ITEM 1. BUSINESS BACKGROUND
Arrhythmia Research Technology, Inc. ("ART") was incorporated under the laws of the State of Louisiana in 1981 and reincorporated under the laws of the State of Delaware in 1987. ART is engaged in marketing and manufacturing computerized medical instruments which acquire data and analyze electrical impulses of the heart to detect and aid in the treatment of potentially lethal arrhythmias. ART's product line includes signal-averaging electrocardiographic (SAECG) equipment and cardiac catheterization equipment. ART's patented signal-averaging product line is comprised of the 1200 EPX-TM-, the LP-Pac Q-TM-, the PREDICTOR IIc-TM-, and the PREDICTOR-Registered Trademark- I. ART also manufactures and sells the proprietary K3 cardiac catheterization product line. Additionally, ART was the exclusive distributor for the CardioMapp-TM- and CardioLab-TM-, Prucka Engineering, Inc.'s electrophysiology products through December 31, 1996. From January 1, 1997 through December 31, 2002, ART will receive a royalty on certain products sold by Prucka. (See "Electrophysiology Products).
ART continues to aggressively seek to acquire additional products and to look for acquisition candidates to replace the electrophysiology product sales. In this process, the Company has developed relationships and possible collaborations with other companies which could result in opportunities to offset the reduction in sales of the electrophysiology products. ART will continue to receive royalties on sales of the CardioLab product of 4% of net receipts on the first $10,000,000 and 1% on any excess in 1998. ART will receive a royalty of 3% on the first $10,000,000 and 25% of the royalties it would otherwise be entitled to receive for revenues attributed to Prucka products in excess of $10,000,000 from January 1, 1999 through 2002.
ART's wholly-owned subsidiary, Micron Products Inc. ("Micron"), is a manufacturer and distributor of silver/silver chloride-plated sensor elements ("sensors") used in the manufacture of disposable electrodes constituting a part of ECG diagnostic and monitoring instruments. Micron also acts as a distributor of metal snap fasteners ("snaps"), another component used in the manufacture of disposable electrodes. In 1997, Micron acquired the rights to an electrode assembly machine which it now manufactures and leases to its sensor and snap customers. Micron was incorporated in the State of Massachusetts in 1972 and is located in Fitchburg, Massachusetts.
The following table sets forth for the periods specified, the net sales derived from the products of ART and its subsidiary Micron (collectively the "Company"):
The Company believes that the continued growth in the fields of cardiology and electrophysiology will result in significant opportunities for the Company to supply equipment and related disposables to hospitals, clinics and physicians. The Company is actively seeking to acquire additional product lines to supply this market.
RECENT DEVELOPMENTS
ACQUISITION OF THE K3 PRODUCT LINE
On April 14, 1997, ART acquired from Astro-Med, Inc. substantially all of the assets related to the following products: (i) the basic cardiac catheterization monitoring system (the "K3-I"), (ii) the stand-alone hemodynamic analysis package (the "K3-II"), (iii) the network ready hemodynamic analysis package (the K3-III"), and (iv) the control work station (the K3-WI") (collectively, the "K3 Products"). The purchase price for the assets was $350,000, payable $50,000 at closing and a promissory note in the amount of $300,000. The note is due and payable not later than the third anniversary of the closing
date. Interest only payments are payable on the last day of each quarter during the first year after the closing and, thereafter, principal and interest payments, in an amount necessary to fully amortize the then-outstanding balance of the note in equal quarterly payments are payable on the last day of each quarter.
Simultaneously with the execution of the asset purchase agreement, ART entered into a manufacturing agreement with Astro-Med. The term of the agreement began on April 14, 1997 and continues for three years; provided, however, that ART may, on sixty days' prior written notice to Astro-Med, terminate the manufacturing agreement after the date of the first anniversary. During the term of the manufacturing agreement, Astro-Med will manufacture the K3 Products at prices which are specified in the agreement.
The K3 cath lab is an advanced hemodynamics system for use in a standard hospital cath lab. The K3 is designed to produce complete hemodynamic analysis and comprehensive reports, including chronological logs, preliminary findings, full inventory control reports, letter generation and medical records, in a simplified drop-down menu format. The FDA issued a 510(k) in November 1994 which allows the K3 Products to be sold in the United States.
ACQUISITION OF A HIGH SPEED ELECTRODE ASSEMBLY MACHINE
Pursuant to an asset purchase agreement, dated March 5, 1997, Micron acquired from Newmark, Inc. substantially of its assets used in the business of manufacturing, marketing, assembling, marketing, leasing and selling medical stud and eyelet application machines. The purchase price for the acquired assets was $400,000, payable as follows: (i) cash paid on account in the amount of $58,368; (ii) cash in the amount of $141,632 paid on March 31, 1997; and (iii) a non-interest bearing promissory note in the principal sum of $200,000, payable in twenty equal monthly installments of $10,000 each.
At the same time it entered into the asset purchase agreement, Micron executed a manufacturing agreement with Newmark pursuant to which Newmark will continue to manufacture and service the machines on behalf of Micron for a period of one year for a specified price. The manufacturing agreement is automatically renewable for successive one-year terms.
Acquisition of the electrode assembly machines provides Micron with a complimentary product which it can lease to existing sensor and snap customers.
SOFTWARE CONVERSION AGREEMENT
In April 1997, the Company entered into an agreement with Softheart, Inc, the developer of the original software for the Cath Lab to convert the Cath Lab software to a Windows NT platform. ART has agreed to pay Softheart, Inc. $145,000, payable $30,725 upon execution of the agreement and $6,725 per month for the next 16 succeeding months. Simultaneously with the execution of the software conversion agreement, ART and Softheart entered into an agreement for the license of the software upon the completion of the conversion. License fees are based on net revenues with certain minimum payments. Development costs will be offset against license fees until such times as the Company has recovered the $145,000.
DESCRIPTION OF BUSINESS
SIGNAL-AVERAGING ELECTROCARDIOGRAPHIC (SAECG) PRODUCTS
Sudden cardiac death afflicts over 400,000 individuals in the United States alone each year. As described in an Expert Consensus on Signal-Averaged Electrocardiography published in the Journal of the American College of Cardiology (Vol. 27, No. 1, 1996), these occurrences are due to sustained ventricular tachycardia (abnormally rapid heartbeat) or ventricular fibrillation (very fast, completely irregular heartbeat) which severely affect the capability of the heart's pumping chambers or ventricles. Ventricular arrhythmias are distinguished from arrhythmias affecting the atrium (the non-pumping chambers of the heart), which generally are not life-threatening. The majority of ventricular arrhythmias occur in patients who have survived a prior heart attack or have significant coronary artery disease. However, individuals with primary electrical disturbances of the heart comprise an additional subset of patients. Thus, various techniques have evolved to detect and treat individuals at risk of the development of sustained ventricular arrhythmias which may cause marked interference with the proper functioning of blood circulation, resulting, in some cases, in sudden cardiac death.
