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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
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[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
December 31, 2002 1-9731
(For the fiscal year ended) (Commission file number)
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-0925679
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation of organization)
25 Sawyer Passway, Fitchburg, MA 01420
(Address of principal executive offices) (Zip Code)
(978) 345-5000
(Registrant's telephone number, including area code)
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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
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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. __
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes No X
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On February 21, 2003 there were 2,717,076 shares of the registrant's
common stock outstanding, par value $.01, which is the only class of common or
voting stock of the registrant. As of June 30, 2002, the aggregate market value
of the voting stock of the registrant held by non-affiliates was $6,737,525
based upon the closing price of the shares of common stock on the American Stock
Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2002. Portions of such proxy statement are incorporated by reference into Part
III of this Form 10-K.
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Arrhythmia Research Technology, Inc.
Table of Contents
Part I Item 1 Business 3
Item 2 Properties 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 7
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial Condition and Results 10
of Operations
Item 7A Quantification and Qualitative Disclosures about Market Risk 17
Item 8 Financial Statements and Supplementary Data 17
Item 9 Change in and Disagreements with Accountants on Accounting and Financial 17
Disclosure
Part III Item 10 Directors and Executive Officers of the Registrant 17
Item 11 Executive Compensation 17
Item 12 Security Ownership of Certain Beneficial Owners and Management 17
Item 13 Certain Relationships and Related Transactions 17
Item 14 Controls and Procedures 17
Part IV Item 15 Exhibits, Financial Statements Schedules, and Reports on Form 8-K 18
Signatures 19
Schedule II Valuation and Qualifying Accounts F-26
2
PART I
Item 1. BUSINESS
OVERVIEW
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 is engaged in the sales 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 consist of signal-averaging electrocardiographic
(SAECG) software. ART recently completed an update to a Windows based version of
its proprietary Predictor(R) series. Rather than restore a direct sales force,
the Company's intent is to market ART's product through licensing with original
equipment manufacturers. No significant sales of these units were recorded in
2002 and 2001 nor are currently forecasted for the year 2003. Work continues to
establish contracts with original equipment manufacturers for this product.
Sudden cardiac death afflicts over 400,000 individuals in the United
States each year. 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.
ART's wholly owned subsidiary, Micron Products, Inc. ("Micron"), is a
manufacturer and distributor of silver plated and non-silver plated conductive
resin 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 State of Massachusetts
in 1972 and is located in Fitchburg, Massachusetts. The sensors are a critical
component of the signal pathway in many different types of disposable
electrodes. The disposable electrodes used to capture the electric impulses of
the heart and enable the analysis of late potentials require sensors which
provide for an accurate, low noise signal to be transmitted to the monitoring
device.
Micron is the largest of a few companies providing silver /
silver-chloride sensors to the medical device industry. Micron's customers
manufacture monitoring and transmitting electrodes which are utilized in a
variety of bio-feedback and bio-stimulation applications including, among many
others, electrocardiograms (ECG's), electroencephalograms (EEG's),
electro-muscular stimulation (EMS), and thermo-electrical neural stimulation
(TENS).
PRODUCTS
The following table sets forth for the periods specified, the revenue derived
from the products of ART and its subsidiary Micron (collectively the "Company"):
Period Ending December 31,
2002 % 2001 % 2000 %
-------------------- -------------------- -------------------
Sensors ................. $ 6,599,677 92 $ 6,388,003 88 $ 6,827,178 72
Snaps & Snap Machines ... 588,648 8 689,948 10 1,515,074 16
CardioLab & CardioMapp .. - - - - 1,000,000 11
SAECG products .......... 3,740 - 141,737 2 114,823 1
Other ................... - - - - 64,788 -
-------------------- -------------------- -------------------
Total ............... $ 7,192,065 100 $ 7,219,688 100 $ 9,521,863 100
==================== ==================== ===================
3
Sensors and Snaps
Silver Plated Sensors
Micron is a manufacturer and distributor of silver-plated and
non-silver plated conductive resin 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, easier, and less expensive to use as compared
to reusable electrodes, which require sterilization 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 tests and a "Holter" monitor.
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.
Signal-Averaging Electrocardiographic (SAECG) Products
Predictor(R) 7
Predictor(R) 7 consists of a Windows(R) compatible analytical software
which produces a hard copy of the signal averaged test. Early Potential Analysis
software has also been incorporated specifically for P wave-triggered SAECG
analysis and is used as a research tool in assessing patients at risk for atrial
fibrillation and flutter. The IntraSpect(TM) module 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. The
Early Potential Analysis software and the IntraSpect(TM) module are not approved
by the FDA, and are for research purposes, not clinical diagnosis.
GENERAL
Customers and Sales
Micron manufactures its sensors against customer purchase orders with
electrode manufacturers. There are approximately 30 significant manufacturers of
disposable snap type and radio translucent electrodes worldwide. Micron sells
its sensors to most of these manufacturers. During the year ended December 31,
2002, three major customers individually accounted for over 10% of Micron's
sales and a loss of this base would have a material adverse effect on results.
These customers account for 36%, 20% and 19% of sales. Sales backlog is not
material to Micron's business due to the method of ordering employed by its
customer base in this competitive industry. Customers purchase on a single
purchase order basis without long-term commitments.
Windows(R) is a registered trademark of the Microsoft Corporation.
4
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 the Years Ended December 31,
2002 % 2001 % 2000 %
------------- ------ ------------- ------ ------------- -----
United States ........................... $ 1,115,941 16 $ 1,311,334 18 $ 2,422,711 29
Europe .................................. 2,669,631 37 2,819,654 39 2,987,559 35
Canada .................................. 3,133,890 44 2,765,531 38 2,756,886 32
Pacific Rim ............................. 230,917 3 274,959 4 248,343 3
Other ................................... 41,686 - 48,210 1 106,364 1
------------- ------ ------------- ------ ------------- -----
Subtotal ........................... $ 7,192,065 100 $ 7,219,688 100 $ 8,521,863 100
============= ====== ============= ====== =====
GE/Prucka termination payment ........... 1,000,000
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Total .............................. $ 9,521,863
=============
While some risks exist in foreign markets, the vast majority of the
Company's customers are based in stable markets. To reduce the risk of the
foreign shipment and currency, the majority of our products are the
responsibility of our customers when shipped, and payment is always required in
US Dollars.
Marketing and Competition
Due to the efforts to concentrate on licensing ART SAECG products,
the sales department has been consolidated to the Fitchburg office. From time to
time the sales and marketing department employs outside consultants to penetrate
new markets. The expenditure for these consultants was $7,500 and $14,670 in
2002 and 2001.
Micron sells its sensors to manufacturers of disposable snap type and
radio translucent ECG electrodes. The Company believes that it has one major
domestic competitor and several minor competitors worldwide for sensors, and
that its sales of sensors exceed those of its competition. The competition in
the sensor and snap market is extremely price sensitive.
Product Suppliers and Manufacturing
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 resins and the chemical involved in the silver/silver
chloride process are in adequate supply. Fluctuations in the price of silver are
contractually passed to customers. All of the chemicals and resins used in any
significant volume in the Micron sensor operations are commodities that are
readily available from numerous regional suppliers.
Micron's distributes medical snap fasteners manufactured by Newmark,
Inc. Micron buys the snaps in bulk, performs additional quality control tests,
and stocks inventory for its customers.
Inventory Requirements
Our larger customers benefit from our ability to maintain inventory of
standard sensors and snaps. This stocking inventory allows for predictable and
planned production resulting in cost efficiencies that have been passed on to
our customers.
Research and Development
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, 2002, 2001, and 2000, ART had research and
development expenses of approximately $24,000, $215,000, and $229,000,
respectively, which consisted principally of the salaries of its employees and
programming consultants.
Micron spent $28,000 in 2002 for research and development related to a
new type of silver plated sensor in order to expand its volume primarily in the
Pacific Rim region. Funding for further development is readily available, but is
not expected to exceed the amount spent in 2002.
5
Patents and Proprietary Technology
The Simson Patent expired in 2002. This technology covers the signal
averaging and filtering technologies utilized in the Predictor(R) 7 product. The
Simson technology has been coupled to a patented process (Mortara) that is used
by ART products and effectively extends the useful life of Simson technologies.
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. The U.S. Patent Office granted
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, in March 1997. The Corazonix technologies 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 earnings.
Micron employs a highly complex, proprietary non-patented multi-step
manufacturing process for its silver/silver chloride-plated sensors. To maintain
our trade secrets associated with the manufacture of disposable electrode
sensors, key employees have executed nondisclosure and non-competition
agreements.
Government Regulation
ART's software products are subject to and currently comply with
clearance and distribution requirements from governmental regulatory
authorities, principally the FDA and the EU. These agencies promulgate quality
system requirements under which a medical device is to be developed, validated
and manufactured. Continued development of the product line is managed in
accordance with applicable regulatory requirements.
