<PAGE>
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, 1998 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)
1101 SOUTH CAPITAL OF TEXAS HIGHWAY 78746
BUILDING G, SUITE 200 (ZIP CODE)
AUSTIN, TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(512) 347-9640
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
On March 24, 1999, there were 3,502,901 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 24, 1999, the aggregate market value
of the voting stock of the registrant held by non-affiliates was $3,976,539
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, 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 signal-averaging product line is comprised of the 1200
EPX-TM-, the LP-Pac Q-TM-, the PREDICTOR IIc-TM-, and the
PREDICTOR-Registered Trademark- I. ART also manufactures and sells the
proprietary K3 cardiac catheterization product line. Additionally, ART was
the exclusive distributor for the CardioMapp-TM- and CardioLab-TM-, Prucka
Engineering, Inc.'s electrophysiology products through December 31, 1996.
From January 1, 1997 through December 31, 2002, ART will receive a royalty on
certain products sold by Prucka. (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 the reduction in sales of the electrophysiology products. ART o
received royalties on sales of the CardioLab product of 4% of net receipts on
the first $10,000,000 and 1% on any excess in 1998. ART will receive a
royalty of 3% on the first $10,000,000 and 25% of the royalties it would
otherwise be entitled to receive for revenues attributed to Prucka products
in excess of $10,000,000 from January 1, 1999 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. In 1997, Micron acquired the rights to an electrode
assembly machine which it now manufactures and leases to its sensor and snap
customers. Micron was incorporated in the State of Massachusetts in 1972 and is
located in Fitchburg, Massachusetts.
The following table sets forth for the periods specified, the net sales
derived from the products of ART and its subsidiary Micron (collectively the
"Company"):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 % 1997 % 1996 %
-------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Sensors & Snaps............ $8,444,870 90 $ 9,495,653 80 $ 9,240,474 37
CardioLab & CardioMapp..... 485,331 5 1,332,099 11 14,611,720 59
SAECG equipment............ 429,300 5 673,414 6 935,655 4
K-3 CathLab................ 1,095 0 386,021 3 - -
-------------------- --------------------- --------------------
Total.................. $9,360,596 100 $11,887,187 100 $24,787,849 100
-------------------- --------------------- --------------------
-------------------- --------------------- --------------------
</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
SOFTWARE MODIFICATIONS
CATH LAB. On April 14, 1997, ART acquired from Astro-Med, Inc. ("Astro-Med")
substantially all of the assets related to the following products: (i) the
basic cardiac catheterization monitoring system; (the "K3-I"); (ii) the
stand-alone hemodynamic analysis package (the "K3-II"); (iii) the network
ready hemodynamic analysis package (the "K3-III"); and (iv) the control work
station (the "K3-WI") (collectively, the "K3 Products"). The K3 cath lab 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 drop-down menu format. At
the same time the Company entered into the
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agreement with Astro-Med, it also entered into an agreement with Softheart,
Inc. ("Softheart"), the developer of the original software for the K3-II and
K3-III, to convert the software from a DOS-based system to a Windows-TM- NT
platform. ART paid to Softheart $138,275 and the project was substantially
completed in 1998. The Company determined, however, that the K3 required
additional modifications to make it competitive and began work in September
1998 on the development of a new state-of-the-art cath lab system.
SIGNAL AVERAGED ECG. 1998 was a transitional period with respect to ART's
signal averaged ECG devices as well. The Company completed the conversion
from DOS to Windows-based software with respect to its PREDICTOR-Registered
Trademark- systems. The Company has integrated it new PREDICTOR software with
software developed by NORAV MEDICAL Ltd. which performs stress and ECG
testing. The new device, called the "Tri-Pac, is currently undergoing
pre-release final validation. Additionally, the PREDICTOR software is being
combined with a Holter monitor which was developed and manufactured by ELA
Medical ("ELA"). ELA has filed for FDA approval with respect to its Holter
monitor and the combined system should be available for sale in the late
Spring of 1999.
ACQUISITION OF HIGH SPEED ELECTRODE ASSEMBLY MACHINES
Pursuant to an asset purchase agreement, dated March 5, 1997, Micron
acquired from Newmark, Inc. substantially all of its assets used in the
business of manufacturing, marketing, assembling, leasing and selling medical
stud and eyelet application machines. Acquisition of the electrode assembly
machines provides Micron with a complimentary product, which it can lease to
existing sensor and snap customers. In February 1999, Micron purchased from
Scoville Fasteners, Inc., 33 additional attaching machines for $64,565.
Micron is now the exclusive provider of medical stud and eyelet application
machines.
DESCRIPTION OF BUSINESS
SIGNAL-AVERAGING ELECTROCARDIOGRAPHIC (SAECG) PRODUCTS
Sudden cardiac death afflicts over 400,000 individuals in the United States
alone each year. As described in an Expert Consensus on Signal-Averaged
Electrocardiography published in the Journal of the American College of
Cardiology (Vol. 27, No. 1, 1996), these occurrences are due to sustained
ventricular tachycardia (abnormally rapid heartbeat) or ventricular
fibrillation (very fast, completely irregular heartbeat) which severely
affect the capability of the heart's pumping chambers or ventricles.
Ventricular arrhythmia's are distinguished from arrhythmia's affecting the
atrium (the non-pumping chambers of the heart), which generally are not life
threatening. The majority of ventricular arrhythmia's occur in patients who
have survived a prior heart attack or have significant coronary artery
disease. However, individuals with primary electrical disturbances of the
heart comprise an additional subset of patients. Thus, various techniques
have evolved to detect and treat individuals at risk of the development of
sustained ventricular arrhythmias which may cause marked interference with
the proper functioning of blood circulation, resulting, in some cases, in
sudden cardiac death.
By analyzing the electrical signals from the hearts of animal and human
survivors of heart attacks, researchers have found that, in contrast to the
relatively discrete, narrow high amplitude signals recorded from normal
subjects, low amplitude, high frequency signals persisted well after the
heartbeats were recorded in approximately 20% to 25% of heart attack survivors.
These latter signals became known as "late potentials." Since directly recorded
late potentials had been documented in subjects with malignant ventricular
arrhythmias, the hypothesis arose that late potentials would be recorded in
subjects with, or at risk of, sustained ventricular arrhythmias. After
successful surgical treatment of ventricular arrhythmias, these late potential
signals disappeared, which indicated an association between these abnormal
signals and the underlying condition.
Signal-averaged surface (non-invasive) electrocardiography has become well
established as a means of evaluating and diagnosing those individuals at risk
for potentially lethal ventricular arrhythmias as documented by the Expert
Consensus on SAECG (noted above). The steps involved in obtaining a SAECG
include: recording, digitization, averaging, amplification, and filtering.
Conventional surface electrocardiography generally cannot detect late
potentials. A major limitation stems from the inability to isolate the low
amplitude signals. Amplification of the standard electrocardiogram to detect
late potentials results in contamination by coincident electrical noise. The
SAECG processes enable late potentials to be amplified and enhanced, while
eliminating undesired electrical noise. At the 1996 AHA Sessions, a
significant study showed that SAECG could be an effective diagnostic tool for
patients with coronary heart disease (CHD) even before they have had a heart
attack. Patients with CHD approximate 15.0 million. An SAECG study involving
458 patients who had an acute myocardial infarction was published in the
American Heart Journal in 1997. In the absence of late potentials, the
probability of having no arrhythmic event was 99% in the first year, and 96%
in five years. On the other hand, the presence of late potentials found in
the SAECG represents the strongest single predictor of future arrhythmic risk
in patients after a first acute myocardial infarction, with a 4.6-fold
increase in the risk of sudden death or sustained ventricular tachycardia.
The results of
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research presented at a meeting at the 1999 American College of Cardiology
indicate that T-wave alternans and late potential seem to be independent
predictors for ventricular tachyarrhythmias in patients with post-myocardial
infarctions. Although T-wave alternans had a higher sensitivity, late
potentials had a higher specificity. It was concluded that a combination of
both tests could identify high risk patients more accurately.
1200 EPX
The 1200 EPX is a specialized high resolution ECG system used to detect
late potentials which cannot be detected by conventional surface ECG
instruments. The 1200 EPX is used in conjunction with an MS-DOS based personal
computer utilizing the patented Simson bi-directional Butterworth filtering
technique. The 1200 EPX acquires, digitizes, averages and filters the cardiac
signals providing late potential analysis with its time domain and
frequency-domain analysis software. ART has the rights to the use of the Simson
bi-directional Butterworth filtering technique for the detection of late
potentials in the terminal portion of the QRS cycle. This method, 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 1200
EPX. All software modules for the 1200 EPX are also available for the LP-Pac Q,
with the exception of Heart Rate Variability analysis. See "EPSoft-TM- Software
Library".
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
The primary thrust in software development efforts since mid-1997, has been
the conversion of DOS-based products into the Windows 95 environment.
ART's research and development staff has developed breakthrough digital signal
processing techniques to enhance the overall analytical power of the SAECG test.
Two such new developments are the IntraSpect-TM- and Early Potential Analysis
software packages. IntraSpect-TM-, which is now protected by a newly allowed
United States patent, permits visualization and quantification of electrical
fragmentation within the entire QRS complex (entire ventricular depolarization
cycle), using individual-lead Acceleration Spectrum Analysis (ASA). Hence,
micropotential detection is no longer limited to the `late potential' region.
Furthermore, patients with conduction delay problems (i.e. "bundle branch
block") can have SAECG analysis performed on them. This covers 25% of a patient
population which previously could not be analyzed with SAECG.
The Early Potential Analysis software has been designed specifically for P
wave-triggered SAECG acquisition and analysis and is used as a research tool in
assessing patients at risk for atrial fibrillation and flutter. ART continues to
offer other optional post-processing signal averaging software packages for the
1200 EPX and LP-Pac Q, including Cal-ABS-TM- Plus software for individual lead
time domain analysis; and Heart Rate Variability (HRV) software for the 1200
EPX. These 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 1998.
4
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K3 CATH-LAB
On April 14, 1997, ART acquired from Astro-Med, Inc. substantially all of the
assets related to the following products (i) the basic cardiac catheterization
monitoring system (the "K3-I"), (ii) the stand-alone hemodynamic analysis
package (the "K3-II"), (iii) the network ready hemodynamic analysis package (the
"K3-III"), and (iv) the control work station (the "K3-WI") (collectively, the
"K3 Products"). The purchase price for the assets was $350,000, payable $50,000
at closing and a promissory note in the amount of $300,000. The note is due and
payable not later than the third anniversary of the closing date. Interest only
payments are payable on the last day of each quarter during the first year after
the closing and, thereafter, principal and interest payments, in an amount
necessary to fully amortize the then-outstanding balance of the note in equal
quarterly payments payable on the last day of each quarter.
Simultaneously with the execution of the Asset Purchase Agreement, ART entered
into a Manufacturing Agreement with Astro-Med. The term of the agreement began
on April 14, 1997 and continues for three years; provided, however, that ART
may, on sixty days prior written notice to Astro-Med, terminate the
Manufacturing Agreement after the date of the first anniversary. During the term
of the Manufacturing Agreement, Astro-Med will manufacture the K3 Products at
prices which are specified in the Agreement.
The K3 cath lab is a 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. In April 1997, the Company entered into an
agreement with Softheart, Inc., the developer of the original software, to
convert the software from a DOS to a Windows NT platform. ART has paid Softheart
$138,275 to date and the conversion is substantially complete. ART determined,
however, that the K3 Products required significant additional modifications to
make them competitive. Work was commenced in September 1998 on a new
state-of-the-art cath lab system.
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
displayed 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, Texas and was distributed exclusively by
ART until December 31, 1996. Pursuant to an agreement dated April 1, 1994,
during 1997 and 1998, ART received 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 also received 25% of the commissions it would otherwise be
entitled to receive for revenues attributable to CardioLab systems that
exceeded $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. ART
will receive 25% of the commissions it would otherwise be entitled to receive
for revenues attributable to the Prucka products that exceed $10,000,000.