By analyzing the electrical signals from the hearts of animal and human survivors of heart attacks, researchers have found that, in contrast to the relatively discrete, narrow high amplitude signals recorded from normal subjects, low amplitude, high frequency signals persisted well after the heartbeats were recorded in approximately 20% to 25% of heart attack survivors. These latter signals became known as "late potentials." Since directly recorded late potentials had been documented in subjects with malignant ventricular arrhythmias, the hypothesis arose that late potentials would be recorded in subjects with,
or at risk of, sustained ventricular arrhythmias. After successful surgical treatment of ventricular arrhythmias, these late potential signals disappeared, which indicated an association between these abnormal signals and the underlying condition.
Signal-averaged surface (non-invasive) electrocardiography has become well established as a means of evaluating and diagnosing those individuals at risk for potentially lethal ventricular arrhythmias as documented by an Expert Consensus on SAECG (noted above). The steps involved in obtaining a SAECG include: recording, digitization, averaging, amplification, and filtering. Conventional surface electrocardiography generally cannot detect late potentials. A major limitation stems from the inability to isolate the low amplitude signals. Amplification of the standard electrocardiogram to detect late potentials results in contamination by coincident electrical noise. The SAECG processes enable late potentials to be amplified and enhanced, while eliminating undesired electrical noise. At the annual American Heart Association (AHA) Scientific Sessions in November 1995, abstracts of studies were presented which described potential new areas of effective use of ART's SAECG technology. Of primary interest were (1) SAECG as a predictor of sudden cardiac death after coronary arterial bypass surgery; (2) SAECG as a tool for determining the effectiveness of ACE inhibitor drug therapy; and (3) as a non-invasive method of detecting rejection after heart transplant surgery. At the 1996 AHA Sessions, a significant study showed that SAECG could be an effective diagnostic tool for patients with coronary heart disease (CHD) even before they have had a heart attack. Patients with CHD approximate 15.0 million. An SAECG study involving 458 patients who had an acute myocardial infarction was published in the American Heart Journal in 1997. In the absence of late potentials, the probability of having no arrhythmic event was 99% in the first year, and 96% in five years. On the other hand, the presence of late potentials found in the SAECG represents the strongest single predictor of future arrhythmic risk in patients after a first acute myocardial infarction, with a 4.6-fold increase in the risk of sudden death or sustained ventricular tachycardia.
1200 EPX
The 1200 EPX is a specialized high resolution ECG system used to detect late potentials which cannot be detected by conventional surface ECG instruments. The 1200 EPX is used in conjunction with an MS-DOS based personal computer utilizing the patented Simson bi-directional Butterworth filtering technique. The 1200 EPX acquires, digitizes, averages and filters the cardiac signals providing late potential analysis with its time domain and frequency-domain analysis software. ART has the rights to the use of the Simson bi-directional Butterworth filtering technique for the detection of late potentials in the terminal portion of the QRS cycle. This method, characterized as the "Standard", was pioneered by Michael Simson, MD, and has been built into each 1200 EPX . Hard copy reports are generated using laserjet printers. See "EPSoft-TM- Software Library" for post-processing applications available for the 1200 EPX.
LP-PAC Q AND PREDICTOR IIC
The LP-Pac Q is a low-cost signal-averaging kit for MS-DOS based personal computers which consists of a "smart" SAECG pre-amplifier/patient cable, lead wires, a data acquisition system (DAS) card to receive ECG signals in real- time, time domain late-potential analysis software and an isolation safety transformer. The LP-Pac Q uses the patented Simson bi-directional Butterworth filtering technique, the recognized standard for the detection of late potentials, and provides results which are substantially equivalent to the 1200 EPX. All software modules for the 1200 EPX are also available for the LP-Pac Q, with the exception of Heart Rate Variability analysis. See "EPSoft-TM- Software Library". In January 1996, ART received CE mark certification for the LP-Pac Q. The certification of the CE mark is required to export products to the European community.
The PREDICTOR IIc is a cart-based patient-isolated system comprised of the same components as the LP-Pac Q kit, but running PREDICTOR software on a notebook computer with a docking station. A Hewlett-Packard laserjet printer is supplied as part of the cart-based system.
PREDICTOR I
The PREDICTOR I is a personal computer-based signal-averaging device that records and analyzes cardiac late potentials. The PREDICTOR I consists of a computer, digitizing hardware, programmable amplifiers, QRS detection hardware/firmware, preamplifiers, and a printer. Software is provided to facilitate the use of these components. The PREDICTOR I is designed to give the physician a flexible tool for the research setting as well as for clinical use.
EPSOFT-TM- SOFTWARE LIBRARY
The primary thrust in software development efforts since mid-1997, has been the migration of DOS-based products into the Windows 95 environment.
ART's research and development staff has recently developed breakthrough digital signal processing techniques to enhance the overall analytical power of the SAECG test. Two such new developments are the IntraSpect-TM- and Early Potential
Analysis software packages. IntraSpect-TM-, which is now protected by a newly allowed United States patent, permits visualization and quantification of electrical fragmentation within the entire QRS complex (entire ventricular depolarization cycle), using individual-lead Acceleration Spectrum Analysis (ASA). Hence, micropotential detection is no longer limited to the 'late potential' region. Furthermore, patients with conduction delay problems (i.e. "bundle branch block") can have SAECG analysis performed on them. This covers 25% of a patient population which previously could not be analyzed with SAECG.
The Early Potential Analysis software has been designed specifically for P wave-triggered SAECG acquisition and analysis and is used as a research tool in assessing patients at risk for atrial fibrillation and flutter. ART continues to offer other optional post-processing signal averaging software packages for the 1200 EPX and LP-Pac Q, including Cal-ABS-TM- Plus software for individual lead time domain analysis and FFT-Plus-TM- spectral temporal mapping software; and Heart Rate Variability (HRV) software for the 1200 EPX. These optional signal-averaging software packages are not approved by the FDA and are for research purposes, not clinical diagnosis.
