable
In August 1995, the Company completed a $600,000 private bond placement.
The bonds are subordinated to the new bank, carry an 11% interest rate, and are
payable in five years.
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 expire in five years. The
Company recorded the allocation between the detachable warrants and debt
securities based on their relative fair values, as determined by a third party
appraisal as of the issuance date. Accordingly, the proceeds related to the
warrants are reported as additional paid-in capital and a discount on the debt
securities of $202,000, which is being amortized to interest expense over the
five-year term of the warrants. For the year ended December 31, 1996, the
Company recorded amortization of bond discount of $39,935 and interest expense
of $67,250. The unamortized bond discount remaining as of December 31, 1996 is
$162,065.
9. Income Taxes
The Company reports income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 utilizes a tax liability (or asset)
approach to inter-period tax allocations and requires tax liabilities to be
stated at current effective tax rates.
29
<PAGE>
The income tax provision (benefit) for each of the three years in the
period ended December 31, 1996 consists of the following:
1996 1995 1994
---------- --------- -----------
Current:
Federal....................... $ 283,739 $ 340,346 $ (175,263)
State......................... - 18,856 -
---------- --------- -----------
Total.................... 283,739 359,202 (175,263)
Deferred........................... 176,916 458,869 (133,802)
========== ========= ===========
Total income tax expense (benefit) $ 460,655 $ 818,071 $ (309,065)
========== ========= ===========
Micron's net operating loss ("NOL") carryforwards for income tax purposes
approximated $2,528,000 and $2,953,000 at December 31, 1996 and 1995,
respectively. During the three years ended December 31, 1996, Micron utilized
approximately $425,000, $773,000, and $0 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 the net deferred tax assets were as follows as of December 31:
Deferred tax liabilities: 1996 1995
------------- ------------
Software development costs............. $ (711) $ (5,317)
Net Patent costs....................... - (29,761)
Environmental consulting............... - 17,260
------------- ------------
Total deferred tax liability........... (711) (52,338)
------------- ------------
Deferred tax assets:
Inventories............................ 339,767 381,906
Mortgage participation certificates.... 960,000 960,000
Corazonix Patents...................... 344,983 386,041
Other.................................. 291,782 390,116
Net operating loss carryforwards....... 957,067 1,004,079
Valuation allowance.................... (2,399,121) (2,399,121)
------------- ------------
Total deferred tax asset............... 494,478 723,021
------------- ------------
Net deferred tax asset...................... $ 493,767 $ 670,683
============= ============
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 acquired Micron effective November 1, 1992
which contained significant NOL carryforwards which are limited in any given
year due to restrictions defined in the Internal Revenue Code.
The significant components of the deferred tax expense were as follows for
the years ended December 31:
1996 1995 1994
----------- ------------ -----------
Utilization of net operating
loss carryforwards............ $ 47,012 $ 262,845 $ -
Valuation reserve................. - - (133,802)
Other............................. 129,904 196,024 -
----------- ----------- -----------
Total........................ $ 176,916 $ 458,869 $ (133,802)
=========== =========== ===========
30
<PAGE>
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 from operations before taxes when calculating the tax
provision. The actual income tax provision differs from the statutory income tax
rate (34%) as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- ---------------
<S> <C> <C> <C>
Tax provision computed at statutory rate............ $ 366,260 $ 660,721 $ (1,286,637)
Increases (reductions) due to:
Nondeductible expenses......................... 2,773 3,750 4,015
Amortization of goodwill....................... 39,054 39,054 39,054
State income taxes net of federal benefit...... 52,568 114,546 1,595
Increase in valuation allowance................ - - 906,086
Other.......................................... - - 26,822
============== ============= ===============
Income tax expense (benefit)........................ $ 460,655 $ 818,071 $ (309,065)
============== ============= ===============
</TABLE>
10. Write-down of Assets
In September 1994, the Company recorded a charge against earnings of
approximately $2,973,000, consisting principally of the write-down of certain
intangibles and allowance for slow-moving inventory. The write-down of
intangibles, of approximately $1,690,000, consisted primarily of patent costs
related to the acquisition of substantially all of the assets of Corazonix in
November, 1993 and patent infringement litigation incurred by ART to defend its
signal-averaging patents. In general, sales of signal-averaging products have
declined since 1990. The Company's management believes that the primary market
for its patented signal-averaging products has become saturated. The Company is
focusing its marketing efforts on secondary markets; however, the ultimate
ability of the Company to successfully sell its signal-averaging products within
such markets is unknown. As a result, the patent acquisition and defense costs
were written-down to an amount that is recoverable over the remaining life of
the patents based on estimated sales levels and undiscounted operating income
projections. These projections are management's best estimates based on
historical data and trends. Other charges total approximately $1,283,000
consisting primarily of an allowance for slow-moving inventories of
signal-averaging products, principally those purchased under the Corazonix
manufacturing agreement (see below), certain parts inventory and other inventory
deemed to be significantly impaired. Increases in inventory reserves for $30,000
and $0 were made in 1996 and 1995 for slow-moving parts inventory. No further
write-downs to patent assets or increases in inventory reserves are expected in
the foreseeable future.