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.
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In addition to the traditional ECG tests, disposable electrodes incorporating
Micron's sensor elements are used in connection with stress and "Holter" tests.
The Holter test utilizes a portable ECG heart monitoring device that is worn by
a patient for up to 24 hours during the patient's normal activity and is
designed to record data from the patient's heart. The stress test monitors the
human heart during rest followed by exercise and again at rest. Both the Holter
and stress tests employ silver/silver chloride disposable electrodes.
METAL SNAP FASTENERS
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 shipments 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.
HIGH SPEED ELECTRODE ASSEMBLY MACHINE
Pursuant to an asset purchase agreement, dated March 5, 1997, Micron acquired
from Newmark, Inc. substantially all its assets used in the business of
manufacturing, assembling, marketing, leasing and selling medical stud and
eyelet application machines. The purchase price for the acquired assets was
$400,000, payable as follows: (i) cash paid on account in the amount of $58,368;
(ii) cash in the amount of $141,632 paid on March 31, 1997; and (iii) a
non-interest bearing promissory note in the principal sum of $200,000, which was
paid in 1998.
At the same time it entered into the asset purchase agreement, Micron executed
a manufacturing agreement with Newmark pursuant to which Newmark will continue
to manufacture and service the machines on behalf of Micron for a period of one
year for a specified price. The manufacturing agreement is automatically
renewable for successive one-year terms.
In February 1999, Micron purchased from Scovill Fasteners, Inc., 33 additional
attaching machines for $64,565. Micron is now the exclusive provider of medical
stud and eyelet application machines.
The acquisitions of the electrode assembly machines provide Micron with a
complimentary product, which it can lease to existing sensor and snap customers
The following table shows sales of sensors, snaps and snap machines by Micron
for the years ended December 31:
<TABLE>
<CAPTION>
1998 % 1997 % 1996 %
------------------ ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Sensors................... $6,817,112 81 $7,938,325 84 $7,838,438 85
Snaps..................... 1,514,521 18 1,511,558 16 1,402,036 15
Snap Machines............. 113,237 1 45,770 - - -
------------------ --------------------------------------
Total.................. $8,444,870 100 $9,495,653 100 $9,240,474 100
------------------ ------------------ -----------------
------------------ ------------------ -----------------
</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 site assessment, including an analysis of
groundwater samples for the presence of certain petroleum-based products,
metals and solvents. The site assessment indicated levels of petroleum
products and metals in excess of the maximum allowable standards. Micron
filed a release report and a Preliminary Assessment and Interim Site
Classification form with the Massachusetts Department of Environmental
Protection ("DEP"). The DEP classified the site as a disposal site within the
meaning of the Massachusetts Oil and Hazardous Material Release Prevention
and Response Act and identified Micron as a potentially responsible party
with liability.
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On January 21, 1993, Micron filed its Phase I Limited Site Investigation and
Waiver Application ("Application"). The Application contained a 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. In January, 1998, Micron filed a Tier Classification, Tier II
Extension & Tier II Transfer Transmittal Form to allow further subsurface
investigation and a consequent risk assessment to be performed. During the site
assessment activities, Micron obtained knowledge of a previously unseen
extractable petroleum hydrocarbon (EPH) release to soil in an amount above the
reportable concentration in September, 1998,and filed the required 120-Day
Release Notification with the DEP on January 5, 1999. In this release
notification, Micron stated its intent to address this release condition as part
of the ongoing response actions at the site.
On January 19, 1999 Micron filed a Tier II Extension & Tier II Transfer
Transmittal Form notifying the DEP that its response actions will not be
completed before the deadline imposed by the previous submission. This extension
summarized site investigation activities accomplished through 1998 and Micron's
intention to complete the necessary Phase II site activities by March 31, 1999,
subject to acceptable findings and any fiscal budgetary constraints.
Based on the results of site activities to date, it does not appear that current
operations at Micron are contributing to any contamination identified at the
site. Although the contaminant concentrations above the MCP standards are on the
site, these contaminants seem to be from prior operations, unknown sources
and/or upgradient off-site sources and may not mandate active remediation. Based
on available information, the institution of an Activity and Use Limitation
(AUL), governing certain activities at the site, will be used to manage the
residual contamination. A method 3 Risk Characterization will be necessary to
demonstrate that a condition of no significant risk exists at the site will be
necessary to support the filing of this limitation.
To complete the required Method 3 Risk Characterization and related activities
and to conduct the anticipated 3-5 year groundwater monitoring program possibly
required, the Company could incur costs of approximately $90,000 to $175,000
over the next five (5) years, as estimated by its environmental engineering
firm. 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. Although the ultimate outcome is uncertain until the remainder of
the work is completed, the engineering firm and management of the Company
believe that no further remediation will be required.
During 1997, Micron spent approximately $700,000 for capital improvements
related to modification and upgrading of its manufacturing processes primarily
related to replacement of its waste treatment equipment. Continued work to
increase savings related to recovery and recycling of water, silver and other
chemicals to offset some of the costs of the improvements is expected during
1999.
In response to an anonymous phone call, all Micron records related to its
wastewater treatment operation and expenses were subpoenaed by the Attorney
General of Massachusetts for investigation in 1997. No further action was taken
by the state's judiciary action until February, 1999 when a similar subpoena was
issued to the environmental engineering firm used by Micron. Conversations
between the assistant district attorney's office and Micron legal counsel are in
process. Both the Company and its environmental law counsel perceive a favorable
outcome to the proceedings.
OPERATIONS
During 1998, 1997 and 1996, Micron spent approximately $102,500, $320,000 and
$137,000, respectively 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 1998, 1997, and 1996.
7
<PAGE>
GENERAL
CUSTOMERS AND SALES
ART sells its electrocardiographic, and cardiac catheterization, products to
hospitals where purchasing decisions are typically made on the advice of
physicians affiliated with such hospitals. The electrocardiographic products are
also marketed to individual physicians and clinics. ART's sales cycle, with
respect to hospitals, which generally commences at the time a hospital issues a
request for proposal and ends upon submission of a purchase order, may take up
to nine months. The sales cycle with respect to physicians and clinics is
significantly shorter, typically 30 to 60 days. 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 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, 1998, four major customers accounted for 32%, 25%, 15% and 11% of net sales
of Micron.
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,
------------------------------------------------------------------------------
1998 % 1997 % 1996 %
------------- ------- -------------- ------- ------------- -------
<S> <C> <C> <C>
United States.......................... $4,898,191 52 $ 7,156,957 60 $15,935,126 64
Europe................................. 2,678,710 28 2,726,142 23 4,829,713 20
Canada, Mexico & South America......... 1,557,356 17 1,715,115 15 1,587,372 6
Pacific Rim............................ 173,966 2 236,654 2 2,303,520 9
Other.................................. 52,373 1 52,319 - 132,118 1
------------- ------- -------------- ------- ------------- -------
Total.............................. $9,360,596 100 $11,887,187 100 $24,787,849 100
------------- ------- -------------- ------- ------------- -------
------------- ------- -------------- ------- ------------- -------
</TABLE>
INSTALLATION AND SERVICE
ELECTROCARDIOGRAPHIC, AND CARDIAC CATHETERIZATION
INSTALLATION. When a purchase order is received for SAECG products, ART's
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. 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.
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 all standard applications of the software.
When a K3 Cath-Lab is installed, two to four days of training is provided by ART
personnel.
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. Customers may
renew the warranty at a cost of 60% of the price of the system. All K3 repairs
are made by Astro-Med personnel.
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.
8
<PAGE>
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.
CARDIAC CATHETERIZATION SYSTEMS
ART is dependent upon Astro-Med as the sole manufacturer of the K3 product
line.
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. Micron's medical snap
fasteners are currently manufactured by Scovill Fastners, 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 nine domestic and 37 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 of SAECG
products. All sales of the K3 products have been initiated by ART's internal
sales force. ART, however, is currently in the process of building a direct
sales force domestically. ART believes that a direct sales force will have a
greater commitment to its products and will be more economical.
ART directly employs sales, marketing and management personnel who are
responsible for making sales presentations and working in conjunction with 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 are well established, have substantially greater financial and
other resources and have established reputations for success in the development,
sale and service of products. ART believes that its competitive advantage is
based on a number of factors, including price, ease of use, and clinical
acceptance of the methodology employed in ART's signal-averaging products.
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.
Competitors for the K3 include the MAC-Lab/Cath Lab Manager from
9
<PAGE>
Marquette, Inc., the Horizon 9000 WS from Mennen Medical, the Q-Cath-DS from
Quinton Instrument, the Cathcor C from Siemens Medical, and the Series IV
from Witt Biomedical. Most of these competitors are well established and have
substantially greater financial and other resources than ART. ART believes
that any competitive advantage it may have is based exclusively on price.
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
Beginning in mid-1997, ART's engineering and research and development efforts
focused primarily on (i) moving DOS software packages in the SAECG and K3
cath-lab product lines into the Windows environment and (ii) updating the
quality system to reflect and comply with new FDA GMP and ISO 9001 quality
system procedures. ART currently employs one engineer engaged in software
development and one technician for customer telephone support, warranty repairs,
and limited manufacturing. ART has also engaged an outside consultant to effect
the conversion from DOS to Windows with respect to the PREDICTOR software and to
assist in its cath lab development effort. For the fiscal years ended December
31, 1998, 1997, and 1996, ART had research and development expenses of
approximately $343,000, $371,000, and $173,000, respectively, in connection with
engineering, regulatory, 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.
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 and CardioLab 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
10
<PAGE>
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 $3,000,000 per occurrence and $3,000,000 per year in the
aggregate.
PATENTS AND PROPRIETARY TECHNOLOGY
ART
ART holds an exclusive licience under the Simson Patent, which covers the
signal-averaging and filtering technologies, which are utilized in the 1200 EPX,
LP-Pac Q, and PREDICTOR I. The Simson Patent was issued in December 1983. ART is
the assignee of three other U. S. Patents, two of which expire in July 2001 and
the other in January 2002. ART holds foreign patents issued in Austria,
Australia, Belgium, Canada, France, United Kingdom, Holland, Italy,
Liechtenstein, Spain, Sweden, Switzerland and Germany. ART believes that patent
protection is important to its business and anticipates that it will apply for
additional patents as deemed appropriate.
As part of the acquisition of substantially all the Corazonix assets in 1993,
including those pertaining to high resolution ECG, ART acquired three additional
patents related to time and frequency domain analysis of electrocardiogram
signals. ART acquired U.S. Patent No. 5,117,833 entitled "BI-SPECTRAL FILTERING
OF ELECTROCARDIOGRAM SIGNALS TO DETERMINE SELECTED QRS POTENTIALS," (the
"Bi-Spec Patent") which expires in 2009. The Bi-Spec Patent, which has been
licensed to Hewlett Packard Company on a non-exclusive basis, may provide ART
with a superior means of detecting late potentials. The Company is currently
evaluating potential benefits. ART also acquired three additional patents. 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 and trademark to a fifth U. S. patent.
United States Patent No. 5,609,158 entitled "Apparatus and Method for
Predicting Cardiac Arrhythmia by Detection of Micropotentials and Analysis of
all ECG Segments and Intervals," which covers a frequency domain analysis
technique for SAECG data, was allowed by the U.S. Patent Office in March 1997.
This technique is embodied in the IntraSpect software product, and has been
found to compliment the Simson methodology by increasing the overall predictive
value of the SAECG test. Additionally, patients with conduction delay problems
(i.e., "bundle branch block") can have SAECG analysis performed on them. This
includes 25% of the patient population which previously could not be analyzed
with SAECG.
