-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ApVA0qPYWDYl38hYXuW+ZNAHriPaXWSyj7xumzl0wEEZjGm76Sp8jOAoZwLS3T2D lP1QY3Frhjf8YHmwltdpSg== 0000927016-02-001759.txt : 20020415 0000927016-02-001759.hdr.sgml : 20020415 ACCESSION NUMBER: 0000927016-02-001759 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARRHYTHMIA RESEARCH TECHNOLOGY INC /DE/ CENTRAL INDEX KEY: 0000819689 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 720925679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09731 FILM NUMBER: 02593298 BUSINESS ADDRESS: STREET 1: 5910 COURTYARD DR #300 CITY: AUSTIN STATE: TX ZIP: 78731 BUSINESS PHONE: 5123436912 MAIL ADDRESS: STREET 1: 5910 COURTYARD DR STREET 2: STE 300 CITY: AUSTIN STATE: TX ZIP: 78731 10-K405 1 d10k405.txt FORM 10K 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 EX-99.6 3 dex996.txt 2001 STOCK OPTION PLAN EXHIBIT 99.6 ARRHYTHMIA RESEARCH TECHNOLOGY, INC. 2001 STOCK OPTION PLAN See Attached 50 ARRHYTHMIA RESEARCH TECHNOLOGY, INC. 2001 STOCK OPTION PLAN -------------- 1. Purpose. This Arrhythmia Research Technology, Inc. 2001 Stock Option ------- Plan (the "Plan") is intended to provide incentives to (a) the officers and other employees of Arrhythmia Research Technology, Inc. (the "Company"), its parent (if any) and any present or future subsidiaries of the Company (each such entity, including the Company, a "Related Company" and collectively, the "Related Companies") by providing them with opportunities to purchase stock in the Company pursuant to options which qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), granted hereunder ("ISO" or "ISOs") and (b) directors, officers, employees and consultants of any Related Company by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which do not qualify as ISOs ("Non-Qualified Option" or "Non-Qualified Options"). Both ISOs and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options." As used herein, the terms "parent" and "subsidiary" mean, respectively, "parent corporation" and "subsidiary corporation" as those terms are defined in Section 425 of the Code. 2. Administration of the Plan. -------------------------- (a) The Plan shall be administered by the Board of Directors of the Company (the "Board"). The Board may appoint a Committee (the "Committee") of two or more of its members to administer the Plan. Each member of the Committee shall be a "Non-Employee Director" as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and shall be an "outside director" within the meaning of Section 162(m) of the Code. Subject to ratification of the grant of each Option by the Board (if so required by applicable state law), and subject to the terms of the Plan, the Committee, if so appointed, shall have the authority to (i) determine the employees of the Related Companies (from among the class of employees eligible under paragraph 3 to receive ISOs) to whom ISOs may be granted, and to determine (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options) to whom Non-Qualified Options may be granted, (ii) determine the time or times at which Options may be granted, (iii) determine the option price of shares subject to each Option, which price with respect to ISOs shall not be less than the minimum specified in paragraph 6, (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option, (v) determine (subject to paragraph 7) the time or times when each Option shall become exercisable and the circumstances under which any options will automatically be accelerated and the duration of the exercise period, (vi) determine whether restrictions such as repurchase options are to be imposed on shares subject to Options, and the nature of such restrictions, if any, and (vii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Option is not treated as an ISO. The interpretation and construction by the Committee of any provisions of the Plan or of any Option granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. 51 (b) The Committee may select one of its members as its chairman, and shall hold meetings at such time and places as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. All references in the Plan to the Committee shall mean the Board if there is no Committee so appointed. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause), and appoint new members in substitution therefore, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. 3. Eligible Employees and Others. ISOs may be granted to any officer or ----------------------------- other employee of any Related Company. Those directors of any Related Company who are not employees may not be granted ISOs under the Plan. Non-Qualified Options may be granted to any director (whether or not an employee), officer, employee or consultant of any Related Company. The Committee may take into consideration an optionee's individual circumstances in determining whether to grant an ISO or a Non-Qualified Option. Granting of any Option to any individual or entity shall neither entitle that individual or entity to, nor disqualify such individual or entity from, participation in any other grant of Options. 4. Stock. The stock subject to Options shall be authorized but unissued ----- shares of Common Stock of the Company, $.01 par value per share (the "Common Stock"), or shares of Common Stock re-acquired by the Company in any manner. The aggregate number of shares which may be issued pursuant to the Plan is 200,000, subject to adjustment as provided in paragraph 13. Any such shares may be issued as ISOs or Non-Qualified Options so long as the aggregate number of shares so issued does not exceed such number, as adjusted. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the shares subject to such expired or terminated Option shall again be available for grants of Options under the Plan. 5. Grants Under the Plan. Options may be granted under the Plan at any time --------------------- on or after March 21, 2001 and prior to March 20,2011. The date of grant of an Option under the Plan will be the date specified by the Committee at the time it awards the Option; provided, however, that such date shall not be prior to the date of award. The Committee shall have the right, with the consent of the optionee, to convert an ISO granted under the Plan to a Non-Qualified Option pursuant to paragraph 16. 6. Minimum Option Price: ISO Limitations. ------------------------------------- a.The price per share specified in the agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of any Related Company, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value of Common Stock on the date of grant. b.In no event shall the aggregate fair market value (determined at the time the option is granted) of Common Stock for which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all stock plans of the Related Companies) exceed $100,000. 