In connection with the Company's acquisition program, the Company advanced
$545,679 to or on behalf of Phoenix Polymers, Inc. ("Phoenix") through December
31, 1994. The advances were supported by two promissory notes with interest
accruing at 8% per annum. The notes were collateralized by a first lien and
security interest in all business assets and technology of the entity. The notes
were convertible, at the Company's option, into 40% of Phoenix's outstanding
common stock. In 1993, the Company entered into certain capital lease
obligations on behalf of Phoenix for equipment used by Phoenix totaling
approximately $291,000. In December 1994, the Company's Board of Directors voted
to terminate its potential acquisition of Phoenix. The Company recorded a charge
against 1994 earnings of approximately $778,000 as an allowance for losses
related to the advances and equipment lease obligations, net of estimated
proceeds to be obtained from the sale of the leased equipment. In August 1995,
Phoenix was petitioned into receivership by its creditors and ceased operations.
As a secured creditor, Micron obtained possession of Phoenix's primary assets
including the leased equipment and certain patents relating to Phoenix's
proprietary plastics manufacturing processes. Micron management is currently
searching for a buyer for the assets. No further write-downs are contemplated as
management believes the current allowance is adequate.
31
<PAGE>
11. Employee Benefit Plans
Under the Micron Reorganization Plan, an Employee Stock Ownership Plan ("ESOP")
was established. The ESOP is noncontributory 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 Reorganization 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 $42,857, $42,857 and
$42,859 during the years ended December 31, 1996, 1995, and 1994, respectively.
The Company sponsors an Employee Savings and Investment Plan under Section
401(k) of the Internal Revenue Service Code covering all eligible employees of
the Company. Employees can contribute up to 15% of their eligible compensation
or up to the maximum allowable by the IRS. The Company does not make any
matching contributions.
12. 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 $60,000 annually.
Electrophysiology Products Contract
Effective April 1, 1994, ART and Prucka Engineering, Inc. ("Prucka"), the
manufacturer of the CardioLab and CardioMapp products (the "Products"), executed
an agreement related to ART's exclusive distribution of the Products. Under the
agreement, during the distribution period which expired December 31, 1996,
purchase orders for Products were received in ART's name; Prucka manufactured
and invoiced ART for the Products at a predetermined discount and received
payment from ART; and ART invoiced customers and received payments. Thereafter,
ART will receive commissions on certain Products sold through December 31, 2002.
During 1997 and 1998, ART will receive a 4% commission on net sales of
CardioLab systems and accessories sold anywhere in the world, up to a ceiling of
$10,000,000 in total annual net sales. From January 1, 1999 through December 31,
2002, ART will receive a commission of 3% of net sales of CardioLab systems sold
anywhere in the world, up to a ceiling of $10,000,000 in total annual net sales.
ART will receive a 4% commission on net sales of CardioMapp products and
accessories sold anywhere in the world up to a ceiling of $10,000,000 in total
annual net sales for the year 1997, the final year in which ART will receive
commissions for CardioMapp products. ART will receive 25% of the commissions it
would otherwise be entitled to receive for revenues attributable to Prucka
products that exceed $10,000,000.
Unaudited pro forma results of operations for the Company, as if the
aforementioned activity had been consummated on January 1, 1996, are as follows
(in thousands):
Actual Proforma
Year Ending Year Ending
-------------- -------------
Net Revenues $ 24,788 $ 10,627
Cost of Sales........... 20,115 6,660
-------------- -------------
Gross Profit............ $ 4,673 $ 3,967
============== =============
Legal Proceedings
In October 1996, plaintiffs Susan and Kevin McGann filed suit in the
Philadelphia Court of Common Pleas naming 216 defendants, including ART and
Micron Medical Products Inc. ("MMPI"). Plaintiff Susan McGann claims to be
suffering Type-1 latex allergy as a result of having worn latex gloves in
connection with her duties as an emergency room nurse from June, 1990. A
dissolved subsidiary of MMPI at one time distributed latex gloves. MMPI was
merged with and into Micron in 1993. The complaint involves allegations of
negligence, strict liability, breach of implied warranty of merchantability,
breach of implied warranty of fitness for a particular purpose, breach of
express warranty, misrepresentation, fraudulent concealment, and violation of
unfair trade practice/consumer protection laws. At this time, ART and MMPI are
not required to respond to the complaint and have been granted an extension
until informed by plaintiff's counsel that all 216 defendants have been served.
The presiding judge has indicated that the suit may be discontinued with respect
to such defendants as are able to execute a form of affidavit indicating a
sufficient lack of involvement with the matters alleged in the suit. ART and
MMPI will submit such affidavits. ART's and MMPI's attorneys have stated that it
is not possible to express an opinion with respect to whether the action will be
discontinued or, if it is not discontinued, as to the likelihood of the outcome
of the matter.
32
<PAGE>
Environmental
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 ground water 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 minimum 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 contained an historical overview of past uses of the site and its
surrounding area. The facility is located in the center of a heavily developed
industrial area and use of the site and surrounding properties predates the
early 1900's. Micron has occupied the site from 1982 to the present. 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. During February, 1993, the representatives
of the DEP visited the site. 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.