ART also offers the PREDICTOR Heart Rate Variability ECG software ("PREDICTOR HRVECG"), which is marketed under a 510(k) granted by the FDA in 1989. PREDICTOR HRVECG provides time and frequency domain mathematical tools for the non-invasive assessment of R wave to R wave in sequential QRS complexes. PREDICTOR HRVECG can be used alone or in conjunction with a PREDICTOR I, PREDICTOR IIc, and LP-Pac Q signal-averaging systems.
Software upgrades are provided at no charge to customers with systems under warranty. Sales of post-processing software products were not material to the Company's business in 1997.
K3 CATH-LAB
On April 14, 1997, ART acquired from Astro-Med, Inc. substantially all of the assets related to the following products (i) the basic cardiac catheterization monitoring system (the "K3-I"), (ii) the stand-alone hemodynamic analysis package (the "K3-II"), (iii) the network ready hemodynamic analysis package (the K3-III"), and (iv) the control work station (the K3-WI") (collectively, the "K3 Products"). The purchase price for the assets was $350,000, payable $50,000 at closing and a promissory note in the amount of $300,000. The note is due and payable not later than the third anniversary of the closing date. Interest only payments are payable on the last day of each quarter during the first year after the closing and, thereafter, principal and interest payments, in an amount necessary to fully amortize the then-outstanding balance of the note in equal quarterly payments are payable on the last day of each quarter.
Simultaneously with the execution of the Asset Purchase Agreement, ART entered into a Manufacturing Agreement with Astro-Med. The term of the agreement began on April 14, 1997 and continues for three years; provided, however, that ART may, on sixty days' prior written notice to Astro-Med, terminate the Manufacturing Agreement after the date of the first anniversary. During the term of the Manufacturing Agreement, Astro-Med will manufacture the K3 Products at prices which are specified in the Agreement.
The K3 cath lab is an advanced hemodynamics system for use in a standard hospital cath lab. The K3 is designed to produce complete hemodynamic analysis and comprehensive reports, including chronological logs, preliminary findings, full inventory control reports, letter generation and medical records, in a simplified drop-down menu format. This system software is presently in DOS, but will be implemented in Windows NT in the near future, along with hardware upgrades to improve system performance and market share. In April 1997, the Company entered into an agreement with Softheart, Inc, the developer of the original software, to convert the software to a Windows NT platform. ART has agreed to pay Softheart, Inc. $145,000, payable $30,725 upon execution of the agreement and $6,725 per month for the next 16 succeeding months. Simultaneously with the execution of the software conversion agreement, ART and Softheart entered into an agreement for the license of the software upon the completion of the conversion. License fees are based on net revenues with certain minimum payments. The FDA issued a 510(k) in November 1994 which allows the K3 Products to be sold in the United States.
ELECTROPHYSIOLOGY PRODUCTS
CARDIOLAB
The CardioLab was introduced and received a 510(k) from the FDA in early 1991. The CardioLab is a computerized recording and analysis system used by electrophysiologists in the diagnosis and treatment of arrhythmias. The CardioLab is used in conjunction with a stimulator and catheters inserted through a blood vessel, allowing an electrophysiologist to electronically induce, monitor, record, analyze and treat arrhythmias under controlled conditions. The CardioLab records cardiac electrical activity which is amplified, digitized and transmitted to a computer for real time analysis and display on a high resolution color graphics monitor or laser printer. Because the CardioLab can be used to accurately detect the presence
and location of diseased or damaged heart tissue, in some cases, a procedure can be performed less invasively via catheter, as compared to open heart exploratory surgery, to treat the condition.
The CardioLab components include an amplifier, computer, monitor and printer. These hardware components are manufactured by various suppliers and are, to a large extent, interchangeable. The CardioLab is manufactured by Prucka Engineering, Inc. of Houston and was distributed exclusively by ART until December 31, 1996 pursuant to an agreement dated April 1, 1994. During 1997 and 1998, ART will receive a 4% commission on net sales of CardioLab systems and accessories sold anywhere in the world, up to a ceiling of $10,000,000. ART receives 25% of the commissions it would otherwise be entitled to receive for revenues attributable to CardioLab systems that exceed $10,000,000. From January 1, 1999 through December 31, 2002, ART will receive a commission of 3% of the net sales of CardioLab systems sold anywhere in the world, up to a ceiling of $10,000,000 in total net sales. ART will receive 25% of the commissions it would otherwise be entitled to receive for revenues attributable to the Prucka products that exceed $10,000,000.
CARDIOMAPP
The CardioMapp was introduced and received a 510(k) from the FDA inNovember 1989. The CardioMapp is a coputerized cadiac mapping system used during open heart surgery to assist surgeons in locating and treating electrical malfunctions of the heart. The system uses several types of electrode arrays placed on the heart to monitor and record cardiac electrical activity. The electrical activity is amplified, digitezed and transmitted to a computer for real-time analysis and display in the operating room during surgery on a high resolution color graphics display or color printer. The graphics display, or map, is presented to the surgeon within one to two minutes after the data is recorded.
The CardioMapp components include fiber optic cable and electrodes, an amplifier, junction box, copmuter monitor and printer. The CardioMapp is manufactured by Prucka and was distributed exclusively by ART until December 31,1996 pursuant to an agreement dated April 1, 1994. During 1997, the final year ART will receive commissions for CardioMapp products, ART received 4% commissions on net sales of CardioMapp systems and accessories sold anywhere in the world, uup to a ceiling of $10,000,000 in total net sales. ART received 25% of the commissions it would otherwise be entitled to receive for revenues attributable to CardioMapp systems that exceed $10,000,000.
SENSORS AND SNAPS
SILVER/SILVER CHLORIDE-PLATED SENSOR ELEMENTS
Micron is a manufacturer and distributor of silver/silver chloride-plated sensor elements for use in the manufacture of disposable electrodes for ECG diagnostic, monitoring and related instrumentation.1
The disposable electrode has proven to be more accurate and reliable than the reusable electrodes available in the market. Additionally, disposable electrodes are faster and easier to use as compared to reusable electrodes, which require cleaning after each use. As a result, the disposable electrode has replaced the reusable electrode in many applications. A disposable electrode generally consists of an adhesive for attachment to the patient's body, a gel to insure maximum signal acquisition, a conductor or snap for attachment to the transfer wires and the sensor element. The type of sensor element manufactured by Micron consists of a molded plastic substrate plated with a silver/silver chloride surface which is a highly sensitive conductor of electrical signals. Silver/silver chloride-plated disposable electrodes are utilized in coronary care units and for other monitoring purposes. In most of these ECG procedures, up to ten electrodes are used and after each test, all such electrodes are discarded.