Rapid technological development in the medical industry results in extensive
patent filings and a rapid rate of issuance of new patents. Although ART
believes that ART's products do not and will not infringe on patents or violate
proprietary rights of others, it is possible that its existing patent rights may
not be valid or that infringement on existing or future patents or proprietary
rights may occur. In the event that ART's products infringe patents or
proprietary rights of others, ART may be required to modify the design of its
products or obtain a license. There can be no assurance that ART will be able to
do so in a timely manner upon acceptable terms and conditions. In addition,
there can be no assurance that ART will have the financial or other resources
necessary to enforce or defend a patent infringement or proprietary rights
violation action. Moreover, if ART's products infringe patents or proprietary
rights of others, ART could, under certain circumstances, become liable for
damages, which could have a material adverse effect on ART. ART does not own or
have any license to any patents relating to the K3 technology. ART does not own
or have any license to any patents relating to the CardioLab or technology
incorporated therein 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.
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, 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.
11
<PAGE>
EMPLOYEES
ART has seven full-time employees and one part-time employee, including five
administrative, sales, marketing and supervisory personnel, and two engineering
personnel. Micron employs forty-two full time employees and two part-time
employees, including thirteen administrative, sales and supervisory personnel,
eleven quality control personnel and eighteen production personnel.
ITEM 2. PROPERTIES
From January through October 1998, ART leased approximately 4,000 square feet
of space in an office building in Austin, Texas from an unaffiliated landlord
with monthly rental payments of approximately $7,100. Beginning in November
1998, ART leased approximately 1,500 square feet of new office space in Austin
from an unaffiliated landlord, with monthly rental payments of $2,527.
The manufacturing facility and offices of Micron are located in an industrial
area in Fitchburg, Massachusetts. The facility consists of two buildings. The
first building, which was purchased in April 1994, consists of a 22,000 square
foot, six story building. The second building, which was purchased in September
1996 for $480,000, is a 94,000 square foot, two story building. During 1996 and
through August of 1997 Micron rented 18,800 square feet of space. The average
monthly rent in 1996 and 1997 was $7,100. There is no further obligation on
leased property.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. Annual meeting of shareholders was held on September 28, 1998
b. E. P. Marinos and Julius Tabin were elected as directors of the Company
at the meeting. Anthony A. Cetrone, Russell C. Chambers and Paul F.
Walter continued to serve as directors.
E. P. Marinos 3,239,467 FOR, 35,563 WITHHELD
Julius Tabin 3,244,067 FOR, 35,963 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.
12
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW
--------- --------
<S> <C> <C>
Year Ended December 31, 1997
1st Quarter..................... $ 3 3/16 $ 2
2nd Quarter..................... 2 3/8 1 7/8
3rd Quarter..................... 3 1/16 1 3/4
4th Quarter..................... 2 11/16 1 1/2
Year Ended December 31, 1998
1st Quarter..................... $ 2 $ 1 3/16
2nd Quarter..................... 2 1/16 1 3/16
3rd Quarter..................... 1 13/16 13/16
4th Quarter..................... 1 3/16 13/16
</TABLE>
As of March 24, 1999 the number of recordholders of ART's common stock was
estimated to be 1,300. On March 24, 1999 the closing price for the common stock
on the American Stock Exchange was $1 1/8.
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 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,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue............................................. $ 9,360 $ 11,887 $ 24,788 $ 22,928 $ 17,381
Cost of sales....................................... 6,127 7,932 20,115 17,947 13,389
---------- ---------- --------- ----------- ----------
Gross profit................................... 3,233 3,955 4,673 4,981 3,992
Selling and marketing............................... 247 499 610 474 1,128
General and administrative.......................... 2,141 2,491 2,420 2,150 2,393
Research and development............................ 343 371 173 183 235
Amortization of goodwill............................ 130 134 115 115 115
Write-down of assets................................ 192 - - - 3,751
---------------------------------------------------------------
Income (loss) from operations................... 180 460 1,355 2,059 (3,630)
Acquisitions expense................................ - - - - (164)
Interest and other expenses, net.................... (117) (378) (278) (116) 10
---------- ---------- --------- ----------- ----------
Income (loss) before income taxes.................. 63 82 1,077 1,943 (3,784)
Income tax benefit (expense)........................ (199) (50) (460) (818) 309
---------- ---------- --------- ----------- ----------
Net income (loss)............................... $ (136) $ 32 $ 617 $ 1,125 $ (3,475)
---------- ---------- --------- ----------- ----------
---------- ---------- --------- ----------- ----------
Basic and diluted net income (loss) per share.... $ (.04) $ .01 $ .17 $ .31 $ (.95)
---------- ---------- --------- ----------- ----------
---------- ---------- --------- ----------- ----------
Weighted average number of shares outstanding........ 3,561 3,563 3,563 3,683 3,653
---------- ---------- --------- ----------- ----------
---------- ---------- --------- ----------- ----------
<CAPTION>
BALANCE SHEET DATA: DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Total assets........................................ $ 9,990 $ 11,832 $ 12,964 $ 12,968 $ 12,711
Long term obligations (including current portion)... $ 1,000 $ 1,466 $ 928 $ 1,089 $ 1,018
Redeemable common stock............................. $ - $ - $ - $ 10 $ 637
Working capital..................................... $ 2,282 $ 2,293 $ 2,891 $ 2,803 $ 1,149
Shareholders' equity................................ $ 7,959 $ 8,087 $ 8,012 $ 7,353 $ 5,845
</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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
----------------------------
<S> <C> <C> <C>
Revenue............................................. 100.0% 100.0% 100.0%
Cost of sales....................................... 65.5 66.7 81.0
Gross profit........................................ 34.5 33.3 19.0
Selling and marketing............................... 2.6 4.2 2.5
General and administrative.......................... 22.9 21.0 9.8
Research and development............................ 3.7 3.1 0.7
Amortization of goodwill............................ 1.4 1.1 0.5
Write-down of assets................................ 2.0 - -
Other, net.......................................... (1.3) (3.2) (1.1)
----------------------------
Income before income taxes.......................... 0.6 0.7 4.4
Income tax provision................................ (2.1) (0.4) (1.9)
----------------------------
Net income (loss)............................. (1.5%) 0.3% 2.5%
----------------------------
----------------------------
</TABLE>
REVENUE
Revenue decreased by approximately $2,527,000 or 21% for the year ended
December 31, 1998 as compared to 1997. The decrease in revenue is attributable
primarily to the change in the Pruka contract for 1998 as discussed below and
because the Company could not sell the cath lab. The Company is in the process
of fixing this software and hopes to be able to market it by June of 1999.
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 were resold
to the customers. The fiscal year ended 1996 was the final year in which ART was
the exclusive distributor under the Prucka contract. In 1997, ART ceased to be
responsible for marketing, selling, invoicing and collecting for Prucka
products. In 1997 and 1998, ART received 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 of approximately $485,000 and $463,000,
respectively. 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 received 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.
Revenue decreased by approximately $12,900,000 or 52% for the year ended
December 31, 1997 as compared to 1996. The decrease in revenues is attributable
primarily to the change in the Prucka contract for 1997, as discussed above.
Revenue increased by approximately $1,860,000 or 8% for the year ended
December 31, 1996 as compared to the year ended December 31, 1995. 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, and decrease of approximately $260,000 in 1997
from 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.
15
<PAGE>
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,
-------------------------------------------------------------------
1998 % 1997 % 1996 %
-------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Sensors & Snaps................. $8,444,870 90 $ 9,495,653 80 $ 9,240,474 37
CardioLab & CardioMapp.......... 485,331 5 1,332,099 11 14,611,720 59
SAECG equipment................. 429,300 5 673,414 6 935,655 4
K-3 Cath-Lab.................... 1,095 - 386,021 3 - -
-------------------- -------------------- --------------------
Total....................... $9,360,596 100 $11,887,187 100 $24,787,849 100
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
</TABLE>
COST OF SALES
Cost of sales as a percentage of revenue decreased from 66.7% in 1997 to 65.5%
in 1998. The decrease is due primarily to the Prucka contract. ART exclusively
sold and distributed the electrophysiology products on behalf of Prucka. 1997
was the first year in which ART was not the exclusive distributor under the
Prucka contract. In 1998 and 1997, the Company received a commission on sales of
approximately $485,000 and $463,000, respectively and did not report the gross
revenues or the related cost of sales for CardioLab and CardioMapp products
sales, of which approximated $14,612,000 for the year ended December 31, 1996.
SELLING AND MARKETING
Selling and marketing expenses as a percentage of sales decreased from 4.2%
in 1997 to 2.6% in 1998. The decrease is primarily due to the software
problems with the K-3 cath-lab and the decrease in sales due to the Prucka
contract.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses as a percentage of sales increased from
9.8% in 1996 to 21.0% in 1997 and to 22.9% in 1998 due to the decrease in
sales.
RESEARCH AND DEVELOPMENT
Research and Development costs decreased from $371,000 in 1997 to $343,000 in
1998 and increased $200,000 from 1996 to 1997. The decrease was due to the fact
that the Company had fewer people engaged in research and development
activities. The increase in gross dollars from 1996 as compared to 1997 is
due to the Company's contract with consulting firms to develop a windows
based version of the Cath-Lab and the Predictor line of products. Research
and development costs have not been material to the operations of Micron.
INTEREST EXPENSE
Interest expense was approximately $220,000 in 1998 as compared to $238,000 in
1997. The majority of the interest costs incurred by the Company stem from its
borrowings under its line(s) of credit and term loan with an institution used to
finance inventory and accounts receivable.
INCOME TAXES
For the years ended December 31, 1998 and 1997 taxes on income were higher
than the federal statutory rate of 34% due primarily to the Massachusetts state
income tax of 9.5% on Micron's earnings.
PROVISION FOR ASSET IMPAIRMENTS
In the second quarter of 1998, ART made a provision of $453,529 to write off
goodwill relating to the Astro-Med acquisition ($172,201), to increase the
inventory reserve of the K-3 Cath Lab inventory ($131,328), to increase the
reserve for inventory for SAECG inventory ($130,000), and to reflect certain
costs associated with reducing and consolidating the Austin operation with
Micron, ($20,000). The per share effect, after taxes, was a charge of $.08
per share and without the provision, net income would have been reported as
earnings per share of $.05 for that quarter and $.04 for the year.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of approximately $2,282,000 and $2,293,000 and
cash and cash equivalents of approximately $558,000 and $215,000 at December 31,
1998 and 1997, respectively. During 1998 Micron paid off three leases as well as
its revolver. Micron reduced expenses and improved on the yields of its
manufacturing operation. ART moved to smaller quarters in November and also
downsized from eleven to seven people. During 1996 and 1997, working capital
decreased primarily due to capital expenditures, implementation of a new waste
water treatment system, and repayments of debt.
The Company has a consolidated $3.5 million working capital line of credit.
The line of credit is collateralized substantially all assets of the company
and bears interest at prime plus .75%. In 1997, the Company obtained a
$400,000 consolidated term loan. The working capital line of credit and term
loans mature December 15, 1999. At December 31, 1998, the revolving credit
balance was zero and the term loan balance was $141,670.
On April 14, 1997, ART acquired from Astro-Med, Inc. substantially all of the
assets related to the K3 Products. A promissory note payable in the amount of
$300,000 was issued in the acquisition of these products. The note is due and
payable not later than the third anniversary of the closing date. Interest only
payments are payable on the last day of each quarter during the first year after
the closing and, thereafter, principal and interest payments, in an amount
necessary to fully amortize the then-outstanding balance of the note in equal
quarterly payments payable on the last day of each quarter.
Pursuant to an asset purchase agreement, dated March 5, 1997, Micron acquired
from Newmark, Inc. substantially all of its assets used in the business of
manufacturing, assembling, marketing, leasing and selling medical stud and
eyelet application machines. The purchase price for the acquired assets included
a non-interest bearing promissory note in the principal sum of $200,000, which
was paid in full in December of 1998.
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.
Net cash provided by operating activities for 1998, 1997 and 1996 was
approximately $1,839,000, $1,959,000 and $1,972,000, respectively. The change in
cash provided by operations was due primarily to the changes in net income,
reduction of inventories and accounts receivable and increases in payables,
during 1998 and 1997.