As a condition of the waiver approved by the DEP, Micron was required to
prepare a five-year plan of remediation for the property. Micron retained an
environmental consulting firm to organize, design, and implement a plan of
remediation and to represent Micron in its dealings with the regulatory
authorities. Upon the completion of these Phase II activities Micron will apply
for final approval and clearance from the DEP. The Massachusetts Contingency
Plan allows closure of sites only after a condition of "no significant risk" is
demonstrated. If the DEP determines that the Company needs to implement the last
phase of remediation (Phase III), the Company could incur approximately $150,000
to $200,000 of additional clean-up costs to remove contaminated property as
estimated by the environmental engineering firm hired to represent the Company
in its dealings with the DEP. Although the ultimate outcome is uncertain until
Phase II is completed, as of December 31, 1996, the engineering firm and
management of the Company believe that Phase III remediation will not be
required.
During 1996 and 1995, Micron spent approximately $137,000 and $139,000, on
an extensive program to evaluate its manufacturing process, employee training,
health and safety programs, air and waste water treatment systems, and to ensure
compliance with current and future federal, state and local regulations as well
as to evaluate the adequacy of such systems to facilitate future growth. The
capitalized expenditures are related to future benefits as described below,
whereas the other environmental costs expensed during 1996 and 1995 are normal
recurring expenses associated with industrial producers in the Commonwealth of
Massachusetts. Using the results of the study, Micron expects to undertake a
manufacturing process and air and waste water treatment redesign. The actual
redesign, which will take place over the next year will require the purchase of
capital equipment to upgrade, augment or replace existing manufacturing and
waste treatment equipment. All such expenditures are expected to be funded from
operating cash flow. The Company expects to spend approximately $480,000 for
such capital improvements. It is expected that Micron will benefit from a
certain level of improved efficiency and savings related to recovery and
recycling of water, silver and other chemicals to help offset some of the costs
of the improvements
Capital Leases
The Company leases equipment under agreements which are classified as
capital leases and expire on various dates. The lease agreements generally
provide purchase options at the end of the original lease. Future minimum lease
payments under noncancelable leases consist of the following.
33
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Capitalized
Fiscal Year Leases
- ---------------------------------- ----------
1997.............................. $ 133,200
1998.............................. 123,248
1999.............................. 49,197
2000.............................. 27,769
2001.............................. 22,639
Thereafter........................ 1,887
----------
Total minimum lease payments...... $ 357,940
Less amounts representing interest (62,919)
----------
$ 295,021
Less current portion.............. 107,196
==========
Long-term obligations under
capital leases................. $ 187,825
==========
Operating Leases
The Company leases certain facilities and equipment under non-cancelable
lease arrangements. During 1996, the Company leased 4,900 square feet of office
space in an office building in Austin, Texas and 18,800 square feet of
manufacturing and quality control space in an industrial building in Fitchburg,
Massachusetts. The lease on the office space will expire in November 1998 and
the manufacturing facility lease will expire in July 1997. Rent expense under
all operating leases was approximately $195,559, $170,000 and $132,000 in 1996,
1995 and 1994, respectively.
Future minimum operating lease payments as of December 31, 1996 are as follows:
Operating
Year Leases
- ---------------------------- ------------
1997....................... $ 126,870
1998....................... 64,600
1999....................... -
2000....................... -
2001....................... -
============
Total.................. $ 191,470
============
13. Net Income (Loss) per share
The following table reconciles the number of common shares shown as
outstanding on the balance sheet with the number of common and common equivalent
shares used in computing primary earnings per share for the years ended December
31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Common shares outstanding........................... 3,563,101 3,564,511 3,613,035
Effect of using weighted common and
common equivalent shares outstanding.............. 353 36,827 40,151
Effect of shares issuable to option holders......... 44,160 82,033 -
========== =========== ===========
Shares used in computing primary earnings per share. 3,607,614 3,683,371 3,653,186
========== =========== ===========
</TABLE>
The difference between shares for primary and fully diluted earnings per
share was not significant in any year.
34
<PAGE>
14. Supplemental Cash Flows Information
Cash paid for income taxes and interest for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income taxes........................................... $ 230,000 $ 440,513 $ 136,050
============ ============ ============
Interest............................................... $ 276,719 $ 256,878 $ 175,990
============ ============ ============
Non-cash activities:
1996 1995 1994
---- ---- ----
Charges to allowance for doubtful accounts............. $ 6,503 $ 122,256 $ 191,586
============ ============ ============
Capital asset lease additions and related obligation... $ 87,790 $ 47,635 $ 185,667
============ ============ ============
</TABLE>
Non-cash portion of Write-down of assets:
1994
------------
Patents........................ $ 1,689,516
Inventories.................... 1,181,497
Note receivable................ 436,731
Deposits on equipment.......... 100,000
Leased assets, net............. 196,008
Other.......................... 147,255
-----------
Total.......................... 3,751,007
===========
15. 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
$30,000, $43,000 and $49,000 for years 1996, 1995 and 1994. The amounts owed to
this firm at the end of 1996, 1995 and 1994 were approximately $21,000, $23,000,
and $37,000, respectively.