52 c.If, at the time an Option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the last business day for which the prices or quotes discussed in this sentence are available prior to the date such Option is granted and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if such stock is then traded on a national securities exchange, (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market, if the Common Stock is not then traded on a national securities exchange, or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq National Market or on a national securities exchange. However, if the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall be deemed to be the fair value of the Common Stock as determined in good faith by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 7. Option Duration. Subject to earlier termination as provided in --------------- paragraphs 9 and 10, each Option shall expire on the date specified by the Committee, but not more than six years from the date of grant and in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of any Related Company, not more than six years from date of grant. Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a Non-Qualified Option pursuant to paragraph 16. 8. Exercise of Option. Subject to the provisions of paragraphs 9 through ------------------ 12, each Option granted under the Plan shall be exercisable as follows: a. The Option shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify. b. Once an installment becomes exercisable it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee. c. Each Option or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. d. The Committee shall have the right to accelerate the date of exercise of any installment, provided that the Committee shall not accelerate the exercise date of any installment of any Option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code which provides generally that the aggregate fair market value (determined at the time the option is granted) of the stock with respect to which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all stock plans of the Related Companies) shall not exceed $100,000. 53 9. Termination of Employment. ------------------------- a. If an ISO optionee ceases to be employed by any Related Company other than by reason of death or Disability as provided in paragraph 10, no further installments of his ISOs shall become exercisable, and his ISOs shall terminate after the passage of 60 days from the date of termination of his employment, but in no event later than on their specified expiration dates except to the extent that such ISOs (or unexercised installments thereof) have been converted into Non-Qualified Options pursuant to paragraph 16. Leave of absence with the written approval of the Committee shall not be considered an interruption of employment under the Plan, provided that such written approval contractually obligates such Related Company to continue the employment of the employee after the approved period of absence. Employment shall also be considered as continuing uninterrupted during any other bona fide leave of absence (such as those attributable to illness, military obligations or governmental service), provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute. Nothing in the Plan shall be deemed to give any grantee of any Option the right to be retained in employment or other service by any Related Company for any period of time. ISOs granted under the Plan shall not be affected by any change of employment within or among any Related Company, so long as the optionee continues to be an employee of such Related Company. In granting any Non-Qualified Option, the Committee may specify that such Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination or cancellation provisions as the Committee may determine. b. With respect to the holder of an Option, unless otherwise provided in such holder's agreement establishing an Option or in any employment or consulting agreement between such holder and any Related Company, the term "Disability" shall mean, in the good faith determination of the Board, any illness (mental or physical) or accident which results in such Holder being unable to perform such holder's duties as an employee of, or consultant to, any Related Company for three months during any 12-month period. 10. Death; Disability; Dissolution. If an optionee ceases to be employed by ------------------------------ a Related Company by reason of his death, any Option of his may be exercised, to the extent of the number of shares with respect to which he could have exercised it on the date of his death, by his estate, personal representative or beneficiary who has acquired the Option by will or by the laws of descent and distribution, at any time prior to the earlier of the Option's specified expiration date or one year from the date of the optionee's death. If an optionee ceases to be employed by (or provide services to) a Related Company by reason of his Disability, he shall have the right to exercise any Option held by him on the date of termination of his employment (or services), to the extent of the number of shares with respect to which he could have exercised it on that date, at any time prior to the earlier of the Option's specified expiration date or one year from the date of the termination of the optionee's employment (or services). 54 11. Assignability. No Option shall be assignable or transferable by the ------------- optionee except by will or by the laws of descent and distribution, and during the lifetime of the optionee each Option shall be exercisable only by him. 12. Terms and Conditions of Options. Options shall be evidenced by ------------------------------- instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including transfer and repurchase restrictions applicable to shares of Common Stock issuable upon exercise of Options. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 13. Adjustments. Upon the happening of any of the following described ----------- events, an optionee's rights with respect to Options granted to him hereunder shall be adjusted as hereinafter provided: a. In the event there is any change in the shares of Common Stock of the Company through the declaration of stock dividends or through any stock split, combinations, recapitalizations, or similar transactions (but excluding any merger or consolidation with any entity that is not 100% owned by the Company, directly or indirectly) effecting all outstanding shares of the Company's capital stock, the number of shares subject to any Option and the purchase price per share for such Option shall be appropriately adjusted. Notwithstanding the foregoing, any adjustments made pursuant to this subparagraph (a) shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments with respect to ISOs will constitute a "modification" of such ISOs as that term is defined in Section 425 of the Code, or cause any adverse tax consequences for the holders of such ISOs. