<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, 1999 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 (IRS EMPLOYER
OF INCORPORATION OF ORGANIZATION) IDENTIFICATION NUMBER)
1101 SOUTH CAPITAL OF TEXAS HIGHWAY 78746
BUILDING G, SUITE 200 (ZIP CODE)
AUSTIN, TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(512) 347-9640
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
On March 24, 2000, there were 3,404,377 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, 2000, the aggregate market value
of the voting stock of the registrant held by non-affiliates was $11,064,225
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.
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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 Tri-Pac, the
1200 EPX-TM-, the LP-Pac Q-TM-, the PREDICTOR IIc-TM-, and the
PREDICTOR-Registered Trademark- I. 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 received
royalties on sales of the CardioLab product of 3% of net receipts on the
first $10,000,000 and 1% on any excess in 1999. 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, 2000 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,
-------------------------------------------------------------------
1999 % 1998 % 1997 %
-------------------- --------------------- --------------------
<S> <C> <C> <C>
Sensors & Snaps....... $ 9,534,569 92 $ 8,444,870 90 $ 9,495,653 80
Polymers.............. 183,839 2 - - - -
CardioLab & CardioMapp 384,598 4 485,331 5 1,332,099 11
SAECG equipment....... 276,578 2 429,300 5 673,414 6
K-3 CathLab........... - 0 1,095 0 386,021 3
-------------------- --------------------- --------------------
Total............. $ 10,379,584 100 $ 9,360,596 100 $ 11,887,187 100
==================== ===================== ====================
</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.
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RECENT DEVELOPMENTS
DISCONTINUATION OF CATH LAB SYSTEMS
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 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 is
substantially complete. The Company determined, however, that the K3 required
significant modifications and began work in September 1998 on the development
of a new state-of-the-art cath lab system. In November, 1999 the Company decided
to discontinue the development indefinitely.
SOFTWARE MODIFICATION
SIGNAL AVERAGED ECG. 1999 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 its new PREDICTOR software with
software developed by NORAV MEDICAL Ltd. which performs stress and ECG
testing. The new device, called the "Tri-Pac, is now completed and the
Company has obtained a CE mark for sale of the product in Europe.
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
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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 infraction was published in the American Heart Journal in
1997. In the absence of late potentials, the probability of having no arrhythmic
event was 99% in the first year, and 96% in five years. On the other hand, the
presence of late potentials found in the SAECG represents the strongest single
predictor of future arrhythmic risk in patients after a first acute myocardial
infarction, with a 4.6-fold increase in the risk of sudden death or sustained
ventricular tachycardia. The results of research presented at a meeting at the
1999 American College of Cardiology indicate that T-wave alternans and late
potential seem to be independent predictors for ventricular tachyarrhythmias in
patients with post-myocardial infarctions. Although T-wave alternans had a
higher sensitivity, late potentials had a higher specificity. It was concluded
that a combination of both tests could identify high risk patients more
accurately.
1200 EPX
The 1200 EPX is a specialized high resolution ECG system used to detect late
potentials which cannot be detected by conventional surface ECG instruments. The
1200 EPX is used in conjunction with an MS-DOS based personal computer utilizing
the patented Simson bi-directional Butterworth filtering technique. The 1200 EPX
acquires, digitizes, averages and filters the cardiac signals providing late
potential analysis with its time domain and frequency-domain analysis software.
ART has the rights to the use of the Simson bi-directional Butterworth filtering
technique for the detection of late potentials in the terminal portion of the
QRS cycle. This method, 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.
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TRI-PAC
The new Windows-based PREDICTOR software has been combined with software
developed by NORAV MEDICAL Ltd. In one system which performs stress and ECG
testing.
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 1999.
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 was
renegotiated in 1999 providing for monthly payments. The final payment will be
payable in May, 2001. Pursuant to the note, ART owes to Astro-Med, Inc.
approximately $178,300, however, ART is currently attempting to renegotiate
the terms of the note.
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, which was terminated in November, 1999 before
completion.
5
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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.
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.
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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 would continue
to manufacture and service the machines on behalf of Micron for a period of one
year for a specified price. The manufacturing of the machines has been taken
over by Micron at the start of 2000.
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
POLYMER OPERATION
During the year the Company had a trial polymer operation utilizing some
existing equipment which resulted in approximately $184,000 in sales. The
Company decided not to pursue the operation so as not to deviate from the core
business and decided to sell all existing polymer equipment. The Company will be
investigating some new products.
The following table shows sales of sensors, snaps, snap machines and polymers
by Micron for the years ended December 31:
<TABLE>
<CAPTION>
1999 % 1998 % 1997 %
----------------- --------------------- -------------------
<S> <C> <C> <C>
Sensors $ 7,583,530 78 $ 6,817,112 81 $ 7,938,325 84
Snaps 1,797,008 18 1,514,521 18 1,511,558 16
Snap Machines 154,031 2 113,237 1 -
45,770
Polymer 183,839 2 - - - -
------------------- --------------------- -------------------
Total $ 9,718,409 100 $ 8,444,870 100 $ 9,495,653 100
=================== ===================== ===================
</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.
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.
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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 would 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, 2000,
subject to acceptable findings and any fiscal budgetary constraints.
During 1999, a Method 3 Risk Characterization was performed demonstrating that
a condition of non-significant resk exists at the site. Based on this and prior
work characterizing the source and extend of the contamination, a Downgradient
Property Status Submittal and a Notice of Activity and Limitation Use (AUL) on
the part of the property were filed. The completion of the Phase II and Response
Action Outcome was filed on February 28, 2000.
Associated with the review of the Phase II report by the DEP, it is
anticipated that Micron will need to conduct a 3-5 year groundwater monitoring
program. The company could incur costs up to $50,000 for this program over the
next 3 to 5 years. 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
implement savings related to recovery and recycling of water, silver and other
chemicals to offset some of the costs of the improvements is expected over the
next two years.
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 legal counsel perceive a favorable outcome to
the proceedings.
OPERATIONS
During 1999, 1998 and 1997, Micron spent approximately $167,400, $102,500 and
$320,000, 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.
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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. 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, 1999, three major customers accounted for 37%, 28% 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,
------------------------------------------------------------------------------
1999 % 1998 % 1997 %
------------- ------- -------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
United States....................... $ 3,349,427 32 $ 4,898,191 52 $ 7,156,957 60
Europe.............................. 2,951,797 28 2,678,710 28 2,726,142 23
Canada, Mexico & South America...... 3,679,873 36 1,557,356 17 1,715,115 15
Pacific Rim......................... 315,256 3 173,966 2 236,654 2
Other............................... 83,231 1 52,373 1 52,319 -
------------- ------- -------------- ------- ------------- -------
Total........................... $ 10,379,5846 100 $ 9,360,596 100 $ 11,887,187 100
------------- ------- -------------- ------- ------------- -------
</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.
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.
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.
9
<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.
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.
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.
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.
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.
10
<PAGE>
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, 1999, 1998, and 1997, ART had research and development expenses of
approximately $297,000, $343,000, and $371,000, 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. ART has also increased its umbrella
policy to $5,000,000. Micron also maintains a general liability insurance policy
which includes product liability coverage of $2,000,000. To date, there have
been no asserted or threatened claims against the Company. Although Company
management believes the present insurance coverage is adequate for the types of
products 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.