In addition to the traditional ECG tests, disposable electrodes incorporating Micron's sensor elements are used in connection with the stress and "Holter" tests. The Holter test utilizes a portable ECG heart monitoring device that is worn by a patient for up to 24 hours during the patient's normal activity and is designed to record data from the patient's heart. The stress test monitors the human heart during rest followed by exercise and again at rest. Both the Holter and stress tests employ disposable silver/silver chloride disposable electrodes.
METAL SNAP FASTENERS
In February, 1991, Micron entered into a non-exclusive world-wide distribution agreement with a manufacturer of metal snap fasteners used to attach the disposable electrode to the lead wires of the ECG machine. As a component of the finished silver/silver chloride disposable electrode, the snaps are sold to some of the same customers that use Micron's sensor elements. Micron purchases finished snap fasteners from its supplier, performs quality control procedures and repackages the snaps for shipment to customers. Snap shipments are often included along with Micron's sensor shipment to a customer. While Micron is attempting to increase the market penetration of this product, there can be no guarantee that the snap fastener product line will produce increased revenues or profits in future periods.
HIGH SPEED ELECTRODE ASSEMBLY MACHINE
Pursuant to an asset purchase agreement, dated March 5, 1997, Micron acquired from Newmark, Inc. substantially of its assets used in the business of manufacturing, marketing, assembling, marketing, leasing and selling medical stud and eyelet application machines. The purchase price for the acquired assets was $400,000, payable as follows: (i) cash paid on account in the amount of $58,368; (ii) cash in the amount of $141,632 paid on March 31, 1997; and (iii) a non-interest bearing promissory note in the principal sum of $200,000, payable in twenty equal monthly installments of $10,000 each.
At the same time it entered into the asset purchase agreement, Micron executed a manufacturing agreement with Newmark pursuant to which Newmark will continue to manufacture and service the machines on behalf of Micron for a period of one year for a specified price. The manufacturing agreement is automatically renewable for successive one-year terms.
Acquisition of the electrode assembly machines provides Micron with a complimentary product which it can lease to existing sensor and snap customers
The following table shows sales of sensors, snaps and snap machines by Micron for the years ended December 31:
ENVIRONMENTAL REGULATION
Like many industrial processes, the Micron manufacturing process utilizes hazardous and non-hazardous chemicals, the treatment and disposal of which are subject to federal and state regulation. Since its inception, Micron has expended significant funds to train its personnel, install waste treatment and recovery equipment and to retain an independent environmental consulting firm to constantly review, monitor and upgrade its air and waste water treatment activities. As a result, Micron believes that the operation of its manufacturing facility is in compliance with currently applicable safety, health and environmental laws and regulations.
GROUNDWATER
During September, 1992, as a requirement for obtaining a mortgage to repurchase its Fitchburg, Massachusetts manufacturing facility, Micron performed an environmental site assessment, including an analysis of groundwater samples for the presence of certain petroleum-based products, metals and solvents. The site assessment indicated levels of petroleum products and metals in excess of the minimum allowable standards. Micron filed a release report and a Preliminary Assessment and Interim Site Classification form with the Massachusetts Department of Environmental Protection ("DEP"). The DEP classified the site as a disposal site within the meaning of the Massachusetts Oil and Hazardous Material Release Prevention and Response Act and identified Micron as a potentially responsible party with liability.
On January 21, 1993, Micron filed its Phase I Limited Site Investigation and Waiver Application ("Application"). The Application contained a historical overview of past uses of the site and its surrounding area. The facility is located in the center of a heavily developed industrial area and use of the site and surrounding properties predates the early 1900's. Micron has occupied the site from 1982 to the present. The Application identified several potential off-site sources for the discharge and demonstrated that none of the types of chemicals found on the property are used in the Micron manufacturing process. During February, 1993, the representatives of the DEP visited the site. On February 18, 1993, the DEP classified the site as a non-priority disposal site and granted a waiver under the Application with the stipulation that Micron evaluate the upgradient, off-site sources which may have caused the contamination.
As a condition of the waiver approved by the DEP, Micron was required to prepare a five-year plan of remediation for the property. Micron retained an environmental consulting firm to organize, design, and implement a plan of remediation and to represent Micron in its dealings with the regulatory authorities. In January, 1998, Micron filed a Tier Classification, Tier II Extension & Tier II Transfer Transmittal Form to allow further subsurface investigation and a consequent risk assessment to be performed. Upon the completion of these Phase II activities, Micron will apply for final approval and clearance from the DEP. The Massachusetts Contingency Plan allows closure of sites only after a condition of "no significant risk" is demonstrated. If the DEP determines that the Company needs to implement the last phase of remediation (Phase III), the
Company could incur approximately $150,000 to $200,000 of additional clean-up costs to remove contaminated property as estimated by the environmental engineering firm hired to represent the Company in its dealing with the DEP. Although the ultimate outcome is uncertain until the remainder of the work is completed, the engineering firm and management of the Company believe that the last phase of remediation will not be required.
During 1997, Micron spent approximately $700,000 for capital improvements related to modification and upgrading of its manufacturing processes primarily related to replacement of its waste water equipment. Continued work to implement savings related to recovery and recycling of water, silver, and other chemicals to offset some of the costs of the improvements is expected during 1998. The Company expects to spend approximately $200,000 for these improvements which will be funded from operating cash flow.
OPERATIONS
During 1997, 1996 and 1995, Micron spent approximately $320,000, $137,000 and $139,000, respectively on an extensive program to evaluate its manufacturing process, employee training, health and safety programs, air and waste water treatment systems, and to ensure compliance with current and future federal, state and local regulations, as well as to evaluate the adequacy of such systems to facilitate future growth. The nature of certain of the above expenses are non-recurring, while others are normal recurring expenses associated with industrial producers in the Commonwealth of Massachusetts. In 1994, costs related to expenditures to improve the efficiency of the manufacturing process and to help mitigate or prevent possible future environmental contamination were capitalized. Such costs are amortized over their estimated useful lives of five years. No costs were capitalized in 1997, 1996, and 1995.
