SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
December 31, 2001(For the fiscal year ended) 1-9731
(Commission file number)
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation of 72-0925679
organization) (IRS Employer Identification Number)
25 Sawyer Passway 01420
Fitchburg, MA (Zip Code)
(Address of principal executive offices)
(978) 345-5000
(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 February 28, 2002, there were 2,917,076 shares of the registrant's
common stock outstanding, excluding shares held in treasury, par value $.01,
which is the only class of common or voting stock of the registrant. As of
February 28, 2002, the aggregate market value of the voting stock of the
registrant held by non-affiliates was $6,365,357 based upon the closing price of
the shares of common stock on the American Stock Exchange.
PART I
Item 1. BUSINESS
BACKGROUND
Arrhythmia Research Technology, Inc. ("ART" or the "Company") was incorporated
under the laws of the State of Louisiana in 1981 and reincorporated under the
laws of the State of Delaware in 1987. ART's wholly owned subsidiary, Micron
Products, Inc. ("Micron"), is a manufacturer and distributor of silver plated
sensors ("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 assembly machine, which it now manufactures and sells or leases to its
sensor and snap customers. Micron was incorporated in the Commonwealth of
Massachusetts in 1972 and is located in Fitchburg, Massachusetts.
ART is engaged in the sale and licensing of medical software which acquires
data and analyzes electrical impulses of the heart to detect and aid in the
treatment of potentially lethal arrhythmias. ART's products include
signal-averaging electrocardiographic (SAECG) software comprised of the
PREDICTOR(R) 7, the Tri-Pac and the LP-Pac Q(TM). ART recently completed a major
update to a Windows based version of its proprietary SAECG PREDICTOR series.
Rather than restore a direct sales force, the Company's intent is to market
ART's product through third party representatives. No significant sales of ART's
products were recorded in 2001 or are forecast for the year 2002.
The following table sets forth for the periods specified, the revenue derived
from the products of ART and its subsidiary Micron (collectively the "Company"):
Years ended December 31,
-------------------------------------------------------
2001 % 2000 % 1999 %
---------------- ---------------- -----------------
Sensors .................. $6,388,003 88 $6,827,178 72 $ 7,583,530 73
Snaps & Snap Machines .... 689,948 10 1,515,074 16 1,951,039 19
CardioLab & CardioMapp ... -- -- 1,000,000 11 384,598 4
SAECG products ........... 141,737 2 114,823 1 276,578 2
Polymers ................. -- -- 64,788 -- 183,839 2
---------------- ---------------- -----------------
Total ................ $7,219,688 100 $9,521,863 100 $10,379,584 100
================ ================ =================
RECENT DEVELOPMENTS
Closure of Austin Operations
In October 2001, the Company's office in Austin, Texas was closed and the
administration and customer service functions were moved to Fitchburg,
Massachusetts, home of the Company's subsidiary Micron Products, Inc.
Extension of Multi-Year Supply Contract
Micron's largest customer has renewed a multi-year contract to supply the silver
plated sensors used in the manufacture of disposable electrodes. Additionally,
the multi-year contract now includes the supply of disposable radiotranslucent
sensors and snaps. These products are used in the manufacture of
radiotranslucent electrodes which replace standard silver plated electrodes in
certain diagnostic, monitoring and critical care applications. The annual growth
of radiotranslucent electrodes is forecast to outpace that of standard
electrodes in the future. To date, Micron has been a minor supplier of
radiotranslucent sensors and snaps but the Company believes that this new
contract will result in a significant increase in the sales of radiotranslucent
product.
New Accounting Standard for Goodwill
Under the new rules promulgated by the Financial Accounting Standards Board for
Goodwill and Other Intangible Assets (SFAS 142), beginning in 2002, the Company
will no longer be reporting an amortization expense of approximately $130,000
through 2006 and $115,000 through 2012. Instead unamortized goodwill of
$1,326,000 related to two acquisitions made in the 1990's will be subject to an
annual test for impairment. The Company is in the process of evaluating the full
effect of SFAS 142 on its financial statements.
2
DESCRIPTION OF BUSINESS
Micron Products, Inc.
Silver Plated Sensors
Micron is a manufacturer and distributor of silver plated sensors 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. The type of sensor
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 addition
to the traditional ECG tests, disposable electrodes incorporating Micron's
sensor are used in connection with stress and "Holter" tests.
Micron also manufactures sensors and conductive plastic studs used in the
manufacture of radiotranslucent electrodes. The radiotranslucent electrodes are
virtually invisible to X-rays and are preferred in some applications such as
nuclear medicine, cath labs, ICU/CCU and certain stress and Holter procedures.
Metal Snap Fasteners
Metal snap fasteners are used to attach the disposable electrode to the
lead wires of an ECG machine. Micron purchases the metal snap fasteners for
resale from a supplier and performs additional quality control tests,
repackaging and inventory stocking for its customers who can purchase the snaps
along with Micron sensors.
High Speed Electrode Assembly Machine
Pursuant to a purchase agreement, dated March 5, 1997, Micron acquired from
Newmark, Inc. substantially all its assets used in the business of
manufacturing, leasing and selling medical sensor and snap application machines.
Electrode assembly machines provide Micron with a complimentary product to sell
to existing sensor and snap customers.
Arrhythmia Research Technology, Inc.
Signal-Averaging Electrocardiographic (SAECG) Products
Sudden cardiac death afflicts over 400,000 individuals in the United States
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. The electric signals
that emanate from the heart are used to detect the presence of late potentials
which indicate the risk of life threatening ventricular arrhythmias. The SAECG
processes enable late potentials to be amplified and enhanced, while eliminating
undesired electrical noise in these crucial tests.
Predictor(R) 7 and Tri-Pac
Predictor(R) 7 consists of a computer, digitizing hardware, programmable
amplifiers, QSR detection hardware/firmware and preamplifiers that can be
attached to a printer to produce a hard copy of the signal averaged test. The
acquisition device developed by NORAV Medical Ltd. is combined with the Windows
compatible Predictor(R) 7 software to provide data for ECG testing. The Tri-Pac
is a system which performs resting ECG, signal averaged ECG and stress ECG's
using the same data acquisition device.
3
LP-Pac Q(TM)
The LP-Pac Q(TM) 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(TM) uses the patented Simson bi-directional
Butterworth filtering technique, the recognized standard for the detection of
late potentials .
EPSoft(TM) Software Library
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. These optional
signal-averaging software packages are not approved by the FDA and are for
research purposes, not clinical diagnosis.
IntraSpect(TM) is also not approved by the FDA and is for research
purposes, not clinical diagnosis. This software package 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.
ART also offers the PREDICTOR Heart Rate Variability ECG software
("PREDICTOR HRVECG"), which is marketed under a 510(k) granted by the FDA in
1989. PREDICTOR HRVECG provides time and frequency domain mathematical tools for
the non-invasive assessment of R wave to R wave in sequential QRS complexes.
PREDICTOR HRVECG can be used alone or in conjunction with a PREDICTOR(R) 7 and
the LP-Pac Q(TM) signal-averaging systems.
4
GENERAL
Customers and Sales
Micron manufactures its sensors against customer purchase orders and in
accordance with supply agreements with electrode manufacturers. There are
approximately 30 significant manufacturers of silver plated disposable
electrodes worldwide. Micron sells its sensors to most of these manufacturers.
During the year ended December 31, 2001, three major customers accounted for
38%, 22% and 18% respectively, of sales of Micron. Sales backlog is not material
to Micron's business.
The following table sets forth, for the periods indicated, the approximate
consolidated revenues and percentages of revenues derived from the sales of the
Company's products in its geographic markets:
Revenues for theYears Ended December 31,
-------------------------------------------------------
2001 % 2000 % 1999 %
---------- --- ---------- --- ----------- ---
Canada ........................... $2,765,531 38 $2,756,886 32 $ 2,732,662 27
Europe ........................... 1,421,798 20 1,427,494 17 1,574,323 15
United Kingdom ................... 1,397,856 19 1,560,065 18 1,377,474 13
United States .................... 1,311,334 18 2,422,711 29 3,349,427 32
Other ............................ 323,169 5 354,707 4 1,345,698 13
---------- --- ---------- --- ----------- ---
Sub Total .................... $7,219,688 100 $8,521,863 100 $10,379,584 100
========== === === =========== ===
GE/Prucka termination payment .... 1,000,000
----------
Total ........................ $9,521,863
==========
The continued lower percentage of U.S. sales in 2001 resulted from the
transfers of the manufacturing operations in 1999 and 2000 of two major Micron
customers from U.S. plants to Canada.
Marketing and Competition
Sensors and Snaps
Micron sells its sensors to manufacturers of disposable silver plated ECG
electrodes. Micron employs one salesperson for sensors and snaps. The Company
believes that it has one major competitor for sensors and that its sales of
sensors exceed those of its competition.
Product Suppliers and Manufacturing
Sensors and Snaps
Micron manufactures its sensors at its Fitchburg, Massachusetts facility
employing a proprietary non-patented multi-step process. The raw materials used
by Micron 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 manufactured by Newmark, Inc. Micron
buys the snaps in bulk, performs additional quality control tests, and stocks
inventory for its customers who can purchase the snaps along with Micron
sensors.
Research and Development
During fiscal year 2001, ART's research and development efforts focused
primarily on converting DOS software packages in the SAECG product lines into a
Windows environment. For the fiscal years ended December 31, 2001, 2000, and
1999, ART had research and development expenses of approximately $215,000,
$229,000, and $298,000, respectively, which consisted principally of the
salaries of its employees and programming consultants.
5
Micron did not devote any significant time or money to research and
development efforts for the years 2001, 2000 and 1999. However, in 2002 Micron
has budgeted $50,000 for research and development related to a new type of
silver plated sensor which the Company expects will also allow it to expand its
volume primarily in the Pacific Rim region.
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
PREDICTOR(R) 7, the Tri-Pac and the LP-Pac Q(TM). The Simson technology is also
coupled to a patented process (Mortara) that is used by ART products and this
patent extends beyond the Simson license which expires in 2002. ART believes
that patent protection is important to its business and anticipates that it will
apply for additional patents or extensions as deemed appropriate.
As part of the purchase of substantially all the assets of Corazonix in
1993, ART acquired three 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. ART also acquired
three additional patents which cover the spectral-temporal, mapping
post-processing software packages sold by ART. United States Patent No.