11
<PAGE>
PATENTS AND PROPRIETARY TECHNOLOGY
ART
ART holds an exclusive license under the Simson Patent, which covers the
signal-averaging and filtering technologies, which are utilized in the 1200 EPX,
LP-Pac Q, and PREDICTOR 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.
12
<PAGE>
EMPLOYEES
ART has five full-time employees, including three administrative, sales,
marketing and supervisory personnel, and two engineering personnel. Micron
employs fifty-one full time employees and two part-time employees, including
eighteen administrative, sales and supervisory personnel, eleven quality control
personnel and twenty-four production personnel.
ITEM 2. PROPERIES
From January 1997 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 $2,657.
The manufacturing facility and offices of Micron are located in an industrial
area in Fitchburg, Massachusetts. The facility consists of two buildings. The
first building, which was purchased in April 1994, consists of a 22,000 square
foot, six story building. The second building, which was purchased in September
1996 for $480,000, is a 94,000 square foot, two story building. From January
through August of 1997 Micron rented 18,800 square feet of space. The average
monthly rent in 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 November 11, 1999
b. Anthony A. Cetrone and Russell C. Chambers were elected as directors of
the Company at the meeting. E. P. Marinos, Juluis Tabin and Paul F.
Walter continued to serve as directors.
Anthony A. Cetrone 3,237,523 FOR, 15,604 WITHHELD
Russell C. Chambers 3,236,823 FOR, 16,304 WITHHELD
c. Not applicable
d. Not applicable
13
<PAGE>
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.
<TABLE>
<CAPTION>
HIGH LOW
--------- --------
<S> <C> <C>
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
Year Ended December 31, 1999
1st Quarter $ 1 1/8 $ 1 5/16
2nd Quarter 1 3/8 1 3/16
3rd Quarter 2 7/16 1 3/16
4th Quarter 2 3/8 1 3/8
</TABLE>
As of March 24, 2000 the number of recordholders of ART's common stock was
estimated to be 1300. On March 24, 2000 the closing price for the common stock
on the American Stock Exchange was $3.25.
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.
14
<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,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue............................................ $ 10,380 $ 9,360 $ 11,887 $ 24,788 $ 22,928
Cost of sales...................................... 6,758 6,127 7,932 20,115 17,947
---------- ---------- -------- ----------- ---------
Gross profit.................................. 3,622 3,233 3,955 4,673 4,981
Selling and marketing.............................. 393 247 499 610 474
General and administrative......................... 2,143 2,141 2,491 2,420 2,150
Research and development........................... 298 343 371 173 183
Amortization of goodwill........................... 130 130 134 115 115
Write-down of assets............................... - 192 - - -
------------------------------------------------------------
Income from operations......................... 658 180 460 1,355 2,059
Interest and other expenses, net................... (213) (117) (378) (278) (116)
---------- ---------- -------- ----------- ---------
Income before income taxes........................ 445 63 82 1,077 1,943
Income tax benefit (expense)....................... (20) (199) (50) (460) (818)
---------- ---------- -------- ----------- ---------
Net income (loss).............................. $ 425 $ (136) $ 32 $ 617 $ 1,125
========== ========== ======== =========== =========
Basic and diluted net income (loss) per share.. $ .12 $ (.04) $ .01 $ .17 $ .31
========== ========== ======== =========== =========
Weighted average number of shares outstanding...... 3,489 3,561 3,563 3,608 3,683
========== ========== ======== =========== =========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Total assets....................................... $ 9,702 $ 9,990 $ 11,832 $ 12,964 $ 12,968
Long term obligations (including current portion).. $ 808 $ 1,000 $ 1,466 $ 928 $ 1,089
Redeemable common stock............................ $ - $ - $ - $ - $ 10
Working capital.................................... $ 2,174 $ 2,282 $ 2,293 $ 2,891 $ 2,803
Shareholders' equity............................... $ 8,222 $ 7,959 $ 8,087 $ 8,012 $ 7,353
</TABLE>
15
<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,
----------------------------
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Revenue.................................. 100.0% 100.0% 100.0%
Cost of sales............................ 65.1 65.5 66.7
Gross profit............................. 34.9 34.5 33.3
Selling and marketing.................... 3.8 2.6 4.2
General and administrative............... 20.6 22.9 21.0
Research and development................. 2.9 3.7 3.1
Amortization of goodwill................. 1.3 1.4 1.1
Write-down of assets..................... - 2.0 -
Other, net............................... (2.0) (1.3) ( 3.2)
----------------------------
Income before income taxes................ 4.3 0.6 0.7
Income tax provision..................... (0.2) (2.1) ( 0.4)
----------------------------
Net income (loss).................. 4.1% (1.5%) 0.3%
============================
</TABLE>
REVENUE
Revenue increased by approximately $1,020,000 or 11% for the year ended
December 31, 1999 as compared to 1998. The increase in revenue is attributable
primarily to the change in sensor and snap sales.
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 1999 and 1998, ART received a 3% and 4% commission, respectively,
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 $385,000
and $485,000, respectively. From January 1, 2000 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 $2,527,000 or 21% for the year ended
December 31, 1998 as compared to 1997. The decrease in revenues is attributable
primarily to the change in the Prucka contract for 1998, as discussed above.
16
<PAGE>
subsidiary Micron (collectively the "Company"):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 % 1998 % 1997 %
-------------------- --------------------- --------------------
<S> <C> <C> <C>
Sensors & Snaps....... $ 9,534,569 92 $ 8,444,870 90 $ 9,495,653 80
Polymers.............. 183,839 2 - - - -
CardioLab & CardioMapp 384,598 4 485,331 5 1,332,099 11
SAECG equipment....... 276,578 2 429,300 5 673,414 6
K-3 Cath-Lab - - 1,095 - 386,021 3
-------------------- --------------------- --------------------
Total............. $ 10,379,584 100 $ 9,360,596 100 $ 11,887,187 100
==================== ===================== ====================
</TABLE>
COST OF SALES
Cost of sales as a percentage of revenue decreased from 65.5% in 1998 to 65.1%
in 1999. The decrease is due primarily to a cost reduction program at Micron.
The cost of sales as a percentage of revenue decreased from 66.7% in 1997 to
65.5% in 1998. The decrease was due primarily to the Pruka contract. ART
exclusively sold and distributed the electrophysiology products on behalf of
Prucka. In 1999 and 1998, the Company received a commission on sales of
approximately $385,000 and $485,000, respectively. 1997 was the first year in
which ART was not the exclusive distributor under the Pruka Contract.
SELLING AND MARKETING
Selling and marketing expenses as a percentage of sales increased from 2.6% in
1998 to 3.8% in 1999. The increase is primarily due to the an increase in
advertising and consulting fees to market the new windows based software in the
United States and Europe. Selling and Marketing expenses as a percent of revenue
decreased from 4.2% in 1997 to 2.6% in 1998. The decrease was due primarily to
the software problems with the K-3 cath-lab and the decrease in sales due to the
pruka Contract.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses as a percentage of sales decreased from
22.9% in 1998 to 20.6% in 1999 due to the increase in sales. General and
administrative expenses as a percent of sales was 21.0% in 1997.