Net cash used in investing activities in 1998 was approximately $524,000 and
in 1997 was approximately $1,463,000 and decreased principally as a result of
expenditures on capital equipment for Micron's manufacturing. Micron spent
approximately $700,000 for capital assets relating to the wastewater treatment
system in 1997. Net cash used in investing activities in 1996 was approximately
$1,141,000 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.
Capital expenditures during 1998, 1997 and 1996 were due primarily to Micron's
need to upgrade and maintain its manufacturing equipment and facilities.
During 1998, the capital expenditures were funded from operating cash flows.
During 1997 significant capital expenditures were due to the purchase of a
waste water system treatment system which was financed partially by a term
loan and in part from operating cash flows. During 1996, the Company's
capital expenditures were funded from operating cash flows.
As discussed under Environmental Regulation, Micron had approximately $92,000
accrued at December 31, 1998 and 1997, to cover estimated costs to be incurred
related to site assessment, monitoring, and remediation. Management estimates
that these costs could approximate from $90,000 to $175,000 depending upon the
final decision by the DEP.
During 1998, 1997 and 1996, Micron spent approximately $102,500, $320,000 and
$137,000, 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 1998, 1997 and 1996 are normal expenses associated with industrial
producers in the Commonwealth of Massachusetts. Using the results of the study,
Micron implemented a manufacturing process and air and waste water treatment
redesign. The actual redesign, which took place in 1997, required the purchase
of capital equipment to upgrade, augment or replace existing manufacturing and
waste treatment equipment. 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 10 to the Financial
Statements).
17
<PAGE>
During 1998, 1997 and 1996 respectively, net cash used in financing
activities totaled approximately $972,000, $513,000 and $996,000 principally
to pay down credit facilities and long-term debt.
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.
YEAR 2000
GENERAL
ART's Company-wide Year 2000 Project is proceeding on schedule. The general
Year 2000 concern is that many computer systems and software products will
experience problems handling dates beyond the year 1999 because the systems
are coded to accept only two-digit entries in the date code fields. Art's
executive staff has directed a centrally coordinated Year 2000 Project team,
made up of representatives from each of the company's departments and
divisions, to address this issue of computer programs and embedded computer
chips being unable to distinguish between the year 1999 and the year 2000. In
1998, ART began testing efforts addressing its, products, services,
infrastructure, and internal business support applications. A detailed plan
has been created and is currently being implemented which will ensure that
all ART's business process and systems have been assessed for Year 2000
Readiness by July 1999.
PROJECT
The ART Year 2000 Project has been addressed on two fronts. ART is a
manufacturing and distributor of medical paroducts. These efforts were
divided into four major sections, Company Products, Infrastructure (Internal
IT Systems), Internal Non-IT systems, and Supply-Chain. The general phases
common to all these sections are: (1) inventorying Year 2000 items; (2)
assigning priorities to identified items; (3) assessing the Year 2000
Readiness of items determined to be material to the Company; (4) repairing or
replacing material items that are determined not to be Year 2000 ready; (5)
testing material items; and (6) designing and implementing contingency and
business continuation plans for each division. The company has engaged the
service of an Information Technology consulting firm, Micro Support Group,
Inc., to assist in the project management and in the conversion and testing
of certain application software code.
PRODUCTS
The year in the date field of all ART's products is in two digits and is
only used as a reference to show when a test was performed. It is not used in
any analytical calculations, hence none of the company's software products
will have operational failures, invalid or incorrect results as a consequence
of the year 2000 date change.
Micron does not manufacturer any date-related products.
INTERNAL IT SYSTEMS
The Company has assessed its internal information technology, or IT,
systems, including business information systems, systems utilizing in it
manufacturing and service operations, and systems providing electronic
interfaces between the Company and its customers, to determine whether the
Company operations will be interrupted by 2000 issue. The actions on this
section are on schedule. The testing phase involved the testing of the Novell
Server and the Real World Financial applications within Micron. Both systems
passed all Year 2000 Readiness tests. ART will be migrating to these Year
2000 Ready systems during the second quarter of 1999. ART expects to have
addressed all internal Year 2000 issues identified in this process by June
1999.
NON-IT SYSTEMS
ART has assessed the impacts of Year 2000 on non-IT systems. Non-IT systems
include, but are not limited to telecommunications systems (PBX), security
systems, HVAC systems, elevators, and utilities (Water, Gas, Electric, etc).
Assessment of these systems is ongoing and is expected to be completed by
July 1999.
18
<PAGE>
SUPPLY-CHAIN
ART has been working closely with suppliers and other third parties upon
which it is dependent, to determine the extent of their Year 2000 Readiness.
All critical suppliers and business partners to the Company have been
contacted and the assessment of their Year 2000 readiness is underway.
The ART Division expects this phase of the project to be on going with the
risk assessment and contingency planning phase completed by July 1999 while
Micron has completed this portion of the project.
COST
Based on its investigation to date, the Company does not expect the total
cost of its Year 2000 Project to have a material effect on the Company's
business or financial results. The estimated cost of the Year 2000 Project is
approximately $17,600 at maximum. This cost is estimated to be distributed
equally between fiscal 1998 and 1999.
RISK
The Year 2000 Project is expected to significantly reduce the Company's
level of uncertainty about the Year 2000 problem and, in particular, about
the Year 2000 readiness of its material external agents. ART believes that,
with the testing of its Financial Business system and the completion of this
project as scheduled, the possibility of significant interruption of normal
operations should be minimized.
The Company recognizes that failure to correct a material Year 2000 problem
could result in an interruption in, or failure of certain normal business
activities or operations. Such failures could materially and adversely affect
the company's results of operations and financial condition. Due to the
general uncertainly inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, the company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the
Company's results of operations.
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Cautionary statements under the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995: This Form 10-K contains certain
statements of a forward looking nature relating to future events or the future
financial performance of the Company. Such forward-looking statements are only
predictions and are subject to risks and uncertainties that could cause actual
results or events to differ materially and adversely from the results discussed
in the forward-looking statements. When used in this Form 10-K, the words or
phrases "believes," "anticipates," "expects," intends," "will likely result,"
"estimates," "projects" or similar expressions are intended to identify
predictions and the actual events or results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, risks regarding
demand for new and existing products; the success of new product development
efforts; the uncertainty as to whether certain products will receive approval
for sale in the United States; the Company's highly competitive industry and
rapid technological change within the industry and the fact that the industry is
dominated by large companies with much greater resources than the Company; and
the reliance on key personnel.
The Company cautions investors and others to review the cautionary statements
set forth in this Form 10-K and cautions that other factors may prove to be more
important in affecting the Company's business and results of operations. These
forward-looking statements speak only as of the date of this report. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this report or to reflect the occurrence of
anticipated events.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS 21
REPORT OF INDEPENDENT ACCOUNTANTS 22
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 23
Statements of operations 24
Statements of changes in stockholders' equity 25
Statements of cash flows 26
Notes to consolidated financial statements 27-54
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Arrhythmia Research Technology, Inc.
We have audited the accompanying consolidated balance sheet of Arrhythmia
Research Technology, Inc. and Subsidiary as of December 31, 1998, and the
related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 1998, and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
--------------------------------
Boston, Massachusetts
February 26, 1999
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of Arrhythmia
Research Technology, Inc. and Subsidiary as of December 31, 1997, and the
related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the years ended December 31, 1997 and
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, 1997, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 and December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 20, 1998
22
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 557,533 $ 214,938
Trade and other accounts receivable, net of allowance
for doubtful accounts of $72,192 and $61,318 (Note 7) 1,307,668 2,397,269
Inventories (Notes 4 and 7) 1,472,726 2,001,123
Deposits, prepaid expenses and other current assets 70,105 63,861
Income taxes recoverable 262,810 262,810
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 3,670,842 4,940,001
PROPERTY, PLANT AND EQUIPMENT, net (Notes 5 and 7) 3,988,766 4,195,167
GOODWILL, net of accumulated amortization (Note 6) 1,717,242 2,025,597
OTHER INTANGIBLES, net of accumulated amortization (Note 6) 97,998 85,667
DEFERRED INCOME TAXES, net (Note 8) 374,923 458,923
OTHER ASSETS 140,373 127,055
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 9,990,144 $ 11,832,410
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facilities (Note 7) $ - $ 467,135
Current portion of capital lease obligations (Note 7) 28,220 100,371
Current maturities of bonds payable and
other long-term debt (Note 7) 356,751 320,328
Accounts payable 681,276 1,091,550
Accrued expenses 322,798 667,172
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,389,045 2,646,556
BONDS PAYABLE AND LONG-TERM DEBT (Note 7) 565,810 953,086
CAPITAL LEASE OBLIGATIONS, net of current portion (Note 7) 49,341 92,082
DEFERRED REVENUE 27,036 53,896
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,031,232 3,745,620
- ------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 3, 7, 9, 10 and 13):
SHAREHOLDERS' EQUITY (Note 13):
Preferred stock, $1 par value; 2,000,000 shares authorized,
none issued - -
Common stock, $.01 par value; 10,000,000 shares authorized;
3,679,216 issued 36,792 36,792
Additional paid-in-capital 8,909,307 8,909,307
Common stock held in treasury, 144,515 and 116,115 shares at cost (913,084) (878,787)
Unearned ESOP compensation (39,277) (82,134)
Retained earnings (accumulated deficit) (34,826) 101,612
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 7,958,912 8,086,790
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,990,144 $ 11,832,410
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES (Note 14) $ 9,360,596 $ 11,887,187 $ 24,787,849
COST OF SALES 6,127,451 7,931,599 20,114,557
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 3,233,145 3,955,588 4,673,292
- ----------------------------------------------------------------------------------------------------------------------
SELLING AND MARKETING 247,340 498,907 610,352
GENERAL AND ADMINISTRATIVE 2,140,804 2,491,519 2,419,777
RESEARCH AND DEVELOPMENT 342,914 371,063 173,120
AMORTIZATION OF GOODWILL 129,890 134,324 114,864
LOSS FROM IMPAIRMENT OF LONG-LIVED ASSETS (Note 3) 192,201 - -
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 179,996 459,775 1,355,179
OTHER INCOME (EXPENSE):
Interest expense (219,627) (238,313) (268,015)
Other income (expense), net 102,776 (139,710) (9,931)
- ----------------------------------------------------------------------------------------------------------------------
Total other expense, net (116,851) (378,023) (277,946)
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 63,145 81,752 1,077,233
INCOME TAX PROVISION (Note 8):
Current (115,583) (15,156) (283,739)
Deferred (84,000) (34,844) (176,916)
- ----------------------------------------------------------------------------------------------------------------------
(199,583) (50,000) (460,655)
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (136,438) $ 31,752 $ 616,578
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE (Note 2):
Basic and diluted $ (0.04) $ 0.01 $ 0.17
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(NOTES 9 AND 13)
<TABLE>
<CAPTION>
Retained
Additional Unearned Earnings
Paid-in Treasury ESOP (Accumulated
Shares Amount Capital Stock Compensation Deficit) Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1996 3,564,511 $36,792 $8,899,261 $(868,740) $(167,848) $(546,718) $7,352,745
Maturity and repurchases
of redeemable common stock - - 10,046 - - - 10,046
Treasury stock purchase (1,410) - - (10,047) - - (10,047)
ESOP payments - - - - 42,857 - 42,857
Net income - - - - - 616,578 616,578
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 3,563,101 36,792 8,909,307 (878,787) (124,991) 69,860 8,012,181
ESOP payments - - - - 42,857 - 42,857
Net income - - - - - 31,752 31,752
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 3,563,101 36,792 8,909,307 (878,787) (82,134) 101,612 8,086,790
Treasury stock purchase (28,400) - - (34,297) - - (34,297)
ESOP payments - - - - 42,857 - 42,857
Net loss - - - - - (136,438) (136,438)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 3,534,701 $36,792 $8,909,307 $(913,084) $ (39,277) $ (34,826) $7,958,912
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 11)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (136,438) $ 31,752 $ 616,578
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 683,418 577,915 514,123
Provision for doubtful accounts 10,874 - -
Amortization 198,500 159,765 152,483
Loss from impairment of long-lived assets 192,201 - -
Loss on sale of equipment - - 3,291
Deferred income tax provision 84,000 34,844 176,916
Deferred revenue (26,860) (33,810) 38,658
Changes in assets and liabilities:
Trade and other accounts receivable 1,078,727 2,050,855 (708,578)
Inventories 528,397 237,313 752,910
Deposits, prepaid expenses and other assets (19,562) 2,451 176,305
Accounts payable and accrued expenses (754,648) (1,101,707) 280,542
Payable to affiliates - - (30,899)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,838,609 1,958,878 1,972,329
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment - - 6,435
Capital expenditures (477,017) (1,110,144) (1,022,053)
Changes in other assets - (14,791) (105,063)
Other intangibles (46,677) (338,000) (20,867)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (523,694) (1,462,932) (1,141,548)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under credit facilities (467,135) (691,525) (780,312)
Proceeds from notes payable - 462,920 100,000
Principal payments on long-term debt and capital leases (513,745) (410,374) (348,943)
Purchase of treasury stock (34,297) - (10,047)
Reduction of unearned ESOP compensation 42,857 42,857 42,857
Increase in cash overdraft - $ 82,979 -
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (972,320) (513,143) (996,445)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 342,595 (17,197) (165,664)
CASH AND CASH EQUIVALENTS, beginning of year 214,938 232,135 397,799
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 557,533 $ 214,938 $ 232,135
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF Arrhythmia Research Technology, Inc. ("ART"), a
BUSINESS Delaware corporation, is engaged in marketing
computerized medical instruments for monitoring,
analyzing and treating heart disease. Micron
Products Inc. ("Micron"), a wholly-owned subsidiary
of ART, is a manufacturer of silver/silver
chloride-plated sensor elements, a component used in
the manufacture of disposable medical electrodes
designed for electrocardiograph ("ECG") and other
instrumentation. Additionally, Micron also acts as a
distributor of metal snap fasteners, another
component used in the manufacture of disposable
medical electrodes. Micron manufactures and leases
high speed electrode assembly machines to its sensor
and snap customers.