5,609,158 entitled "Apparatus and Method for Predicting Cardiac Arrhythmia by
Detection of Micropotentials and Analysis of all ECG Segments and Intervals",
which covers a frequency domain analysis technique for SAECG data, was granted
by the U.S. Patent Office in March 1997. The Corazonix patents are also utilized
in the current version of Predictor(R) 7.
The Company believes that ART's products do not and will not infringe on
patents or violate proprietary rights of others. 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.
Micron
Micron employs a highly complex, proprietary non-patented multi-step
manufacturing process for its silver/silver chloride-plated sensors. 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 plated ECG electrodes, Micron received a
patent for a radiographically translucent snap that is manufactured from a
flexible electrically conductive thermoplastic polymeric compound in 1995.
Government Regulation
ART believes that its products sold in the United States have all necessary
governmental clearances required as well as in each of the countries in which
its products are sold.
Federal legislation relating to medical devices could 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.
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
periodically 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.
6
Insurance
The Company may be exposed to potential product liability claims by
patients who use the Company's products. The Company 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. The Company
also has an umbrella policy to $5,000,000. To date, there have been no asserted
or threatened claims against the Company relating to the sale or use of its
products. Although Company management believes the present insurance coverage is
adequate for the types of products marketed by the Company, there can be no
assurance that such insurance will be sufficient to cover potential claims or
that the present level of coverage will be available in the future at a
reasonable cost.
The Company has directors and officers' liability insurance with coverage
in the amount of $3,000,000 per occurrence and $3,000,000 per year in the
aggregate.
Employees
The Company has 48 full-time employees including 12 administrative, sales
and supervisory personnel, 10 quality control personnel and 24 production
personnel. None of the employees of the Company are represented by a union.
Item 2. PROPERTIES
The manufacturing facility and offices of the Company are located in two
buildings in an industrial area in Fitchburg, Massachusetts. The first building,
which was purchased in April 1994, consists of a 22,000 square foot, six story
building. The second building, which was purchased in September 1996, is a
94,000 square foot, two story building.
Item 3. LEGAL PROCEEDINGS
There are currently no material legal proceedings to which the Company is a
party.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. Annual meeting of shareholders was held on October 5, 2001.
b. E.P. Marinos and Julius Tabin were elected as directors of the Company
at the meeting. Russell C. Chambers, and Paul F. Walter continued to
serve as directors.
E.P.Marinos 2,314,788 FOR 70,395 WITHHELD
Julius Tabin 2,312,746 FOR 72,437 WITHHELD
c. BDO Seidman, LLP, was appointed to audit the consolidated financial
statements of the Company for the year ended December 31, 2001
2,369,277 FOR 14,649 WITHHELD 1,257 ABSTAINED
d. The 2001 Stock Option Plan was adopted reserving 200.000 shares of the
Company's common stock for issuance thereunder
2,157,224 FOR 8,921 WITHHELD 219,038 ABSTAINED
7
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ART's Common Stock is listed on the American Stock Exchange and trades
under the ticker symbol HRT.
The following table sets forth, for the period indicated, the high and low
closing prices per share for ART's Common Stock as quoted by the American Stock
Exchange.
High Low
----- -----
Year Ended December 31, 2001
1st Quarter..................... $2.25 $1.81
2nd Quarter..................... 3.19 1.95
3rd Quarter..................... 3.10 2.40
4th Quarter..................... 2.95 2.62
Year Ended December 31, 2000
1st Quarter..................... $4.50 $1.50
2nd Quarter..................... 2.62 1.88
3rd Quarter..................... 2.38 1.75
4th Quarter..................... 2.00 1.44
As of February 28, 2002, the number of record holders of ART's Common Stock
was approximately 1,100. On February 28, 2002, the closing price for the Common
Stock on the American Stock Exchange was $3.03.
DIVIDEND POLICY
To date, ART has not paid any dividends on its Common Stock. The Company's
revolving credit agreement contains 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.
8
Item 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
The selected financial data presented below for each of the years ended December
31 has been derived from the Company's audited consolidated financial
statements. The data should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the Financial
Statements, including the notes thereto, appearing elsewhere in this report.
Statements of Operations Data: Years ended December 31,
--------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------- ------ -------
Net sales $7,220 $8,522 $ 9,995 $8,875 $10,555
Commissions and related revenues -- 1,000 385 485 1,332
------ ------ ------- ------ -------
Total revenue 7,220 9,522 10,380 9,360 11,887
Cost of sales 5,030 6,249 7,008 6,367 8,162
------ ------ ------- ------ -------
Gross profit 2,190 3,273 3,372 2,993 3,725
Selling and marketing 59 193 393 247 499
General and administrative 1,480 1,908 1,893 1,901 2,261
Research and development 215 229 298 343 371
Amortization of goodwill 131 130 130 130 134
Write-down of assets -- -- -- 192 --
------ ------ ------- ------ -------
Income from operations 305 813 658 180 460
Interest and other expenses, net (72) (148) (213) (117) (378)
------ ------ ------- ------ -------
Income before income taxes 233 665 445 63 82
Income tax expense 10 45 20 199 50
------ ------ ------- ------ -------
Net income (loss) $ 223 $ 620 $ 425 $ (136) $ 32
====== ====== ======= ====== =======
Net income (loss) per share - basic $ .07 $ .19 $ .12 $ (.04) $ .01
====== ====== ======= ====== =======
- diluted $ .07 $ .18 $ .12 $ (.04) $ .01
====== ====== ======= ====== =======
Weighted average number
of shares outstanding - basic 3,010 3,333 3,489 3,561 3,563
====== ====== ======= ====== =======
- diluted 3,156 3,430 3,549 3,561 3,563
====== ====== ======= ====== =======
Balance Sheet Data: December 31,
-------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ -------
Total assets $8,684 $9,919 $9,702 $9,990 $11,832
Long-term obligations (including current portion) $ 113 $ 602 $ 808 $1,000 $ 1,466
Working capital $2,869 $3,671 $2,174 $2,282 $ 2,293
Shareholders' equity $7,913 $8,560 $8,222 $7,959 $ 8,087
9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth for the periods indicated, the percentages
of the net sales represented by certain items reflected in the Company's
statements of operations.
Years ended December 31,
-------------------------
2001 2000 1999
-------------------------
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of sales...................................... 69.7 73.3 67.5
Gross profit....................................... 30.3 26.7 32.5
Selling and marketing.............................. 0.8 2.3 3.8
General and administrative......................... 20.5 22.4 18.2
Research and development........................... 3.0 2.7 2.9
Amortization of goodwill........................... 1.8 1.5 1.3
Other (expense), net............................... (1.0) (1.7) (2.0)
GE/Prucka lump sum termination payment............. -- 11.7 --
-------------------------
Income before income taxes 3.2 7.8 4.3
Income tax provision............................... (0.1) (.5) (0.2)
-------------------------
Net income .................................. 3.1% 7.3% 4.1%
=========================
Revenue
Total revenue in 2001 declined $2,302,175 from total revenue in 2000.
Revenue in 2000 included a $1,000,000 lump sum payment to buy out a sales
commission agreement between ART and Prucka Engineering, Inc. (now GE Marquette
Medical Systems, Inc.). Net sales of snap fasteners distributed by Micron were
lower by $840,364 in 2001 compared to 2000. This loss of snap sales was due to a
major customer purchasing snaps directly from the original manufacturer
beginning in 2000.
Net sales of Micron silver plated sensors for disposable ECG electrodes
were $439,175 or 6% lower in 2001 than 2000. Sensor sales in the first quarter
of 2000 were approximately $400,000 higher than the first quarter of 2001 a
condition attributed to the Y2K concerns that carried over into early 2000.
Excluding revenues attributed to the GE/Prucka commission agreement, the
revenues from ongoing operations decreased $1,473,132 or 15% for the year ended
December 31, 2000 compared to 1999. Revenues in 2000 from the sales of Micron
sensors and snap fasteners decreased $1,192,000 or 13% compared to 1999. Sales
in 1999 related to (Y2K) concerns were abnormally high for Micron, especially at
year-end. As a result, orders for sensors dropped in the first half of 2000 but
have resumed to more normal rates in the second half of 2000. Orders for snap
fasteners decreased approximately $400,000 or 23% in 2000 and the lower sales
volume is projected to continue due to the loss of a major customer.
Revenues for 2001, 2000 and 1999 derived from sales of ART's products were
not material except for the $1,000,000 payment in 2000 to buy out a CardioLab
commission agreement that was due to expire December 31, 2002.
Years ended December 31,
-------------------------------------------------------
2001 2000 % 1999 %
---------------- ---------------- -----------------
Sensors $6,388,003 88 $6,827,178 72 $ 7,583,530 73
Snaps & Snap Machines 689,948 10 1,515,074 16 1,951,039 19
CardioLab & CardioMapp -- -- 1,000,000 11 384,598 4
SAECG equipment 141,737 2 114,823 1 276,578 2
Polymers -- -- 64,788 -- 183,839 2
---------------- ---------------- -----------------
Total............. $7,219,688 100 $9,521,863 100 $10,379,584 100
---------------- ---------------- -----------------
10
Cost of Sales
Cost of sales as a percent of revenues was 69.7% in 2001 compared to 73.3%
in 2000. The reduction in cost of sales in 2001 is primarily attributed to the
lower sales mix of snaps in 2001 that are purchased for resale with a higher
cost than Micron's manufactured sensors. The costs in 2001 for Micron to
manufacture its silver plated sensors has remained comparable to those of the
prior year.
Cost of sales as a percent of revenues excluding the effect of GE/Prucka
commissions and termination payment was 73.3% in 2000 compared to 67.5% in 1999.
The percentage increase was primarily due to unabsorbed fixed manufacturing
expenses, such as depreciation, utilities and salaried employees, associated
with the lower volume of sensor sales.
Selling and Marketing
Selling and marketing expenses decreased $133,877 or 69% in 2001 compared
to 2000 reflecting the decision to eliminate direct sales and sales support
personnel engaged in promoting ART SAECG Products being converted to Windows
based versions. The conversion of the Predictor series, which offers either
ART's licensed Simson bi-directional Butterworth filter technique or the
patented Corazonix Bi Spec filter technique for signal-averaging ECGs, is now
available in a Windows version. The Company hopes to market ART's software
through license or outright sales agreements that would avoid future expenses by
ART on sales and marketing services.
Selling and marketing expenses as a percent of revenues decreased from 3.8%
in 1999 to 2.3% in 2000. The decrease reflects reductions in direct sales staff
and marketing support for ART products until a new generation of
signal-averaging ECG products is available for market introduction now scheduled
to commence mid-year 2001.