GENERAL CUSTOMERS AND SALES
ART sells its electrocardiographic, and cardiac catheterization, products to hospitals where purchasing decisions are typically made on the advice of physicians affiliated with such hospitals. The electrocardiographic products are also marketed to individual physicians and clinics. ART's sales cycle, with respect to hospitals, which generally commences at the time a hospital issues a request for proposal and ends upon submission of a purchase order, may take up to nine months. The sales cycle with respect to physicians and clinics is significantly shorter, typically 30 to 60 days. ART generally fills orders within approximately 30 days of receipt of customer orders for electrocardiographic products and within approximately 60-90 days for cardiac catheterization products. Because orders are filled shortly after receipt, backlog is not usually material to ART's business.
Micron manufactures its sensor elements against specific customer purchase orders in accordance with supply agreements between Micron and the electrode manufacturers. There are approximately 50 significant manufacturers of silver/silver chloride-plated disposable electrodes world-wide. Micron sells its sensor elements to most of these manufacturers. During the year ended December 31, 1997, three major customers accounted for 35%, 23% and 13% of net sales of Micron.
The following table sets forth, for the periods indicated, the approximate consolidated net sales and percentages of net sales derived from sales of the Company's products in its geographic markets:
INSTALLATION AND SERVICE
ELECTROCARDIOGRAPHIC, AND CARDIAC CATHETERIZATION
INSTALLATION. When a purchase order is received for SAECG products, ART's sales representatives or distributors are responsible for installation of the systems. ART records the revenue at shipment in these cases, as the title and risk of loss passes to the customer at the time of shipment. However, in cases where ART personnel are scheduled to perform this in-service/installation, this revenue is not recognized until that time. The period from the time of execution of the purchase order until completion of installation of such system typically ranges from one to four weeks. The period from the time of execution of the purchase order until completion of installation of a K3 Cath-Lab is approximately 30-45 days.
TRAINING. Ordinarily, the sales representative provides training to customers in the use of SAECG products. ART personnel are sometimes used to provide additional training support, as necessary. Generally one day of training is provided on-site on the day of installation. ART provides training for both the operation and use of the hardware and of all standard applications of the software. When a K3 Cath-Lab is installed, two to four days of training is provided by ART personnel.
WARRANTY AND MAINTENANCE. ART provides a one-year warranty which covers parts and labor for all of its SAECG software and hardware products. Customers may renew the warranty annually at a cost of approximately $1,000 to $2,700 depending on the service level and type of system. The K3 comes with a standard one-year labor and parts warranty included in the purchase price. Customers may renew the warranty at a cost of approximately $1,000 to $2,000 annually. All K3 repairs are made by Astro-Med personnel.
SENSORS AND SNAPS
Micron sells its sensors and snaps to original equipment manufacturers of disposable electrodes who assemble the finished product. Micron sales, manufacturing and customer service personnel provide the electrode manufacturers with technical support whenever necessary.
PRODUCT SUPPLIERS AND MANUFACTURING
ELECTROCARDIOGRAPHIC
ART currently has limited manufacturing capabilities for its signal averaging products and relies upon established inventories to fill current sales orders. When additional units are required, ART plans to sub-contract the basic unit production and perform final assembly and quality-control testing in-house.
CARDIAC CATHETERIZATION SYSTEMS ART is dependent upon Astro-Med as the sole manufacturer of the K3 product line.
SENSORS AND SNAPS
Micron manufactures its sensor elements at its Fitchburg, Massachusetts facility employing a proprietary non-patented seven-step process. The raw materials used by Micron in its sensors are (1) plastic resins used to mold the substrates and (2) silver/silver chloride chemical solutions for plating the molded plastic substrates. Both the plastic used by Micron and the silver/silver chloride solutions are in adequate supply. Fluctuations in the price of silver are contractually passed on to customers.
During February, 1991, Micron entered into a non-exclusive world-wide distribution agreement for medical snap fasteners manufactured by TRW Inc. ("TRW"). TRW later sold its entire fastener operation and Micron's medical snap fasteners are currently manufactured by Scovill, Inc. ("Scovill"). The agreement allows Micron to buy the various snap fasteners in bulk
and to repackage and resell them to its customers. The agreement has a provision for annual renewals and Micron and its supplier are cooperating to increase market penetration of the Scovill snap products.
MARKETING AND COMPETITION
ART engages independent sales representatives and distributors of medical instruments in various regions throughout the United States and foreign distributors to market all of ART's products. Sales representatives, who are paid on a commission basis, are generally responsible for identifying customers and demonstrating products in their respective geographic markets. ART has arrangements with 34 foreign distributors who sell ART's products in most of the significant foreign markets. To date, ART's independent sales organization has accounted for substantially all of ART's sales of SAECG products. All domestic sales of the K3 products have been initiated by ART's internal sales force. ART however, is currently in the process of building a direct sales force domestically. ART believes that a direct sales force will have a greater commitment to its products and will be more economical.
ART directly employs sales, marketing and management personnel who are responsible for making sales presentations and working in conjunction with sales representatives in marketing and selling products to doctors and hospitals. ART's staff prepares advertising copy, full-color sales brochures, technical bulletins, reimbursement documentation, and sponsors training programs. In addition, the in-house marketing department sets sales goals and manages the independent sales organizations as well as making marketing decisions with respect to present and future products.
SAECG PRODUCTS
ART's marketing efforts with respect to SAECG products have focused primarily on those hospitals with an electrophysiology laboratory and electrophysiologists with the ability to apply the late potential test in a clinical environment. ART believes that this market segment is a relatively small percentage of the potential market for signal-averaging instruments. ART is expanding its marketing focus to include buying groups, cardiologists, and other physicians involved in the diagnosis of heart problems. In the United States there are approximately 9,000 cardiologists certified by the American Board of Internal Medicine. ART markets its SAECG products at regional and national trade shows in the United States and Europe. In addition, ART markets its SAECG products through the use of direct mail campaigns to selected cardiologists.
ART is aware of certain other companies which have developed or are developing technologies and products which are competitive with ART's products. Other technologies or products which are functionally similar to ART's signal- averaging products are currently available from a number of competitors, including Del Mar Avionics, Marquette Electronics, Inc., and Hewlett-Packard Company, most of which are well established, have substantially greater financial and other resources than ART and have established reputations for success in the development, sale and service of products. ART believes that its competitive advantage is based on a number of factors, including price, ease of use, and clinical acceptance of the methodology employed in ART's signal-averaging products.