Micron's sensor elements are not considered medical devices. As such,
they are not required to be listed with regulatory agencies and do not need to
have regulatory clearance for distribution. However, because Micron primarily
distributes sensors to manufacturers for use in finished medical devices, Micron
exercises the same controls over their manufacturing processes and finished
products as would be required if the sensors were considered medical devices.
Environmental Regulation
Micron's operations involve use of hazardous and toxic materials and
generate hazardous, toxic and other wastes. We are subject to federal, state and
local laws and regulations governing the use, storage, handling and disposal of
such materials and certain waste products. Although we believe that our safety
procedures for using, handling, storing and disposing of such materials comply
with these standards required by state and federal laws and regulations, we
cannot completely eliminate the risk of accidental contamination or injury from
these materials. A specific insurance policy has been purchased to offset this
risk to the Company and the environment. A contingency reserve equal to two
deductibles on the policy is on our balance sheet minimizing the potential to
adversely impact future operating results.
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. In 2002, the related
expenditures for waste treatment were approximately $40,000 and $48,000 in
depreciation of the treatment equipment. Operational costs are expected to
6
be similar in 2003, while scheduled depreciation expense decreases to $4,500. 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.
Employees
As of December 31, 2002, the Company had 46 full-time employees
including 12 administrative, sales and supervisory personnel, 10 quality control
personnel and 24 production personnel. A union does not represent the employees
of the Company.
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 2002 and 2001, the Company used consultants on a specific project basis.
Amounts paid to consultants during 2002 and 2001 were not material.
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. We believe our current facilities
are sufficient to meet our production needs through fiscal year ending December
31, 2003. A 40,000 square foot portion of the second building is not utilized at
this time.
Item 3. LEGAL PROCEEDINGS
We are not a party to any material threatened or pending legal
proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The results of the Company's 2002 Annual Meeting of Shareholders were
reported in the Company's Form 10-Q for the quarter ending September 30, 2002.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ART's Common Stock was listed on the American Stock Exchange on March
3, 1992 and trades under the ticker symbol HRT. Prior to that, ART's stock was
listed on NASDAQ.
The following table sets forth, for the period indicated, the high and
low sale prices per share for ART's Common Stock as quoted by the American Stock
Exchange.
High Low
-------- --------
Year Ended December 31, 2002
1st Quarter $ 3.25 $ 2.46
2nd Quarter 3.25 2.76
3rd Quarter 3.05 2.35
4th Quarter 2.96 2.51
Year Ended December 31, 2001
1st Quarter $ 2.25 $ 1.62
2nd Quarter 3.29 1.95
3rd Quarter 3.10 2.40
4th Quarter 3.10 2.26
As of February 21, 2003 the number of record holders of ART's common
stock was estimated to be 1,100.
7
Dividend Policy
The Company's cash reserves would be more than adequate to facilitate
a payment, but at this time, the Company does not plan to pay any dividends. The
Company's revolving credit agreement contains various restrictions and
conditions including restrictions regarding the payment of dividends. Future
determination as to the payment of cash dividend, if any, will be at the
discretion of the Board of Directors and will be dependant upon the Company's
financial condition, results of operations, capital requirements, and other such
factors as the Board of Directors may deem relevant, including restrictions
under the credit facility.
Securities authorized for issuance under equity compensations plans
2001 Stock Option Plan
In October 2001, the shareholders of the Company approved the 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 Option Plan. Options for
30,000 shares were granted to an officer in 2001 of which 6,000 of the options
were exercisable at December 31, 2002 and options with respect to 170,000 are
available for future grants.
1987 Incentive Stock Option Plan
In 1987, the shareholders of the Company approved the incentive stock
Option Plan (the "ISO Plan"). The ISO Plan provided for issuance of stock
options for up to 250,000 shares. Under the ISO Plan, the exercise price of the
options is the fair market value of the common stock on the date of grant. The
range of exercise prices of options granted under the ISO Plan was $1.06 to
$6.00 per share for all options outstanding and granted under the 1987 ISO Plan,
with a weighted average exercise price of $1.44 per share. The ISO Plan that was
terminated for additional grants in 2001 currently has 26,000 outstanding and
exercisable options.
Number of
securities to be Weighted-
issued upon average Number of securities
exercise of exercise price remaining available for
outstanding of outstanding future issuance under
options,warrants options, equity compensation
and warrants and plans(excluding
Plan Category rights rights securities reflected in
column (a))
---------------------------------------------------------------------------------------------------------
Equity compensation plan approved by
security holders 56,000 $1.74 170,000
Equity compensation plans not approved by
security holders 0 $ .00 0
---------------------------------------------------------------------------------------------------------
Totals 56,000 $1.74 170,000
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 Ending December 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales $ 7,192 $ 7,220 $ 8,522 $ 9,995 $ 8,875
Commissions and related revenues - - 1,000 385 485
--------- --------- -------- --------- --------
Total revenue 7,192 7,220 9,522 10,380 9,360
Cost of sales 4,934 5,030 6,249 7,008 6,367
--------- --------- -------- --------- --------
Gross profit 2,258 2,190 3,273 3,372 2,993
Selling and marketing 38 59 193 393 247
General and administrative 1,305 1,480 1,908 1,893 1,901
Research and development 52 215 229 298 343
Amortization of goodwill - 131 130 130 130
Write-down of assets - - - - 192
--------- --------- -------- --------- --------
Income from operations 863 305 813 658 180
Interest and other expenses, net (1) (72) (148) (213) (117)
--------- --------- -------- --------- --------
Income before income taxes and cumulative 862 233 665 445 63
change in accounting principle
Income tax expense 52 10 45 20 199
--------- --------- -------- --------- --------
Income before cumulative change in accounting 810 223 620 425 (136)
principal
Cumulative effect of change in accounting
principal (net of tax) (57) - - - -
Net income (loss) $ 753 $ 223 $ 620 $ 425 $ (136)
========= ========= ======== ========= ========
Before cumulative effect of change in
accounting principle:
Net income (loss) per share - basic $ .28 $ .07 $ .19 $ .12 $ (.04)
========= ========= ======== ========= ========
- diluted $ .28 $ .07 $ .18 $ .12 $ (.04)
========= ========= ======== ========= ========
After cumulative effect of change in accounting
principle:
Net income (loss) per share - basic $ .26 $ .07 $ .19 $ .12 $ (.04)
========= ========= ======== ========= ========
- diluted $ .26 $ .07 $ .18 $ .12 $ (.04)
========= ========= ======== ========= ========
Weighted average number
of shares outstanding - basic 2,875 3,010 3,333 3,489 3,561
- diluted 2,935 3,156 3,430 3,549 3,561
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total assets $ 8,478 $ 8,684 $ 9,919 $ 9,702 $ 9,990
Long-term obligations
(including current portion) $ - $ 113 $ 602 $ 808 $ 1,000
Working capital $ 3,577 $ 2,869 $ 3,671 $ 2,174 $ 2,282
Shareholders' equity $ 8,098 $ 7,913 $ 8,560 $ 8,222 $ 7,959
9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Any forward looking statements made herein are based on current
expectations of the Company that involves a number of risks and uncertainties
and should not be considered as guarantees of future performance. These
statements are made under the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995. Forward looking statements may be identified by
the use of words such as "expect," "anticipate," "believe," "intend," "plans,"
"predict," or "will." The factors that could cause actual results to differ
materially include: interruptions or cancellation of existing contracts, impact
of competitive products and pricing, product demand and market acceptance risks,
the presence of competitors with greater financial resources than the Company,
product development and commercialization risks and an inability to arrange
additional debt or equity financing.
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,
-------------------------------
2002 2001 2000
-------------------------------
Net sales .......................................................... 100.0% 100.0% 100.0%
Cost of sales .................................................. 68.6 69.7 73.3
Gross profit ....................................................... 31.4 30.3 26.7
Selling and marketing .......................................... 0.5 0.8 2.3
General and administrative ..................................... 18.1 20.5 22.4
Research and development ....................................... 0.7 3.0 2.7
Amortization of goodwill ....................................... - 1.8 1.5
Other (expense), net ........................................... - (1.0) (1.7)
GE/Prucka lump sum commission termination payment .............. - - 11.7
-------------------------------
Income before income taxes and cumulative effect of change in
accounting principle ........................................... 12.0 3.2 7.8
Income tax provision ........................................... 0.7 (0.1) (0.5)
-------------------------------
Income before cumulative effect of change in accounting principal .. 11.3 3.1 7.3
Cumulative effect of change in accounting principle, net of tax 0.8 - -
-------------------------------
Net income ......................................................... 10.5% 3.1% 7.3%
===============================
Revenue
Total revenue declined from $7,219,688 in 2001 to $7,192,065 in 2002
and from $9,521,863 in 2000 to $7,219,688 in 2001. The $27,623 decline in total
revenue in 2002 was due to two factors. There was an increase of electrode
component sales by $110,374 due in part to the introduction of a radio
translucent product, offset by a $137,997 decline in the sale of computerized
medical instruments. The increase in electrode component sales was the result of
an increase in sales of electronic sensors of $211,674 or 3.3% in 2002 compared
to 2001 offset by a decrease in snap sales by $77,761 in 2002 compared to 2001.