General and Administrative Expenses
General and administrative expenses were $427,967 lower in 2001 than in
2000. The savings in 2001 result primary from the severance of three officers of
the Company in 2000 and the assignment of their duties to other management
personnel or outside consultants in 2001. Savings in 2001 related to reduced
costs associated with the office of the Presidency were approximately $102,000,
reduced costs associated with SEC compliance were approximately $53,000 and
non-recurring severance pay was approximately $137,500. Additionally, legal
expenses were $74,000 less in 2001 as a result of the completion of an
environmental investigation concerning Micron facilities with no adverse
actions.
General and administrative expenses as a percent of revenues was 22.4% in
2000 compared to 18.2% in 1999. As general and administrative expenses only
increased $15,610 in 2000 over 1999, the higher percent than 1999 is strictly a
function of the lower sales in 2000. Included in expenses in 2000 are $137,500
of severance costs related to two executives of the Company, and approximately
$120,000 of legal expenses which were incurred in connection with an
environmental investigation of Micron by the Attorney General's office of
Massachusetts. Micron has been informed the investigation has concluded in 2000
with no adverse actions. These one-time costs were mostly offset by the
continuing reduction in costs associated with the Austin headquarters operation.
Research and Development
Research and development costs decreased from $229,659 in 2000 to $214,872
in 2001 due to the termination of ART's full time technician. Included in the
costs for 2001 was $71,000 related to an outside programming service used to
complete the Predictor(R)7 conversion which are not expected to recur in 2002.
Research and development costs decreased from $297,568 in 1999 to $229,659
in 2000. The decrease was due to fewer full time employees engaged in ART's R&D
activities, somewhat replaced by outside programming services. Ongoing research
and development for Micron's products and manufacturing processes is part of its
manufacturing overhead.
Interest Expense
Interest expense was $64,412 in 2001 compared to $91,477 in 2000. Included
in interest expense is interest of $48,055 in 2001 and $63,250 in 2000 related
to the 11% Bonds, a majority of which were redeemed in 2001. Bonds with a face
value of $125,000 remain outstanding and will mature in May 2002. In addition,
interest expense of $24,000 was reported in 2000 on a note payable that was paid
in early 2001.
Interest expense was $91,477 in 2000 compared to $132,919 in 1999. The
Company had no bank borrowings of its credit line during 2000 and interest
expense in 2000 was accrued on Bonds Payable and Long Term Debt. Bank borrowings
were not required in 2000 due to approximately $2,377,000 of cash generation
from operations which included the $1,000,000 for the termination of the
GE/Prucka commission agreement, $295,000 from the sale of a polymer extruder and
$229,000 from the refund of prior year's income taxes.
11
Other Income (Expense)
Included in other income (expense) is amortization expense in 2001 of
$138,538, in 2000 of $63,490 and in 1999 of $46,065 for the discount recorded on
the 11% Bonds payable. The increase in amortization expense of $75,048 was
caused by the early redemption of bonds totaling $425,000 that were due to
mature May 2002. As a result of the acceleration of bond discount in 2001, bond
discount amortization expense in 2002 will be $11,972.
Income Taxes
Income taxes as a percent of income before income taxes was 4.3% in 2001
compared to 6.8% in 2000. In both years the Company has no Federal income tax
expense due to Net Operating Loss Carryforwards and available deferred tax
assets. In 2001 and 2000, the tax expense shown is for state taxes, principally
in Massachusetts where Micron is located.
For the year ended December 31, 2000, income tax as a percent of income
before taxes was 6.8%, primarily due to the state tax of 9.5% on Micron's
Massachusetts earnings similar to 1999. The low Federal income tax reflects the
higher than estimated utilization of deferred tax deductions available for 2000
and future periods that generate taxable income.
Liquidity and Capital Resources
Working capital was $2,869,344 as of December 31, 2001 compared to
$3,671,443 at December 31, 2000. The $802,099 decrease in working capital in
2001 is mainly attributed to $622,030 of payments to retire the principal and
repurchase the associated warrants of the 11% Bonds in 2001 that were due to
mature in 2002. In addition to the early bond redemptions, the announced program
of acquiring the Company's common stock resulted in a non-operating use of funds
aggregating $702,615 (305,859 shares) in 2001 compared to $502,772 (265,040)
shares in 2000. The Company expects to continue the Stock Buy Back Program in
2002.
The Company had working capital of $3,671,443 at December 31, 2000 compared
to $2,173,947 at December 31, 1999. The increase of $1,497,496 is basically the
result of two events: (1) The receipt from GE/Prucka of a $1,000,000 termination
payment related to a commission agreement and (2) the classification of $580,000
of bonds that were included in current liabilities in 1999 and now are included
in long term debt. The bonds were originally scheduled to mature May, 2000 have
been renewed to mature in May 2002.
Net cash provided by operating activities was $2,033,166 in 2001,
$2,377,357 in 2000 and $919,349 in 1999. The large amount of cash funds in 2000
was due to the $1,000,000 lump sum payment received from GE/Prucka to terminate
a multi year sales agreement. Accounts receivable balances contributed $751,542
to the cash provided by operations in 2001 as one account with past due amounts
of approximately $400,000 at the end of 2000 was collected in 2001. The major
source of cash provided by operations is the net income of the Company after
adjustment for the large non-cash items of depreciation and amortization.
Net cash used in investing activities is principally for capital equipment
at Micron. Capital equipment expenditures were $675,111 in 2001, $246,658 in
2000 and $540,713 in 1999. The increase in capital spending in 2001 reflects the
addition of 4 new, larger capacity molding machines with higher volumes and
efficiencies than the other equipment in the plant. The Company plans to expend
approximately $400,000 for capital equipment in 2002.
Cash and cash equivalents were $1,860,822, $1,999,282 and $455,674 at
December 31, 2001, 2000 and 1999, respectively. The increase in cash in 2000
from 1999 reflects the receipt of the $1,000,000 lump sum payment. Substantially
all cash and cash equivalents are invested in fixed rate bank instruments that
are highly liquid.
During 2001, the Company had a $1 million line of credit with a bank that
has been renewed through June 2002. There were no borrowings under the line of
credit in 2001 or 2000. The Company anticipates the line of credit will be
renewed again in 2002.
12
Recently Issued Accounting Standard
In August 2001, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standard No. 144 ("SFAS 144") Accounting for
the Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Although SFAS 144 supersedes the Statement of Financial Accounting Standard No.
121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets to Be
Disposed of, it retains many of the fundamental provisions of SFAS 121. SFAS 144
also supersedes the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30 ("APB 30"), Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. However, it retains the requirement in APB 30 to report
separately discontinued operations and extends that reporting to a component of
an entity that either has been disposed of, by sale, abandonment, or in a
distribution to owners, or is classified as held for sale. SFAS 144 is effective
for fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years. The adoption of SFAS 144 is not expected to have significant
effect on the Company's consolidated financial statements. See Item 1
("Business") for discussion of new accounting standards related to Goodwill
(SFAS 141 and SFAS 142).
Inflation
The Company does not believe that inflation in the United States or
international markets in recent years has had a significant effect on its
results of operations.
Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
Cautionary statements under the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995. This Form 10-K contains certain
statements of a forward-looking nature relating to future events or the future
financial performance of the Company. Such forward-looking statements are only
predictions and are subject to risks and uncertainties that could cause actual
results or events to differ materially and adversely from the results discussed
in the forward-looking statements. When used in this Form 10-K, the words or
phrases "believes," "anticipates," "expects," intends," "will likely result,"
"estimates," "projects" or similar expressions are intended to identify
predictions and the actual events or results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, risks regarding
demand for new and existing products; the success of new product development
efforts; the uncertainty as to whether certain products will receive approval
for sale in the United States; the Company's highly competitive industry and
rapid technological change within the industry and the fact that the industry is
dominated by large companies with much greater resources than the Company; and
the reliance on key personnel.
The Company cautions investors and others to review the cautionary
statements set forth in this Form 10-K and cautions that other factors may prove
to be more important in affecting the Company's business and results of
operations. These forward-looking statements speak only as of the date of this
report. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date of this report or to reflect the
occurrence of anticipated events.
Item 7A. Quantification and Qualitative Disclosures About Market Risk
The Company is not exposed to foreign currency exchange risk as all business is
conducted based on U.S. Dollars.
13
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report 15
Consolidated Financial Statements:
Balance sheets 16
Statements of income 17
Statements of changes in shareholders' equity 18
Statements of cash flows 19
Notes to consolidated financial statements 20-36
14
Independent Auditors' Report
To the Shareholders of
Arrhythmia Research Technology, Inc.
We have audited the accompanying consolidated balance sheets of Arrhythmia
Research Technology, Inc. and Subsidiary as of December 31, 2001 and 2000, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arrhythmia
Research Technology, Inc. and Subsidiary as of December 31, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/BDO Seidman, LLP
Gardner, Massachusetts
February 23, 2002
15
Arrhythmia Research Technology, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2001 2000
=================================================================================================
Assets
Current assets:
Cash and cash equivalents $ 1,860,822 $ 1,999,292
Trade and other accounts receivable, net of allowance
for doubtful accounts of $51,000 and $52,827 854,426 1,604,141
Inventories (Note 3) 897,087 860,161
Deposits, prepaid expenses and other current assets 27,887 62,728
Income taxes recoverable -- 100,000
-------------------------------------------------------------------------------------------------
Total current assets 3,640,222 4,626,322
Property, plant and equipment, net (Note 4) 3,272,592 3,310,958
Goodwill, net of accumulated amortization (Note 5) 1,326,000 1,456,833
Other intangibles, net of accumulated amortization -- 48,030
Deferred income taxes, net (Note 7) 444,923 444,923
Other assets -- 31,518
-------------------------------------------------------------------------------------------------
Total assets $ 8,683,737 $ 9,918,584
=================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of capital lease obligations $ -- $ 23,882
Current maturities of bonds payable and other
long-term debt (Note 6) 113,028 178,279
Accounts payable 343,010 344,821
Accrued expenses 314,840 407,897
-------------------------------------------------------------------------------------------------
Total current liabilities 770,878 954,879
Bonds payable, net of current maturities (Note 6) -- 399,490
Deferred revenue -- 4,621
-------------------------------------------------------------------------------------------------
Total liabilities 770,878 1,358,990
-------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6, 8, 9 and 12):
Shareholders' equity (Note 12):
Preferred stock, $1 par value; 2,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value; 10,000,000 shares authorized;
3,758,181 and 3,729,681 issued, respectively 37,582 37,297
Additional paid-in-capital 8,999,581 9,166,615
Common stock held in treasury, 869,305 and 563,446 shares at cost (2,357,279) (1,654,664)
Retained earnings 1,232,975 1,010,346
-------------------------------------------------------------------------------------------------
Total shareholders' equity 7,912,859 8,559,594
-------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,683,737 $ 9,918,584
=================================================================================================
See accompanying notes to consolidated financial statements.