2. ACCOUNTING POLICIES
PRINCIPLES OF The consolidated financial statements include the
CONSOLIDATION 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
RECOGNITION shipment of the product when independent sales
representatives or distributors are responsible for
installation of systems, as the title and risk of
loss passes to the customer at the time of shipment.
However, in cases where ART personnel are scheduled
to perform this in-service/installation, the revenue
is not recognized until completion of such
obligations. Revenue from the sale of extended
warranties is deferred and amortized ratably over
the life of the warranty.
CASH AND CASH Cash and cash equivalents consist of cash on hand
EQUIVALENTS and on deposit in high quality financial
institutions. The Company considers highly liquid
investments with original maturities of three months
or less to be cash equivalents.
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.
27
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES
(Continued)
CONCENTRATIONS OF Financial instruments which potentially expose the
CREDIT RISK 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 financial
institutions. The Company does not believe
significant credit risk exists with respect to these
institutions.
ADVERTISING Advertising expenses consist primarily of costs
EXPENSES incurred in promoting the Company's products,
printed brochures and other activities. The Company
expenses advertising costs as incurred. The
Company's advertising expense was approximately
$72,000, $69,000 and $89,000 in 1998, 1997, and 1996
respectively.
PROPERTY, PLANT Property, plant and equipment are recorded at cost
AND EQUIPMENT 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.
28
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES
(Continued)
GOODWILL The excess of the aggregate purchase price over the
fair value of net assets of businesses acquired is
amortized over 20 years using the straight-line
method. The Company periodically reviews goodwill of
acquired businesses to assess recoverability based
on future operating projections. Impairments would
be recognized in operating results if a permanent
diminution in value were to occur on an undiscounted
basis.
OTHER INTANGIBLES Direct costs to acquire patent technology and legal
costs associated with securing and defending patents
are capitalized and amortized using the
straight-line method over the remaining useful life
of the patents. The Company periodically reviews its
patent assets to assess recoverability based on
future undiscounted projected earnings from
operations. Impairments are recognized in operating
results when a permanent diminution in value occurs.
Certain software development costs incurred
subsequent to establishment of technological
feasibility are capitalized and amortized using the
straight-line method over the estimated economic
life of the related product, generally three years.
Amortization commences when the product is available
for general release. Costs to establish the
technological feasibility of the product are
expensed as research and development. Amortization
of software development costs amounted to $3,759,
$1,134 and $16,047, for the years ended December 31,
1998, 1997, and 1996, respectively.
LONG-LIVED ASSETS The Company evaluates long-lived assets under the
provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for
the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". SFAS No. 121
establishes accounting standards for the impairment
of long-lived assets and certain identifiable
intangibles to be held and used and for long-lived
assets and certain identifiable intangibles to be
disposed of.
29
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES
(Continued)
LONG-LIVED ASSETS The Company reviews the carrying values of its
(Continued) long-lived and identifiable intangible assets for
possible impairment whenever events or changes in
circumstances indicate that the carrying amount of
the assets may not be recoverable.
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) In fiscal 1997, the Company adopted SFAS No. 128
PER SHARE DATA "Earnings Per Share" which requires the Company to
present its basic earnings per share and diluted
earnings per share, and certain other earnings per
share disclosures for each year presented. Basic
earnings per share is computed by dividing income
available to common shareholders by the weighted
average number of common shares outstanding. The
computation of diluted earnings per share is similar
to the computation of basic earnings per share
except that the denominator is increased to include
the number of additional common shares that would
have been outstanding if the dilutive potential
common shares had been issued. In addition, the
numerator is adjusted for any changes in income or
loss that would result from the assumed conversions
of those potential shares.
30
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES
(Continued)
NET INCOME (LOSS) Basic and diluted EPS computation for the years
PER SHARE DATA ended December 31, 1998, 1997, and 1996 are
(Continued) as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) available
to common stockholders $ (136,438) $ 31,752 $ 616,578
Weighted average common
shares outstanding 3,560,713 3,563,101 3,563,454
Basic EPS $ (0.04) $ 0.01 $ 0.17
Diluted EPS:
Net income (loss) available
to common stockholders $ (136,438) $ 31,752 $ 616,578
Weighted average common
share outstanding 3,560,713 3,563,101 3,563,454
Assumed conversion of
common shares issuable
under stock option plan - - 44,160
Weighted average common
and common equivalent
shares outstanding 3,560,713 3,563,101 3,607,614
Diluted EPS $ (0.04) $ 0.01 $ 0.17
</TABLE>
In 1998 and 1997, the Company had common stock
options and warrants outstanding, none of which were
included in the diluted earnings per share
calculation since their effect would have been
antidilutive.
31
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES
(Continued)
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 The carrying amount reported in the balance sheets
FINANCIAL for cash and cash equivalents, ccounts receivable
INSTRUMENTS and a 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.
COMPREHENSIVE The Company adopted Statement of Financial
INCOME Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME, ("SFAS No. 130") which
establishes standards for reporting and display of
comprehensive income, its components, and
accumulated balances. Comprehensive income is
defined to include all changes in equity except
those resulting from investments by owners and
distributions to owners. Among other disclosures,
SFAS No. 130 stipulates that all items that are
required to be recognized under current accounting
standards as components of comprehensive income be
reported in a financial statement that is displayed
with the same prominence as other financial
statements. The Company did not have any components
of comprehensive income for the years ended December
31, 1998, 1997 and 1996.
32
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES
(Continued)
INDUSTRY SEGMENTS The Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information"
("SFAS No. 131"), which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 establishes standards for
the way that public enterprises report information
about operating segments in annual financial
statements and requires reporting of selected
information about operating segments in interim
financial statements issued to the public. It also
establishes standards for disclosures regarding
products and services, geographic areas, and major
customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate
financial information is available that is evaluated
regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing
performance.
NEW ACCOUNTING In June 1998, the Financial Accounting Standards
STANDARD NOT Board issued SFAS No. 133, "Accounting for
YET ADOPTED Derivatives Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a
derivative may be specifically designated as a
hedge, the objective of which is to match the timing
of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes
in the fair value of the hedged assets or liability
or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized
in income in the period of change. SFAS No. 133 is
effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
Historically, the Company has not entered into
derivative contracts either to hedge existing risks
or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard
to affect its financial statements.
33
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS On April 14, 1997, ART acquired from Astro-Med, Inc.
ACTIVITY substantially all of the assets related to the
following products (i) the basic cardiac
catheterization monitoring system (the "K3-I"), (ii)
the stand-alone hemodynamic analysis package (the
"K3-II"), (iii) the network ready hemodynamic
analysis package (the K3-III"), and (iv) the control
work station (the K3-WI") (collectively, the "K3
Products"). The purchase price for the assets was
$350,000, with $50,000 paid at closing and a
promissory note issued in the amount of $300,000
(see Note 7). The note is due and payable not later
than the third anniversary of the closing date.
Interest only payments are payable on the last day
of each quarter during the first year after the
closing and, thereafter, principal and interest
payments, in an amount necessary to fully amortize
the then-outstanding balance of the note in equal
quarterly payments are payable on the last day of
each quarter.
During the year ended December 31, 1998, the Company
recorded an impairment loss on the long-lived assets
related to the Astro-Med acquisition. The impairment
was the result of the K-3 products technology
failing to meet competitive demands. Included in the
results of operations is an impairment loss of
$192,201 which was due primarily to the reduction of
the goodwill carrying value to zero. The Company
also recorded a charge of approximately $261,000 in
cost of sales for the write-down of the related
inventory to its net realizable value.
Simultaneously, with the execution of the asset
purchase agreement, ART entered into a manufacturing
agreement with Astro-Med. The term of the agreement
began on April 14, 1997 and continues for three
years; provided, however, that ART may, on sixty
days' prior written notice to Astro-Med, terminate
the manufacturing agreement after the date of the
first anniversary. During the term of the
manufacturing agreement, Astro-Med will manufacture
the K3 Products at prices which are specified in the
agreement.
34
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS Pursuant to an asset purchase agreement dated
ACTIVITY March 5, 1997, Micron acquired from Newmark, Inc.
(Continued) substantially all of its assets used in the business
of manufacturing, assembling, marketing, leasing and
selling medical stud and eyelet application
machines. The purchase price for the acquired assets
was $400,000, payable as follows: (i) cash paid on
account in the amount of $58,368; (ii) cash in the
amount of $141,632 paid on March 31, 1997; and (iii)
a non-interest bearing promissory note in the
principal sum of $200,000, payable in twenty equal
monthly installments of $10,000 each (see Note 7).
At the same time it entered into the asset purchase
agreement, Micron executed a manufacturing agreement
with Newmark pursuant to which Newmark will continue
to manufacture and service the machines on behalf of
Micron for a period of one year for a specified
price. The manufacturing agreement is automatically
renewable for successive one-year terms.
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. As
of December 31, 1996 the Company, through its Micron
subsidiary, had a net note receivable from Lite-Tech
in the amount of $54,000 for the return of an
initial good-faith deposit. During 1997, the
remaining good faith deposit of $54,000 was written
off as a doubtful account receivable. During 1998,
the amount was settled in full for a payment of
$40,000. These amounts were included in the results
of operations for 1998 and 1997.