The decline in total revenue by $2,302,175 in 2001 as compared to 2000
resulted from several factors. Revenue in 2000 included a one-time $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 snaps
distributed by Micron were lower by $840,364 in 2001 compared to 2000. A major
customer purchasing snaps directly from the original manufacturer beginning in
2000 caused this loss of snap sales. Micron's silver-plated and conductive resin
sensors for disposable ECG electrodes were $439,175 or 6.4% lower in 2001 than
in 2000.
Cost of Sales
Cost of sales as a percent of revenues was 68.6% in 2002 compared to
69.7% in 2001 and 73.3% in 2000 excluding the GE/Prucka termination payment. The
reduction in cost of sales in 2002 is primarily attributed to the process
improvements that resulted in manufacturing efficiencies. Cost of sales in 2002
also includes an impairment
10
charge of $50,923 related to obsolete electrode assembly machine parts. The
reduction from 2000 to 2001 was primarily due to the higher sales mix of snaps
in 2000.
Selling and Marketing
Selling and marketing expenses decreased $20,999, or 36% in 2002
compared to 2001 and $133,877, or 69% from 2000 to 2001. This was due primarily
to the decision to eliminate direct sales and sales support personnel engaged in
promoting ART SAECG Products. While the conversion of the Predictor series to a
Windows version is complete, the Company plans to market this software under
license through original equipment manufacturers and expects to avoid future
expenses by ART on sales and marketing services.
General and Administrative Expenses
General and administrative expenses were $175,587 lower in 2002 than in
2001. The savings in 2002 resulted from the reduction of administrative payroll
from final severance associated with the closing of the Texas office, and
reductions at the Fitchburg office. Even with this reduction the Company
incurred approximately $111,000 of legal expenses and $25,600 in other
professional and corporate expenses in the year ended December 31, 2002 related
to an attempt to acquire certain business assets of a competitor of Micron
Products Inc. The negotiations to acquire the assets were discontinued in July
2002. Better containment of legal and other administrative expenses contributed
to the reductions as compared to prior years.
General and administrative expenses were $427,967 lower in 2001 than in
2000. The savings in 2001 resulted primarily 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 investor relations and investor related
legal costs were approximately $53,000. 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.
Research and Development
Research and development costs decreased from $229,659 in 2000,
$214,872 in 2001, to $52,456 in 2002 due to the termination of ART's full time
technician and the significant decrease in the use of outside consultants with
respect to software development. Included in the $71,000 of cost for 2001 and
$24,220 of cost for 2002 was the outside programming service used to complete
the Predictor(R)7 conversion. This cost is not expected to recur in 2003. Micron
spent the remaining $28,236 in 2002 on its development of a sensor to be
marketed in the Pacific Rim. Funding for future research and development is
expected to come from cash provided by ongoing operations.
Interest Expense
Interest expense was $15,932 in 2002, $64,412 in 2001 and $91,477 in
2000. Interest expense of $5,729 in 2002, $48,055 in 2001, and $63,250 in 2000
is related to the 11% bonds, a majority of which were redeemed in 2001. The
remaining bonds with a face value of $125,000 matured in May 2002. Interest
expense also includes a $10,000 annual charge for unutilized borrowing base on
our $1,000,000 revolving loan.
Other Income (Expense)
Included in other income (expense) is amortization expense of $11,972
in 2002, $138,538 in 2001, and $63,490 in 2000 for the discount recorded on the
11% Bonds. The decrease of amortization expense of $126,566 in 2002 was caused
by the early redemption of $425,000 of bonds 2001. This expense was offset by
interest income on the cash and cash equivalents balance.
Income Taxes
Income taxes as a percent of income before income taxes was 6% in 2002,
4.3% in 2001, and 6.8% in 2000. In these years the Company had no current
Federal income tax expense due to Net Operating Loss Carryforwards and available
deferred tax assets. The tax expense for 2002, 2001, and 2000 is for state
taxes, principally in Massachusetts where Micron is located.
11
Earnings Per Share
The Company has an ongoing stock repurchase program, which resulted in
the repurchase of 270,413 shares of the Company's common stock in 2002. The
reduction in the number outstanding shares has had the effect of increasing the
Company's earnings per share as reported. This decrease in the weighted average
number of shares outstanding has had the effect of increasing the basic earnings
per share as reported in 2002 by $.01.
Liquidity and Capital Resources
Working capital was $3,577,424 as of December 31, 2002, $2,869,344 at
December 31, 2001 and $3,671,443 at December 31, 2000. The $708,080 increase in
working capital in 2002 was mostly attributable to the operating cash flows of
$824,327 and the maturing of the remaining bond debt in May of 2002. The
$802,099 decrease in working capital in 2001 was mainly attributed to $622,030
of payments to the early retirement of the principal and repurchase the
associated warrants of the 11% bonds in 2001, and the $1,000,000 GE/Prucka
commission agreement termination payment inflating the position in 2000. Cash
and cash equivalents were $1,773,412, $1,860,822, and $1,999,292 at December 31,
2002, 2001, and 2000 respectively. Substantially all these funds are invested in
fixed rate bank instruments that are highly liquid.
In addition, the announced program of acquiring the Company's common
stock resulted in a non-operating use of funds aggregating $730,837 (270,413
shares) in 2002, $702,615 (305,859 shares) in 2001, and $502,772 (265,040)
shares in 2000. The Company expanded its Stock Buy Back Program on December 24,
2002 authorizing an additional $600,000 worth of stock to be purchased from time
to time as determined by management based upon market conditions.
Inventories increased by $226,978 in 2002 as compared to $36,926 in
2001. The increased use of capital to fund inventory is the result of carrying a
larger quantity of radio translucent base resin, and manufactured product. The
resin inventory was necessary to adequately insure materials would be readily
available for production demands at a reasonable cost. The increased final
product inventory is resulting from lower than expected shipments of radio
translucent in 2002, and the remaining inventory increase from the terminated
attempt to purchase a competitor.
Essentially all of the capital equipment expenditures of $420,013
($219,325 net of disposals) in 2002, $675,111 in 2001 and $246,658 in 2000 were
related to the electrode sensor operation at Micron. In 2002, a $200,000
decrease in capital equipment relates to the sale of $130,000 of attaching
machines, $51,000 long lived asset impairment and other miscellaneous disposals
of equipment. As in prior years, the expected capital expenditures of $400,000
for machinery and equipment in 2003 in the electrode sensor operation will be
derived from net operating cash flows.
The Company has a $1 million line of credit with a bank that has been
renewed through May 2003. There were no borrowings under the line of credit in
2002, 2001 or 2000. The Company anticipates evaluating the line of credit before
its renewal again in 2003.
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.
Factors that may affect future operating results
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating the Company and its business. The
risks and uncertainties described below are not the only ones facing the
Company. Additional risks and uncertainties that the Company does not presently
know or currently deems immaterial may also impair the Company's business,
results of operations and financial conditions.
The Company could become involved in litigation over intellectual property
rights
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Litigation,
which would likely result in substantial cost to us, may be necessary to enforce
any patents issued or licensed to us and/or to determine the scope and validity
of others' proprietary rights.
12
In particular, our competitors and other third parties hold issued patents and
are assumed to hold pending patent applications, which may result in claims of
infringement against us or other patent litigation. The Company also may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office, which could result in substantial cost, to determine the
priority of inventions
If trade secrets are not kept confidential, the secrets may be used by
others to compete against us
Micron relies on unpatented trade secrets to protect its proprietary
process. There are no assurances that others will not independently develop or
acquire substantially equivalent technologies or otherwise gain access to our
proprietary process. Ultimately the meaningful protection of such unpatented
proprietary technology cannot be guaranteed. The Company relies on
confidentiality agreements with its employees. Remedies for any breach by a
party of these confidentiality agreements may not be adequate to prevent such
actions. Failure to maintain trade secret protection, for any reason, could have
a material adverse effect on us.
Dependence on a limited number of customers
In the fiscal years 2002 and 2001, 75% and 78%, respectively of the
Company's revenues was derived from three customers. The loss of any one or more
of these customers would have an immediate significant adverse effect on our
financial results. In an effort to maintain this customer base, more favorable
terms than might otherwise be agreed to could be granted. Currently, the Company
generally does not receive purchase volume commitments extending beyond several
months. Large corporations can shift focus away from a need for our product with
little or no warning.