Cardio Digital Inc. ("CDI") has four shareholders who are also shareholders
of the Company. Royalties to CDI were $10,500, $8,400, and $10,950 for years
1996, 1995, and 1994. The amounts owed to CDI at the end of 1996, 1995 and 1994
were $10,500, $8,400, and $10,950, respectively.
During the years 1996, 1995, and 1994 healthcare coverage premiums of
$5,900, $5,300, and $6,300 were paid on behalf of a Director of the Company in
exchange for consulting services. During 1994, a Director of the Company
received approximately $2,400, for medical consulting services.
In October, 1994, the Marshalled Cherubs Trust loaned the Company $100,000,
with interest accruing at 11% per annum, under a demand note. The Marshalled
Cherubs Trust is for the benefit of the son of a director and shareholder.
However, the director holds no voting or dispositive power with respect to
Company shares held by the Trust. The note, plus accrued interest, was repaid in
August 1995.
16. Stock Options
The Company has reserved 250,000 shares of its Common Stock for issuance to
officers and key employees pursuant to a 1987 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, which was $3.00 to $6.50 per
share for all options outstanding and granted under the Option Plan.
35
<PAGE>
Transactions under the Option Plan are summarized as follows:
1996 1995 1994
---------- -------- --------
Options outstanding at beginning of year.. 240,750 131,250 150,250
Granted................................... - 130,000 -
Forfeited................................. - - -
Terminated................................ 63,750 20,500 19,000
---------- -------- --------
Options outstanding at end of year........ 177,000 240,750 131,250
---------- -------- --------
Options exercised to date 2,000 2,000 2,000
---------- -------- --------
Available for grant at end of year........ 71,000 7,250 116,750
========== ======== ========
Exercisable at end of year................ 64,200 52,550 48,950
========== ======== ========
During 1989 and 1988, options outside the Option Plan (the "Non-plan
options") were granted by the Board of Directors to six employees and an
independent sales person. These Non-plan options were for 41,250 shares at an
exercise price ranging from $2.00 to $4.00, the approximate market price at the
date of grant. The options were approved by the shareholders and have all
expired. During 1991, options for 219,000 shares, expiring in 1996, at an
exercise price of $4.00 were granted to the Directors, the President and three
employees. During 1994, options for 144,000 shares, expiring in 2004, at an
exercise price of $3.00, were granted to eight current Directors. Additionally,
options to purchase 5,200 shares of common stock, expiring in 1996, at an
exercise price of $6.00, were granted to a former officer of the Company under a
separation agreement. In 1996, the shares were terminated pursuant to a letter
amendment to the original separation agreement. During 1995, Non-plan options
for 29,000 shares, expiring in 2005, at an exercise price of $3.00 were granted
to two key officers of the Company.
During 1993, options for 48,000 shares at an exercise price of $4.00 were
granted to two directors. The options vest at 1,000 per month to an aggregate of
24,000 per director. At the date of the grant the market price was $5.75. The
difference between the grant price and the market price is compensation which is
being amortized over the vesting period. Total compensation expense related to
these options were recognized in the prior years. Compensation expense recorded
during the years ended December 31, 1996, 1995 and 1994 was $0, $22,750 and
$29,750 respectively.
Transactions relative to Non-plan options are summarized as follows:
1996 1995 1994
----------- ---------- -----------
Options outstanding at beginning of year.... 353,700 366,700 222,500
Granted..................................... 29,000 149,200
Exercised................................... 17,000 5,000
Terminated.................................. 156,700 25,000 -
------- ------ -------
Options outstanding at end of year.......... 197,000 353,700 366,700
======= ======= =======
Exercisable at end of year.................. 182,500 331,950 363,700
======= ======= =======
The Company has applied Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, in
accounting for their stock option plans. Accordingly, no compensation expense
has been recognized for the plans. Had compensation cost for the plans 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, ART's net
income would have decreased by the proforma amounts indicated below, for the
years ended December 31, 1996 and December 31, 1995:
1996 1995
---- ----
Net income - as reported............ $ 616,579 $ 1,125,226
========== ============
Net Income - pro forma.............. $ 580,389 $ 1,088,658
========== ============
Net income per share - as reported.. $ .17 $ .31
========== ============
Net income per share - pro forma.... $ .16 $ .30
========== ============
36
<PAGE>
The fair value of each stock option granted is estimated on the date of
grant using the option-pricing method with the following weighted average
assumptions: dividend yield of 0.0%, expected volatility of 65%, risk-free
interest rate of 5.81%, and an expected life of 5.8 years.
The underwriter of the June 1991 public offering was granted warrants to
purchase 75,000 shares at $4.40 per share, expiring in 1996. The Common Stock to
be issued upon exercise of the warrants was registered with the Securities and
Exchange Commission under Form S-3 during 1993. The underwriter exercised
warrant rights and shares were issued for 15,000 shares of common stock during
1993. The underwriter's warrants expired unexercised in June 1996. In August
1995, warrants were issued to bondholders to purchase an aggregate of 279,000
shares of common B stock at $3.00 per share. The bondholder's warrants expire
five years from the date of the bond.