RESEARCH AND DEVELOPMENT
Research and Development costs decreased from $343,000 in 1998 to $298,000 in
1999 and decreased $28,000 from 1997 to 1998. The decrease was due to the fact
that the Company had fewer people engaged in R & D activities. Research and
development costs have not been material to the operations of Micron.
INTEREST EXPENSE
Interest expense was approximately $133,000 in 1999 as compared to $220,000 in
1998. 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. The company paid the term loan in
full in 1999 and only used its revolving line of credit minimally during the
year. Interest expense in 1997 was approximately $238,000.
INCOME TAXES
For the years ended December 31, 1999, 1998 and 1997 taxes on income were 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
inventory reserve 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. There were no asset impairments
in 1999.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of approximately $2,174,000 and $2,282,000 and
cash and cash equivalents of approximately $456,000 and $558,000 at December 31,
1999 and 1998, respectively. During 1999, Micron paid off their term loan.
During 1998 Micron paid off three leases as well as its revolver. Micron reduced
expenses and improved the yields of its manufacturing operation. ART moved to
smaller quarters in November, 1998 and also downsized from eleven to seven
people. During 1997, working capital decreased primarily due to capital
expenditures, implementation of a new waste water treatment system, and
repayments of debt.
The Company had a credit facility with a bank which expired December 15,
1999. There were no outstanding borrowings on the working capital line of credit
as of December 31, 1998. During fiscal 1999, 1998 and 1997, the maximum amount
of borrowings under the line of credit was approximately, $10,000, $723,000 and
$1,422,000, respectively. The weighted average interest rate on the Company's
line of credit was approximately 9% for the years 1999, 1998 and 1997,
respectively. The Company has negotiated a new credit facility under similar
terms.
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 May, 2001.
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 1999, 1998 and 1997 was
approximately $919,000, $1,839,000 and $1,959,000, respectively. The change in
cash provided by operations was due primarily to the changes in net income,
inventories, accounts receivable and payables.
Net cash used in investing activities in 1999 of approximately $583,000 and in
1998 of approximately $524,000 consisted of expenditures on capital equipment
for Micron's manufacturing. Net cash used in investing activities in 1997 was
approximately $1,463,000 as a result of expenditures on capital equipment for
Micron's manufacturing facility.
Capital expenditures during 1999, 1998 and 1997 were due primarily to Micron's
need to upgrade and maintain its manufacturing equipment and facilities. During
1999 and 1998, the Company's 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.
As discussed under Environmental Regulation, Micron had approximately $50,000
accrued at December 31, 1999 and approximately $92,000 accrued at December 31,
1998, to cover estimated costs to be incurred related to site assessment,
monitoring, and remediation. Management estimates that these costs could
approximate $50,000 depending upon the final decision by the DEP.
During 1999, 1998 and 1997, Micron spent approximately $167,400, $102,500 and
$320,000, 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 1999, 1998 and 1997 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).
18
<PAGE>
During 1999, 1998 and 1997 respectively, net cash used in financing
activities totaled approximately $438,000, $972,000 and $513,000 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 United States or
international markets in recent years has had a significant effect on its
results of operations.
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Cautionary statements under the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995: This Form 10-K contains certain
statements of a forward looking nature relating to future events or the future
financial performance of the Company. Such forward-looking statements are only
predictions and are subject to risks and uncertainties that could cause actual
results or events to differ materially and adversely from the results discussed
in the forward-looking statements. When used in this Form 10-K, the words or
phrases "believes," "anticipates," "expects," intends," "will likely result,"
"estimates," "projects" or similar expressions are intended to identify
predictions and the actual events or results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, risks regarding
demand for new and existing products; the success of new product development
efforts; the uncertainty as to whether certain products will receive approval
for sale in the United States; the Company's highly competitive industry and
rapid technological change within the industry and the fact that the industry is
dominated by large companies with much greater resources than the Company; and
the reliance on key personnel.
The Company cautions investors and others to review the cautionary statements
set forth in this Form 10-K and cautions that other factors may prove to be more
important in affecting the Company's business and results of operations. These
forward-looking statements speak only as of the date of this report. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this report or to reflect the occurrence of
anticipated events.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 27-50
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Arrhythmia Research Technology, Inc.
We have audited the accompanying consolidated balance sheets of Arrhythmia
Research Technology, Inc. and Subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arrhythmia
Research Technology, Inc. and Subsidiary as of December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, L.L.P.
Boston, Massachusetts
February 18, 2000
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity and cash flows of Arrhythmia Research Technology, Inc.
and Subsidiary for the year ended December 31, 1997. 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 results of their operations of
Arrhythmia Research Technology, Inc. and Subsidiary and their cash flows for the
year ended December 31, 1997, 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, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 455,674 $ 557,533
Trade and other accounts receivable, net of allowance
for doubtful accounts of $83,203 and $72,192 1,653,098 1,307,668
Inventories (Note 4) 1,082,517 1,472,726
Deposits, prepaid expenses and other current assets 52,172 70,105
Income taxes recoverable 329,408 262,810
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 3,572,869 3,670,842
PROPERTY, PLANT AND EQUIPMENT, net (Notes 5 and 7) 3,835,831 3,988,766
GOODWILL, net of accumulated amortization (Note 6) 1,586,723 1,717,242
OTHER INTANGIBLES, net of accumulated amortization (Note 6) 122,887 97,998
DEFERRED INCOME TAXES, net (Note 8) 423,923 374,923
OTHER ASSETS 159,453 140,373
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 9,701,686 $ 9,990,144
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations (Note 7) $ 23,811 $ 28,220
Current maturities of bonds payable and other
long-term debt (Note 7) 711,464 356,751
Accounts payable 412,933 681,276
Accrued expenses 250,714 322,798
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,398,922 1,389,045
BONDS PAYABLE AND LONG-TERM DEBT (Note 7) 46,815 565,810
CAPITAL LEASE OBLIGATIONS, net of current portion (Note 7) 25,530 49,341
DEFERRED REVENUE 8,680 27,036
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,479,947 2,031,232
- ----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 7, 9, 10 and 13):
SHAREHOLDERS' EQUITY
(Note 13):
Preferred stock, $1 par value; 2,000,000 shares authorized,
none issued - -
Common stock, $.01 par value; 10,000,000 shares authorized;
3,711,883 and 3,679,216 issued, respectively 37,119 36,792
Additional paid-in-capital 8,946,293 8,909,307
Common stock held in treasury, 298,406 and 144,515 shares at cost (1,151,892) (913,084)
Unearned ESOP compensation - (39,277)
Retained earnings (accumulated deficit) 390,219 (34,826)
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,221,739 7,958,912
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,701,686 $ 9,990,144
======================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES (Note 14) $ 10,379,584 $ 9,360,596 $ 11,887,187
COST OF SALES 6,757,519 6,127,451 7,931,599
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 3,622,065 3,233,145 3,955,588
- ----------------------------------------------------------------------------------------------------------------------
SELLING AND MARKETING 392,851 247,340 498,907
GENERAL AND ADMINISTRATIVE 2,142,607 2,140,804 2,491,519
RESEARCH AND DEVELOPMENT 297,568 342,914 371,063
AMORTIZATION OF GOODWILL 130,519 129,890 134,324
LOSS FROM IMPAIRMENT OF LONG-LIVED ASSETS (Note 3) - 192,201 -