The vast majority of revenues are derived from the sale of a single product
In fiscal years 2002 and 2001, the Company derived 92% and 88%,
respectively, of its income from medical electrode sensors for use in disposable
electrodes. While the technology in electrode sensors has been used for many
years, there is no assurance that a new patented or unpatented technology might
not replace the existing market for disposable electrode sensors. Any
substantial technological advance that eliminates our product will have a
material adverse effect on our operating results.
A product liability suit could adversely effect on operating results.
The testing, manufacture, marketing and sale of medical devices of our
customers entail the inherent risk of liability claims or product recalls. If
our customers are involved in a lawsuit it is foreseeable that the company would
also be named. Although, the Company maintains product liability insurance,
coverage may not be adequate. Product liability insurance is expensive, and in
the future may not be available on acceptable terms, if at all. A successful
product liability claim or product recall could have a material adverse effect
on our business, financial condition, and ability to market product in the
future.
The Company is subject to stringent environmental regulations.
The Company is subject to a variety of Federal, state and local
requirements governing the protection of the environment. These environmental
regulations include those related to the use, storage, handling, discharge and
disposal of toxic or otherwise hazardous materials used in or resulting from the
Company's manufacturing processes. Failure to comply with environmental law
could subject the Company to substantial liability or force use to significantly
change our manufacturing operations. In addition, under some of these laws and
regulations, the Company could be held financially responsible for remedial
measures if its properties are contaminated, even if it did not cause the
contamination.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with generally accepted accounting principles requires management to
make judgments, assumptions and estimates that affect the amounts reported. Note
2 of Notes to Consolidated Financial Statements describes the significant
accounting policies used in the preparation of the consolidated financial
statements. Certain of these significant accounting policies are considered to
be critical accounting policies, as defined below.
13
A critical accounting policy is defined as one that is both material to
the presentation of the Company's financial statements and requires management
to make difficult, subjective or complex judgments that could have a material
effect on the Company's financial condition and results of operations.
Specifically, critical accounting estimates have the following attributes: 1)
the Company is required to make assumptions about matters that are highly
uncertain at the time of the estimate; and 2) different estimates the Company
could reasonably have used, or changes in the estimate that are reasonably
likely to occur, would have a material effect on the Company's financial
condition or results of operations.
Estimates and assumptions about future events and their effects cannot
be determined with certainty. The Company bases its estimates on historical
experience and on various other assumptions believed to be applicable and
reasonable under the circumstances. These estimates may change as new events
occur, as additional information is obtained and as the Company's operating
environment changes. These changes have historically been minor and have been
included in the consolidated financial statements as soon as they became known.
In addition, management is periodically faced with uncertainties, the outcomes
of which are not within its control and will not be known for prolonged periods
of time. These uncertainties are discussed in the section below entitled
"Factors that could affect future results." Based on a critical assessment of
its accounting policies and the underlying judgments and uncertainties affecting
the application of those policies, management believes that the Company's
consolidated financial statements are fairly stated in accordance with generally
accepted accounting principles, and present a meaningful presentation of the
Company's financial condition and results of operations.
Management believes that the following are critical accounting policies:
Revenue Recognition and Accounts Receivable
Revenues from the sale of products are recorded when the product is
shipped, title and risk of loss have transferred to the purchaser, payment terms
are fixed or determinable and payment is reasonably assured.
Based on management's on-going analysis of accounts receivable
balances, and after the initial recognition of the revenue, if an event occurs
which adversely affects the ultimate collectibility of the related receivable,
management will record an allowance for bad debts. Bad debts have not had a
significant impact on our financial position, results of operations and cash
flows.
Inventory and Inventory Reserves
The Company values its inventory at the lower of cost or market. The
Company reviews its inventory for quantities in excess of production
requirements, obsolescence and for compliance with internal quality
specifications. Any adjustments to inventory would be equal to the difference
between the cost of inventory and the estimated net market value based upon
assumptions about future demand, market conditions and expected cost to
distribute those products to market. If actual market conditions are less
favorable than those projected by management, additional inventory may be
required.
The Company maintains a reserve for excess, slow moving, and obsolete
inventory as well as inventory with a carrying value in excess of its net
realizable value. A review of inventory on hand is made at least annually and
provisions for excess and obsolete inventory is recorded. The review is based on
several factors including a current assessment of future product demand,
historical experience, and product expiration.
Deferred Tax Assets
The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such a
determination was made.
Asset Impairment - Goodwill
The Company reviews the valuation of goodwill and intangible assets to
assess potential impairments. The management reassesses the useful lives of
goodwill and other intangible assets in accordance with the guidelines set forth
in FASB Statement No. 142, "Goodwill and Other Intangible Assets". The value
assigned to intangible assets is determined by a valuation based on estimates
and judgment regarding expectations for the success and life cycle of products
14
acquired from Newmark or others in the future. If the actual sale of product and
market acceptance differs significantly from the estimates, management may be
required to record an impairment charge to write down the asset to its
realizable value. To test for impairment, a present value of an estimate of
future cash flows related to the intangible asset are calculated compared to the
value of the intangible asset. When impairment exists it could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Asset Impairment - Long Lived Assets
The Company assesses the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be
fully recoverable. When we determine that the carrying value of such assets may
not be recoverable, we generally measure any impairment on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model.
Included in cost of sales for 2002 is an impairment charge of $50,923 related to
machine parts, which were used in the electrode assembly machine leasing
business. The parts were determined to have no future utilization and therefore
were fully impaired.
Recently Issued Accounting Standards
Stock-Based Compensation
In December 2002, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 148 ("SFAS 148"), "Accounting for
Stock-Based Compensation - Transition and Disclosure" which amends Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effect on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board Opinion No. 28, "Interim Financial Reporting," to require disclosure about
those effects in interim financial information.
Exit or Disposal Activities
In June 2002, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting for Costs
Associated with Exit or Disposal Activities" which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 is
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of SFAS 146 is not expected to have a material effect on the Company's
consolidated financial statements.
New Accounting Standards Implemented
Long-Lived Assets
In 2002, the Company adopted Statement of Financial Accounting Standards
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 of ABP 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. The adoption of SFAS 144 did not have a material
effect on the Company's consolidated financial statements.
Included in cost of sales for 2002 is an impairment charge of $50,923
related to machine parts which were used in the electrode assembly machine
leasing business. The parts were determined to have no future utilization.
15
Goodwill
Effective January 1, 2002 the Company adopted FASB Statement 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 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed 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 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
to all goodwill and other intangible assets regardless of when those assets were
initially recognized.
As of January 1, 2002, the Company's goodwill of $1,326,000 was
composed of $82,000 associated with attaching machine assets purchased from
Newmark, Inc. in 1997 and $1,244,000 associated with the acquisition of Micron
Products Inc. in 1992. As a result of the transitional impairment tests, the
goodwill associated with the Newmark agreement was determined to be impaired as
determined by using the present value of future cash flows solely related to
attaching machines. The balance of $82,000 ($57,000 net of tax) is being
reported as the cumulative effect of change in accounting principle for the
twelve months ended December 31, 2002. The diminishing number of leases and
sales of attaching machines used for the assembly of disposable medical
electrodes in this mature industry lead to the impairment of Newmark goodwill.
No adjustment to the $1,244,000 balance of goodwill associated with the Micron
Products acquisition was deemed necessary as of December 31, 2002.
The continued effect on reported net income due to the cumulative
effect of change in accounting principle, and the discontinuance of
goodwill amortization is as follows:
2002 2001 2000
-------------------------------------------------------------------------------------------------
Reported net income $ 752,736 $ 222,629 $ 620,127
Cumulative effect of change in accounting principle 57,000 - -
Goodwill amortization - 130,833 129,889
-------------------------------------------------------------------------------------------------
Adjusted net income before cumulative effect of
change in accounting principle and
discontinuance of goodwill amortization $ 809,736 $ 335,867 750,016
=================================================================================================
Basic net income per share as reported $ .26 $ .07 $ .19
Cumulative effect of change in accounting principle .02 - -
Goodwill amortization .05 .04
-------------------------------------------------------------------------------------------------
Basic net income per share before cumulative effect $ .28 $ .12 $ .23
of change in accounting principle and
discontinuance of goodwill amortization
=================================================================================================
Diluted net income per share as reported $ .26 $ .07 $ .18
Cumulative effect of change in accounting principle .02 - -
Goodwill amortization - .04 .04
-------------------------------------------------------------------------------------------------
Diluted net income per share before cumulative $ .28 $ .11 $ .22
effect of change in accounting principle and
discontinuance of goodwill amortization
=================================================================================================
16
Item 7A. Quantification and Qualitative Disclosures About Market Risk
The Company is not directly exposed to foreign currency exchange risk
as all business is conducted based in U.S. Dollars. However, our foreign
customers revenue, expense and capital spending are transacted in their local
currencies. As a result weak, economic conditions in foreign markets could
affect our results. We do not use derivative instruments to hedge foreign risk
and we believe our allowances are adequate for these risks.