CARDIAC CATHETERIZATION PRODUCTS
The K3 Cath-Lab product is marketed through national trade shows in the United States. Additionally, ART has placed full-page advertisements in trade journals. Competitors for the K3 include the Midas system from E for M Corp., the MAC-Lab/Cath Lab Manager from Marquette, Inc., the Horizon 9000 WS from Mennen Medical, the Q-Cath-DS from Quinton Instrument, the Cathcor C & T from Siemens Medical, and the Series II from Witt Biomedical. Most of these competitors are well established and have substantially greater financial and other resources than ART. ART believes that its competitive advantage is based on a number of factors, including price, ease of use, and clinical acceptance of the methodology employed in the K3.
SENSORS AND SNAPS
Micron sells its sensor elements to most major manufacturers of disposable silver/silver chloride ECG electrodes. Micron employs one full-time salesperson for sensors and snaps. The Company believes that it has two competitors for sensors and that its sales of sensors greatly exceed those of its competition.
ENGINEERING AND RESEARCH AND DEVELOPMENT
Beginning in mid-1997, ART's engineering and research and development efforts focused primarily on (i) moving DOS software packages in the SAECG and K3 cathlab product lines into the Windows environment and (ii) updating the quality system to reflect and comply with new FDA GMP and ISO 9001 quality system procedures. ART currently employs two engineers engaged in software and hardware development and one technician for customer telephone support, warranty repairs, and limited manufacturing. ART also engages outside consultants for specific projects. For example, Southwest Research Institute in San Antonio, Texas, were consultants for revising the quality system procedures. For the fiscal years
ended December 31, 1997, 1996, and 1995 ART had research and development expenses of approximately $371,000, $173,000, and $183,000, respectively, in connection with engineering, regulatory, and research and development activities, which consisted principally of the salaries of its employees and consultants.
GOVERNMENT REGULATION
Diagnostic products such as those marketed by ART are subject to an extensive regulatory clearance process by the FDA and comparable agencies in other countries. ART believes that the products currently marketed in the United States have all necessary governmental clearances required for the sale of such products in the United States and each of the countries in which its products are presently sold. The regulatory process for diagnostic devices, which sometimes includes the requirements for pre-clinical and clinical testing, can take many years and requires the expenditure of substantial amounts of money. In the event ART seeks to market new products or significantly modify a product currently in commercial distribution, ART would be required to obtain regulatory clearance.
Federal legislation relating to medical devices could potentially cause compliance with the pre-market clearance and approval processes to be more time consuming, difficult and expensive. It is not anticipated that ART's products will be subject to special controls or regulation, but there can be no assurance that the FDA will not impose special controls or regulation.
THIRD-PARTY REIMBURSEMENT
Hospitals, physicians and other health care providers that purchase capital or other equipment, such as the products sold by ART, for use in furnishing care to their patients typically rely on third-party payers, principally Medicare, Medicaid, and private health insurance plans, to reimburse all or part of the costs or fees associated with the medical procedures performed with such equipment, and of the capital costs of acquiring such equipment. Cost control measures adopted by third-party payers in recent years and reductions in Medicare payments for hospital outpatient services and capital costs have had and may continue to have a significant effect on the purchasing practices of many such providers, generally causing them to be more selective in the purchase of medical equipment and to place increasing emphasis on maximizing the return on investment in new equipment.
The Medicare statute prohibits payment for any items or services that are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member. SAECG medical tests are reimbursed under Part B Medicare in all 50 states. The procedures performed utilizing the K3 Cath-Lab and CardioLab systems are reimbursed under Part B Medicare in all states. While third-party payers generally make their own decisions regarding which items and services to cover, Medicaid and other third- party payers often apply standards similar to Medicare's in determining whether to provide coverage for a particular medical procedure.
ART is unable to predict the impact of additional legislation or regulations, if any, which may be enacted or adopted in the future relating to ART's business or the health care industry, including third-party coverage and reimbursement.
INSURANCE
The Company may be exposed to potential product liability claims by patients who use the Company's products. ART maintains a general liability insurance policy, which includes product liability coverage of $1,000,000 per occurrence and $2,000,000 per year in the aggregate. Micron also maintains a general liability insurance policy which includes product liability coverage of $2,000,000. To date, there have been no asserted or threatened claims against the Company. Although Company management believes the present insurance coverage is adequate for the types of products currently marketed by the Company, there can be no assurance that such insurance will be sufficient to cover potential claims or that the present level of coverage will be available in the future at a reasonable cost.
ART has a directors and officers liability insurance policy with coverage in the amount of $3,000,000 per occurrence and $3,000,000 per year in the aggregate.
PATENTS AND PROPRIETARY TECHNOLOGY
ART
The Simson Patent, which covers the core technology, including the signal- averaging and filtering technologies, on which the 1200 EPX, LP-Pac Q, and PREDICTOR I are based, is of material importance to ART. ART holds an exclusive license for the Simson Patent, which expires in December 2000. In connection with the 1200 EPX, ART is the assignee of three other U. S. Patents, two of which expire in July 2001 and the other in January 2002. ART holds foreign patents issued in Austria, Australia, Belgium, Canada, France, United Kingdom, Holland, Italy, Liechtenstein, Spain, Sweden, Switzerland
and Germany. ART believes that patent protection is important to its business and anticipates that it will apply for additional patents as deemed appropriate.
As part of the acquisition of substantially all the Corazonix assets in 1993, including those pertaining to high resolution ECG, ART acquired four additional patents related to time and frequency domain analysis of electrocardiogram signals. These patents were allowed in 1993 by the U.S. Patent Office, and cover the spectral-temporal mapping post-processing software packages sold by ART. ART currently holds a non-exclusive license to a fifth U.S. patent.
United States Patent No. 5,609,158 entitled "Apparatus and Method for Predicting Cardiac Arrhythmia by Detection of Micropotentials and Analysis of all ECG Segments and Intervals," which covers a frequency domain analysis technique for SAECG data, was allowed by the U.S. Patent Office in March 1997. This technique is embodied in the IntraSpect software product, and has been found to compliment the Simson methodology by increasing the overall predictive value of the SAECG test.
Rapid technological development in the medical industry results in extensive patent filings and a rapid rate of issuance of new patents. Although ART believes that ART's products do not and will not infringe patents or violate proprietary rights of others, it is possible that its existing patent rights may not be valid or that infringement of existing or future patents or proprietary rights may occur. In the event that ART's products infringe patents or proprietary rights of others, ART may be required to modify the design of its products or obtain a license. There can be no assurance that ART will be able to do so in a timely manner upon acceptable terms and conditions. In addition, there can be no assurance that ART will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. Moreover, if ART's products infringe patents or proprietary rights of others, ART could, under certain circumstances, become liable for damages, which could have a material adverse effect on ART. ART does not own or have any license to any patents relating to the K3 technology. ART does not own or have any license to any patents relating to the CardioLab or technology incorporated therein and it is not aware of any patents or licenses to patents that Prucka may hold.