17. Export Sales and Significant Customers
The following table sets forth the geographic distribution of the Company's
net sales:
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
United States................... $ 15,935,126 $ 16,380,540 $ 11,813,557
Europe.......................... 4,829,713 4,325,860 2,938,187
Canada, Mexico & South America.. 1,587,372 1,078,263 1,210,068
Far East ....................... 2,303,520 1,101,015 1,349,310
--------- --------- ---------
Other........................... 132,118 42,341 69,545
======= ====== ======
Net Sales...................... 24,787,849 22,928,089 17,380,667
========== ========== ==========
During the year ended December 31, 1996 three major customers accounted for
32%, 23% and 11% of net sales of Micron. There were no single significant
customers for ART during the three years in the period ended December 31, 1996.
18. Significant Fourth Quarter Adjustments
There were no significant fourth quarter adjustments during 1996.
37
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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
- --------------------------------------------------------------------------------
Anthony A. Cetrone....... 68 Chairman of the Board of Directors, Chief
Executive Officer of Micron, Director
E.P. (Lou) Marinos....... 54 President and Chief Executive Officer, Director
Eric K. Y. Chan, Ph.D.... 39 Vice President of Engineering
Nancy C. Garbade......... 49 Secretary and General Counsel
Julius Tabin, Ph.D....... 77 Director
Paul F. Walter, MD....... 59 Director
Russell C. Chambers, MD.. 53 Director
Michael A. McManus, Jr... 53 Director
Lawrence S. Black........ 57 Director
Robert A. Simms.......... 58 Director
The Directors are divided into three classes with rotating three-year
terms. Dr. Chambers, Mr. Cetrone, and Mr. Simms have been elected to serve as
Directors until the 1999 annual meeting of shareholders. Dr. Walter, Mr. Black,
and Mr. McManus have been elected to serve until the 1997 annual meeting of
shareholders. Dr. Tabin and Mr. Marinos have been elected to serve as Directors
until the 1998 annual meeting of shareholders. The Company's executive officers
are appointed by the Board of Directors and serve at the pleasure of the Board.
Robert A. Simms was appointed as Chairman of the Board during January, 1993
and resigned as Chairman in October 1996. Mr. Simms had been a director of the
Company since April 1990. Mr. Simms has been chairman of Simms Capital
Management. Ltd. since 1984.
E.P. (Lou) Marinos was appointed President and Chief Executive Officer of
the Company in March 1995. Mr. Marinos has 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.
Anthony A. Cetrone has been President of Micron sine 1988 and chairman of
its Board from June 1990 to the present, Mr. Cetrone also served as President
and Chief Executive Officer of the Company from January 1993 to March 1995. Mr.
Cetrone was appointed Chairman of the Board in November 1996.
Nancy C. Garbade has been Secretary of the Company since March 1988 and
General Counsel since January 1990.
Eric K. Y. Chan, Ph.D. has been Vice President of Engineering since April
1993, and was Director of Engineering from August 1991.
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.
Michael A. McManus, Jr. has been a director of the Company since October
1994. He has been President and Chief Executive Officer of New York Bancorp Inc.
since 1991 and a member of its Board of Directors since 1990. He was elected
Vice Chairman of the Board of Directors of New York Bancorp Inc. in 1991.
Lawrence S. Black has been a director of the Company since October 1994. He
is the Chairman and founder of Black & Company, Inc., investment bankers. Mr.
Black is also a director of International Yogurt Company and Mt. Bachelor Corp.
38
<PAGE>
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
<TABLE>
<CAPTION>
Long-term Compensation
-----------------------
Annual Compensation Awards Payouts
-----------------------------------------------------------------
All
Stock Long-term Other
Name and Principal Position Year Salary Bonus Options(1) Options Incentive Compensation
(sh) Payouts
- --------------------------------------------- ----- --------- -------- ---------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
E. P. Marinos, President and Chief Executive
Officer 1996 $ 100,000 $ 2,000 - - $ - $
Anthony A. Cetrone, President, Micron
Products Inc. 1996 $ 98,000 17,118 - - - -
E.P. Marinos, President and Chief Executive
Officer 1995 $ 92,300 $ - - 80,000(1) $ - $ -
Anthony A. Cetrone, President Micron
Products, Inc. 1995 $ 98,000 $ 21,907 5,250 29,000(1) $ - $ -
E.P. Marinos, President and Chief Executive
Officer 1994 $ 38,215 $ - - 18,000(2) $ - $ -
Anthony A. Cetrone, President Micron
Products, Inc. 1994 $ 98,000 $ 22,075 21,000 18,000(2) $ - $ 628
Wayne Schroeder, Former Chief Operating
Officer 1994 $ 95,833 $ - 26,250 5,200 $ - $ 10,790
</TABLE>
(1) Mr. Marinos and Mr. Cetrone were granted 60,000 and 20,000 options to
purchase shares, respectively, under the Option Plan. The shares vest at
the rate of 20% per year for five years until fully vested. The exercise
price approximated the market price on the date of grant. Mr. Marinos and
Mr. Cetrone were granted 20,000 and 9,000 options to purchase shares at an
exercise price of $3.00, respectively, outside the Option Plan. Twenty-five
percent of the shares vest immediately and the remainder vest at
twenty-five percent on each anniversary date, until fully vested. The
shares granted outside the Option Plan were approved by the shareholders.