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 658,520 179,996 459,775
OTHER INCOME (EXPENSE):
Interest expense (132,919) (219,627) (238,313)
Other income (expense), net (80,243) 102,776 (139,710)
- ----------------------------------------------------------------------------------------------------------------------
Total other expense, net (213,162) (116,851) (378,023)
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 445,358 63,145 81,752
INCOME TAX PROVISION (Note 8):
Current (69,313) (115,583) (15,156)
Deferred 49,000 (84,000) (34,844)
- ----------------------------------------------------------------------------------------------------------------------
(20,313) (199,583) (50,000)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 425,045 $ (136,438) $ 31,752
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE (Note 2):
Basic and diluted $ 0.12 $ (0.04) $ 0.01
======================================================================================================================
</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>
DECEMBER 31, 1996 3,679,216 $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 3,679,216 36,792 8,909,307 (878,787) (82,134) 101,612 8,086,790
Treasury stock purchase
of 28,400 shares - - - (34,297) - - (34,297)
ESOP payments - - - - 42,857 - 42,857
Net loss - - - - - (136,438) (136,438)
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 3,679,216 36,792 8,909,307 (913,084) (39,277) (34,826) 7,958,912
Issuance of common stock 32,667 327 36,986 - - - 37,313
Treasury stock purchase
of 153,891 shares - - - (238,808) - - (238,808)
ESOP payments - - - - 39,277 - 39,277
Net income - - - - - 425,045 425,045
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 3,711,883 $37,119 $8,946,293 $(1,151,892) $ - $390,219 $8,221,739
========================================================================================================================
</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, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 425,045 $ (136,438) $ 31,752
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Director fees paid in stock 37,313 - -
Depreciation 693,648 683,418 577,915
Provision for doubtful accounts 11,011 10,874 -
Amortization 194,092 198,500 159,765
Loss from impairment of long-lived assets - 192,201 -
Deferred income tax provision (49,000) 84,000 34,844
Deferred revenue (18,356) (26,860) (33,810)
Changes in assets and liabilities:
Trade and other accounts receivable (356,441) 1,078,727 2,050,355
Inventories 390,209 528,397 237,313
Deposits, prepaid expenses and other assets (67,745) (19,562) 2,451
Accounts payable and accrued expenses (340,427) (754,648) (1,101,707)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 919,349 1,838,609 1,958,878
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (540,713) (477,017) (1,110,141)
Changes in other assets - - (14,791)
Other intangibles (42,397) (46,677) (338,000)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (583,110) (523,694) (1,462,932)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under credit facilities - (467,135) (691,525)
Proceeds from notes payable - - 462,920
Principal payments on long-term debt and capital leases (238,567) (513,745) (410,374)
Purchase of treasury stock (238,808) (34,297) -
Reduction of unearned ESOP compensation 39,277 42,857 42,857
Increase in cash overdraft - - 82,979
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (438,098) (972,320) (513,143)
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (101,859) 342,595 (17,197)
CASH AND CASH EQUIVALENTS, beginning of year 557,533 214,938 232,135
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 455,674 $ 557,533 $ 214,938
========================================================================================================================
</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.
BUSINESS ("ART"), a 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
CONSOLIDATION include the accounts of ART and Micron
(collectively the "Company"). All
intercompany balances and transactions have
been eliminated in consolidation.
REVENUE RECOGNITION Revenue from product sales is recognized
upon shipment of the product when
independent sales representatives or
distributors are responsible for
installation of systems, as the title and
risk of loss passes to the customer at the
time of shipment. However, in cases where
ART personnel are scheduled to perform this
in-service/installation, the revenue is not
recognized until completion of such
obligations. Revenue from the sale of
extended warranties is deferred and
amortized ratably over the life of the
warranty.
CASH AND CASH Cash and cash equivalents consist of cash on
EQUIVALENTS hand 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 inventories 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
CREDIT RISK expose the Company to concentrations of
credit risk, as defined by SFAS No. 105,
consist primarily of trade accounts
receivable, cash and cash equivalents.
ART's customer base for ECG and
electrophysiology products is primarily
comprised of hospitals and to a much lesser
extent of cardiologists and office based
practitioners. Micron products are sold to
manufacturers of disposable electrodes, who
are typically large diversified medical
product manufacturers. The Company does not
generally require collateral for its sales;
however, the Company believes that its terms
of sale provide adequate protection against
significant credit risk.
It is the Company's policy to place its cash
and cash equivalents in high quality
financial institutions. The Company does not
believe significant credit risk exists with
respect to these institutions.
ADVERTISING Advertising expenses consist primarily of
EXPENSES costs incurred in promoting the Company's
products, printed brochures and other
activities. The Company expenses advertising
costs as incurred. The Company's advertising
expense was approximately $52,000, $72,000
and $69,000 in 1999, 1998, and 1997
respectively.
PROPERTY, PLANT Property, plant and equipment are recorded
AND EQUIPMENT at cost and include expenditures which
substantially extend their useful lives.
Depreciation on property, plant and
equipment is calculated using the
straight-line method over the estimated
useful lives of the assets. Expenditures for
maintenance and repairs are charged to
earnings as incurred. When equipment is
retired or sold, the resulting gain or loss
is reflected in earnings.
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 $5,446, $3,759 and $1,134, for
the years ended December 31, 1999, 1998, and
1997, 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
(Continued) its long-lived and identifiable intangible
assets for possible impairment whenever
events or changes in circumstances indicate
that the carrying amount of the assets may
not be recoverable.
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.
PER SHARE DATA 128 "Earnings Per Share" which requires the
Company to present its basic earnings per
share and diluted earnings per share, and
certain other earnings per share disclosures
for each year presented. Basic earnings per
share is computed by dividing income
available to common shareholders by the
weighted average number of common shares
outstanding. The computation of diluted
earnings per share is similar to the
computation of basic earnings per share
except that the denominator is increased to
include the number of additional common
shares that would have been outstanding if
the dilutive potential common shares had
been issued. In addition, the numerator is
adjusted for any changes in income or loss
that would result from the assumed
conversions of those potential shares.
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
PER SHARE DATA years ended December 31, 1999, 1998, and
(Continued) 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) available
to common stockholders $ 425,045 $ (136,438) $ 31,752
Weighted average common
shares outstanding 3,488,650 3,560,713 3,563,101
Basic EPS $ 0.12 $ (0.04) $ 0.01
Diluted EPS:
Net income (loss) available
to common stockholders $ 425,045 $ (136,438) $ 31,752
Weighted average common
share outstanding 3,488,650 3,560,713 3,563,101
Assumed conversion of
common shares issuable
under stock option plan 60,544 - -
Weighted average common
and common equivalent
shares outstanding 3,549,194 3,560,713 3,563,101
Diluted EPS $ 0.12 $ (0.04) $ 0.01
</TABLE>
The following table summarizes securities
that were outstanding but not included in
the calculation of diluted earnings per
share because their effect would have been
antidilutive:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock options 14,000 209,000 340,000
Stock warrants 279,000 279,000 279,000
</TABLE>
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
FINANCIAL sheets for cash and cash equivalents,
INSTRUMENTS accounts receivable and accounts payable and
accrued liabilities approximate their fair
value due to the immediate or short-term
maturity of such instruments. The carrying
amounts reported for the promissory note and
bonds payable approximate fair value based
on the Company's incremental borrowing
rates.