16
Arrhythmia Research Technology, Inc. and Subsidiary
Consolidated Statements of Income
Years ended December 31, 2001 2000 1999
=================================================================================
Net sales $7,219,688 $8,521,863 $ 9,994,986
Commission and related revenue (Note 9) -- 1,000,000 384,598
---------------------------------------------------------------------------------
Total revenue (Note 13) 7,219,688 9,521,863 10,379,584
Cost of sales 5,029,922 6,248,579 7,007,519
---------------------------------------------------------------------------------
Gross profit 2,189,766 3,273,284 3,372,065
Selling and marketing 58,985 192,862 392,851
General and administrative 1,480,250 1,908,217 1,892,607
Research and development 214,872 229,659 297,568
Amortization of goodwill 130,833 129,889 130,519
---------------------------------------------------------------------------------
Income from operations 304,826 812,657 658,520
Other income (expense):
Interest expense (64,412) (91,477) (132,919)
Other income (expense), net (7,785) (56,053) (80,243)
---------------------------------------------------------------------------------
Total other expense, net (72,197) (147,530) (213,162)
---------------------------------------------------------------------------------
Income before income taxes 232,629 665,127 445,358
Income tax provision (Note 7):
Current 10,000 66,000 69,313
Deferred -- (21,000) (49,000)
---------------------------------------------------------------------------------
10,000 45,000 20,313
---------------------------------------------------------------------------------
Net income $ 222,629 $ 620,127 $ 425,045
=================================================================================
Net income per share (Note 2):
Basic $ 0.07 $ 0.19 $ 0.12
Diluted $ 0.07 $ 0.18 $ 0.12
See accompanying notes to consolidated financial statements.
17
Arrhythmia Research Technology, Inc.and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Notes 6, 8 and 12)
Retained
Additional Unearned Earnings
Paid-in Treasury ESOP (Accumulated
Shares Amount Capital Stock Compensation Deficit) Total
===========================================================================================================================
December 31, 1998 3,679,216 $36,792 $8,909,307 $ (913,084) $(39,277) $ (34,826) $7,958,912
Issuance of common stock 32,667 327 36,986 -- -- -- 37,313
Treasury stock purchase of
153,891 shares -- -- -- (238,808) -- - (238,808
ESOP payments -- -- -- -- 39,277 -- 39,277
Net income -- -- -- -- -- 425,045 425,045
---------------------------------------------------------------------------------------------------------------------------
December 31, 1999 3,711,883 37,119 8,946,293 (1,151,892) -- 390,219 8,221,739
Issuance of common stock 17,798 178 26,322 -- -- -- 26,500
Treasury stock purchase of
265,040 shares -- -- -- (502,772) -- -- (502,772)
Value of warrants issued with
bond renewal -- -- 194,000 -- -- -- 194,000
Net income -- -- -- -- -- 620,127 620,127
---------------------------------------------------------------------------------------------------------------------------
December 31, 2000 3,729,681 37,297 9,166,615 (1,654,664) -- 1,010,346 8,559,594
Issuance of common stock 28,500 285 29,996 -- -- -- 30,281
Treasury stock purchase of
305,859 shares -- -- -- (702,615) -- -- (702,615)
Warrants repurchased -- -- (197,030) -- -- -- (197,030)
Net income -- -- -- -- -- 222,629 222,629
---------------------------------------------------------------------------------------------------------------------------
December 31, 2001 3,758,181 $37,582 $8,999,581 $(2,357,279) $ -- $ 1,232,975 $7,912,859
===========================================================================================================================
See accompanying notes to consolidated financial statements.
18
Arrhythmia Research Technology, Inc.and Subsidiary
Consolidated Statements of Cash Flows
(Note 10)
Years ended December 31, 2001 2000 1999
============================================================================================
Cash flows from operating activities:
Net income $ 222,629 $ 620,127 $ 425,045
Adjustments to reconcile net income to net cash
provided by operating activities:
Director fees paid in stock -- 26,500 37,313
Depreciation 713,477 771,531 693,648
Provision for doubtful accounts (1,827) (30,376) 11,011
Amortization 317,401 277,087 194,092
Deferred income tax provision -- (21,000) (49,000)
Deferred revenue (4,621) (4,059) (18,356)
Changes in operating assets and liabilities:
Trade and other accounts receivable 751,542 79,333 (356,441)
Inventories (36,926) 222,356 390,209
Deposits, prepaid expenses and other assets 66,359 117,379 (1,147)
Income taxes recoverable 100,000 229,408 (66,598)
Accounts payable and accrued expenses (94,868) 89,071 (340,427)
--------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,033,166 2,377,357 919,349
--------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (675,111) (246,658) (540,713)
Other intangibles -- (8,850) (42,397)
--------------------------------------------------------------------------------------------
Net cash used in investing activities (675,111) (255,508) (583,110)
--------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock 30,281 -- --
Purchase of warrants (197,030) (50,000) --
Payments on long-term debt and capital leases (627,161) (25,459) (238,567)
Purchase of treasury stock (702,615) (502,772) (238,808)
Reduction of unearned ESOP compensation -- -- 39,277
--------------------------------------------------------------------------------------------
Net cash used in financing activities (1,496,525) (578,231) (438,098)
--------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (138,470) 1,543,618 (101,859)
Cash and cash equivalents, beginning of year 1,999,292 455,674 557,533
--------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,860,822 $ 1,999,292 $ 455,674
============================================================================================
See accompanying notes to consolidated financial statements.
19
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
1. Description of Arrhythmia Research Technology, Inc. ("ART"), a
Business Delaware corporation, is engaged in sales and
licensing of medical software for monitoring,
analyzing and treating heart disease. Micron
Products, Inc. ("Micron"), a Massachusetts
corporation, a wholly-owned subsidiary of ART, is
a manufacturer of silver/silver chloride-plated
sensor elements, a component primarily used in the
manufacture of disposable medical electrodes
designed for electrocardiograph ("ECG").
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 The consolidated financial statements include the
Principles of accounts of ART and Micron (collectively the
Consolidation "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 hand
Equivalents and on deposit in high quality financial
institutions. The Company considers highly liquid
investments that can be readily converted to cash
at par value to be cash equivalents.
Inventories Inventories are stated at the lower of cost or
market. Cost of inventories is determined by the
first-in, first-out method.
Concentration of Financial instruments, which potentially expose
Credit Risk the Company to concentrations of credit risk, as
defined by SFAS No. 105, consist primarily of
trade accounts receivable and cash and cash
equivalents.
ART's customer base for ECG products is primarily
comprised of hospitals and to a much lesser extent
of cardiologists and office based practitioners.
Micron products are sold to manufacturers of
disposable electrodes, who are typically large
diversified medical product manufacturers. The
Company does not generally require collateral for
its sales; however, the Company believes that its
terms of sale provide adequate protection against
significant credit risk.
It is the Company's policy to place its cash and
cash equivalents in high quality financial
institutions. The Company does not believe
significant credit risk exists with respect to
these institutions.
Advertising Advertising expenses consist primarily of costs
Expenses incurred in promoting the Company's products,
printed brochures and other activities. The
Company expenses advertising costs as incurred.
The Company's advertising expense was
approximately $4,000, $16,000 and $52,000 in 2001,
2000 and 1999, respectively.
20
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
Property, Plant Property, plant and equipment are recorded at cost
and Equipment and include expenditures which substantially
extend their useful lives. Depreciation on
property, plant and equipment is calculated using
the straight-line method over the estimated useful
lives of the assets. Expenditures for maintenance
and repairs are charged to earnings as incurred.
When equipment is retired or sold, the resulting
gain or loss is reflected in earnings.
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.
In June 2001, the Financial Accounting Standards
Board finalized FASB Statements No. 141, Business
Combinations ("SFAS 141") and No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"). SFAS 141
requires the use of the purchase method of
accounting and prohibits the use of the
pooling-of-interest method of accounting for
business combinations initiated after June 30,
2001. SFAS 141 also requires that the Company
recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applied to all business
combinations initiated on or after July 1, 2001.
It also requires, upon adoption of SFAS 142, that
the Company reclassify the carrying amounts of
intangible assets and goodwill based on the
criteria in SFAS 141.
SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead
test goodwill for impairment at least annually. In
addition, SFAS 142, requires that the Company
identify reporting units for the purpose of
assessing potential future impairments of
goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease
amortization of intangible assets with an
indefinite useful life. An intangible asset with
an indefinite useful life should be tested for
impairment in accordance with the guidelines in
SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to
all goodwill and other intangible assets
recognized at that date, regardless of when those
assets were initially recognized. SFAS 142
requires the Company to complete a transitional
goodwill impairment test six months from the date
of adoption. The Company is also required to
reassess the useful lives of other intangible
assets within the first interim quarter after
adoption of SFAS 142.
The Company's previous business combinations were
accounted for using the purchase method. As of
December 31, 2001 the net carrying amount of
goodwill is $1,326,000. Amortization expense
during the year ended December 31, 2001, was
approximately $131,000. Currently, the Company is
assessing but has not yet determined how the
adoption of SFAS 141 and SFAS 142 will impact its
financial position and results of operations.
21
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
Other Direct costs to acquire patent technology and
Intangibles legal costs associated with securing patents are
capitalized and amortized using the straight-line
method over the remaining useful life of the
patents.
Certain software costs to establish the
technological feasibility of the product are
expensed as research and development.
Other intangibles as of December 31, 2001 have
been fully amortized.
Long-Lived The Company reviews the carrying values of its
Assets 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 The Company follows the provisions of SFAS No. 128
Per Share Data "Earnings Per Share", which requires the Company
to present its basic earnings per share and
diluted earnings per share, and certain other
earnings per share disclosures for each year
presented. Basic earnings per share is computed by
dividing income available to common shareholders
by the weighted average number of common shares
outstanding. The computation of diluted earnings
per share is similar to the computation of basic
earnings per share except that the denominator is
increased to include the number of additional
common shares that would have been outstanding if
the dilutive potential common shares had been
issued. In addition, the numerator is adjusted for
any changes in income or loss that would result
from the assumed conversions of those potential
shares.