Item 8. Financial Statements and Supplementary Data
The information required by this item may be found on pages F-1 through
F-27 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information with respect to directors and executive officers
required under this item is incorporated by reference to the information set
forth under the section entitled "Election of Directors" and "Executive
Officers" in our proxy statement for our 2003 Annual Meeting of Shareholders to
be held on May 2, 2003. Information relating to compliance with beneficial
ownership reporting requirements is contained in our proxy statement for our
2003 Annual Meeting of Shareholders under the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance." and is incorporated herein by
reference.
Item 11. Executive Compensation.
The information required under this item is incorporated by reference
to the section entitled "Compensation of Executive Officers" in our proxy
statement for our 2003 Annual Meeting of Shareholders and is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required under this item is incorporated by reference
to the section entitled "Stock Ownership Information" in our proxy statement for
our 2003 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required under this item is incorporated by reference
to the section entitled "Certain Relationships and Related Transactions" in our
proxy statement for our 2003 Annual Meeting of Shareholders and is incorporated
herein by reference.
Item 14. Controls and Procedures
Within ninety days prior to the filing date of this report, the
Disclosure Committee including James E. Rouse as President and Chief Executive
Officer and David A Garrison as Chief Financial Officer, evaluated the
effectiveness of the Company's disclosure controls and procedures. Under rules
promulgated by the SEC, disclosure controls and procedures are defined as those
controls and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Based on the evaluation of the Company's disclosure controls
and procedures, it was determined that such controls and procedures were
effective as of the date of the conclusion of the evaluation.
Further, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
after the date of the conclusion of their most recent evaluation. It should be
noted that the design of any system of controls is based on assumptions about
future events, and there can be no assurance that any design will succeed under
all future conditions.
17
PART IV
Item 15. 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 F-1.
2. Financial Statement Schedules
as attached on page F-26 and F-27.
i. 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. List of Exhibits
The exhibits listed on page 17 and 18 are filed as part of
and incorporated by reference into, this Annual Report on
Form 10-K
(b) Reports filed in the fourth quarter on Form 8-K
1. On December 23, 2002 a form 8-K was filed detailing under
item 5 a stock buyback program.
2. On November 1, 2002 a form 8-K was filed detailing under
item 5 the appointment of a Chief Executive Officer and
Chief Financial Officer and the results of the shareholder
votes during the 2001 annual meeting.
(c) Exhibits
The Company hereby files as part of this Annual Report on Form 10-K
the exhibits listed in 15(a)(3) set forth above. Exhibits, which are
incorporated herein by reference, may be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024,
Washington, D.C. 20549. Copies of such material may be obtained by
mail from the Public Reference Section of the SEC at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The SEC also maintains a website that contains reports, proxy and
information statements and other information regarding registrants
that file electronically with the SEC at the address
"http://www.sec.gov".
18
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 Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
------------------------------- ----------------------------- ----------------------------
/s/ James E. Rouse President and Chief Executive Officer March 18, 2003
-----------------------------------
James E. Rouse (Principal Executive Officer)
/s/ David A. Garrison Chief Financial Officer March 18, 2003
-----------------------------------
David A. Garrison (Principle Financial and Accounting Officer)
/s/ E. P. Marinos Chairman of the Board March 18, 2003
-----------------------------------
E. P. Marinos
/s/ Russell C. Chambers Director March 18, 2003
-----------------------------------
Russell C. Chambers
/s/ Julius Tabin Director March 18, 2003
-----------------------------------
Julius Tabin
/s/ Paul F. Walter Director March 18, 2003
-----------------------------------
Paul F. Walter
/s/ James E. Rouse Director March 18, 2003
-----------------------------------
James E. Rouse
19
CERTIFICATION
I, James E. Rouse, certify that:
1.I have reviewed this annual report on Form 10-K of Arrhythmia Research
Technology, Inc.;
2.Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4.The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a.designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b.evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c.presented in this annual report our conclusions about the effect-
iveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a.All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b.Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6.The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions in regard to significant deficiencies
and material weaknesses.
DATE: March 18, 2003
/s/ James E. Rouse
James E. Rouse
President and Chief Executive Officer
20
CERTIFICATION
I, David A. Garrison, certify that:
1.I have reviewed this annual report on Form 10-K of Arrhythmia Research
Technology, Inc.;
2.Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4.The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effect-
iveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6.The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions in regard to significant deficiencies
and material weaknesses.
DATE: March 18, 2003
/s/ David A. Garrison
David A. Garrison
Chief Financial Officer
21
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Page
------------- ------------------------------------------------------------------------------------------------- --------
3.0 Articles of Incorporation ........................................................................ (a)
3.1 By-laws .......................................................................................... (k)
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 ..................................................................... (d)
4.5 Form of Option for E.P. (Lou) Marinos under 1995 Key Employees Stock Option Plan (d)
10.2 Lockup Agreement. ................................................................................ (a)
10.3 Manufacturing Agreement by and between ART and Mortara Instrument, Inc. dated March 8, 1987. (a)
10.4 Amendment to Manufacturing agreement dated June 15, 1987. ........................................ (a)
10.5 Letter agreement by and between ART and Mortara Instrument, Inc. dated October 26, 1989. ......... (c)
10.6 Letter agreement by and between ART and Mortara Instrument, Inc. dated February 21, 1990. ........ (c)
10.7 Letter agreement by and between ART and Mortara Instrument, Inc. dated February 21, 1990. ....... (c)
10.8 Letter agreement by and between ART and Mortara Instrument, Inc. dated July 31, 1990. ............ (c)
10.9 License Agreement dated November 15, 1981 by and between University Patents, Inc., and ART. ...... (a)
10.10 Amendment to License Agreement dated June 1, 1985. ............................................... (a)
10.11 License of Cardiac Signal Average and Base Technology by ART to Cardiodigital Industries, Inc.
to ART. .......................................................................................... (a)
10.12 Grant of Option to Acquire Exclusive License for Use of Signal Averaging Technology from
Cardiodigital Industries, Inc. to ART. ........................................................... (a)
10.13 Agreement and Plan of Merger executed by ART and Arrhythmia Research Technology, Inc., a
Louisiana corporation. ........................................................................... (a)
10.16 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. ... (l)
10.40 Employment agreement between James E. Rouse and the Company dated October 5th, 2001. ............. (m)
28.0 1987 Incentive Stock Option Plan ................................................................. (a)
28.09 Merger Agreement, dated December 26, 1993, between Micron Products, Inc. and Micron Medical
Products, Inc .................................................................................... (i)
28.10 Articles of Merger of Parent and Subsidiary ...................................................... (i)
28.11 Consent Judgment signed by Arrhythmia Research Technology, Inc. and Corazonix Corporation and
entered on November 15, 1993. .................................................................... (h)
21.0 Subsidiaries ..................................................................................... X-1
99.6 2001 Stock Option Plan ........................................................................... (j)
99.7 Certification pursuant to 18 U.S.C.ss.1350, as adopted pursuant to
section 906 of The Sarbanes-Oxley Act of 2002 ................. X-2
(a) Incorporated by reference from the Company's Registration Statement on
Form S-18 as filed with the Commission in April 1988, Registration
Statement No. 33-20945-FW.
(b) Incorporated by reference from the Company's Form 10-K for fiscal year
ended December 31, 1989 as filed with the Commission in March 1990.
(c) Incorporated by reference from the Company's Registration Statement on
Form S-1 as filed with the Commission in August 1990, Registration
Statement No. 33-36607.
(d) Incorporated by reference from the Company's Form 10-K for fiscal year
ended December 31, 1996 as filed with the Commission in March 1997.
(e) Incorporated by reference from the Company's Form 8-K as filed with the
Commission on December 10, 1992.
(f) Incorporated by reference from the Company's Form 10-K for fiscal year
ended December 31, 1992 as filed with the Commission in March 1993.
(g) Incorporated by reference from the Company's Form 8-K as filed with the
Commission on July 15, 1993. (h) Incorporated by reference from the
Company's Form 8-K as filed with the Commission on November 22, 1993.
(i) Incorporated by reference from the Company's Form 8-K as filed with
the Commission on June 30, 1998. (j) Incorporated by reference from the
Company's Form 10-K for fiscal year ended December 31, 2001 as filed
with the Commission in March 2002.
(k) Incorporated by reference from the Company's Form 10-Q for period ended
September 30, 2002 as filed with the Commission in November 2002.
(l) Incorporated by reference from the Company's Form 10-K for fiscal year
ended December 31, 1997 as filed with the Commission in March 1998.
(m) Incorporated by reference from the Company's Form 10-Q as exhibit 10.10
for period ended September 30, 2002 as filed with the Commission in
November 2002.