COMPREHENSIVE The Company follows the provisions of
INCOME Statement of Financial Accounting Standards
No. 130, REPORTING COMPREHENSIVE INCOME,
("SFAS No. 130") which establishes standards
for reporting and display of comprehensive
income, its components, and accumulated
balances. Comprehensive income is defined to
include all changes in equity except those
resulting from investments by owners and
distributions to owners. Among other
disclosures, SFAS No. 130 stipulates that
all items that are required to be recognized
under current accounting standards as
components of comprehensive income be
reported in a financial statement that is
displayed with the same prominence as other
financial statements. The Company did not
have any components of comprehensive income
for the years ended December 31, 1999, 1998
and 1997.
32
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES
(Continued)
INDUSTRY SEGMENTS The Company follows the provisions of
Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS
No. 131"), which 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
STANDARD NOT Standards Board issued SFAS No. 133,
YET ADOPTED "Accounting for Derivatives Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS
No. 133 requires companies to recognize all
derivatives contracts as either assets or
liabilities in the balance sheet and to
measure them at fair value. If certain
conditions are met, a derivative may be
specifically designated as a hedge, the
objective of which is to match the timing of
gain or loss recognition on the hedging
derivative with the recognition of (i) the
changes in the fair value of the hedged
assets or liability or (ii) the earnings
effect of the hedged forecasted transaction.
For a derivative not designated as a hedging
instrument, the gain or loss is recognized
in income in the period of change. SFAS No.
133, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
Historically, the Company has not entered
into derivative contracts either to hedge
existing risks or for speculative purposes.
Accordingly, the Company does not expect
adoption of the new standard to affect its
financial statements.
33
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS On April 14, 1997, ART acquired from
ACTIVITY Astro-Med, Inc. substantially all of the
assets related to the following products (i)
the basic cardiac catheterization monitoring
system (the "K3-I"), (ii) the stand-alone
hemodynamic analysis package (the "K3-II"),
(iii) the network ready hemodynamic analysis
package (the K3-III"), and (iv) the control
work station (the K3-WI") (collectively, the
"K3 Products"). The purchase price for the
assets was $350,000, with $50,000 paid at
closing and a promissory note issued in the
amount of $300,000 (see Note 7).
During the year end December 31, 1998, the
Company recorded an impairment loss on the
long-lived assets related to the Astro-Med
acquisition. The impairment was the result
of the K3 Products technology failing to
meet competitive demands. Included in the
1998 results of operations is an impairment
loss of $192,201 which was due primarily to
the reduction of the goodwill carrying value
to zero. The Company also recorded a charge
in 1998 of approximately $261,000 in cost of
sales for the write-down of the related
inventory to its net realizable value.
4. INVENTORIES Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 252,237 $ 303,689
Work-in-process 233,966 330,812
Finished goods 596,314 838,225
--------------------------------------------------------------------------------------
Total $ 1,082,517 $ 1,472,726
======================================================================================
</TABLE>
34
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY, PLANT Property, plant and equipment consist of the
AND EQUIPMENT following:
<TABLE>
<CAPTION>
Asset
DECEMBER 31, Lives 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Machinery and equipment 5 to 15 years $ 4,764,551 $ 4,395,922
Equipment held for lease 10 years 539,222 451,456
Building and improvements 20 years 1,903,221 1,843,594
Furniture and fixtures 3 to 5 years 328,119 303,428
--------------------------------------------------------------------------------------
7,535,113 6,994,400
Less accumulated
depreciation (3,699,282) (3,005,634)
--------------------------------------------------------------------------------------
Net property, plant and
equipment $ 3,835,831 $ 3,988,766
======================================================================================
</TABLE>
The Company had approximately $135,400 of
assets under capital leases, included in
machinery and equipment, at December 31,
1999 and 1998. Accumulated depreciation on
these assets was approximately $33,307 and
$24,300 at December 31, 1999 and 1998,
respectively.
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 $106,721 and $54,125 at December 31,
1999 and 1998.
6. GOODWILL AND OTHER Goodwill and other intangibles consist of
INTANGIBLES the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 2,661,073 $ 2,661,073
Accumulated amortization (1,074,350) (943,831)
--------------------------------------------------------------------------------------
Net goodwill $ 1,586,723 $ 1,717,242
======================================================================================
Patents $ 351,812 $ 328,784
Software development costs 245,787 226,418
Accumulated amortization (474,712) (457,204)
--------------------------------------------------------------------------------------
Net other intangibles $ 122,887 $ 97,998
======================================================================================
</TABLE>
35
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEBT
REVOLVING CREDIT The Company had a credit facility with a
FACILITY bank which expired December 15, 1999. There
were no outstanding borrowings on the
working capital line of credit as of
December 31, 1998. During fiscal 1999, 1998
and 1997, the maximum amount of borrowings
under the line of credit was approximately
$10,000, $723,000 and $1,422,000,
respectively. The weighted average interest
rate on the Company's line of credit was
approximately 9% for the years 1999, 1998
and 1997, respectively.
The Company has negotiated a new credit
facility under similar terms.
LONG-TERM DEBT Long-term borrowings, excluding capital
lease obligations, consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Bonds payable $ 580,000 $ 533,935
$300,000 promissory note bearing interest at 8%
per annum, payable in monthly installments
of $9,551 through May 2001, collateralized
by equipment purchased. 178,279 223,125
Term note paid in 1999 - 141,670
Other obligations - 23,831
--------------------------------------------------------------------------------------
758,279 922,561
Less current maturities 711,464 356,751
--------------------------------------------------------------------------------------
Long-term bonds payable and debt $ 46,815 $ 565,810
======================================================================================
</TABLE>
36
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEBT
(Continued)
LONG-TERM DEBT In August 1995, the Company completed a
(Continued) $600,000 private bond placement. The bonds
carry an 11% interest rate and mature in May
2000. In connection with the private bond
placement, ART issued an aggregate of
279,000 warrants to the bondholders to
purchase ART common stock at $3.00 per
share. The warrants were exercisable upon
issuance and 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 1999, 1998 and 1997, the Company
recorded amortization of the bond discount
of $46,065, $48,000 and $48,000,
respectively and interest expense of
$66,000. The unamortized bond discount
remaining as of December 31, 1999 and 1998
was $20,000 and $66,065, 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. The note was amended in 1999
which extended the due date to May 31, 2001
and provided for monthly payments of
principal and interest of $9,551. The
maturities on the promissory note are
$131,464 and $46,815 for the years ended
December 31, 2000 and 2001, respectively.
37
<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>
2000 $ 27,800
2001 22,639
2002 5,660
--------------------------------------------------------------------------------------
Total minimum lease payments 56,099
Less amounts representing interest 6,758
--------------------------------------------------------------------------------------
49,341
Less current portion 23,811
--------------------------------------------------------------------------------------
Long-term capital lease obligation $ 25,530
======================================================================================
</TABLE>
38
<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,
1999 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State 69,313 115,583 15,156
--------------------------------------------------------------------------------------
Total 69,313 115,583 15,156
Deferred (49,000) 84,000 34,844
--------------------------------------------------------------------------------------
Total income tax expense $ 20,313 $ 199,583 $ 50,000
======================================================================================
</TABLE>
The Company's federal net operating loss
("NOL") carryforwards were approximately
$2,002,000 at December 31, 1999. During the
three years ended December 31, 1999, the
Company utilized approximately $0, $137,000
and $32,000, 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.