22
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
Net Income Basic and diluted EPS computation for the years
Per Share Data ended December 31, 2001, 2000, and 1999 are as
(Continued) follows:
Years ended December 31, 2001 2000 1999
=================================================================
Net income available
to common shareholders $ 222,629 $ 620,127 $ 425,045
========== ========== ==========
Weighted average common
shares outstanding 3,009,823 3,333,317 3,488,650
========== ========== ==========
Basic EPS $ 0.07 $ 0.19 $ 0.12
========== ========== ==========
Diluted EPS:
Net income available
to common shareholders $ 222,629 $ 620,127 $ 425,045
========== ========== ==========
Weighted average common
share outstanding 3,009,823 3,333,317 3,488,650
Assumed conversion of
common shares issuable
under stock option plans 146,424 97,084 60,544
---------- ---------- ----------
Weighted average common
and common equivalent
shares outstanding 3,156,247 3,430,401 3,549,194
========== ========== ==========
Diluted EPS $ 0.07 $ 0.18 $ 0.12
========== ========== ==========
The following table summarizes securities that
were outstanding but not included in the
calculation of diluted earnings per share because
their effect would have been antidilutive:
December 31, 2001 2000 1999
=================================================================
Stock options 4,000 7,000 14,000
Stock warrants -- -- 279,000
23
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements and the reported amounts
of revenue and expenses during the reporting
periods. Actual results could differ from those
estimates.
Fair Value of The carrying amount reported in the balance sheets
Financial for cash and cash equivalents, accounts
Instruments receivable, accounts payable and accrued
liabilities approximate their fair value due to
the immediate or short-term maturity of such
instruments. The carrying amounts reported for the
bonds payable approximate fair value based on the
Company's incremental borrowing rates.
Comprehensive The Company follows the provisions of Statement of
Income 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, 2001, 2000 and 1999.
Industry Segments The Company follows the provisions of Statement of
Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and
Related Information" ("SFAS No. 131") which
requires reporting of selected information about
operating segments in interim financial statements
issued to the public. It also establishes
standards for disclosures regarding products and
services, geographic areas, and major customers.
SFAS No. 131 defines operating segments as
components of an enterprise about which separate
financial information is available that is
evaluated regularly by the chief operating
decision maker in deciding how to allocate
resources and in assessing performance.
Shipping and Shipping and handling costs include primarily
Handling Costs freight and are classified as a cost of sales in
the consolidated statements of income.
24
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
Derivative Instruments The Company follows the provisions of Statement of
Financial Accounting Standards No. 133,
"Accounting for Derivatives Instruments and
Hedging Activities" ("SFAS No. 133") which
requires companies to recognize all derivative
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.
Historically, the Company has not entered into
derivative contracts either to hedge existing
risks or for speculative purposes.
Recently Issued In August 2001, the Financial Accounting Standards
Accounting Standard Board issued Statement of Financial Accounting
Standard No. 144 ("SFAS 144") Accounting for the
Impairment or Disposal of Long-Lived Assets, which
addresses financial accounting and reporting for
the impairment or disposal of long-lived assets.
Although SFAS 144 supersedes Statement of
Financial Accounting Standard No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived
Assets to Be Disposed of, it retains many of the
fundamental provisions of SFAS 121. SFAS 144 also
supersedes the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30
("APB 30"), Reporting the Results of
Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a
business. However, it retains the requirement in
APB 30 to report separately discontinued
operations and extends that reporting to a
component of an entity that either has been
disposed of, by sale, abandonment, or in a
distribution to owners, or is classified as held
for sale. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and interim
periods within those fiscal years. The adoption of
SFAS 144 is not expected to have significant
effect on the Company's consolidated financial
statements.
Reclassifications Certain amounts in the 2000 and the 1999
consolidated financial statements have been
reclassified to conform with the 2001
presentation.
3. Inventories Inventories consist of the following:
December 31, 2001 2000
==================================================
Raw materials $166,835 $123,962
Work-in-process 318,070 197,254
Finished goods 412,182 538,945
--------------------------------------------------
Total $897,087 $860,161
==================================================
25
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
4. Property, Plant Property, plant and equipment consist of the
and Equipment following:
Asset
December 31, Lives 2001 2000
=============================================================================
Machinery and equipment 5 to 15 years $ 5,102,745 $ 4,481,941
Equipment held for lease 10 years 340,743 403,708
Building and improvements 20 years 1,852,875 1,856,585
Vehicles 3 to 5 years 24,445 28,855
Furniture and fixtures 3 to 5 years 310,738 568,825
-----------------------------------------------------------------------------
7,631,546 7,339,914
Less accumulated depreciation (4,358,954) (4,028,956)
-----------------------------------------------------------------------------
Net property, plant and equipment $ 3,272,592 $ 3,310,958
=============================================================================
The Company had $87,770 of assets under capital
leases, included in machinery and equipment, at
December 31, 2001 and 2000. Accumulated
depreciation on these assets was $30,720 and
$24,868 at December 31, 2001 and 2000,
respectively.
Equipment The Company leases attaching machines to customers
Leasing under operating leases for periods of up to one
year with renewable terms. The cost of the leased
equipment is depreciated on a straight-line basis
over ten years. Accumulated depreciation on leased
equipment was $129,758 and $113,936 at December
31, 2001 and 2000.
5. Goodwill Goodwill consists of the following:
December 31, 2001 2000
=============================================================================
Goodwill $ 2,473,326 $ 2,473,326
Accumulated amortization (1,147,326) (1,016,493)
-----------------------------------------------------------------------------
Net goodwill $ 1,326,000 $ 1,456,833
=============================================================================
26
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
6. Debt
Revolving Credit The Company has available $1,000,000 from a
Facility revolving credit facility with a bank, which is
renewable in June 2002. The agreement provides for
borrowings up to 85% of eligible accounts
receivable plus 40% of raw material and finished
goods inventories. There were no outstanding
borrowings on the working capital line of credit
as of December 31, 2001 and 2000 and no borrowings
during 2001 and 2000.
The agreement contains covenants that, among
various matters, restrict further borrowings and
security interests, merger or consolidation,
acquisitions, guarantees, sales of assets other
than in the normal course of business, leasing,
changes in ownership and payment of dividends.
Long-Term Debt Long-term borrowings, excluding capital lease
obligations, consist of:
December 31, 2001 2000
================================================================================
11% Bonds payable $113,028 $399,490
Note payable paid in 2001 -- 178,279
--------------------------------------------------------------------------------
113,028 577,769
Less current maturities 113,028 178,279
--------------------------------------------------------------------------------
Long-term bonds payable and debt $ -- $399,490
================================================================================
Bonds Payable In 2000, the Company renewed $550,000 of a private
bond placement for a two-year period maturing May
31, 2002. New warrants were issued to the
bondholders for 254,980 shares of the Company's
stock at $1.50 per share. The warrants also expire
May 31, 2002. The fair-value allocated to the
warrants was $194,000 which was reported as
additional paid-in capital and a discount on the
debt securities being amortized to interest
expense over the two year term of the bonds.
In 2001, the Company redeemed bonds with a face
value of $425,000 and re-purchased the 197,030
associated warrants for $197,030.
For the years 2001, 2000 and 1999, the Company
recorded amortization of bond discount of
$138,538, $63,490 and $46,065, respectively and
interest expense of $48,055, $63,250 and $66,000
in 2001, 2000 and 1999. The unamortized bond
discount as of December 31, 2001 and 2000 was
$11,972 and $150,510, respectively.
27
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
7. Income Taxes The income tax provision for each of the three
years in the period ended December 31, 2001
consists of the following:
2001 2000 1999
==============================================================================
Current:
Federal $ -- $ -- $ --
State 10,000 66,000 69,313
------------------------------------------------------------------------------
Total 10,000 66,000 69,313
Deferred -- (21,000) (49,000)
------------------------------------------------------------------------------
Total income tax expense $10,000 $ 45,000 $ 20,313
==============================================================================
The Company's federal net operating loss ("NOL")
carryforwards were approximately $1,750,000 at
December 31, 2001 and expire through 2007. The use
of the loss carryforwards to reduce future income
tax obligations are limited in any given year due
to restrictions defined in the Internal Revenue
Code related to a change in ownership control.
The components of deferred income taxes were as
follows as of December 31:
2001 2000
==============================================================================
Deferred income taxes:
Inventories $ 51,306 $ 66,164
Property, plant and equipment 68,585 61,000
Patents 237,244 288,238
Other 111,234 265,741
Net operating loss carryforwards 595,000 513,016
Valuation allowance (618,446) (749,236)
------------------------------------------------------------------------------
Deferred income taxes $ 444,923 $ 444,923
==============================================================================
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.
28
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
7. Income Taxes The Company files a consolidated federal income
(Continued) 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:
2001 2000 1999
====================================================================
Tax provision computed at
statutory rate $ 79,094 $ 226,143 $ 151,422
Increases (reductions) due to:
Nondeductible expenses -- 5,358 3,850
Amortization of goodwill 39,054 39,054 39,054
State income taxes net of
federal benefit 6,600 43,560 45,747
Changes in valuation
allowance estimates (130,790) (306,880) (240,172)
Other 16,042 37,765 20,412
--------------------------------------------------------------------
Income tax expense $ 10,000 $ 45,000 $ 20,313
====================================================================
8. Employee Benefit Micron established an Employee Stock Ownership
Plans Plan ("ESOP") as a result of a previous plan of
reorganization. The ESOP is non-contributory on
the part of its participants. All employees of the
Company are eligible for participation in the
ESOP. The ESOP borrowed $300,000 to purchase the
Company's shares. The proceeds were used to pay
creditors electing to receive cash under the ESOP
plan. The shares issued by the Company to the ESOP
are reflected as a reduction in shareholders'
equity. The Company accounts for its ESOP in
accordance with Statement of Position 76-3.
Accordingly, all shares held by the ESOP,
allocated or unallocated, are treated as
outstanding in the earnings per share calculation.
The Company has elected to recognize compensation
expense based on contributions made. There are no
repurchase obligations by the Company. The Company
contributed and recorded compensation expense of
$0, $0 and $39,277 during the years ended December
31, 2001, 2000 and 1999, 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,
2001, 2000 and 1999.
29
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
9. Commitments and
Contingencies
Royalties ART licenses its signal-averaging technology from
an unrelated entity for a royalty fee of 4.5% of
gross sales, less certain allowances for selling
commissions and discounts. Costs of obtaining
patents are offset against royalties due. To
retain an exclusive license for the technology,
ART is obligated to pay a minimum royalty of
$30,000 annually. The royalties paid were $30,000,
$30,000 and $30,000 for each of 2001, 2000 and
1999, respectively. The license expires in
February 2002.