Arrhythmia Research Technology, Inc.
And Subsidiary
Contents
Independent Auditors' Report F-2
Consolidated Financial Statements:
Balance sheets F-3, F-4
Statements of income F-5
Statements of changes in shareholders' equity F-6
Statements of cash flows F-7
Notes to consolidated financial statements F-8 to F-25
F-1
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, 2002 and 2001, 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,
2002. 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, 2002 and 2001, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company in
2002 adopted the provisions of Statement of Financial Accounting Standards SFAS
No. 142, "Goodwill and Other Intangible Assets".
/s/ BDO Seidman, LLP
Gardner, Massachusetts
February 14, 2003
F-2
Arrhythmia Research Technology, Inc.
and Subsidiary
Consolidated Balance Sheets
December 31, 2002 2001
================================================================================================================
Assets
Current assets:
Cash and cash equivalents $1,773,412 $1,860,822
Trade accounts receivable, net of allowance
for doubtful accounts of $39,000 and $51,000 979,774 854,426
Inventories (Note 3) 1,124,065 897,087
Deposits, prepaid expenses and other current assets 79,726 27,887
----------------------------------------------------------------------------------------------------------------
Total current assets 3,956,977 3,640,222
Property, plant and equipment, net (Note 4) 2,831,836 3,272,592
Goodwill (Note 2) 1,244,000 1,326,000
Deferred income taxes, net (Note 6) 444,923 444,923
----------------------------------------------------------------------------------------------------------------
Total assets $8,477,736 $8,683,737
================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
Arrhythmia Research Technology, Inc.
and Subsidiary
Consolidated Balance Sheets
December 31, 2002 2001
================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 156,275 $ 343,010
Accrued expenses 223,278 314,840
Current maturities of bonds payable (Note 5) - 113,028
----------------------------------------------------------------------------------------------------------------
Total current liabilities 379,553 770,878
----------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 7 and 8):
Shareholders' equity (Notes 2 and 11):
Preferred stock, $1 par value; 2,000,000 shares authorized;
none issued - -
Common stock, $.01 par value; 10,000,000 shares authorized;
3,888,131 and 3,758,181 issued, respectively 38,881 37,582
Additional paid-in-capital 9,161,707 8,999,581
Common stock held in treasury, 1,139,718 and 869,305 shares at cost (3,088,116) (2,357,279)
Retained earnings 1,985,711 1,232,975
----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,098,183 7,912,859
----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $8,477,736 $8,683,737
================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
Arrhythmia Research Technology, Inc.
and Subsidiary
Consolidated Statements of Income
Years ended December 31, 2002 2001 2000
=========================================================================================================================
Net sales $ 7,192,065 $ 7,219,688 $ 8,521,863
Commission and related revenue (Note 8) - - 1,000,000
-------------------------------------------------------------------------------------------------------------------------
Total revenue (Note 12) 7,192,065 7,219,688 9,521,863
Cost of sales 4,934,307 5,029,922 6,248,579
-------------------------------------------------------------------------------------------------------------------------
Gross profit 2,257,758 2,189,766 3,273,284
Selling and marketing 37,986 58,985 192,862
General and administrative 1,304,663 1,480,250 1,908,217
Research and development 52,456 214,872 229,659
Amortization of goodwill (Note 2) - 130,833 129,889
-------------------------------------------------------------------------------------------------------------------------
Income from operations 862,653 304,826 812,657
Other income (expense):
Interest expense (15,932) (64,412) (91,477)
Other income (expense), net 15,015 (7,785) (56,053)
-------------------------------------------------------------------------------------------------------------------------
Total other expense, net (917) (72,197) (147,530)
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of change in accounting principle 861,736 232,629 665,127
-------------------------------------------------------------------------------------------------------------------------
Income tax provision (Note 6):
Current 52,000 10,000 66,000
Deferred - - (21,000)
-------------------------------------------------------------------------------------------------------------------------
52,000 10,000 45,000
-------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting
principle 809,736 222,629 620,127
Cumulative effect of change in accounting principle, net of
income taxes of $25,000 (Note 2) (57,000) - -
-------------------------------------------------------------------------------------------------------------------------
Net income $ 752,736 $ 222,629 $ 620,127
=========================================================================================================================
Earnings per share (Note 2):
Before cumulative effect of change in accounting principle:
Basic $ 0.28 $ 0.07 $ 0.19
Diluted $ 0.28 $ 0.07 $ 0.18
After cumulative effect of change in accounting principle:
Basic $ 0.26 $ 0.07 $ 0.19
Diluted $ 0.26 $ 0.07 $ 0.18
See accompanying notes to consolidated financial statements.
F-5
Arrhythmia Research Technology, Inc.
and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Notes 5 and 11)
Paid-in Treasury Retained
Shares Amount Capital Stock Earnings Total
====================================================================================================================================
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
Treasury stock purchase of
270,413 shares - - - (730,837) - (730,837)
Exercise of stock options
and warrants 129,950 1,299 162,126 - - 163,425
Net income - - - - 752,736 752,736
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 3,888,131 $38,881 $9,161,707 $(3,088,116) $1,985,711 $8,098,183
====================================================================================================================================
See accompanying notes to consolidated financial statements.
F-6
Arrhythmia Research Technology, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(Note 9)
Years ended December 31, 2002 2001 2000
====================================================================================================================================
Cash flows from operating activities:
Net income $ 752,736 $ 222,629 $ 620,127
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle 82,000 - -
Impairment of long-lived assets 50,923 - -
Director fees paid in stock - - 26,500
Depreciation 609,158 713,477 771,531
Provision for doubtful accounts 12,167 1,827 30,376
Amortization 11,972 317,401 277,087
Deferred income tax provision - - (21,000)
Deferred revenue - (4,621) (4,059)
Changes in operating assets and liabilities:
Trade accounts receivable (137,515) 747,888 18,581
Inventories (226,978) (36,926) 222,356
Deposits, prepaid expenses and other assets (51,839) 66,359 117,379
Income taxes recoverable - 100,000 229,408
Accounts payable and accrued expenses (278,297) (94,868) 89,071
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 824,327 2,033,166 2,377,357
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net of disposals (219,325) (675,111) (246,658)
Other intangibles - - (8,850)
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (219,235) (675,111) (255,508)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock 163,425 30,281 -
Purchase of warrants - (197,030) (50,000)
Payments on long-term debt and capital leases (125,000) (627,161) (25,459)
Purchase of treasury stock (730,837) (702,615) (502,772)
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (692,412) (1,496,525) (578,231)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (87,410) (138,470) 1,543,618
Cash and cash equivalents, beginning of year 1,860,822 1,999,292 455,674
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,773,412 $ 1,860,822 $1,999,292
====================================================================================================================================
See accompanying notes to consolidated financial statements.
F-7
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
Principles of The consolidated financial statements include the
Consolidation accounts of ART and Micron (collectively the
"Company"). All intercompany balances and
transactions have been eliminated in
consolidation.
Revenue 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.
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.
Accounts receivable are customer obligations due
under normal trade terms. 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.
Senior management reviews accounts receivable on a
monthly basis to determine if any receivables will
potentially be uncollectible. The Company includes
any accounts receivable balances that are
determined to be uncollectible, along with a
general reserve, in our overall allowance for
doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written
off against the allowance. Based on the
information available to us, we believe our
allowance for doubtful accounts as of December 31,
2002 is adequate. However, actual write offs might
exceed the recorded allowance.
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.
F-8
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
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 $2,000, $4,000 and $16,000 in 2002,
2001 and 2000, respectively.
Property, Plant Property, plant and equipment are recorded at cost
and Equipment and include expenditures which substantially
extend their useful lives. Depreciation on
property, plant and equipment is calculated using
the straight-line method over the estimated useful
lives of the assets. Expenditures for maintenance
and repairs are charged to earnings as incurred.
When equipment is retired or sold, the resulting
gain or loss is reflected in earnings.
Goodwill Effective January 1, 2002 the Company adopted FASB
Statement 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 applies to
all business combinations initiated after June 30,
2001 and for purchase business combinations
completed 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 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 to
all goodwill and other intangible assets
regardless of when those assets were initially
recognized.
As of January 1, 2002, the Company's goodwill of
$1,326,000 was composed of $82,000 associated with
attaching machine assets purchased from Newmark,
Inc. in 1997 and $1,244,000 associated with the
acquisition of Micron Products Inc. in 1992. As a
result of the transitional impairment tests, the
goodwill associated with the Newmark agreement was
determined to be impaired as determined by using
the present value of future cash flows solely
related to attaching machines. The balance of
$82,000 ($57,000 net of tax) is being reported as
the cumulative effect of change in accounting
principle in 2002. The diminishing number of
leases and sales of attaching machines used for
the assembly of disposable medical electrodes in
this mature industry lead to the impairment of
Newmark goodwill. No adjustment to the $1,244,000
balance of goodwill associated with the Micron
Products acquisition was deemed necessary as of
December 31, 2002.