ART also relies on proprietary know-how and employs various methods to protect the source codes, concepts, ideas and documentation of its proprietary software. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop such know-how or obtain access to ART's know-how or software codes, concepts, ideas and documentation. Furthermore, although ART has confidentiality agreements with its employees and appropriate vendors, there can be no assurance that such arrangements will adequately protect ART's trade secrets.
ART is not aware of any new copyright registration or application for the software incorporated in the 1200 EPX, LP-Pac Q, PREDICTOR I, K3, CardioLab, or CardioMapp.
MICRON
Micron employs a highly complex, proprietary non-patented seven step manufacturing process for its silver/silver chloride-plated sensor elements. Key employees have executed nondisclosure and non-competition agreements. To maintain its leadership as a major supplier of sensors and snaps to the manufacturers of disposable silver/silver chloride ECG electrodes, Micron submitted a patent application for a radiographically translucent snap that is manufactured from a flexible electrically conductive thermoplastic polymeric compound in 1995. In early 1996, the patent for this innovative product was granted to Micron. Micron has begun marketing and manufacturing this product. Future increased acceptance for this product and its potential applications is expected.
EMPLOYEES
ART has eleven full-time employees, including seven administrative, sales, marketing and supervisory personnel, and four engineering personnel. Micron employs forty-four full time employees and two part-time employees, including fifteen administrative, sales and supervisory personnel, fifteen quality control personnel and sixteen production personnel.
ITEM 2.
ITEM 2. PROPERTY
During 1997 ART leased approximately 4,000 square feet of space in an office building in Austin, Texas from an unaffiliated landlord with monthly rental payments of approximately $7,100.
The manufacturing facility and offices of Micron are located in an industrial area in Fitchburg, Massachusetts. The facility consists of two buildings. The first building, which purchased in April 1994, consists of a 22,000 square foot, six story building. The second building, which was purchased in September 1996 for $480,000, consists of a 94,000 square foot, two story building. During 1995, 1996 and through August of 1997 Micron rented 18,800 square feet of space. The average monthly rent in 1995, 1996 and 1997 was $6,300, $7,100 and $7,100 respectively.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As further discussed under Environmental Regulation, Micron has been identified as a potentially responsible party with liability by the DEP. On February 18, 1993, the site was classified as a non-priority site and Micron's waiver application was approved. As a condition of the waiver, Micron was required to prepare a five-year plan of remediation for the property. Micron has retained an environmental consulting firm, and in 1995 hired an internal consultant, to organize and implement the remediation plan and to represent Micron in its dealings with the regulatory authorities. Initial Phase II activities have been completed, including drilling two borings and installing three monitoring wells. Additional Phase II activities will likely include further site history data collection, review and evaluation; evaluation of upgradient potential sources as required by the DEP waiver; additional soil sample collection to further redefine source areas; groundwater monitoring; report and required document preparation; a risk assessment; and regulatory agency coordination. Upon the completion of Phase II activities Micron will apply for final approval and clearance from the DEP. The Massachusetts Contingency Plan allows closure of sites only after a condition of "no significant risk" is demonstrated.
While the waiver application has been approved, the DEP still retains jurisdiction and will oversee the remediation. Should Micron not comply with the terms of the remediation plan, the DEP may institute a lawsuit to enforce a site clean-up. Micron believes that it is currently in compliance with the terms of the remediation plan.
Plaintiffs Susan and Kevin McGann filed suit in the Philadelphia Court of Common Pleas during October, 1996 naming approximately 216 entities as defendants, including ART and Micron Medical Products Inc. ("MMPI"). This matter is a latex toxic tort case. Plaintiff, Susan McGann, alleges that she was injured as a result of having worn latex gloves in her capacity as emergency room nurse at Albert Einstein Medical Center from June 1990. She claims to be suffering from "severe and irreversible Type-1 latex allergy, which is believed to be permanent and life threatening" as a result of her exposure. The complaint contains an allegation of defect and includes the following counts: negligence: strict 402A liability; breach of implied warranty of merchantability; breach of express warranty; misrepresentation; fraudulent concealment; violation of unfair trade practice/consumer protection law; loss of consortium (Mr. McGann's claim); and punitive damages.
After negotiations with plaintiffs' counsel, plaintiffs and ART and MMPI presented the Court with a Stipulation of Discontinuance for Fewer Than All Parties, which the Court approved on July 18, 1997. Pursuant to said Stipulation, both ART and MMPI were dismissed from the action without prejudice. According to the terms of that Stipulation, should discovery uncover facts that suggest that ART and/or MMPI are proper defendants, plaintiffs may reinstate this action against ART and /or MMPI without prior notice of such reinstatement.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. Annual meeting of shareholders was held on September 18, 1997
b. Lawrence S. Black, Michael A. McManus and Paul F. Walter were elected as directors of the Company at the meeting. E..P. Marinos, Julius Tabin, Ph.D., Anthony A. Cetrone, Russell C. Chambers and Sidney Barbanel continued to serve as directors.
Lawrence S. Black 3,183,012 FOR, 35,600 WITHHELD Michael A. McManus 3,182,997 FOR, 35,615 WITHHELD Paul F. Walter 3,183,012 FOR, 35,600 WITHHELD
c. Not applicable
d. Not applicable
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ART's Common Stock was listed on the American Stock Exchange on March 3, 1992 and trades under the ticker symbol HRT. Prior to that, ART's stock was listed on NASDAQ .
The following table sets forth, for the period indicated, the high and low closing prices per share for ART's Common Stock as quoted by the American Stock Exchange and the high and low bid prices as quoted by the National Quotation Bureau, Inc. and the National Association of Securities Dealers, Inc. The NASDAQ quotations reflect inter-dealer prices without retail mark-up, mark- down or commission and may not necessarily represent actual transactions.
As of March 20, 1998 the number of recordholders of ART's common stock was estimated to be 1,500. On March 20, 1998 the closing price for the common stock on the American Stock Exchange was $1 3/8.
DIVIDEND POLICY
To date, ART has not paid any dividends on its Common Stock. The Company's long-term debt agreements contain various restrictions and conditions including restrictions regarding the payment of dividends. ART does not intend to declare any dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in the Company's business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data presented below for each of the years ended December 31 has been derived from the Company's audited financial statements. The data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements, including the notes thereto, appearing elsewhere in this report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentages of revenue represented by certain items reflected in the Company's statements of operations.