35
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 303,689 $ 288,255
Work-in-process 330,812 282,929
Finished goods 838,225 1,429,939
--------------------------------------------------------------------------------------
Total $ 1,472,726 $ 2,001,123
--------------------------------------------------------------------------------------
</TABLE>
5. PROPERTY, PLANT Property, plant and equipment consist of
AND EQUIPMENT the following:
<TABLE>
<CAPTION>
Asset
DECEMBER 31, Lives 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Machinery and equipment 5 to 15 years $ 4,395,922 $ 4,086,672
Equipment held for lease 10 years 451,456 362,352
Building and improvements 20 years 1,843,594 1,787,118
Furniture and fixtures 3 to 5 years 303,428 281,241
--------------------------------------------------------------------------------------
6,994,400 6,517,383
Less accumulated
depreciation (3,005,634) (2,322,216)
--------------------------------------------------------------------------------------
Net property, plant and
equipment $ 3,988,766 $ 4,195,167
--------------------------------------------------------------------------------------
</TABLE>
The Company had approximately $135,400 and $244,000
of assets under capital leases, included in
machinery and equipment, at December 31, 1998 and
1997, respectively. Accumulated depreciation on
these assets was approximately $24,300 and $33,000
at December 31, 1998 and 1997, respectively.
36
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY, PLANT
AND EQUIPMENT
(Continued)
EQUIPMENT The Company leases attaching machines under
LEASING operating leases for periods of up to one year with
renewable terms. The cost of the leased equipment is
depreciated on a straight-line basis over ten years.
Accumulated depreciation on leased equipment was
$54,125 and $39,996 at December 31, 1998 and 1997.
6. GOODWILL AND OTHER Goodwill and other intangibles consist of the
INTANGIBLES following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 2,661,073 $ 2,661,073
Accumulated amortization (943,831) (635,476)
--------------------------------------------------------------------------------------
Net goodwill $ 1,717,242 $ 2,025,597
--------------------------------------------------------------------------------------
Patents $ 328,784 $ 286,108
Software development costs 226,418 222,418
Accumulated amortization (457,204) (422,859)
--------------------------------------------------------------------------------------
Net other intangibles $ 97,998 $ 85,667
--------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEBT
REVOLVING CREDIT The Company has a credit facility with a bank which
FACILITY includes a $3,500,000 working capital line of credit
and a term loan of $400,000 obtained in June 1997
maturing December 15, 1999 that is collateralized by
substantially all of the Company's assets. The line
of credit bears interest at prime plus .75% (8.5% at
December 31, 1998). The availability of the line of
credit is limited to certain percentages of accounts
receivable and inventory. The outstanding balance on
the working capital line of credit as of December
31, 1998 and 1997 was $0 and $467,135, respectively.
During fiscal 1998, 1997 and 1996, the maximum
amount of borrowings under the line of credit was
approximately $723,000, $1,422,000 and $2,124,000,
respectively.
The weighted average interest rate on the Company's
line of credit was 9% for the years 1998, 1997 and
1996, respectively. The loan agreement contains
covenants which require the Company 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.
As of December 31, 1998, the Company was in default
of the minimum net income financial covenant. The
Company obtained a waiver for the covenant
violations for the year ended December 31, 1998.
The Company obtained a waiver for exceeding the
limit for asset acquisitions during 1996 and 1997.
38
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEBT
(Continued)
LONG-TERM DEBT Long-term borrowings, excluding capital lease
obligations, consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C>
$400,000 term note payable to a bank, bearing
interest at 9% per annum, payable in monthly
installments of $8,333 through, maturity,
December 15, 1999, collateralized by
substantially all of the Company's assets. $ 141,670 $ 325,001
Bonds payable 533,935 485,935
$300,000 promissory note for acquisition of
machines, patents, engineering drawings and
related technology, bearing interest at 8%
per annum, payable interest only in the
first year and in quarterly installments of
$28,203 through June 2000, collateralized by
equipment purchased. 223,125 300,000
$200,000 promissory note for acquisition of
machines paid in 1998. - 105,207
Mortgage payable paid in 1998. - 46,155
Other obligations 23,831 11,116
---------------------------------------------------------------------------------------
922,561 1,273,414
Less current maturities 356,751 320,328
---------------------------------------------------------------------------------------
Long-term bonds payable and debt $ 565,810 $ 953,086
---------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEBT
(Continued)
LONG-TERM DEBT In August 1995, the Company completed a $600,000
(Continued) private bond placement. The bonds are subordinated
to the credit facility, 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 years 1998, 1997 and
1996, the Company recorded amortization of the bond
discount of $48,000, $48,000 and $39,935,
respectively and interest expense of $66,000. The
unamortized bond discount remaining as of December
31, 1998 and 1997 was $66,065 and $135,374,
respectively.
On April 14, 1997, ART incurred a promissory note in
the amount of $300,000, bearing interest of 8% per
annum, through the acquisition of property and
equipment from a manufacturer. Interest only
payments are payable on the last day of each quarter
during the first year, thereafter, principal and
interest payments, in an amount necessary to fully
amortize the then-outstanding balance of the note in
equal quarterly payments are payable on the last day
of each quarter. The note contains a subjective
acceleration clause which states that any material
adverse change in the Company's financial condition
would result in the note becoming due and payable
without further notice.
40
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEBT
(Continued)
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:
<TABLE>
<CAPTION>
YEAR Amount
------------------------------------------------------------------
<S> <C>
1999 $35,023
2000 27,800
2001 22,639
2002 5,658
------------------------------------------------------------------
Total minimum lease payments 91,120
Less amounts representing interest 13,559
------------------------------------------------------------------
77,561
Less current portion 28,220
------------------------------------------------------------------
Long-term capital lease obligation $49,341
------------------------------------------------------------------
</TABLE>
41
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES The income tax provision for each of the three years
in the period ended December 31, 1998 consists of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ 283,739
State 115,583 15,156 -
--------------------------------------------------------------------------------------
Total 115,583 15,156 283,739
Deferred 84,000 34,844 176,916
--------------------------------------------------------------------------------------
Total income tax
expense $ 199,583 $ 50,000 $ 460,655
--------------------------------------------------------------------------------------
</TABLE>
Micron's net operating loss ("NOL") carryforwards
for income tax purposes approximated $2,360,000 and
$2,496,000 at December 31, 1998 and 1997,
respectively. During the three years ended December
31, 1998, Micron utilized approximately $137,000,
$32,000, and $425,000 of its NOL carryforwards. The
NOL carryforwards expire through 2007. The use of
the loss carryforwards to reduce future income tax
obligations are limited in any given year due to
restrictions defined in the Internal Revenue Code
related to a change in ownership control.
42
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES The components of the net deferred tax assets were
(Continued) as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Software development costs $ (2,330) $ (1,558)
--------------------------------------------------------------------------------------
Total deferred tax liability (2,330) (1,558)
--------------------------------------------------------------------------------------
Deferred tax assets:
Inventories 409,134 303,626
Mortgage participation certificates 960,000 960,000
Corazonix Patents 327,333 313,826
Other 254,719 298,176
Net operating loss carryforwards 802,355 848,832
Valuation allowance (2,376,288) (2,263,979)
--------------------------------------------------------------------------------------
Total deferred tax asset 377,253 460,481
--------------------------------------------------------------------------------------
Net deferred tax asset $ 374,923 $ 458,923
--------------------------------------------------------------------------------------
</TABLE>
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 increase in the valuation
allowance in 1998 was primarily due to an increase
in the inventory reserve.
43
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES The significant components of deferred tax expense
(Continued) were as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Utilization of net operating
loss carryforwards $ 46,477 $ 10,682 $ 47,012
Valuation reserve 112,309 (135,142) -
Other (74,786) 159,304 129,904
--------------------------------------------------------------------------------------
Total $ 84,000 $ 34,844 $ 176,916
--------------------------------------------------------------------------------------
</TABLE>
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>
1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision computed at
statutory rate $ 21,470 $ 27,795 $ 366,260
Increases (reductions) due to:
Nondeductible expenses 2,034 2,720 2,773
Amortization of goodwill 39,054 39,054 39,054
State income taxes net of
federal benefit 76,285 - 52,568
Increase in valuation
allowance 112,309 - -
Other (51,569) (19,569) -
--------------------------------------------------------------------------------------
Income tax expense $ 199,583 $ 50,000 $ 460,655
--------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EMPLOYEE BENEFIT Micron established an Employee Stock Ownership Plan
PLANS ("ESOP") as a result of a previous plan of
reorganization. The ESOP is non- contributory on the
part of its participants. All employees of the
Company are eligible for participation in the ESOP.
The ESOP borrowed $300,000 to purchase the Company's
shares. The proceeds were used to pay creditors
electing to receive cash under the ESOP plan. The
shares issued by the Company to the ESOP are
reflected as a reduction in shareholders' equity.
The Company accounts for its ESOP in accordance with
Statement of Position 76-3. Accordingly, all shares
held by the ESOP, allocated or unallocated, are
treated as outstanding in the earnings per share
calculation. The Company has elected to recognize
compensation expense based on contributions made.
There are no repurchase obligations by the Company.
The Company contributed and recorded compensation
expense of $42,857 during the years ended December
31, 1998, 1997, and 1996.
The Company sponsors an Employee Savings and
Investment Plan under Section 401(k) of the Internal
Revenue Code covering all eligible employees of the
Company. Employees can contribute up to 20% of their
eligible compensation or up to the maximum allowable
by the IRS. The Company's matching contributions are
at the discretion of management. The Company did not
make any contributions for the years ended December
31, 1998, 1997 and 1996.
10. COMMITMENTS AND
CONTINGENCIES
ROYALTIES ART licenses its signal-averaging technology from an
unrelated entity for a royalty fee of 4.5% of gross
sales, less certain allowances for selling
commissions and discounts. Costs of obtaining
patents are offset against royalties due. To retain
an exclusive license for the technology, ART is
obligated to pay a minimum royalty of $30,000
annually. The royalties paid were $35,000, $25,000
and $40,200 for 1998, 1997, and 1996, respectively.
45
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND
CONTINGENCIES
(Continued)
ELECTROPHYSIOLOGY Effective April 1, 1994, ART and Prucka Engineering,
PRODUCTS CONTRACT Inc. ("Prucka"), the manufacturer of the CardioLab
and CardioMapp products (the "Products"), executed
an agreement related to ART's exclusive distribution
of the Products. During the distribution period of
the agreement, which expired December 31, 1996,
purchase orders for Products were received in ART's
name; Prucka manufactured the Products and invoiced
ART at a predetermined discount and received payment
from ART. ART invoiced the customers and received
payments. Beginning January 1997 and thereafter, ART
will receive commissions on certain Products sold
through December 31, 2002. The commissions earned
were approximately $485,000 and $463,000 for the
years 1998 and 1997, respectively.
During 1998 and 1997, ART received 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 received
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.
SALES TAX In 1997, the state of California gave notice to the
Company that sales tax statements had not been filed
by the Company since 1989. As a result, the Company
has notified all applicable customers with invoices
during the period that they would be responsible for
sales and use taxes for the specific invoices. The
Company has a reserve of $22,000 and $125,000 for
1998 and 1997, respectively, for California sales
tax liability. Going forward, the Company is
charging and collecting sales tax as customers are
billed.
46
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND
CONTINGENCIES
(Continued)
ENVIRONMENTAL Like many industrial processes, the Micron
GROUNDWATER manufacturing process utilizes hazardous and
non-hazardous chemicals, the treatment and disposal
of which are subject to federal and state
regulation. Since its inception, Micron has expended
significant funds to train its personnel, install
waste treatment and recovery equipment and to retain
an independent environmental consulting firm to
constantly review, monitor and upgrade its air and
waste water treatment activities. As a result,
Micron believes that the operations of its
manufacturing facility are in compliance with
currently applicable safety, health and
environmental laws and regulations.
Micron has been identified as a "potential
responsible party" (PRP) under the Comprehensive
Environmental Response and may be required to share
in the cost of cleanup with respect to its
Fitchburg, Massachusetts manufacturing facility. In
January 1998, Micron filed information with the
Massachusetts Department on Environmental Protection
(DEP) to allow further subsurface investigation and
a consequent risk assessment to be performed. The
Company's environmental engineers have developed
estimates of the possible remediation costs for this
facility of $90,000 to $175,000. The Company accrues
the best estimates of these costs when it is
probable that a liability has been incurred. At
December 31, 1998 and 1997, the balance sheet
included an accrual for these costs of approximately
$92,000. In addition, to comply with environmental
laws and regulations, the Company spent
approximately $700,000 for capital improvements in
1997.