F-9
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
Goodwill The effect on reported net income due to the cumulative
(Continued) effect of change in accounting principle and
discontinuance of goodwill amortization is as follows:
Years ended December 31, 2002 2001 2000
====================================================================================
Reported net income $752,736 $ 222,629 $ 620,127
Cumulative effect of change in accounting
principle 57,000 - -
Goodwill amortization - 130,833 129,889
--------------------------------------------------------------------------------------
Adjusted net income before cumulative effect
of change in accounting principle and
discontinuance of goodwill amortization $809,736 $ 335,867 $ 750,016
====================================================================================
Basic earnings per share as reported $ 0.26 $ 0.07 $ 0.19
Cumulative effect of change in accounting
principle 0.02 - -
Goodwill amortization - 0.05 0.04
--------------------------------------------------------------------------------------
Basic earnings per share before cumulative
effect of change in accounting principle and
discontinuance of goodwill amortization $ 0.28 $ 0.12 $ 0.23
====================================================================================
Diluted earnings per share as reported $ 0.26 $ 0.07 $ 0.18
Cumulative effect of change in accounting
principle 0.02 - -
Goodwill amortization - 0.04 0.04
--------------------------------------------------------------------------------------
Diluted earnings per share before cumulative
effect of change in accounting principle and
discontinuance of goodwill amortization $ 0.28 $ 0.11 $ 0.22
=====================================================================================
F-10
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
Long-Lived Assets In 2002, the Company adopted Statement of
Financial Accounting Standards 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 of ABP 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. The adoption of SFAS 144 did not
have a material effect on the Company's
consolidated financial statements.
Included in cost of sales for 2002 is an
impairment charge of $50,923 related to machine
parts which were used in the electrode assembly
machine leasing business. The parts were
determined to have no future utilization.
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.
Earnings Per The Company follows the provisions of SFAS No. 128
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 average 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.
F-11
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
Earnings Per Basic and diluted EPS computation for the years
Share Data ended December 31, 2002, 2001 and 2000 are as
(Continued) follows:
Years ended December 31, 2002 2001 2000
====================================================================================
Net income available to common
shareholders $ 752,736 $ 222,629 $ 620,127
Weighted average common shares
outstanding 2,875,244 3,009,823 3,333,317
Basic EPS $ .26 $ 0.07 $ 0.19
Diluted EPS:
Net income available to common
shareholders $ 752,736 $ 222,629 $ 620,127
Weighted average common share
outstanding 2,875,244 3,009,823 3,333,317
Assumed conversion of net common shares
issuable under stock option plans 60,040 146,424 97,084
Weighted average common and common
equivalent shares outstanding 2,935,284 3,156,247 3,430,401
Diluted EPS $ .26 $ 0.07 $ 0.18
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
anti-dilutive:
December 31, 2002 2001 2000
====================================================================================
Stock options 2,000 4,000 7,000
F-12
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
Stock-Based The Company accounts for stock options at
Compensation intrinsic value in accordance with Accounting
principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25") and related
interpretations. Had compensation cost for the
Company's stock options been determined based upon
the fair value at the grant date for awards under
the plans consistent with the methodology
prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net income would have
been adjusted to the pro forma amounts indicated
below:
Years ended December 31, 2002 2001 2000
=====================================================================================
Net income - as reported $ 752,736 $222,629 $ 620,127
Deduct: Total stock-based compensation
expense determined under fair value
based method (7,876) - (5,440)
-------------------------------------------------------------------------------------
Net income - pro forma $ 744,860 $222,629 $ 614,685
=====================================================================================
Basic earnings per share:
as reported $ 0.26 $ 0.07 $ 0.19
proforma $ 0.26 $ 0.07 $ 0.18
Diluted earnings per share:
as reported $ 0.26 $ 0.07 $ 0.18
proforma $ 0.25 $ 0.07 $ 0.18
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.
F-13
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
Comprehensive Income The Company follows the provisions of Statement
(Continued) of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", ("SFAS No. 130")
which establishes standards for reporting and
display of comprehensive income, its components,
and accumulated balances. Comprehensive income is
defined to include all changes in equity except
those resulting from investments by owners and
distributions to owners. Among other disclosures,
SFAS No. 130 stipulates that all items that are
required to be recognized under current accounting
standards as components of comprehensive income be
reported in a financial statement that is
displayed with the same prominence as other
financial statements. The Company did not have any
components of comprehensive income, exclusive of
net income, for the years ended December 31, 2002,
2001 and 2000.
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.
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.
The Company has not entered into derivative
contracts either to hedge existing risks or for
speculative purposes.
Recently Issued In June 2002, The Financial Accounting Standards
Accounting Standard Board issued Statement of Financial Accounting
Standard No. 146 ("SFAS 146"), "Accounting for
Costs Associated with Exit or Disposal Activities"
which addresses financial accounting and reporting
for costs associated with exit or disposal
activities and nullifies Emerging Issues Task
Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination
Benefits and Other Costs to Exit and Activity
(including Certain Costs Incurred in a
Restructuring)." SFAS 146 is effective for exit or
disposal activities initiated after December 31,
2002. The adoption of SFAS 146 is not expected to
have a material effect on the Company's
consolidated financial statements.
F-14
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
2. Accounting Policies
(Continued)
Recently Issued In December 2002, The Financial Accounting
Accounting Standard Standards Board issued Statement of Financial
(continured) Accounting Standard No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation -
Transition and Disclosure" which amends Statement
of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation," to
provide alternative methods of transition for an
entity that voluntarily changes to the fair value
based method of accounting for stock-based
employee compensation. It also amends the
disclosure provisions of that Statement to require
prominent disclosure about the effect on reported
net income of an entity's accounting policy
decisions with respect to stock-based employee
compensation. Finally, this Statement amends
Accounting Principles Board Opinion No. 28,
"Interim Financial Reporting," to require
disclosure about those effects in interim
financial information. The Company plan to
continue accounting for stock based compensation
under the intrinsic value method in accordance
with APB 25.
3. Inventories Inventories consist of the following:
December 31, 2002 2001
=====================================================================================
Raw materials $ 215,552 $ 166,835
Work-in-process 290,368 318,070
Finished goods 618,145 412,182
-------------------------------------------------------------------------------------
Total $ 1,124,065 $ 897,087
=====================================================================================
4. Property, Plant Property, plant and equipment consist of the
and Equipment following:
Asset
December 31, Lives 2002 2001
=====================================================================================
Machinery and equipment 5 to 15 years $ 4,739,594 $ 5,102,745
Equipment held for lease 10 years 292,621 340,743
Building and improvements 20 years 1,869,894 1,852,875
Vehicles 3 to 5 years 24,445 24,445
Furniture and fixtures 3 to 5 years 313,378 310,738
-------------------------------------------------------------------------------------
7,239,932 7,631,546
Less accumulated depreciation (4,408,096) (4,358,954)
-------------------------------------------------------------------------------------
Net property, plant and equipment $ 2,831,836 $ 3,272,592
=====================================================================================
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 $143,920 and $129,758 at December
31, 2002 and 2001.
F-15
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
5. Debt
Revolving Credit The Company has available $1,000,000 from a
Facility revolving credit facility with a bank, which is
renewable in May 2003. 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, 2002 and 2001 and no borrowings
during 2002 and 2001. Interest expense includes an
unutilized borrowing base charge of $10,000 in
2002 and 2001.
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 consist of:
December 31, 2002 2001
==================================================
Bonds payable $ - $ 113,028
Less current maturities - 113,028
--------------------------------------------------
Long-term bonds payable $ - $ -
==================================================
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 expired 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. In May 2002, the
matured bonds were paid in full and the remaining
57,950 warrants were exercised.
For the years 2002, 2001 and 2000, the Company
recorded amortization of bond discount of $11,972,
$138,538 and $63,490, respectively and interest
expense of $5,729, $48,055 and $63,250 in 2002,
2001 and 2000.
F-16
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
6. Income Taxes The income tax provision for each of the three
years in the period ended December 31, 2002
consists of the following:
2002 2001 2000
==========================================================================================
Current:
Federal $ - $ - $ -
State 52,000 10,000 66,000
------------------------------------------------------------------------------------------
52,000 10,000 66,000
Deferred - - (21,000)
------------------------------------------------------------------------------------------
Total income tax provision $52,000 $10,000 $ 45,000
==========================================================================================
The Company's federal net operating loss ("NOL")
carryforwards were approximately $1,300,000 at
December 31, 2002 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:
2002 2001
==========================================================================================
Deferred income taxes:
Inventories $ 46,000 $ 51,306
Property, plant and equipment 43,000 68,585
Patents 199,000 237,244
Other 83,923 111,234
Net operating loss carryforwards 442,000 595,000
Valuation allowance (369,000) (618,446)
------------------------------------------------------------------------------------------
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.