39
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES The components of the net deferred tax
(Continued) assets were as follows as of December 31:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Basis difference of equipment $ (59,770) $ -
Software development costs - (2,330)
--------------------------------------------------------------------------------------
Total deferred tax liability (59,770) (2,330)
--------------------------------------------------------------------------------------
Deferred tax assets:
Inventories 218,560 409,134
Patents 294,560 327,333
Other 346,009 254,719
Net operating loss carryforwards 680,680 682,355
Valuation allowance (1,056,116) (1,296,288)
--------------------------------------------------------------------------------------
Total deferred tax assets 483,693 377,253
--------------------------------------------------------------------------------------
Net deferred tax assets $ 423,923 $ 374,923
======================================================================================
</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.
40
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES The Company files a consolidated federal
(Continued) income tax return. For financial statement
purposes, the actual effective consolidated
tax rates have been applied to the income
before income taxes when calculating the tax
provision. The actual income tax provision
differs from the statutory income tax rate
(34%) as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision computed at
statutory rate $ 151,422 $ 21,470 $ 27,795
Increases (reductions) due to:
Nondeductible expenses 3,850 2,034 2,720
Amortization of goodwill 39,054 39,054 39,054
State income taxes net of
federal benefit 45,747 76,285 -
Changes in valuation
allowance estimates (240,172) 112,309 -
Other 20,412 (51,569) (19,569)
--------------------------------------------------------------------------------------
Income tax expense $ 20,313 $ 199,583 $ 50,000
======================================================================================
</TABLE>
41
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EMPLOYEE BENEFIT Micron established an Employee Stock
PLANS Ownership Plan ("ESOP") as a result of a
previous plan of reorganization. The ESOP is
non-contributory on the part of its
participants. All employees of the Company
are eligible for participation in the ESOP.
The ESOP borrowed $300,000 to purchase the
Company's shares. The proceeds were used to
pay creditors electing to receive cash under
the ESOP plan. The shares issued by the
Company to the ESOP are reflected as a
reduction in shareholders' equity. The
Company accounts for its ESOP in accordance
with Statement of Position 76-3.
Accordingly, all shares held by the ESOP,
allocated or unallocated, are treated as
outstanding in the earnings per share
calculation. The Company has elected to
recognize compensation expense based on
contributions made. There are no repurchase
obligations by the Company. The Company
contributed and recorded compensation
expense of $39,277, $42,857 and $42,857
during the years ended December 31, 1999,
1998, and 1997, respectively.
The Company sponsors an Employee Savings and
Investment Plan under Section 401(k) of the
Internal Revenue Code covering all eligible
employees of the Company. Employees can
contribute up to 20% of their eligible
compensation or up to the maximum allowable
by the IRS. The Company's matching
contributions are at the discretion of
management. The Company did not make any
contributions for the years ended December
31, 1999, 1998 and 1997, respectively.
10. COMMITMENTS AND
CONTINGENCIES
ROYALTIES ART licenses its signal-averaging technology
from an unrelated entity for a royalty fee
of 4.5% of gross sales, less certain
allowances for selling commissions and
discounts. Costs of obtaining patents are
offset against royalties due. To retain an
exclusive license for the technology, ART is
obligated to pay a minimum royalty of
$30,000 annually. The royalties paid were
$30,000, $35,000 and $25,000 for 1999, 1998
and 1997, respectively.
ELECTROPHYSIOLOGY ART and Prucka Engineering, Inc. ("Prucka"),
PRODUCTS CONTRACT the manufacturer of the CardioLab and
CardioMapp products (the "Products") have an
agreement related to ART's exclusive
distribution of the Products. The agreement
provides for ART to receive a 3% commission
on CardioLab sales through December 31,
2002. The commission percentage is reduced
to .75% on sales in excess of $10,000,000
annually. The commissions earned were
approximately $385,000, $485,000 and
$463,000 for the years 1999, 1998 and 1997,
respectively.
42
<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 approximately $50,000.
The Company accrues the best estimates of
these costs when it is probable that a
liability has been incurred. At December 31,
1999 and 1998, the balance sheet included an
accrual for these costs of approximately
$50,000 and $92,000, respectively. In
addition, to comply with environmental laws
and regulations, the Company spent
approximately $700,000 for capital
improvements in 1997.
Based on the Company's analyses and subject
to the difficulty in estimating these future
costs, the Company expects that any sum it
may be required to pay in connection with
environmental matters is not reasonably
likely to exceed the amounts disclosed in an
amount which would have a material adverse
effect on financial condition, result of
operations or liquidity.
43
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND
CONTINGENCIES
(Continued)
OPERATING LEASES The Company leases certain office space,
facilities, vehicles and equipment under
non-cancelable lease arrangements. Rent
expense under all operating leases was
approximately $115,000, $106,000 and
$158,000 in 1999, 1998 and 1997,
respectively.
Future minimum operating lease payments as
of December 31, 1999 are approximately as
follows:
<TABLE>
<CAPTION>
Operating
YEAR Leases
--------------------------------------------------------------------------------------
<S> <C>
2000 $ 84,000
2001 51,000
2002 37,000
2003 14,000
2004 7,000
--------------------------------------------------------------------------------------
Total $ 193,000
======================================================================================
</TABLE>
44
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SUPPLEMENTAL Cash paid for income taxes and interest for
CASH FLOWS the years ended December 31 is as follows:
INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes $ 110,172 $ 94,860 $ 350,000
Interest $ 139,060 $ 218,447 $ 245,845
Non-cash activities:
Capital asset lease additions
and related obligation $ - $ - $ 485,080
Directors fees paid in stock $ 37,313 $ - $ -
</TABLE>
12. RELATED PARTY The Company obtains legal services with
TRANSACTIONS respect to its patents from a law firm, a
partner of which is a shareholder and
Director of the Company. Fees for services
and patent prosecution costs paid to this
firm were approximately $41,000, $3,300 and
$20,000 for years 1999, 1998 and 1997,
respectively. The amounts owed to this firm
at December 31, 1999, 1998 and 1997 were
approximately $31,000, $18,000 and $22,000,
respectively.
Cardio Digital Inc. ("CDI") has four
shareholders who are also shareholders of
the Company. Royalties to CDI were $2,700,
$2,700 and $6,300 for years 1999, 1998, and
1997, respectively. The amounts owed to CDI
at December 31, 1999, 1998 and 1997 were
$15,700, $19,000 and $16,300, respectively.
During the years 1999, 1998, and 1997
healthcare coverage premiums of
approximately $8,500, $8,300 and $8,900,
respectively, were paid on behalf of a
Director of the Company in exchange for
consulting services.
The Company obtains consulting services from
a shareholder and Director of the Company
related to acquisitions and other
negotiations. Fees for services paid were
approximately $0, $0 and $25,000 for years
1999, 1998 and 1997, respectively.