47
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND
CONTINGENCIES
(Continued)
ENVIRONMENTAL Based on the Company's analyses and subject to the
GROUNDWATER difficulty in estimating these future costs, the
(Continued) Company expects that any sum it may be required to
pay in connection with environmental matters is not
reasonably likely to exceed the amounts disclosed in
an amount which would have a material adverse effect
on financial condition, result of operations or
liquidity.
OPERATING LEASES The Company leases certain facilities,
vehicles and equipment under non-cancelable lease
arrangements. During 1998, the Company leased
approximately 1,600 square feet of office space in
an office building in Austin, Texas. The lease on
the office space will expire in October 2001. Rent
expense under all operating leases was approximately
$106,000, $158,000 and $196,000 in 1998, 1997 and
1996, respectively.
Future minimum operating lease payments as of
December 31, 1998 are approximately as follows:
<TABLE>
<CAPTION>
Operating
YEAR Leases
-----------------------------------------------------------
<S> <C>
1999 $ 73,000
2000 63,000
2001 29,000
2002 22,000
2003 13,000
Thereafter 8,000
-----------------------------------------------------------
Total $208,000
-----------------------------------------------------------
</TABLE>
48
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SUPPLEMENTAL Cash paid for income taxes and interest for the
CASH FLOWS years ended December 31 is as follows:
INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes $ 94,860 $ 350,000 $ 230,000
Interest $ 218,447 $ 245,845 $ 276,719
Non-cash activities:
Capital asset lease additions
and related obligation $ - $ 485,080 $ 87,790
</TABLE>
12. RELATED PARTY The Company obtains legal services with respect to
TRANSACTIONS 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 $3,300, $20,000 and $30,000
for years 1998, 1997 and 1996, respectively. The
amounts owed to this firm at December 31, 1998, 1997
and 1996 were approximately $18,000, $22,000 and
$21,000, respectively.
Cardio Digital Inc. ("CDI") has four shareholders
who are also shareholders of the Company. Royalties
to CDI were $2,700, $6,300 and $10,500 for years
1998, 1997, and 1996, respectively. The amounts owed
to CDI at December 31, 1998, 1997 and 1996 were
$19,000, $16,300 and $10,500, respectively.
During the years 1998, 1997, and 1996 healthcare
coverage premiums of approximately $8,300, $8,900
and $5,900, respectively, were paid on behalf of a
Director of the Company in exchange for consulting
services.
The Company obtains consulting services with respect
to acquisitions and other negotiations from a
shareholder and Director of the Company. Fees for
services paid to this Director were approximately $0
and $25,000 for years 1998 and 1997, respectively.
The amounts owed to this Director were approximately
$0 and $4,200 for December 31, 1998 and 1997,
respectively.
49
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS The Company has reserved 250,000 shares of its
Common Stock for issuance to officers and key
employees pursuant to a 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 $1.06
to $6.00 per share for all options outstanding and
granted under the Option Plan with a weighted
average exercise price of $1.40 per share. In
September 1998, the Board of Directors repriced
96,000 options outstanding to Directors and
Officers. The options were repriced to reflect the
fair market value on the effective date of $1.06 per
share.
Transactions under the Option Plan are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
beginning of year 163,000 177,000 240,750
Granted - 25,000 -
Terminated/forfeited 53,000 39,000 63,750
--------------------------------------------------------------------------------------
Options outstanding at
end of year 110,000 163,000 177,000
--------------------------------------------------------------------------------------
Options exercised to date 2,000 2,000 2,000
--------------------------------------------------------------------------------------
Available for grant at
end of year 138,000 85,000 71,000
--------------------------------------------------------------------------------------
Exercisable at end of year 95,400 91,800 64,200
--------------------------------------------------------------------------------------
Weighted-average fair value
of options granted - 1.34 -
--------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS During 1991, certain Non-plan options (the "Non-plan
(Continued) 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
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.
During September 1998, the Board of Directors
repriced options outstanding to Directors and
Officers. All options were repriced to reflect the
fair market value on the effective date of $1.06 per
share.
As of December 31, 1998 the exercise price for
Non-plan options outstanding was $1.06 per share
with a weighted average exercise price of $1.06 per
share.
Transactions relative to Non-plan options are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
beginning of year 177,000 197,000 353,700
Granted - - -
Terminated/forfeited 78,000 20,000 156,700
--------------------------------------------------------------------------------------
Options outstanding at
end of year 99,000 177,000 197,000
--------------------------------------------------------------------------------------
Exercisable at end of year 96,750 136,500 182,500
--------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS The Company has applied Accounting Principles Board
(Continued) 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, the
Company's net income (loss) would have decreased to
the pro forma amounts indicated below, for the years
ended December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $ (136,438) $ 31,752 $ 616,578
Net income (loss) - pro forma $ (269,539) $ (10,867) $ 580,389
Basic and diluted income (loss)
per share - as reported $ (0.04) $ .01 $ .17
Basic and diluted income (loss)
per share - pro forma $ (0.08) $ (.01) $ .16
</TABLE>
The fair value of each stock option granted is
estimated on the date of grant using the
option-pricing method. The weighted average
assumptions for the year ended December 31, 1998
were a dividend yield of 0.0%, expected volatility
of 46.1%, risk-free interest rate of 4.33% and an
expected life of 6.07. The weighted average
assumptions for the years ended 1997 and 1996 were a
dividend yield of 0.0%, expected volatility of 57%,
risk-free interest rate of 6.22%, 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 remaining
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
bondholders' warrants expire five years from the
date of the bond.
52
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INDUSTRY AND The Company operations are classified into two
GEOGRAPHIC business segments: medical electrodecomponents and
SEGMENTS computerized medical instruments. All of the assets
of the Company are located in the United States.
The following table shows sales, operating income
(loss) and other financial information by industry
segment as of and for the years ended December 31,
1998 and 1997:
<TABLE>
<CAPTION>
Medical Computerized
Electrode Medical
Components Instruments Corporate Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Sales $ 8,444,870 $ 915,726 $ - $ 9,360,596
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 1,263,650 $ (953,764) $ (129,890) $ 179,996
- ----------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 453,112 $ - $ 23,903 $ 477,015
Depreciation and amortization $ 650,703 $ 27,053 $ 204,160 $ 881,916
Identifiable assets at
December 31, 1998 $ 6,188,950 $ 574,019 $ 3,227,175 $ 9,990,144
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
Sales $ 9,495,653 $ 2,391,534 $ - $ 11,887,187
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 1,263,189 $ (549,287) $ (254,127) $ 459,775
- ----------------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 1,099,354 $ - $ 10,790 $ 1,110,144
Depreciation and Amortization $ 554,066 $ 25,204 $ 158,411 $ 737,681
Identifiable assets at
December 31, 1997 $ 7,324,601 $ 1,341,275 $ 3,166,534 $ 11,832,410
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INDUSTRY AND The following table sets forth the geographic
GEOGRAPHIC distribution of the Company's net sales:
SEGMENTS
(Continued)
<TABLE>
<CAPTION>
REGION 1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 4,898,191 $ 7,156,957 $ 15,935,126
Europe 2,678,710 2,726,142 4,829,713
Canada, Mexico &
South America 1,557,356 1,715,115 1,587,372
Pacific Rim 173,966 236,654 2,303,520
Other 52,373 52,319 132,118
--------------------------------------------------------------------------------------
Net Sales $ 9,360,596 $ 11,887,187 $ 24,787,849
--------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the percentage of net
sales to significant customers of the medical
electrode components segment in relation to total
segment sales:
<TABLE>
<CAPTION>
CUSTOMERS 1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
A 32% 35% 32%
B 25% 23% 23%
C 15% 5% 7%
D 11% 13% 11%
</TABLE>
There was no single significant customer for the
computerized medical instruments segment during the
three years in the period ended December 31, 1998.
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------ ---- -----------------------------------------------------
<S> <C> <C>
Anthony A. Cetrone.................. 70 Chairman of the Board of Directors, Chief
Executive Officer of Micron, Director
Nancy C. Arnold..................... 51 Vice President, Secretary and General Counsel
Julius Tabin, Ph.D.................. 79 Director
Paul F. Walter, MD.................. 61 Director
Russell C. Chambers, MD............. 55 Director
E.P. Marinos 57 Director
</TABLE>
The Directors are divided into three classes with rotating three-year
terms. Mr. Marinos and Dr. Tabin were elected to serve as Directors until the
2001 annual meeting of shareholders. Dr.Walter was elected to serve until the
2000 annual meeting of shareholders and Dr.Chambers and Mr. Cetrone have been
elected to serve until the 1999 annual meeting of shareholders. The Company's
executive officers are appointed by the Board of Directors and serve at the
pleasure of the Board.
E.P. (LOU) MARINOS was appointed President and Chief Executive Officer
of the Company in March 1995 and resigned in May, 1997. Mr. Marinos, until he
resigned, also served in the capacity of Chief Financial Officer and Chief
Operating Officer since joining the Company in May, 1994. Prior to joining
the Company Mr. Marinos held senior executive management or Director
positions with Intermedics, Inc., Carbon Implants, Inc., Bio-International,
Inc. and Endevco, Inc. He was also a senior partner with Deloitte & Touche.
Mr. Marinos is presently President and Chief Executive Officer of Midcoast
Interstate Transmission, Inc.
ANTHONY A. CETRONE has been President of Micron since 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. ARNOLD has been Secretary of the Company since March 1988 and
General Counsel since January 1990. She was elected Vice President in 1997.
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.
55
<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
------------------------------------------ ---------------------
STOCK LONG-TERM ALL
OPTIONS INCENTIVE OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(1) (SH) PAYOUTS COMPENSATION
- ----------------------------------------------- -------- --------- --------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Anthony A. Cetrone, President, Micron 1998 $ 98,000 5,282 - - - -
Products Inc.
Sidney M. Barbanel, President and Chief 1998 $ 70,833 - - - - -
Executive Officer
E. P. Marinos, former President and Chief 1997 $ 62,800 $ 4,000 - - - -
Executive Officer
Anthony A. Cetrone, President, Micron 1997 $ 98,000 13,569 - - - -
Products Inc.
Sidney M. Barbanel, President and Chief 1997 $ 43,800 - - - - -
Executive Officer
E. P. Marinos, former President and Chief 1996 $100,000 $ 2,000 - - - -
Executive Officer
Anthony A. Cetrone, President, Micron 1996 $ 98,000$ 17,118 - - - -
Products Inc.
</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
was based on the market price on the date of grant. Mr. Marinos relinquished
36,000 options in June 1997. 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. Mr. Marinos relinquished all 20,000 options in June 1997. In September
1998, all outstanding options were repriced to reflect the fair market value
of $1.06 per share.
OPTION GRANTS IN LAST FISCAL YEAR
There were no option grants/SARS in fiscal year 1998.
56
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
VALUE REALIZED OPTIONS HELD AT MONEY OPTIONS AT
(MARKET PRICE DECEMBER 31, 1998 DECEMBER 31, 1998
SHARES AT --------------------------------- ----------------------------------
ACQUIRED EXERCISE LESS
NAME ON EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ------------- ---------------- --------------- ---------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Anthony A. Cetrone..... - $ - 66,750 7,250 $ - $ -
</TABLE>
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 1997,
except Julius Tabin who inadvertently neglected to file with respect to certain
purchases of the Company's common stock in October 1998. Dr. Tabin has corrected
the omission.
EMPLOYMENT ARRANGEMENTS
ANTHONY A. CETRONE
Mr. Cetrone's employment agreement expired in 1996 It is currently being
renegotiated. He is receiving the same compensation he received pursuant to his
agreement. He is being paid a base salary of $98,000 per annum and he is
entitled to bonus compensation in the amount of 5% of Micron's net income after
taxes above $500,000.
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.