The market price at the date of grant was $3.00.
(2) Options for the purchase of 18,000 shares at $3.00 per share were granted
to all current directors of the Company, at the Annual Meeting of
Shareholders on October 25, 1994. The options were immediately exercisable
on the date of grant. In the event the value of the Common Stock reaches
$6.00 per share, then the exercise price of one share of the Common Stock
shall be the fair market value of the Common Stock on the date the Option
is granted less the difference between the average closing price of the
Common Stock for the twenty trading days immediately preceding the date on
which the Optionee gives notice of his intention to exercise an option and
$6.00 per share. There is a floor of $1.00 per share.
OPTION GRANTS IN LAST FISCAL YEAR
There were no option grants/SARS in fiscal year 1996.
39
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value Realized Number of Unexercised Options Value of Unexercised In-the-Money
Shares (Market Price at Held at December 31, 1996 Options at December 31, 1996 (1)
-------------------------------- -----------------------------------
Acquired Exercise Less
Name on Exercise Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ------------- ------------------ ------------------------------ ----------------- -----------------
<S> <C> <S> <C> <C> <C> <C>
E.P. Marinos........... - $ - 40,000 58,000 $ - $ -
Anthony A. Cetrone..... - $ - 66,700 31,300 $ - $ -
</TABLE>
(1) Calculated on the basis of the closing sale price per share for the Common
Stock on the American Stock Exchange of $2.50 on December 31, 1996
Mr. David Jenkins, previous President and Chairman of the Board of
Directors, submitted his resignation effective on January 25, 1993.. In March,
1994, Mr. Jenkins exercised options for 5,000 shares at $4.00 per share. In
August 1995, Mr. Jenkins exercised options for 12,000 shares at $4.00 per share.
In September 1995, Mr. Jenkins exercised the balance of his options for 5,000
shares at $4.00 per share.
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 1996.
Employment Arrangements
Anthony A. Cetrone
------------------
Anthony A. Cetrone entered into a four-year employment agreement with the
Company, effective November 24, 1992, which provides for his employment as
President of Micron at a base salary of $98,000 per year. In addition to his
base compensation, Mr. Cetrone was entitled to annual bonus compensation in the
amount of 5% of Micron's net income after taxes above $500,000 and after
goodwill amortization. Mr. Cetrone has agreed not to compete with Micron for a
period of five years after the expiration or termination of his employment.
E.P. Marinos
------------
E. P. Marinos entered into an employment contract with the Company, dated
as of January 1, 1996. The contract terminates on December 1, 1998 and is
automatically renewable for successive one-year terms. Under the terms of the
contract, the Company shall pay to Mr. Marinos a salary of $100,000 per annum
and he is entitled to participate in such bonus compensation and benefit plans
as the Board of Directors may institute from time to time. In connection with
his employment agreement, Mr. Marinos has entered into a confidentiality
agreement with the Company and has agreed not to compete with the Company for a
period of three years after the termination of his employment.
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.
40
<PAGE>
Options to purchase an aggregate of 204,009 shares of Common Stock at an
exercise price of $3.00 to $6.50 per share have been granted under the Option
Plan to twenty current and former employees. Of these, options for 2,000 shares
were exercised and options to purchase 48,500 shares granted to eight former
employees were canceled due to termination of employment or death of the
employees. During 1993, 2,000 shares were exercised. As of December 31, 1995,
included in the total are options to purchase 98,000, 98,000, 25,000, and 30,000
shares, granted to E.P. Marinos, Anthony Cetrone, Nancy C. Garbade, and William
E. Cooper, respectively. Mr. Coopers' options terminated upon his resignation in
1996. During the year ended December 31, 1996, no options were granted. During
the year ended December 31, 1995, options to purchase 130,000 shares were
granted to eight employees. During the year ended December 31, 1994, no options
to purchase shares were granted.
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, 1996, options
for 55,251 shares have been exercised and options for 240,700 shares have been
terminated.
During 1988 and 1989 options to purchase 18,750 shares were granted to four
employees, all of which have been exercised or terminated as of December 31,
1993. During 1988, options to purchase 7,500 shares were granted to Wayne
Schroeder at an exercise price of $2.00 per share. The options were exercised
during 1993.
During 1990, options to purchase 25,000 shares of Common Stock were granted
to Robert A. Simms, at an exercise price of $4.00 per share, all of which are
currently exercisable. Options to purchase an aggregate of 125,000 shares were
granted to David Jenkins, from 1988 to 1991, at exercise prices ranging from
$2.00 to $4.00 per share, of which 95,500 were terminated in January, 1993 when
Mr. Jenkins resigned as President of the Company. Also in January, 1993, Mr.