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. The range of exercise prices was
$1.06 to $6.00 per share for all options
outstanding and granted under the Option
Plan with a weighted average exercise price
of $1.63 per share and weighted average
remaining life of 4.7 years. In September
1998, the Board of Directors repriced 96,000
options outstanding under the Option Plan to
reflect the fair market value on the
effective date of $1.06 per share.
45
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS Transactions under the Option Plan are
(Continued) summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
beginning of year 110,000 163,000 177,000
Granted - - 25,000
Cancelled/expired (2,500) (53,000) (39,000)
--------------------------------------------------------------------------------------
Options outstanding at
end of year 107,500 110,000 163,000
======================================================================================
Options exercised to date 2,000 2,000 2,000
--------------------------------------------------------------------------------------
Available for grant at
end of year 140,500 138,000 85,000
======================================================================================
Exercisable at end of year 102,700 95,400 91,800
======================================================================================
Weighted-average fair value
of options granted $ - $ - $ 1.34
======================================================================================
</TABLE>
During 1994, options for 144,000 shares,
expiring in 2004, at an exercise price of
$3.00, were granted to eight Directors.
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, 1999 the exercise price
for all Non-plan options outstanding was
$1.06 per share with a weighted average
exercise price of $1.06 per share and a
weighted average remaining life of 4.9
years.
46
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS Transactions relative to Non-plan options
(Continued) are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
beginning of year 99,000 177,000 197,000
Granted - - -
Cancelled/expired - (78,000) (20,000)
--------------------------------------------------------------------------------------
Options outstanding at
end of year 99,000 99,000 177,000
======================================================================================
Exercisable at end of year 99,000 96,750 136,500
======================================================================================
</TABLE>
The Company accounts for stock options at
intrinsic value in accordance with
Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations. Accordingly, no
compensation expense has been recognized for
the plans. Had compensation cost for the
Company's stock options been determined
based upon the fair value at the grant date
for awards under the plans consistent with
the methodology prescribed under Statement
of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's net income (loss) would have been
adjusted to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $ 425,045 $ (136,438) $ 31,752
Net income (loss) - pro forma $ 414,161 $ (269,539) $ (10,867)
Basic and diluted income (loss)
per share - as reported $ 0.12 $ (0.04) $ .01
Basic and diluted income (loss)
per share - pro forma $ 0.12 $ (0.08) $ (.01)
</TABLE>
47
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS The fair value of each stock option granted
(Continued) is estimated on the date of grant using the
Black-Scholes option-pricing model. The
weighted average assumptions for the year
ended December 31, 1998 were a dividend
yield of 0.0%, expected volatility of 46.1%,
a risk-free interest rate of 4.33%, and an
expected life of 6.07. The weighted average
assumptions for the year ended 1997 were a
dividend yield of 0.0%, expected volatility
of 57%, a risk-free interest rate of 6.22%
and an expected life of 5.8 years.
In August 1995, warrants were issued to
bondholders to purchase an aggregate of
279,000 shares of common stock at $3.00 per
share which expire five years from the date
of the bond.
14. INDUSTRY AND The Company's operations are classified into
GEOGRAPHIC two business segments for December 31, 1999:
SEGMENTS medical electrode components and
computerized medical instruments.
48
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INDUSTRY AND
GEOGRAPHIC
SEGMENTS
(Continued)
The following table shows sales, operating income (loss) and other financial
information by industry segment as of and for the years ended December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
Medical Computerized
Electrode Medical
Components Instruments Corporate Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Sales $9,718,408 $ 661,176 $ - $10,379,584
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $1,529,928 $ (740,889) $ (130,519) $ 658,520
- ----------------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 504,817 $ - $ 35,896 $ 540,713
Depreciation and Amortization $ 637,381 $ 13,975 $ 236,384 $ 887,740
Identifiable assets at
December 31, 1999 $7,076,354 $ 473,374 $2,151,958 $ 9,701,686
============================================================================================================================
Year ended December 31, 1998
Sales $8,444,870 $ 915,726 $ - $ 9,360,596
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $1,263,650 $ (953,764) $ (129,890) $ 179,996
- ----------------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 453,112 $ - $ 23,905 $ 477,017
Depreciation and Amortization $ 650,705 $ 27,053 $ 204,160 $ 881,918
Identifiable assets at
December 31, 1998 $6,188,950 $ 574,019 $3,227,175 $ 9,990,144
============================================================================================================================
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 $ 158,410 $ 737,680
Identifiable assets at
December 31, 1997 $7,324,601 $1,341,275 $3,166,534 $11,832,410
============================================================================================================================
</TABLE>
49
<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
SEGMENTS sales:
(Continued)
<TABLE>
<CAPTION>
REGION 1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 3,349,427 $ 4,898,191 $ 7,156,957
Europe 2,951,797 2,678,710 2,726,142
Canada, Mexico &
South America 3,679,873 1,557,356 1,715,115
Pacific Rim 315,256 173,966 236,654
Other 83,231 52,373 52,319
--------------------------------------------------------------------------------------
Net Sales $ 10,379,584 $ 9,360,596 $ 11,887,187
======================================================================================
</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 1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
A 37% 32% 35%
B 28% 15% 5%
C 11% 11% 13%
D - 25% 23%
</TABLE>
There was no single significant customer for
the computerized medical instruments segment
during the three years ended December 31,
1999.
50
<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.................. 71 Chairman of the Board of Directors, Chief
Executive Officer of Micron, Director
Nancy C. Arnold..................... 52 President and General Counsel
Julius Tabin, Ph.D.................. 80 Director
Paul F. Walter, MD.................. 62 Director
Russell C. Chambers, MD............. 56 Director
E.P. Marinos........................ 58 Director
</TABLE>
The Directors are divided into three classes with rotating three-year terms.
Dr. Chambers and Mr. Cetrone were elected to serve as Directors until the 2002
annual meeting of shareholders. Mr. Marinos and Dr. Tabin were elected to serve
until the 2001 annual meeting of shareholders and Dr.Walter has been elected to
serve until the 2000 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 Chairman of the Board of Midcoast Interstate
Transmission, Inc. and President and Chief Executive Officer of Kansas
Pipeline Co.
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, and
President in 1999.
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.
51
<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 1999 $ 103,200 - - - - -
Products Inc.
Nancy C. Arnold, President, Arrhythmia
Research Technology, Inc. 1999 $ 83,000 - - - - -
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
</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 options granted during fiscal year 1999.
52
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE REALIZED NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED
SHARES (MARKET PRICE AT HELD AT DECEMBER 31, 1999 IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999
--------------------------------- ----------------------------------
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 $ 37,714 $ 4,096
</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 1999,
except Russell C. Chambers who inadvertently neglected to file with respect to
certain purchases of the Company's common stock in October 1999. Dr. Chambers
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 $103,200 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 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 fair market value of the stock, which was $1.06. During the
years ended December 31, 1999 and 1998, no options were granted.
53
<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, 1999, 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 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 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
1997 , 1998 and 1999, the Company used consultants on a specific project basis.