Options to purchase an aggregate of 229,000 shares of Common Stock at an
exercise price of $2.25 to $6.50 per share have been granted under the Option
Plan to twenty current and former employees. Of these, options for 2,000 shares
were exercised and options to purchase 87,500 shares granted to ten 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 97,000, 60,000, 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, 1997, 25,000 options to purchase shares
were granted to one employee, which were terminated upon his resignation. Mr.
Marinos forfeited 56,000 options upon his resignation in 1997. During the years
ended December 31, 1998 and 1996, no options were granted. During the year ended
December 31, 1995, options to purchase 130,000 shares were granted to eight
employees. In September 1998, the Board of Directors adjusted the exercise price
of the options granted to the Directors and officers of the company to reflect
the current market value of the stock, which was $1.06.
57
<PAGE>
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, 1998, options
for 55,251 shares have been exercised and options for 302,700 shares have been
terminated/forfeited.
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 were
terminated in 1997 upon the resignation of Mr. Simms as director. 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. All such options expired unexercised in 1996. 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 expiring March 1998. 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 was 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 Directors. The shares were
immediately exercisable. Fifty-four thousand shares have been terminated or
forfeited and the remaining shares were repriced in September 1998 at $1.06 per
share. 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. These shares were also repriced in September 1998 at $1.06 per share.
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.
In September 1998, the Board of Directors adjusted the exercise price of
the options granted to the Directors and officers of the Company to reflect the
current market value of the stock, which was $1.06 per share.
MEDICAL CONSULTANTS
From time to time, the Company consults with medical advisors who report on
advances in technology and on developments in their respective fields. During
1995 , 1996 and 1997, the Company used consultants on a specific project basis.
Amounts paid to consultants during 1996, 1997 and 1998 were not material.
58
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 24, 1999 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.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP (1)
--------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
--------------------------------------------------------------------------------------------
<S> <C> <C>
Russell C. Chambers, M.D. (3).......................................... 397,365 10.22
Julius Tabin, Ph.D..................................................... 88,375 2.27
Paul F. Walter, M.D.................................................... 69,375 1.78
Anthony A. Cetrone (4)................................................. 134,317 3.45
E.P. Marinos........................................................... 49,000 1.26
All officers and directors as a group ( 6 persons) (5)................. 771,607 19.84
</TABLE>
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.
Chamber's 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, 1998, as follows:
<TABLE>
<CAPTION>
NAME NUMBER
-------------------------------------------- ------------------
<S> <C>
E.P. Marinos.............................. 42,000
Russell C. Chambers, M.D.................. 18,000
Julius Tabin.............................. 18,000
Paul F. Walter, M.D....................... 18,000
Nancy C. Arnold........................... 17,000
Anthony A. Cetrone........................ 66,750
------------------
Total................................ 179,750
------------------
------------------
</TABLE>
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.
59
<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, 1998, 1997 and 1996 were
$2,700, $6,300 and $10,500, respectively.
Dr. Julius Tabin, a member of the law firm of Fitch, Even, Tabin &
Flannery, the Company's patent counsel, has been a director of the Company since
its inception and he and other members of the firm are shareholders of the
Company. For the years ended December 31, 1998, 1997 and 1996, the law firm
billed the Company approximately $3,286, $20,000 and $30,000, respectively, for
legal services rendered and patent prosecution costs. The amounts owed to the
firm at December 31, 1998, 1997, and 1996 were approximately $18,000, $22,000
and $21,000, respectively.
Dr. Russell C. Chambers, a director and shareholder of the Company, is
engaged as a consultant to the Company. For the years ended December 31, 1998,
1997 and 1996, health insurance premiums paid on Dr. Chambers behalf amounted to
approximately $8,320, $8,900 and $5,900, respectively.
The Company obtains consulting services, with respect to acquisitions,
financial road shows, and other negotiations, from a shareholder and Director of
the Company. Fees for services paid to this Director were approximately $0 and
$25,000 for years 1998 and 1997, respectively. The amounts owed to the Director
were approximately $0 and $4,200 for December 31, 1998 and 1997, respectively.
60
<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 page 20 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:
<TABLE>
<CAPTION>
DESCRIPTION OF EXHIBIT
----------------------------------------------------------------
<S> <C>
10.34 Asset Purchase Agreement, dated March 5, 1997, between Micron
Products, Inc. and Newmark, Inc.................................
10.35 Manufacturing Agreement, dated March 5, 1997, between Micron
Products, Inc. and Newmark, Inc.................................
10.36 Asset Purchase Agreement, dated April 14, 1997, between
Arrhythmia Research Technology, Inc. and Astro-Med,
Inc.............................................................
10.37 Manufacturing Agreement, dated April 14, 1997, between
Arrhythmia Research Technology, Inc. and Astro-Med,
Inc.............................................................
10.38 Software Conversion Agreement, dated April 21, 1997, between
Arrhythmia Research Technology, Inc. and Softheart, Inc.........
10.39 License Agreement, dated April 21, 1997, between Arrhythmia
Research Technology, Inc. and Softheart, Inc....................
</TABLE>
(b) Reports filed in the fourth quarter on Form 8-K:
None
61
<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
on its behalf by the undersigned, thereunto duly authorized.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
BY: /s/ Anthony A. Cetrone
-------------------------
Anthony A. Cetrone
Chairman of the Board & President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- -------------------------------------- ----------------------------------------- -------------------
<S> <C> <C>
Chairman of the Board & President,
Arrhythmia Research Technology, Inc.,
President & Chief Executive Officer,
/s/ Anthony A. Cetrone Micron Products Inc. March 30, 1999
- --------------------------------------
Anthony A. Cetrone
/s/ Russell C. Chambers Director March 30, 1999
- --------------------------------------
Russell C. Chambers
/s/ Julius Tabin Director March 30, 1999
- --------------------------------------
Julius Tabin
/s/ E. P. Marinos Director March 30, 1999
- --------------------------------------
E. P. Marinos
/s/ Paul F. Walter Director March 30, 1999
- --------------------------------------
Paul F. Walter
</TABLE>
62
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------------ ---------------------------------------------------------------------------------------------------- -------
<S> <C> <C>
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)
</TABLE>
63
<PAGE>
<TABLE>
<S> <C> <C>
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.................
10.34 Asset Purchase Agreement, dated March 5, 1997, between Micron Products, Inc. and Newmark, Inc.
10.35 Manufacturing Agreement, dated March 5, 1997, between Micron Products, Inc. and Newmark, Inc.
10.36 Asset Purchase Agreement, dated April 14, 1997, between Arrhythmia Research Technology, Inc. and
Astro-Med, Inc.
10.37 Manufacturing Agreement, dated April 14, 1997, between Arrhythmia Research Technology, Inc. and
Astro-Med, Inc.
10.38 Software Conversion Agreement, dated April 21,1 997, between Arrhythmia Research Technology, Inc.
and Softheart, Inc.
10.39 License Agreement, dated April 21, 1997, between Arrhythmia Research Technology, Inc. and
Softheart, Inc.
22.0 Subsidiaries..................................................................................... (f)
28.0 1987 Incentive Stock Option Plan................................................................. (a)
28.1 Option Agreement, dated March 18, 1991, between the Company and Julius Tabin..................... (f)
28.2 Option Agreement, dated March 18, 1991, between the Company and Robert A. Simms.................. (f)
28.3 Option Agreement, dated March 18, 1991, between the Company and Tom Podl......................... (f)
28.4 Option Agreement, dated March 18, 1991, between the Company and Paul F. Walter................... (f)
28.5 Option Agreement, dated March 18, 1991 between the Company and Russell C. Chambers............... (f)
28.6 Option Agreement, dated August 21, 1990, between the Company and Robert A. Simms................. (f)
28.7 Option Agreement, dated March 8, 1993, between the Company and Anthony A. Cetrone....... (i)
28.8 Option Agreement, dated March 8, 1993, between the Company and Wayne Schroeder. ........... (i)
28.9 Merger Agreement, dated December 26, 1993, between Micron Products Inc. and Micron Medical
Products Inc..................................................................................... (i)
28.10 Articles of Merger of Parent and Subsidiary...................................................... (i)
28.11 Consent Judgment signed by Arrhythmia Research Technology, Inc. and Corazonix Corporation and
entered on November 15, 1993..................................................................... (h)
</TABLE>
64
<PAGE>
(A) Incorporated herein by reference from a Registration Statement on
Form S-18 as filed with the Commission in April 1988,
Registration Statement No. 33-20945-FW.
(B) Incorporated herein by reference from a Form 10-K as filed with
the Commission in March 1990.
(C) Incorporated herein by reference from a Registration Statement on
Form S-1 as filed with the Commission in August 1990,
Registration Statement No. 33-36607.
(D) Incorporated herein by reference from a Form 10-K as filed with
the Commission in March 1992.
(E) Incorporated by reference from Form 8-K as filed with the
Commission on December 10, 1992.
(F) Incorporated herein by reference from a Form 10-K as filed with
the Commission in March 1993
(G) Incorporated by reference from Form 8-K as filed with the
Commission on July 15, 1993
(H) Incorporated by reference from Form 8-K as filed with the
Commission on November 22, 1993.
(I) Incorporated by reference from Form 8-K as filed with the
Commission of June 30, 1998.
(J) Incorporated by reference from Form 8-K-A as filed with the
Commission of July 10, 1998.
(K) Incorporated by reference from Form 8-K as filed with the
Commission September 29, 1998.
(L) Incorporated by reference from Form 10-K as filed with the
Commission in March 1994.
(M) Incorporated by reference from Form 10-K as filed with the
Commission in March 1995
65
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
SCHEDULE II
REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE
To the Shareholders
Arrhythmia Research Technology, Inc.
The audit referred to in our report dated February 26, 1999 relating to
the consolidated financial statements of Arrhythmia Research Technology, Inc.
and Subsidiary, which is contained in Item 8 of this form 10-K included the
audit of the financial statements schedule listed in Item 14 (a)(2). This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audit.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
Boston, Massachusetts /s/ BDO Seidman L.L.P.
February 26, 1999 ----------------------
66
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
SCHEDULE II
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 elsewhere in this Form
10-K. In connection with audits of such financial statements, we have also
audited the 1997 and 1996 information in the financial statement schedule
listed in Item 14(a)(2) herein.
In our opinion, the 1997 and 1996 information in 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/ PricewaterhouseCoopers LLP
- ------------------------------
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 20, 1998
67
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning of Costs and at End
Period Expenses Deductions of Period
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
1998 $ 61,318 $ 21,518 $ 10,644 $ 72,192
- --------------------------------------------------------------------------------------------------------------------------
1997 $ 29,864 $ 39,000 $ 7,546 $ 61,318
- --------------------------------------------------------------------------------------------------------------------------
1996 $ 18,820 $ 17,547 $ 6,503 $ 29,864
- --------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR SLOW-MOVING INVENTORIES:
- --------------------------------------------------------------------------------------------------------------------------
1998 $ 820,610 $ 202,225 $ - $ 1,022,835
1997 $ 912,952 $ - $ 92,342 $ 820,610
- --------------------------------------------------------------------------------------------------------------------------
1996 $1,113,232 $ - $200,280 $ 912,952
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1999
<CASH> 558
<SECURITIES> 0
<RECEIVABLES> 1,380
<ALLOWANCES> (72)
<INVENTORY> 1,472
<CURRENT-ASSETS> 3,671
<PP&E> 6,994
<DEPRECIATION> (3,005)
<TOTAL-ASSETS> 9,990
<CURRENT-LIABILITIES> 1,261
<BONDS> 976
0
0
<COMMON> 37
<OTHER-SE> 7,922
<TOTAL-LIABILITY-AND-EQUITY> 9,990
<SALES> 8,875
<TOTAL-REVENUES> 9,360
<CGS> 6,127
<TOTAL-COSTS> 2,861
<OTHER-EXPENSES> 12
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 63
<INCOME-TAX> 199
<INCOME-CONTINUING> (136)
<DISCONTINUED> 0
<EXTRAORDINARY> 192
<CHANGES> 0
<NET-INCOME> (136)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