Electrophysiology ART and Prucka Engineering, Inc. ("Prucka"), the
Products Contract manufacturer of the CardioLab and CardioMapp
products (the "Products") had an agreement related
to ART's distribution of the Products. The
agreement provided for ART to receive a 3%
commission on CardioLab sales through December 31,
2002. In 2000, Prucka (now owned by GE/Marquette)
negotiated to buy out the remainder of the
agreement for $1,000,000 with no further
obligations to either party. The commissions
earned were approximately $385,000 in 1999.
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.
Based on the Company's analyses and subject to the
difficulty in estimating these future costs, the
Company does not expect future costs in connection
with environmental matters to have a material
adverse effect on financial condition, result of
operations or liquidity. At December 31, 2001 and
2000, the consolidated balance sheets include an
accrual for these costs of $50,000.
Employment The Company has employment agreements
Agreements with certain executives extending through
September 2006. The agreements provide for a base
compensation and certain other benefits. The
agreements also contain other terms and conditions
of employment, including termination payments
under certain circumstances.
30
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
9. Commitments and
Contingencies
(Continued)
Operating The Company leases certain office space,
Leases facilities, vehicles and equipment under
non-cancelable lease arrangements. Rent expense
under all operating leases was approximately
$77,000, $117,000 and $115,000 in 2001, 2000 and
1999, respectively
Future minimum operating lease payments as of
December 31, 2001 are approximately as follows:
Year Amount
==================================================================
2002 $36,000
2003 14,000
2004 7,000
------------------------------------------------------------------
Total $57,000
==================================================================
10. Supplemental Cash paid for income taxes and interest for the
Cash Flow years ended December 31 are:
Information
2001 2000 1999
==================================================================
Income taxes $13,185 $ 59,091 $110,172
Interest $78,428 $ 68,889 $139,060
Non-cash activities:
Bond discount resulting from bond
and stock warrant renewal $ -- $194,000 $ --
Directors fees paid in stock $ -- $ 26,500 $ 37,313
11. Related Party The Company obtains legal services with respect to
Transactions its patents from a law firm, a partner of which is
a shareholder and Director of the Company. Fees
for services and patent prosecution costs paid to
this firm were approximately $25,000, $37,700 and
$41,000 for years 2001, 2000 and 1999,
respectively. The amounts owed to this firm at
December 31, 2001 and 2000 were approximately
$6,000 and $4,000, respectively.
Cardio Digital Inc. ("CDI") has four shareholders
who are also shareholders of the Company.
Royalties paid CDI were $450, $6,100 and $15,700
for years 2001, 2000 and 1999, respectively. The
amounts owed to CDI at December 31, 2001 and 2000
were $0 and $300, respectively.
During the years 2001, 2000 and 1999 healthcare
coverage premiums of approximately $7,800, $11,670
and $8,500, 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 paid to
this Director during the years 2001, 2000 and 1999
were $8,048, $0 and $0 respectively.
31
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
1. Stock Options
2001 Stock In October 2001, the shareholders approved the
Option Plan adoption of the 2001 Stock Option Plan (the
"Option Plan") and reserved 200,000 shares of the
Company's common stock for issuance under the new
Option Plan. Under the Option Plan, options become
exercisable commencing one year from the date of
grant at the rate of 20% of the amount granted per
year and expire six years from the date of grant.
The exercise price is the fair market value of the
common stock on the date of the grant.
In 2001, options for 60,000 shares were granted to
two officers at an exercise price of $2.00. None
of the options were exercisable at December 31,
2001 and 140,000 were available for future grants.
The weighted average fair market value on the date
of grant of the options granted was $1.31.
Incentive Stock The Company had reserved 250,000 shares of its
Option Plan common stock for issuance to officers and key
employees pursuant to an Incentive Stock Option
Plan (the "ISO Plan"). Under the ISO 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 ISO Plan with a weighted average
exercise price of $1.55 per share and weighted
average remaining life of 3.6 years. The ISO Plan
was terminated for additional grants in 2001.
Transactions under the ISO Plan are summarized as
follows:
2001 2000 1999
=====================================================================
Options outstanding at beginning
of year 51,000 107,500 110,000
Exercised (8,000) -- --
Cancelled/expired (15,000) (56,500) (2,500)
---------------------------------------------------------------------
Options outstanding at end of year 28,000 51,000 107,500
=====================================================================
Options exercised to date 12,500 4,500 2,000
---------------------------------------------------------------------
Available for grant at end of year -- 194,500 140,500
---------------------------------------------------------------------
Exercisable at end of year 28,000 51,000 102,700
=====================================================================
Weighted-average fair value of
options granted $ -- $ -- $ --
=====================================================================
32
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
12. Stock Options
(Continued)
Non-Plan Options During 1994, non-plan options for 144,000 shares,
expiring in 2004, at an exercise price of $3.00,
were granted to eight Directors. 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. At December
31, 2001, 72,000 options remain outstanding with
an exercise price of $1.06. In January 2002, all
72,000 shares were exercised.
Transactions relative to non-plan options are
summarized as follows:
2001 2000 1999
===============================================================================
Options outstanding at beginning
of year 90,000 99,000 99,000
Exercised (18,000) -- --
Cancelled/expired -- (9,000) --
-------------------------------------------------------------------------------
Options outstanding at end of year 72,000 90,000 99,000
===============================================================================
Exercisable at end of year 72,000 90,000 99,000
===============================================================================
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 net income would
have been adjusted to the pro forma amounts as
indicated below:
2001 2000 1999
===============================================================================
Net income - as reported $222,629 $620,127 $425,045
Net income - pro forma $222,629 $614,685 $414,161
Basic income per share -
as reported $ .07 $ 0.19 $ 0.12
Diluted income per share -
as reported $ .07 $ 0.18 $ 0.12
Basic and diluted income per
share - pro forma $ .07 $ 0.18 $ 0.12
33
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
12. Stock Options
(Continued)
The fair value of each stock option granted is
estimated on the date of grant using the
Black-Scholes option-pricing model. The model uses
assumptions for dividend yield, expected
volatility, and the risk-free interest rate.
The assumptions used for the 60,000 options issued
in 2001 were a dividend yield of 0%, expected
volatility of .8 and a risk free rate of 3%.
In August 1995, warrants were issued to
bondholders to purchase an aggregate of 279,000
shares of common stock at $3.00 per share which
expire five years from the date of the bond. In
2000, the warrants were extended to bondholders to
purchase an aggregate of 254,980 shares of common
stock at $1.50 per share which expire May 31,
2002. In 2001, warrants to purchase an aggregate
of 197,030 shares of common stock were acquired by
the Company. As of December 31, 2001, warrants to
purchase 57,590 shares of common stock at $1.50
per share were outstanding.
34
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
13. Industry and The Company's operations are classified into two
Geographic business segments: medical electrode components
Segments and computerized medical instruments.
The following table shows sales, operating income
(loss) and other financial information by industry
segment as of and for the years ended December 31,
2001, 2000 and 1999:
Medical Computerized
Electrode Medical
Components Instruments Corporate Consolidated
=======================================================================================================
Year ended December 31, 2001
Sales $7,077,951 $ 141,737 $ -- $ 7,219,688
-------------------------------------------------------------------------------------------------------
Operating income (loss) $ 838,239 $ (402,580) $ (130,833) $ 304,826
-------------------------------------------------------------------------------------------------------
Capital Expenditures $ 675,111 $ -- $ -- $ 675,111
Depreciation and Amortization $ 725,678 $ 3,463 $ 301,737 $ 1,030,878
Identifiable assets at
December 31, 2001 $5,395,525 $ 17,248 $3,270,964 $ 8,683,737
=======================================================================================================
=======================================================================================================
Year ended December 31, 2000
Sales $8,407,040 $ 1,114,823 (A) $ -- $ 9,521,863
-------------------------------------------------------------------------------------------------------
Operating income (loss) $ 589,402 $ 353,144 $ (129,889) $ 812,657
-------------------------------------------------------------------------------------------------------
Capital Expenditures $ 246,658 $ -- $ -- $ 246,658
Depreciation and Amortization $ 777,576 $ 12,778 $ 258,264 $ 1,048,618
Identifiable assets at
December 31, 2000 $6,079,844 $ 227,819 $3,610,921 $ 9,918,584
=======================================================================================================
=======================================================================================================
Year ended December 31, 1999
Sales $9,718,408 $ 661,176 $ -- $10,379,584
-------------------------------------------------------------------------------------------------------
Operating income (loss) $1,529,928 $ (740,889) $ (130,519) $ 658,520
-------------------------------------------------------------------------------------------------------
Capital Expenditures $ 504,817 $ -- $ 35,896 $ 540,713
Depreciation and Amortization $ 637,381 $ 13,975 $ 236,384 $ 887,740
Identifiable assets at
December 31, 1999 $7,076,354 $ 473,374 $2,151,958 $ 9,701,686
=======================================================================================================
(A) Includes a $1,000,000 buyout of Prucka commission agreement.
35
Arrhythmia Research Technology, Inc.and Subsidiary
Notes to Consolidated Financial Statements
13. Industry and The following table sets forth the geographic
Geographic distribution of the Company's net sales:
Segments
(Continued)
2001 2000 1999
================================================================================
Canada $2,765,531 $2,756,886 $ 2,732,662
Europe 1,421,798 1,427,494 1,574,323
United Kingdom 1,397,856 1,560,065 1,377,474
United States 1,311,334 3,422,711(A) 3,349,427
Other 323,169 354,707 1,345,698
--------------------------------------------------------------------------------
Net Sales $7,219,688 $9,521,863 $10,379,584
================================================================================
(A) Includes a $1,000,000 buyout of Prucka
commission agreement.
The following table sets forth the percentage of
net sales to significant customers of the medical
electrode components segment in relation to total
segment sales:
Customers 2001 2000 1999
================================================================================
A 38% 36% 37%
B 18% 25% 28%
C 22% 14% 11%
The only single significant customer for the
computerized medical instruments segment was
revenue from the Prucka commission agreement,
which was terminated in 2000. For the years ended
December 31, 2000 and 1999, this was 90% and 58%
of computerized medical instrument net sales,
respectively.