Jenkins exercised options for 7,500 shares at $2.00, and relinquished the
balance of his options, except for 22,000 options in which he is fully vested,
which were granted him as a director of the Company. In March, 1994, Mr. Jenkins
exercised 5,000 options at an exercise price of $4.00 per share. In August 1995,
Mr. Jenkins exercised 12,000 options at an exercise price of $4.00 per share. In
September 1995, Mr. Jenkins exercised the balance of his options for 5,000
shares at an exercise price of $4.00 per share.
During 1991, options to purchase 25,000 shares of common stock were granted
to three employees, of which 17,500 shares have been exercised or terminated.
In March 1991, five-year options to purchase 24,000 shares were granted to
each of the six current directors of the Company (including Mr. Jenkins),
exercisable at a rate of 1,000 shares per month at an exercise price of $4.00
per share. During 1991, options to purchase 25,000 shares at $4.00, expiring in
1996, were granted to three employees.
In March 1993, options for 48,000 shares at an exercise price of $4.00 were
granted to two directors. The options vest at 1,000 per month to an aggregate of
24,000 per director. At the date of the grant the market price was $5.75. The
difference between the grant price and the market price is compensation which is
being amortized over the vesting period. All compensation expenses related to
these options were recognized in the prior years. Compensation expense recorded
during 1995 and 1994 was $22,750 and $29,750, respectively.
In October 1994, options for 144,000 shares, expiring in 2004, at an
exercise price of $3.00, were granted to eight current Directors. The shares
were immediately exercisable. Additionally, options to purchase 5,200 shares of
common stock, expiring in 1996, at an exercise price of $6.00, were granted to a
former officer of the Company under a separation agreement.
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. Twenty-five percent of the shares vest immediately and the remaining
shares vest at twenty-five percent per year on each anniversary date until fully
vested.
Medical Consultants
The Company previously retained medical consultants who agreed to advise
the Company from time to time of advances in technology and in the respective
areas of their expertise. In August 1994, the Company canceled or did not
continue payment under the consulting retainer contracts due to their
expiration. The aggregate compensation paid by the Company to consultants under
their agreements during 1994 was $58,533. During 1995 and 1996 the Company used
consultants on a specific project basis. Amounts paid to consultants during 1995
and 1996 were not material.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 21, 1997 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.
41
<PAGE>
Beneficial
Ownership (1)
-------------------
Name and Address of Beneficial Owner Number Percent
----------------------------------------------------------------------------
R.C. Chambers Irrevocable Trust (2)..................... 222,350 5.68
1807 Lake Street
Lake Charles, Louisiana 70601
Russell C. Chambers, M.D. (3)........................... 58,450 1.49
Julius Tabin, Ph.D...................................... 38,375 .98
Paul F. Walter, M.D..................................... 69,375 1.77
Robert A. Simms......................................... 134,276 4.04
Anthony A. Cetrone (4).................................. 139,676 3.43
E.P. Marinos............................................ 40,000 1.02
Michael A. McManus, Jr.................................. 18,000 .46
Lawrence S. Black....................................... 19,500 .50
All officers and directors as a group ( 11 persons) (5). 563,851 14.41
1. Unless otherwise noted, each person has sole voting and investment power
with respect to the shares of Common Stock beneficially owned.
2. The beneficiary of all of the trust's income is Dr. Chambers' son. Dr.
Chambers son has a 50% ownership interest in the assets held by the trust
and Dr. Chamber's wife's estate has the remaining 50% ownership interest.
Dr. Chambers disclaims any beneficial ownership of the Common Stock held by
the trust.
3. 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.
4. Includes 67,567 shares held by the Micron Employee Stock Ownership Plan
over which Mr. Cetrone shares voting power as Trustee.
5. Includes options to purchase shares of Common Stock, all of which are
exercisable at December 31, 1996, as follows:
Name Number
- ------------------------------------------- -----------------
Russell C. Chambers, M.D(1)............... 18,000
Julius Tabin(1)........................... 18,000
Paul F. Walter, M.D.(1)................... 18,000
Robert A. Simms(1)........................ 18,000
Nancy C. Garbade.......................... 9,000
Anthony A. Cetrone........................ 66,700
Eric Chan................................. 9,000
E.P. Marinos.............................. 40,000
Michael A. McManus, Jr.................... 18,000
Lawrence S. Black......................... 18,000
=================
Total................................ 232,700
=================
(1) 24,000 shares expired unexercised on March 17, 1996 for each Mr. Chambers,
Mr. Tabin, Mr. Walter, and Mr. Simms.
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.
42
<PAGE>
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 for the years ended December 31, 1996, 1995 and 1994 were
$10, 500, $8,400, and $10,950, respectively.
During 1993 ART forgave advances of approximately $20,225 made to Calcasieu
Technology Research and Investment Group ("CTRIG") The advances were principally
for rent paid on behalf of CTRIG and health insurance premiums.