F-17
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
6. 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:
2002 2001 2000
=====================================================================================
Tax provision computed at statutory rate $ 292,990 $ 79,094 $ 226,143
Increases (reductions) due to:
Tax effect of change in accounting
principle (25,000) - -
Amortization of goodwill - 39,054 39,054
State income taxes net of federal benefit 34,320 6,600 43,560
Changes in valuation allowance estimates (249,446) (130,790) (306,880)
Other (864) 16,042 43,123
-------------------------------------------------------------------------------------
Income tax expense $ 52,000 $ 10,000 $ 45,000
=====================================================================================
7. Employee Benefit The Company sponsors an Employee Savings and
Plans Investment Plan under Section 401(k) of the
Internal Revenue Code covering all eligible
employees of the Company. Employees can contribute
up to 90% 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,
2002, 2001 and 2000.
8. 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 $3,917,
$30,000 and $30,000 for each of 2002, 2001 and
2000, respectively. The license expired 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
commission agreement for $1,000,000 with no
further obligations to either party.
F-18
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
8. Commitments and
Contingencies
(Continued)
Environmental Like many industrial processes, the Micron
Groundwater manufacturing process utilizes hazardous and
non-hazardous chemicals, the treatment and
disposal of which are subject to federal and state
regulation. Since its inception, Micron has
expended significant funds to train its personnel,
install waste treatment and recovery equipment and
to retain an independent environmental consulting
firm to constantly review, monitor and upgrade its
air and waste water treatment activities. As a
result, Micron believes that the operations of its
manufacturing facility are in compliance with
currently applicable safety, health and
environmental laws and regulations.
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.
Employment The Company has an employment agreement with a
Agreement certain executive extending through September
2006. The agreement provide for a base
compensation and certain other benefits. The
agreement also contains other terms and conditions
of employment, including termination payments
under certain circumstances.
Operating Leases The Company leases vehicles and equipment under
non-cancelable lease arrangements. Lease expense
under all operating leases was approximately
$40,000, $77,000 and $117,000 in 2002, 2001 and
2000, respectively.
Future minimum operating lease payments as of
December 31, 2002 are approximately as follows:
Year Amount
==================================================
2003 $32,000
2004 26,000
2005 15,000
--------------------------------------------------
Total $73,000
==================================================
F-19
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
9. Supplemental Cash paid for income taxes and interest for the
Cash Flow years ended December 31 are as follows:
Information
2002 2001 2000
=================================================================================
Income taxes $15,000 $13,185 $ 59,091
Interest $10,203 $78,428 $ 68,889
Non-cash activities:
Bond discount resulting from bond and
stock warrant renewal $ - $ - $ 194,000
Directors fees paid in stock $ - $ - $ 26,500
10. 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 $18,600, $25,000 and
$37,700 for years 2002, 2001 and 2000,
respectively. The amounts owed to this firm at
December 31, 2002 and 2001 were approximately $0
and $6,000, respectively.
Cardio Digital Inc. ("CDI") has four shareholders
who are also shareholders of the Company.
Royalties paid CDI were $0, $450 and $6,100 for
years 2002, 2001 and 2000, respectively.
During the years 2002, 2001 and 2000 healthcare
coverage premiums of approximately $7,400, $7,800
and $11,670, 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 2002, 2001 and 2000
were $5,250, $8,048 and $0, respectively.
F-20
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
11. 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.
After the resignation of one of those officers,
6,000 of the options were exercisable at December
31, 2002 and 170,000 are available for future
grants. The weighted average fair market value on
the date of grant of the options granted was
$1.31.
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 3.0%.
Incentive Stock The Company had reserved 250,000 shares of its
Option Plan common stock for issuance to officers and Option
Plan 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 $1.44 per share and
weighted average remaining life of 2.4 years. The
ISO Plan was terminated for additional grants in
2001.
F-21
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
11. Stock Options
(Continued)
Incentive Stock Transactions under the ISO Plan are summarized as
Option Plan follows:
2002 2001 2000
==========================================================================================
Options outstanding at beginning of year 28,000 51,000 107,500
Exercised - (8,000) -
Cancelled/expired (2,000) (15,000) (56,500)
------------------------------------------------------------------------------------------
Options outstanding at end of year 26,000 28,000 51,000
==========================================================================================
Options exercised to date 12,500 12,500 4,500
------------------------------------------------------------------------------------------
Available for grant at end of year - - 194,500
==========================================================================================
Exercisable at end of year 26,000 28,000 51,000
==========================================================================================
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. During
2002, the remaining 72,000 options were exercised.
Transactions relative to non-plan options are
summarized as follows:
2002 2001 2000
==========================================================================================
Options outstanding at beginning of year 72,000 90,000 99,000
Exercised (72,000) (18,000) -
Cancelled/expired - - (9,000)
------------------------------------------------------------------------------------------
Options outstanding at end of year - 72,000 90,000
==========================================================================================
Exercisable at end of year - 72,000 90,000
==========================================================================================
F-22
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
12. Industry and The Company's operations are classified into two business
Geographic segments: medical electrode components and computerized
Segments 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, 2002, 2001 and 2000:
Medical Computerized
Electrode Medical
Components Instruments Corporate Consolidated
=======================================================================================================================
Year ended December 31, 2002
Sales $7,188,325 $ 3,740 $ - $7,192,065
-----------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 927,099 $ (64,446) $ - $ 862,653
-----------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 219,325 $ - $ - $ 219,325
Depreciation and Amortization $ 609,158 $ - $ 11,972 $ 621,130
Identifiable assets at
December 31, 2002 $5,411,611 $ 15,106 $3,051,019 $8,477,736
=======================================================================================================================
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
=======================================================================================================================
F-23
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
12. Industry and
Geographic
Segments
(Continued)
Medical Computerized
Electrode Medical
Components Instruments Corporate Consolidated
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
(A) Includes a $1,000,000 buyout and termination of GE/Prucka commission agreement.
The following table sets forth the geographic distribution of the Company's net sales:
2002 2001 2000
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Canada $ 3,133,890 $ 2,765,531 $ 2,756,886
Europe 1,239,172 1,421,798 1,427,494
United Kingdom 1,430,459 1,397,856 1,560,065
United States 1,115,941 1,311,334 3,422,711(A)
Other 272,603 323,169 354,707
------------------------------------------------------------------------------------------
Net Sales $ 7,192,065 $ 7,219,688 $ 9,521,863
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
(A) Includes a $1,000,000 buyout and termination of GE/Prucka commission agreement.
F-24
Arrhythmia Research Technology, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
12. Industry and The following table sets forth the percentage of
Geographic net sales to significant customers of the medical
Segments electrode components segment in relation to total
(Continued) segment sales:
Customers 2002 2001 2000
==========================================================================================
A 36% 38% 36%
B 19% 18% 25%
C 20% 22% 14%
The single significant customer for the
computerized medical instruments segment was
revenue from the GE/Prucka commission agreement,
which was terminated in 2000. For the year ended
December 31, 2000, this was 90% of computerized
medical instrument net sales,respectively.
13 Quarterly First Second Third Fourth
Financial Data Quarter Quarter Quarter Quarter
=============================================================================================
2002
Net sales $ 1,915,097 $ 1,832,237 $1,630,427 $ 1,814,304
Gross profit 632,381 577,180 548,463 499,734
Net income 145,021 101,440 178,744 327,531
Earnings per share 0.05 0.03 0.06 0.12
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
Earnings per share 0.01 0.03 0.03 0.00
During the fourth quarter of 2002, the Company
determined that $50,923 of electrode assembly
machine parts had no future value and were
charged to expense. Also in the fourth quarter
of 2002, the Company adjusted income tax
expense by approximately $80,000 to better
reflect the expected utilization of deferred
tax assets.
F-25
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 14, 2003 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
audits of the financial statement schedule for the years ended December 31,
2002, 2001 and 2000 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, 2002, 2001 and 2000.
/s/ BDO Seidman, LLP
Gardner, Massachusetts
February 14, 2003
F-26
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:
2002 $ 51,000 $ - $ 12,000 $ 39,000
======================================================================================================
2001 $ 52,827 $ 35,978 $ 37,805 $ 51,000
======================================================================================================
2000 $ 83,203 $ 56,918 $ 87,294 $ 52,827
======================================================================================================
Allowance for slow-moving inventories:
======================================================================================================
2002 $ 111,654 $ - $ 6,315 $ 105,339
======================================================================================================
2001 $ 150,487 $ - $ 38,833 $ 111,654
======================================================================================================
2000 $ 458,500 $ 24,433 $332,446 $ 150,487
======================================================================================================