14. Quarterly
Financial Data
First Second Third Fourth
Quarter Quarter Quarter Quarter
================================================================================
2001
----
Net sales $1,753,974 $ 1,874,662 $1,637,050 $1,954,002
Gross profit 504,507 634,667 456,152 594,440
Net income 34,052 102,652 80,766 5,159
Net income per share .01 .03 .03 .00
2000
----
Net sales $2,543,826 $ 2,863,091 $2,108,247 $2,006,699
Gross profit 805,192 1,508,495 527,157 432,440
Net income(loss) 101,731 644,842 21,933 (148,379)
Net income(loss) per share .03 .19 .01 (.04)
The second quarter results in 2000 include
$1,000,000 of revenue and gross profit ($760,000
net of tax) associated with the termination of a
commission agreement with Prucka. During the
fourth quarter of 2000, the Company determined
that $90,000 of costs related to a previous
version of ART software had no future value and
were charged to expense. In addition, $106,000 of
severance costs were provided for in the fourth
quarter of 2000.
36
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position with the Company
----------------------------------- --- --------------------------------------------
E.P. Marinos 60 Chairman of the Board of Directors, Director
Julius Tabin, Ph.D 82 Director
Paul F. Walter, MD 64 Director
Russell C. Chambers, MD 58 Director
James E. Rouse 47 President and Chief Operating Officer
Richard A. Campbell 59 Vice President of Finance
The directors are divided into two classes with rotating two-year terms. Mr.
Marinos, Dr. Tabin and Dr. Walter have been elected to serve until the 2003
annual meeting of shareholders while Dr. Chambers was elected to serve as a
director until the 2002 annual meeting of shareholders. The Company's executive
officers are appointed by the Board of Directors and serve at the pleasure of
the Board.
Each non-employee director receives compensation of $1,000 per quarter.
Additionally, each non-employee director receives $500 for each meeting at which
such director is present in person and $250 for each meeting at which such
director is present by telephone. Employee directors do not receive
compensation.
E.P. (Lou) Marinos was appointed President and Chief Executive Officer of the
Company in March 1995 and resigned in May, 1997. Mr. Marinos, until he resigned,
also served in the capacity of Chief Financial Officer and Chief Operating
Officer since joining the Company in May, 1994. From June 1997 until June 2001,
Mr. Marinos was principally employed as a senior executive officer with Midcoast
Interstate Transmission Inc. Mr. Marinos has been CEO of AMT/EPM Associates, a
consulting company, since June, 2001. Mr. Marinos has been a director of the
Company since March, 1996 and was appointed Chairman of the Board of Directors
and Chairman of the Audit Committee in October, 2001.
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.
James E. Rouse was appointed President and Chief Operating Officer of the
Company in October, 2001. Mr. Rouse has been employed by Micron since 1996.
Richard A. Campbell was appointed Vice President of Finance of the Company in
October 2001 and was employed as CFO of Micron in May 2000. From 1992 until
1998, Mr. Campbell served as Vice President of Finance for Nichols & Stone
Company. Before joining Micron, Mr. Campbell devoted his time to managing his
personal finances.
37
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 Operating Officer
and the President of the Company's subsidiary, Micron:
SUMMARY COMPENSATION TABLE
Long-term
Compensation
--------------------
Annual Compensation Awards Payouts
----------------------------------- ------- ----------
Stock Long-term All
Options Incentive Other
Name and Principal Position Year Salary Bonus Options (sh) Payouts Compensation
--------------------------------------- ---- -------- ------- ------- ------- ---------- ------------
James E. Rouse, President 2001 $100,000 -- 30,000 -- --
Anthony A. Cetrone, President 2000 $ 66,353 -- -- -- -- --
Micron Products Inc. (1)
Nancy C. Arnold, President 2000 $ 72,188 -- -- -- -- --
Arrhythmia Research Technology, Inc. (2)
Anthony A. Cetrone, President, 1999 $110,000 $15,651 -- -- -- --
Micron Products, Inc.
Nancy C. Arnold, President, Arrhythmia 1999 $ 82,500 $ 500 -- -- -- --
Research Technology, Inc.
(1) Mr. Cetrone retired from the Company and resigned his position as
Chairman of the Board and Chief Executive Officer in July, 2000.
(2) Ms. Arnold terminated her employment with the Company in November,
2000.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option Term
---------------------------------------------------------------------- ----------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
% of Total
Options
Granted to
Options Employees Exercise
Name Granted(1) in 2001 Price Expiration Date 5% 10%
-----------------------------------------------------------------------------------------------------------------------------------
James E. Rouse 30,000 50% $ 2.00 March 21, 2007 $20,400 $43,590
-----------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Rouse was granted 30,000 options under the 2001 Stock Option Plan.
The shares vest at the rate of 20% per year for five years until fully
vested. The exercise price equals the market price on the date of
grant. The market price at the date of grant was $2.00 per share.
38
Aggregated Option Exercises and Fiscal Year-End Options Values Table
The realized value of aggregated option exercises during 2001 and the value of
unexercised in-the-money options at December 31, 2001 held by the Named
Executive Officers are shown in the following table:
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
Value Realized Number of Unexercised Options Value of Unexercised In-the-
Shares (Market Price Held at December 31, 2001 Money Options at
at December 31, 2001 December 31, 2001(1)
----------------------------- ----------------------------
Acquired Exercise Less
Name on Exercise Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
-------------- ----------- --------------- ----------- -------------- ----------- --------------
James E. Rouse -- $-- -- 30,000 $-- $15,000
(1) Calculated on the basis of the closing price per share for the Common Stock
on the American Stock Exchange of $2.50 on December 31, 2001
Employment Agreement
Mr. Rouse has entered into a five year employment agreement with the Company
effective October 5, 2001 which provides for his employment as an officer of the
Company at a base salary of $100,000. Mr. Rouse is also covered by an incentive
arrangement for 2002 that provides for a bonus of up to 20% of his base salary
dependent upon the earnings of the Company.
REPORT OF THE COMPENSATION COMMITTEE
The following report of the Compensation Committee (the "Committee" ), as well
as the Performance Table set forth herein, are not soliciting materials, are not
deemed filed with the Securities and Exchange Commission (the "SEC") and are not
incorporated by reference in any filing of the Company under the Securities Act
of 1933, as amended (the "Securities Act"), or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether made before or after the date of
this Form 10-K and irrespective of any general incorporation language in any
such filing.
The Compensation Committee is responsible for establishing and reviewing the
Company's executive compensation policies, advising the full Board of Directors
on all compensation matters and administering the Company's stock option plans.
The Committee relating to compensation of the President and Chief Executive
Officer are reviewed and approved by the other non-employee Directors.
Compensation Policy
The Company's executive compensation policies are designed to foster the
Company's business goals of achieving profitable growth and premium returns to
Stockholders. The principal objectives of these policies are as follows: (1) to
attract, motivate and retain executives of outstanding ability and character;
(2) to provide rewards that are closely related to the performance of the
Company and the individual executive by placing a portion of compensation at
risk; and (3) to align the interests of executives and Stockholders through
long-term, equity-based incentives and programs to encourage and reward stock
ownership.
This report discusses the manner in which base salaries, short-term incentive
compensation and long-term, equity-based incentives for the Company's President
and Chief Executive Officer and other executive officers were determined for the
2001 fiscal year.
39
Executive Compensation
The key components of executive compensation are base salary, short-term
incentive compensation and long-term, equity-based incentives. Base salaries are
generally targeted to be competitive with the average salaries paid at other
companies of similar size and complexity both within and outside the medical
device distribution and manufacturing industries.
Base Salary
Salary level targets are established so that the Company can attract and retain
the most qualified employees. The Compensation Committee approves the individual
salaries of executive officers. In determining an executive officer's salary,
the Compensation Committee considers, but does not assign specific weights to,
the following factors: internal factors involving the executive's level of
responsibility, experience, individual performance, and equity issues relating
to pay for other Company executives, as well as external factors involving
competitive positioning, overall corporate performance, and general economic
conditions. No specific formula is applied to determine the weight of each
factor.
Incentive Compensation Program
The Company maintains an incentive compensation program for substantially all
officers and executives designed to reward such individuals for their
contributions to corporate and individual objectives. In the past, the programs
have provided additional compensation based on performance and profits of those
operations for which the various executives have responsibility. No bonuses were
earned by any executive officers named in the Summary Compensation Table, in
2001.
Long-Term Incentive Compensation
The Company also grants stock options and other equity incentives in order to
link compensation to the Company's long-term growth and performance and to
increases in Stockholder value. The Committee has broad discretion to establish
the terms of such grants. The Company grants awards to designated employees upon
commencement of employment or following a significant change in an employee's
responsibility or title. Awards are based on guidelines relating to the
employee's position in the Company which are set by the Committee, as well as
the employee's current performance and anticipated future contributions. The
Committee also considers the amount and terms of stock options previously
granted to each of the employees. The Committee individually evaluates these
factors with respect to each executive and then the Committee reaches a
consensus on the appropriate award. During fiscal year 2001, the Committee
recommend the grant of options to purchase 30,000 shares of the Company's Common
Stock to each of James E. Rouse and Richard A. Campbell.
Compensation of President and Chief Executive Officer
James E. Rouse was named President and Chief Operating Officer in October, 2001.
His annual rate of compensation in 2001 was $100,000. Anthony A. Cetrone served
as President and Chief Executive Officer of the Company until November, 1999,
however, he continued as Chairman of the Board and Chief Operating Officer of
Micron. Mr. Cetrone retired from the Company and resigned his position as
Chairman of the Board and Chief Operating Officer of the Company in July, 2000.
Prior to his retirement, his annual rate of base compensation was $110,000.
Nancy C. Arnold was named President in November, 1999. Ms. Arnold served as
President and General Counsel until she terminated her employment with the
Company in November, 2000. Prior to her termination, her annual rate of
compensation was $82,500.
This report on executive compensation is made by and on behalf of the Company's
Compensation Committee.
Russell C. Chambers, M.D.
Paul F. Walter M.D.
40
STOCK PERFORMANCE INFORMATION
The following Performance Table compares the Company's cumulative total
shareholder return on its Common Stock for a five-year period (from December 31,
1996 to December 31, 2001), with the cumulative total return of the Standard &
Poor's 500 Stock Index ("S&P 500") (which does not include the Company), and the
Standard & Poor's Medical Products and Supplies Stock Index (which includes the
Company) ("S&P Med"). Dividend reinvestment has been assumed. The Performance
Table assumes $100 invested in December 31, 1996 in the Company's Common Stock,
S&P 500, and S&P Medical Products and Supplies Stock Index.