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, 1996, 1995 and 1994, the law firm
billed the Company approximately $30,000, $43,000 and $49,000 respectively, for
legal services rendered and patent prosecution costs. The 1993 payments included
fees for services in connection with the Corazonix litigation. The amounts owed
to the firm at December 31, 1996, 1995, and 1994 were approximately $21,000,
$23,000, $37,000 respectively.
Dr. Paul Walter, a director and shareholder of the Company, was engaged as
a medical consultant to the Company during 1994 and 1993. For the years ended
December 31, 1994 and 1993, fees paid to Dr. Walter amounted to approximately
$2,400 and $3,600, 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, 1994,
1993 and 1992, health insurance premiums paid on Dr. Chambers behalf amounted to
approximately $5,300, $6,300, and $7,400, respectively.
In October, 1994, the Marshalled Cherubs Trust loaned the Company $100,000,
with interest accruing at 11% per annum, under a demand note. The loan, plus
accrued interest, was repaid in August 1995. The Marshalled Cherubs Trust is for
the benefit of the Jason Chambers, the son of Dr. Russell C. Chambers, a
director and shareholder of the Company. However, Dr. Chambers holds no voting
or dispositive power with respect to Company shares hold by the Trust.
43
<PAGE>
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 page19 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 Exhibit
-----------------------------
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
10.33 Employment Agreement, dated March 1, 1996, between the Company and E.
P. Marinos
(b) Reports filed in the fourth quarter on Form 8-K:
None
44
<PAGE>
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
March 28, 1997 on its behalf by the undersigned, thereunto duly authorized.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
BY: /s/ E. P. Marinos
------------------
E. P. Marinos
President & Chief Executive Officer
Chief Financial 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
- --------------------------- ------------------------------------ --------------
Chairman of the Board, ART, Inc.,
President & Chief Executive Officer, March 28, 1997
/s/ Anthony A. Cetrone Micron Products Inc.
- ---------------------------
Anthony A. Cetrone
/s/ Russell C. Chambers Director March 28, 1997
- ---------------------------
Russell C. Chambers
/s/ Julius Tabin Director March 28, 1997
- ---------------------------
Julius Tabin
/s/ E. P. Marinos Director March 28,1997
- ---------------------------
E. P. Marinos
/s/ Michael McManus Director March 28, 1997
- ---------------------------
Michael A. McManus, Jr.
/s/ Lawrence S. Black Director March 28, 1997
- ---------------------------
Lawrence S. Black
/s/ Paul F. Walter Director March 28, 1997
- ---------------------------
Paul F. Walter
/s/ Robert A. Simms Director March 28, 1997
- ---------------------------
Robert A. Simms
45
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -------- ------------------------------------------------------------------
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 (a)
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 (f)
46
<PAGE>
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)
10.23 Agreement and Plan of Merger, dated November 25, 1992, among
Arrhythmia Research Technology, Inc., 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
22.0 Subsidiaries (f)
27.0 Financial Data Schedule
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)
- --------
(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 10-K as filed with the Commission in
March, 1994.
(j) Incorporated by reference from Form 10-K as filed with the Commission in
March 1995
47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE
To the Shareholders
Arrhythmia Research Technology, Inc.
Our report on the consolidated financial statements of Arrhythmia Research
Technology, Inc. and Subsidiary is included on page 21 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the financial statement schedule listed in Item 14(a)(2) herein. ..In our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 21, 1997
48
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to
beginning of costs and Balance at
Description period expenses Deductions end of period
- -------------------------------------------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1996............................... $ 18,820 $ 17,547 $ 6,503 $ 29,864
============ ========== =========== ===========
1995............................... $ 126,665 $ 14,411 $ 122,256 $ 18,820
============ ========== =========== ===========
1994............................... $ 71,344 $ 191,586 $ 136,265 $ 126,665
============ ========== =========== ===========
Allowance for slow-moving inventories:
1996............................... $ 1,113,232 $ - $ 200,280 $ 912,952
============ ========== =========== ===========
1995............................... $ 1,182,897 $ - $ 69,645 $ 1,113,232
============ ========== =========== ===========
1994............................... $ - $1,182,897 $ - $ 1,182,897
============ ========== =========== ===========
</TABLE>
49
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 232,135
<SECURITIES> 0
<RECEIVABLES> 4,477,488
<ALLOWANCES> (29,864)
<INVENTORY> 2,238,436
<CURRENT-ASSETS> 7,083,074
<PP&E> 4,922,164
<DEPRECIATION> (1,744,302)
<TOTAL-ASSETS> 12,964,237
<CURRENT-LIABILITIES> 4,192,237
<BONDS> 484,900
0
0
<COMMON> 36,792
<OTHER-SE> 8,909,307
<TOTAL-LIABILITY-AND-EQUITY> 12,964,239
<SALES> 24,787,849
<TOTAL-REVENUES> 24,787,849
<CGS> 20,114,557
<TOTAL-COSTS> 610,352
<OTHER-EXPENSES> 2,707,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268,015
<INCOME-PRETAX> 1,077,234
<INCOME-TAX> 460,655
<INCOME-CONTINUING> 616,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 616,579
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0
</TABLE>