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. b.No fractional shares shall actually be issued under the Plan. Any fractional shares which, but for this subparagraph (b), would have been issued to an optionee pursuant to an Option, shall be deemed to have been issued and immediately sold to the Company for their fair market value, and the optionee shall receive from the Company cash in lieu of such fractional shares. c. Upon the happening of any of the foregoing events described in subparagraph (a) above, the class and aggregate number of shares set forth in paragraph 4 hereof which are subject to Options which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events specified in such subparagraphs. The Committee shall determine the specific adjustments to be made under this paragraph 13, and subject to paragraph 2, its determination shall be conclusive. 55 14. Means of Exercising Options. An Option (or any part or installment --------------------------- thereof) shall be exercised by giving written notice to the Company at its principal office address. Such notice shall identify the Option being exercised and specify the number of shares as to which such Option is being exercised, accompanied by full payment of the purchase price therefore either (a) in United States dollars in cash or by check, (b) at the discretion of the Committee, through delivery of shares of Common Stock having fair market value equal as of the date of the exercise to the cash exercise price of the Option, (c) at the discretion of the Committee, by delivery of the optionee's personal recourse note bearing interest payable not less than annually at no less than 100% of the lowest applicable Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion of the Committee, in consideration of services rendered or to be rendered to any Related Company, or (e) at the discretion of the Committee, by any combination of (a), (b), (c) and (d) above. If the Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (b), (c), (d) and (e) of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the ISO in question. The holder of an Option shall not have the rights of a shareholder with respect to the shares covered by his Option until the date of issuance of a stock certificate to him for such shares. Except as expressly provided above in paragraph 13 with respect to a change in capitalization of the Company and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificates are issued. 15. Conversion of ISOs into Non-Qualified Options; Termination of ISOs. The ------------------------------------------------------------------ Committee, at the written request of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of any Related Company at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such Options. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with the Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Board takes appropriate action. The Committee, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such termination. 16. Term and Amendment of Plan. The Plan was adopted by the Board on March -------------------------- 21, 2001, and subsequently approved by the holders of a majority of the stockholders of the Company entitled to vote thereon on or about September 28, 2001. The Plan shall expire on March 20, 2011 (except as to Options outstanding on that date). The Board may terminate or amend the Plan in any respect at any time, except that, any amendment that (a) increases the total number of shares that may be issued under the Plan (except by adjustment pursuant to paragraph 13); (b) changes the class of persons eligible to participate in the Plan, or (c) materially increases the benefits to participants under the Plan, shall be subject to approval by the Company's stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the foregoing amendments, and shall be null and void if such approval is not obtained. Except as provided in the third sentence of this paragraph 17, in no event may action of the Board or the Company's stockholders alter or impair the rights of an optionee without his consent, under any Option previously granted to him. 56 17. Application of Funds. The proceeds received by the Company from the -------------------- sale of shares pursuant to Options authorized under the Plan shall be used for general corporate purposes. 18. Securities Law Requirements, etc. Shares of Common Stock shall not be -------------------------------- issued under the Plan unless the issuance and delivery of such shares comply with (or are exempt from) all applicable requirements of law including, without limitation, the Securities Act of 1933, as amended, and the rules and regulations of any stock exchange or other securities market on which the Company's securities may then be traded. 19. Withholding of Additional Income Taxes. The Company, in accordance with -------------------------------------- the Code, may (a) upon exercise of a Non-Qualified Option, (b) the purchase of Common Stock for less than its fair market value, (c) the making of a Disqualifying Disposition (as defined in paragraph 21) or (e) any other similar event then required by law, require an optionee to pay additional withholding taxes in respect of the amount that is considered compensation includible in such person's gross income. 20. Notice to Company of Disqualifying Disposition. Each employee who ---------------------------------------------- receives ISOs shall agree to notify the Company in writing immediately after the employee makes a disqualifying disposition of any Common Stock received pursuant to the exercise of an ISO (a "Disqualifying Disposition"). Disqualifying Disposition means any disposition (including any sale) of such stock before the later of (a) two years after the employee was granted the ISO under which he acquired such stock, or (b) one year after the employee acquired such stock by exercising such ISO. If the employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition will thereafter occur. 21. Governing Laws; Construction. The validity and construction of the Plan ---------------------------- and the instruments evidencing Options shall be governed by the laws of The Commonwealth of Massachusetts, without giving effect to its choice of law principles. In construing the Plan, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires. 57 -----END PRIVACY-ENHANCED MESSAGE-----