[CHART]
Cumulative Total Return
---------------------------------------------------
12/96 12/97 12/98 12/99 12/00 12/01
ARRHYTHMIA RESEARCH TECHNOLOGY, INC 100.00 62.50 52.50 65.00 65.00 100.00
S & P 500 100.00 133.36 171.47 207.56 188.66 166.24
S & P HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) 100.00 124.67 179.70 166.45 240.09 227.91
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 2001.
Stock Options
2001 Stock Option Plan
In 2001, the Company adopted the 2001 Stock Option Plan (the "Option Plan")
pursuant to which 200,000 shares of Common Stock have been reserved for issuance
to officers and other key employees. 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. 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 is exercisable more than 6 years
after the date of grant. Generally, 20% of options become exercisable or "vest"
one year from the date of grant and an additional 20% becomes exercisable each
year thereafter. Options are not transferable, except upon death of the option
holder.
Options to purchase an aggregate of 60,000 shares of Common Stock at an exercise
price of $2.00 per share have been granted under the Option Plan to two current
officers of the Company. None of these options were exercisable as of December
31, 2001.
1987 Incentive Stock Option Plan
In 1987, the Company adopted an incentive stock option plan (the "ISO Plan")
pursuant to which 250,000 shares of Common Stock were reserved for issuance to
officers and other key employees. Options were designated as "incentive stock
options" within the meaning of the Internal Revenue Code of 1986, as amended.
The exercise price of any stock option granted to an eligible employee could 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
could not be less than 110% of such fair market value. The term of each option
and the manner in which it may be exercised was determined by the Board of
Directors provided that no option was 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 became exercisable one year from the date of grant and each year
thereafter at a rate of 20% per year. Options were not transferable, except upon
death of the option holder. The 1987 ISO Plan was terminated for new grants in
2001. Options outstanding under the ISO Plan continue to be exercisable on the
terms of the original option grants.
Under the 1987 ISO Plan, options to purchase 28,000 shares of common stock at
exercises prices between $1.06 and $6.00 per share were exercisable as of
December 31, 2001. During 2001, 8,000 shares were exercised and 15,000 shares
lapsed.
41
Other Options
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. In September 1998, the Board of Directors adjusted the exercise
price of the options to reflect the current fair market value of the stock,
which was $1.06 per share. Options to purchase 18,000 shares were exercised in
2001. Options to purchase 72,000 shares were exercised in January 2002. Options
for 54,000 shares have been terminated or forfeited.
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
2001, 2000 and 1999, the Company used consultants on a specific project basis.
Amounts paid to consultants during 2001, 2000 and 1999 were not material.
42
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 2002 based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than five percent of the outstanding shares of
Common Stock, (ii) each director of the Company and (iii) all officers and
directors as a group.
Beneficial
Ownership (1)
-----------------
Name of Beneficial Owner Number Percent
----------------------------------------------------- -----------------
Russell C. Chambers, M.D. (2)........................ 491,213 16.84
Julius Tabin, Ph.D................................... 138,824 4.76
Paul F. Walter, M.D.................................. 82,055 2.81
E.P. Marinos (3)..................................... 60,426 2.07
All officers and directors as a group (4) ........... 816,298 27.98
1. Unless otherwise noted, each person has sole voting and investment power
with respect to the shares of Common Stock beneficially owned.
2. 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. Excludes Company shares owned by two trusts
of which Dr. Chambers' son and Dr. Chambers' wife have a beneficial
interest. Dr. Chambers is neither a beneficiary nor a trustee of the two
trusts and disclaims any beneficial ownership of the common stock held by
the trusts. Excludes 23,802 shares owned by a Foundation of which Dr.
Chambers is a co-trustee and has shared voting power but has no beneficial
interest.
3. Includes options to purchase 24,000 shares of Common Stock, all of which
are exercisable at December 31, 2001.
4. Includes 43,780 shares held by the Micron Employee Stock Ownership Plan
over which an Officer of the Company has power as Trustee.
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. Dr. Julius Tabin, is a
director of ART and a shareholder of CDI. In addition, the estate of G. Russell
Chambers (Dr. Chambers' father), is a principal shareholder of CDI. Royalty fees
paid for the years ended December 31, 2001, 2000 and 1999 were $450, $6,100 and
$15,700, 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, 2001, 2000 and 1999, the law firm billed the Company
approximately $29,200, $19,300 and $40,600, respectively, for legal services
rendered and patent prosecution costs. The amounts owed to the firm at December
31, 2001, 2000 and 1999 were approximately $6,000, $4,000, and $31,000,
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, 2001, 2000 and
1999, health insurance premiums paid on Dr. Chambers behalf amounted to
approximately $ 7,800, $11,670, and $8,500, respectively.
43
The Company obtains consulting services, with respect to acquisitions and other
negotiations, from Mr. E. P. Marinos, a shareholder and Director of the Company.
Fees for services were paid to this Director for years 2001, 2000 and 1999, were
$8,048, $0, and $ 0 respectively. The amounts owed to the Director were
approximately $3,325, $4,275 and $0 for December 31, 2001, 2000 and 1999,
respectively.
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 14 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 - None
(b) Reports filed in the fourth quarter on Form 8-K:
None
44
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/ James E. Rouse
------------------------------------------------------
James E. Rouse, President and Chief Operating Officer
BY /s/ Richard A. Campbell
-----------------------------------------------------
Richard A. Campbell, Vice President of Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
------------------------------ ---------------------------- ---------------
/s/ E. P. Marinos Chairman of the Board March 28, 2002
------------------------------
E. P. Marinos
/s/ Russell C. Chambers Director March 28, 2002
------------------------------
Russell C. Chambers
/s/ Julius Tabin Director March 28, 2002
------------------------------
Julius Tabin
/s/ Paul F. Walter Director March 28, 2002
------------------------------
Paul F. Walter
45
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Page
------- -------------------------------------------------------------------------------------------------- ----
3.0 Articles of Incorporation......................................................................... (a)
3.1 By-laws........................................................................................... (a)
3.2 Certificate of Agreement of Merger of Arrhythmia Research Technology, Inc., a Louisiana
Corporation, and Arrhythmia Research Technology, Inc., a Delaware Corporation..................... (a)
3.3 Articles of Merger of Arrhythmia Research Technology, Inc., a Louisiana Corporation, and
Arrhythmia Research Technology, Inc., a Delaware corporation...................................... (a)
4.0 Form of Certificate evidencing shares of the Company's Common Stock............................... (a)
4.2 Form of Option to purchase Company Common Stock under the 1987 Incentive Stock Option Plan........ (a)
4.4 Bond Indenture and Bond Form......................................................................
4.5 Form of Option for E.P. (Lou) Marinos under 1995 Key Employees Stock Option Plan..................
10.2 Lockup Agreement.................................................................................. (a)
10.3 Manufacturing Agreement by and between ART and Mortara Instrument, Inc. dated March 8, 1987....... (a)
10.4 Amendment to Manufacturing agreement dated June 15, 1987.......................................... (a)
10.5 Letter agreement by and between ART and Mortara Instrument, Inc. dated October 26, 1989........... (c)
10.6 Letter agreement by and between ART and Mortara Instrument, Inc. dated February 21, 1990.......... (c)
10.7 Letter agreement by and between ART and Mortara Instrument, Inc. dated February 21, 1990......... (c)
10.8 Letter agreement by and between ART and Mortara Instrument, Inc. dated July 31, 1990.............. (c)
10.9 License Agreement dated November 15, 1981 by and between University Patents, Inc., and ART........
10.10 Amendment to License Agreement dated June 1, 1985................................................. (a)
10.11 License of Cardiac Signal Average and Base Technology by ART to Cardiodigital Industries, Inc. to
ART............................................................................................... (a)
10.12 Grant of Option to Acquire Exclusive License for Use of Signal Averaging Technology from
Cardiodigital Industries, Inc. to ART............................................................. (a)
10.13 Agreement and Plan of Merger executed by ART and Arrhythmia Research Technology, Inc., a
Louisiana corporation............................................................................. (a)
10.16 Amendment No. 2 to License Agreement between ART and University Patents, Inc. dated February
6, 1991........................................................................................... (b)
10.22 Asset Purchase Agreement, dated February 17, 1993, by and among Hubbard, Thurman,
Tucker & Harris, L.L.P. and ART related to Corazonix............................................. (f)
10.23 Agreement and Plan of Merger, dated November 25, 1992, among Arrhythmia Research
Technology, Inc., ART Merger Subsidiary II, Inc., Micron Products, Inc. and Micron Medical
Products, Inc..................................................................................... (e)
10.24 Merger Agreement, dated November 25, 1992, between ART Merger Subsidiary II, Inc. and Micron
Products, Inc.................................................................................... (e)
10.25 Asset Purchase Agreement, dated July 9, 1993, between Arrhythmia Research Technology, Inc. and
Corazonix Corporation............................................................................ (g)
10.26 Amendment to Asset Purchase Agreement, dated November 5, 1993, between Arrhythmia Research
Technology, Inc. and Corazonix Corporation....................................................... (i)
10.34 Asset Purchase Agreement, dated March 5, 1997, between Micron Products, Inc. and Newmark, Inc.
99.1 Subsidiaries..................................................................................... (f)
99.2 1987 Incentive Stock Option Plan................................................................. (a)
99.3 Merger Agreement, dated December 26, 1993, between Micron Products, Inc. and Micron Medical
Products, Inc..................................................................................... (i)
99.4 Articles of Merger of Parent and Subsidiary....................................................... (i)
99.5 Consent Judgment signed by Arrhythmia Research Technology, Inc. and Corazonix Corporation and
entered on November 15, 1993...................................................................... (h)
99.6 2001 Stock Option Plan (filed herewith)...........................................................
46
(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.
(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.
47
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 23, 2002 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 statement schedule for the years ended December 31, 2001,
2000 and 1999 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, 2001, 2000 and 1999.
/s/ BDO Seidman, LLP
Gardner,
Massachusetts
February 23, 2002
48
Arrhythmia Research Technology, Inc.
And Subsidiary
Schedule II
Valuation and Qualifying Accounts
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
================================================================================
Allowance for doubtful accounts:
2001 $ 52,827 $35,978 $ 37,805 $ 51,000
================================================================================
2000 $ 83,203 $56,918 $ 87,294 $ 52,827
================================================================================
1999 $ 72,192 $48,375 $ 37,364 $ 83,203
================================================================================
Allow ance for slow-moving inventories:
2001 $ 150,487 $ -- $ 38,833 $111,654
================================================================================
2000 $ 458,500 $24,433 $332,446 $150,487
================================================================================
1999 $1,022,835 $ -- $564,335 $ 458,50
================================================================================
49