Amounts paid to consultants during 1997, 1998 and 1999 were not material.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 24, 2000 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
54
<PAGE>
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).......................................... 427,065 11.89
Julius Tabin, Ph.D..................................................... 88,375 2.46
Paul F. Walter, M.D.................................................... 69,375 1.93
Anthony A. Cetrone (4)................................................. 134,317 3.73
E.P. Marinos........................................................... 54,167 1.50
All officers and directors as a group ( 6 persons) (5)................. 814,374 22.67
</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, 1999, 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........................... 22,500
Anthony A. Cetrone........................ 74,000
------------------
Total................................ 192,500
==================
</TABLE>
55
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To date, all transactions between the Company and its officers, directors, or
their affiliates have been approved or ratified by a majority of the directors
who did not have an interest in, and who were not employed by the Company at the
time of, such transaction. The Company's Board of Directors adopted resolutions
providing that any transaction between the Company and its officers, directors
or their affiliates must be approved by a majority of the Board of Directors who
do not have an interest in, and who are not employed by the Company at the time
of, such transaction. The Company believes that all transactions entered into
with affiliates of the Company were on terms no less favorable than could have
been obtained from unaffiliated third parties.
In May 1983, ART entered into an agreement with Cardiodigital Industries,
Inc., a Texas corporation ("CDI"), pursuant to which ART granted an exclusive
license to CDI to use the technology covered by the Simson Patent in connection
with research and development of signal-averaging devices. In consideration for
the license, CDI provided $175,000 of financing and granted ART an option to
acquire any technology developed by CDI on an exclusive basis at a price of
either $1,250,000 or a royalty fee of $150 per cardiac signal-averaging device
sold by ART, up to a maximum of $1,250,000. ART exercised its option to purchase
such technology at the fee of $150 per signal-averaging device sold by ART. Dr.
Julius Tabin, is a director of ART and a shareholder of CDI. In addition, the
estate of G. Russell Chambers (Dr. Chambers' father), is a principal shareholder
of CDI. Royalty fees for the years ended December 31, 1999, 1998 and 1997 were
$2,700, $2,700 and $6,300, 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, 1999, 1998 and 1997, the law firm billed the
Company approximately $40,638, $3,286 and $20,000, respectively, for legal
services rendered and patent prosecution costs. The amounts owed to the firm at
December 31, 1999, 1998, and 1997 were approximately $31,000, $18,000 and
$22,000, 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, 1999, 1998 and
1997, health insurance premiums paid on Dr. Chambers behalf amounted to
approximately $8,522, $8,320 and $8,900, 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, $0
and $25,000 for years 1999, 1998 and 1997, respectively. The amounts owed to the
Director were approximately $0, $0 and $4,200 for December 31, 1999, 1998 and
1997, respectively.
56
<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:
DESCRIPTION OF EXHIBIT
---------------------------------------------------------------------
27 Financial Data Schedule
(b) Reports filed in the fourth quarter on Form 8-K:
None
57
<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, 2000
- ------------------------------------------------------
Anthony A. Cetrone
/s/ Russell C. Chambers Director March 30, 2000
- ------------------------------------------------------
Russell C. Chambers
/s/ Julius Tabin Director March 30, 2000
- ------------------------------------------------------
Julius Tabin
/s/ E. P. Marinos Director March 30, 2000
- ------------------------------------------------------
E. P. Marinos
/s/ Paul F. Walter Director March 30, 2000
- ------------------------------------------------------
Paul F. Walter
</TABLE>
58
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------------ ---------------------------------------------------------------------------------------------------- -------
<S> <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)
59
<PAGE>
10.21 Employment Agreement, dated November 24, 1992, between the Company and Anthony A. Cetrone........... (f)
10.22 Asset Purchase Agreement, dated February 17, 1993, by and among Hubbard, Thurman,
Tucker & Harris, L.L.P. and ART..................................................................... (f)
Agreement and Plan of Merger, dated November 25, 1992, among Arrhythmia Research
10.23 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)
27.0 Financial Data Schedule
28.0 1987 Incentive Stock Option Plan.................................................................... (a)
28.1 Option Agreement, dated March 18, 1991, between the Company and Julius Tabin........................ (f)
28.2 Option Agreement, dated March 18, 1991, between the Company and Robert A. Simms..................... (f)
28.3 Option Agreement, dated March 18, 1991, between the Company and Tom Podl............................ (f)
28.4 Option Agreement, dated March 18, 1991, between the Company and Paul F. Walter...................... (f)
28.5 Option Agreement, dated March 18, 1991 between the Company and Russell C. Chambers.................. (f)
28.6 Option Agreement, dated August 21, 1990, between the Company and Robert A. Simms.................... (f)
28.7 Option Agreement, dated March 8, 1993, between the Company and Anthony A. Cetrone................... (i)
28.8 Option Agreement, dated March 8, 1993, between the Company and Wayne Schroeder...................... (i)
28.9 Merger Agreement, dated December 26, 1993, between Micron Products Inc. and Micron Medical
Products Inc........................................................................................ (i)
28.10 Articles of Merger of Parent and Subsidiary......................................................... (i)
28.11 Consent Judgment signed by Arrhythmia Research Technology, Inc. and Corazonix Corporation and
entered on November 15, 1993........................................................................ (h)
</TABLE>
60
<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
61
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
SCHEDULE II
REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE
To the Shareholders
Arrhythmia Research Technology, Inc.
The audits referred to in our report dated February 18, 2000 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 schedules for the years ended December 31, 1999 and
1998 listed in Item 14 (a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein for the years ended
December 31, 1999 and 1998.
Boston, Massachusetts
February 18, 2000 /s/ BDO SEIDMAN L.L.P.
62
<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 information in the financial statement schedule listed in Item 14(a)(2)
herein.
In our opinion, the 1997 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
63
<PAGE>
<TABLE>
<CAPTION>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance
Beginning of Costs and at End
Period Expenses Deductions of Period
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
1999 $ 72,192 $ 48,375 $ 37,364 $ 83,203
==========================================================================================================================
1998 $ 61,318 $ 21,518 $ 10,644 $ 72,192
==========================================================================================================================
1997 $ 29,864 $ 39,000 $ 7,546 $ 61,318
==========================================================================================================================
ALLOWANCE FOR SLOW-MOVING INVENTORIES:
1999 $1,022,835 $ - $564,335 $ 458,500
==========================================================================================================================
1998 $ 820,610 $ 202,225 $ - $ 1,022,835
==========================================================================================================================
1997 $ 912,9522 $ - $ 92,342 $ 820,610
==========================================================================================================================
</TABLE>
64
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 1,736
<ALLOWANCES> (83)
<INVENTORY> 1,082
<CURRENT-ASSETS> 3,573
<PP&E> 7,535
<DEPRECIATION> (3,699)
<TOTAL-ASSETS> 9,702
<CURRENT-LIABILITIES> 1,399
<BONDS> 47
0
0
<COMMON> 37
<OTHER-SE> 8,186
<TOTAL-LIABILITY-AND-EQUITY> 9,702
<SALES> 10,380
<TOTAL-REVENUES> 10,380
<CGS> (6,758)
<TOTAL-COSTS> (658)
<OTHER-EXPENSES> (80)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (133)
<INCOME-PRETAX> 445
<INCOME-TAX> (20)
<INCOME-CONTINUING> 425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425
<EPS-BASIC> 0.12
<EPS-DILUTED> 3,488
</TABLE>