REVENUE
Revenue decreased by approximately $12,900,000 or 52% for the year ended December 31, 1997 as compared to 1996. The decrease in revenues is attributable primarily to the change in the Prucka contract for 1997, as discussed below.
Pursuant to an agreement signed April 1, 1994, ART became the exclusive distributor for both the CardioMapp and CardioLab product lines which are manufactured by Prucka Engineering of Houston, Texas. Under the agreement, ART was obligated to purchase CardioMapp and CardioLab from Prucka which were resold to the customers. The fiscal year ending 1996 was the final year in which ART was the exclusive distributor under the Prucka contract. In 1997, ART ceased to be responsible for marketing, selling, invoicing and collecting for Prucka products. In 1997 and 1998, ART receives a 4% commission on net sales of CardioLab systems and accessories sold anywhere in the world, up to a ceiling of $10,000,000 in total annual net sales. From January 1, 1999 through December 31, 2002, ART will receive a commission of 3% of net sales of CardioLab systems sold anywhere in the world, up to a ceiling of $10,000,000 in total annual net sales. ART will receive a 4% commission on net sales of CardioMapp products and accessories sold anywhere in the world, up to a ceiling of $10,000,000 in total annual net sales for the year 1997, the final year in which ART will receive commissions for CardioMapp products. ART will receive 25% of the commissions it would otherwise be entitled to receive for revenues attributable to Prucka products that exceed $10,000,000.
Revenue increased by approximately $1,860,000 or 8% for the year ended December 31, 1996 as compared to the year ended December 31, 1995. The increase in revenues is attributable primarily to increased electrophysiology system sales in the domestic market and, to a lesser extent, an increase in sales of sensors by Micron.
Sales of signal averaging products have represented a declining percentage of the Company's revenue since the introduction of the CardioLab in 1991 and the acquisition of Micron in 1992, which resulted in a change in product mix. Sales of signal-averaging products had declined in absolute dollars since the year ended December 31, 1990 and through 1995, however, there was an increase of approximately $130,000 in 1996, and decrease of approximately $260,000 in 1997 from 1996. The Company believes that the current primary market for the 1200 EPX, hospitals with an electrophysiology laboratory, has been saturated and is looking to sell to non-traditional markets, primarily physician's offices and clinics, to increase revenues.
The following table sets forth for the periods specified, the net sales derived from the products of ART and its subsidiary Micron (collectively the "Company"):
COST OF SALES
Cost of sales as a percentage of revenue decreased from 81% in 1996 to 66.7% in 1997. The decrease is due primarily to the Prucka contract. ART exclusively sold and distributed the electrophysiology products on behalf of Prucka. 1996 was the final year in which ART was the exclusive distributor under the Prucka contract. In 1997, the Company receives a commission on sales, and does not report the gross revenues or the related cost of sales for CardioLab and CardioMapp products which approximated $14,612,000 and $13,455,000, respectively, for the year ended December 31, 1996, and $13,672,000 and $12,139,000, respectively, for the year ended December 31, 1995.
SELLING AND MARKETING
Selling and marketing expenses as a percentage of sales increased from 2.5% in 1996 to 4.2% in 1997 The increase is primarily due to the selling and marketing expenses remaining constant compared to the decrease in sales due to the Prucka contract.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses as a percentage of sales remained constant from 1995 to 1996, but increased as a percentage of sales from 9.8% in 1996 to 21.0% in 1997 due to the decrease in sales.
RESEARCH AND DEVELOPMENT
Research and Development costs as a percent of sales have remained comparable for the years ended December 31, 1996 and 1995, and increased $200,000 from 1996 to 1997. The increase in gross dollars from 1996 as compared to 1997 is due to the Company's contract with consulting firms to develop a windows based version of the CathLab and the Predictor line of products. Research and development costs have not been material to the operations of Micron.
INTEREST EXPENSE
Interest expense was approximately $238,000 in 1997 as compared to $268,000 in 1996. The majority of the interest costs incurred by the Company stem from its borrowings under its line(s) of credit and term loan with a financial institution used to finance inventory and accounts receivable with a bank.
INCOME TAXES
For the year ended December 31, 1997 taxes on income approximate the statutory rate paid by the Company. The rate is higher than the federal maximum rate of 34% due to the Massachusetts state income tax of 9.5% on Micron's earnings. Management evaluated the recoverability of the net deferred tax asset at December 31, 1997 and believes that future taxable income of the Company will be sufficient to realize the net deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of approximately $2,293,000 and $2,891,000 and cash and cash equivalents of approximately $215,000 and $232,000 at December 31, 1997 and 1996, respectively. The Company improved its liquidity and working capital due primarily to the restructuring of the ART operations in late 1994 which significantly helped the Company's return to profitability in 1995. During 1996 and 1997, working capital decreased primarily due to capital expenditures. Implementation of a new waste water treatment system, and repayments of debt.
In November 1995, the Company obtained funding for a consolidated $3.5 million working capital line of credit and a $375,000 term loan with a bank. The line of credit is collateralized by the accounts receivable and inventory of ART and Micron and bears interest at prime plus .75%. The consolidated working capital line of credit replaced the individual lines of credit maintained by ART and Micron. Previously, the individual lines of credit maintained by the parent and its subsidiary hampered the Company's ability to maximize its credit-worthiness to meet its liquidity needs. In 1997 the Company obtained
an additional $400,000 consolidated term loan. The working capital line of credit and term loans (originally) matured December 15, 1999, however, the maturity date has been extended to December 15, 2002.
On April 14, 1997, ART acquired from Astro-Med, Inc. substantially all of the assets related to the K3 Products. A promissory note payable in the amount of $300,000 was issued in the acquisition of these products. The note is due and payable not later than the third anniversary of the closing date. Interest only payments are payable on the last day of each quarter during the first year after the closing and, thereafter, principal and interest payments, in an amount necessary to fully amortize the then-outstanding balance of the note in equal quarterly payments are payable on the last day of each quarter.
Pursuant to an asset purchase agreement, dated March 5, 1997, Micron acquired from Newmark, Inc. substantially all of its assets used in the business of manufacturing, marketing, assembling, marketing, leasing and selling medical stud and eyelet application machines. The purchase price for the acquired assets included a non-interest bearing promissory note in the principal sum of $200,000, payable in twenty equal monthly installments of $10,000 each.
In August 1995, the Company completed a $600,000 private bond placement. The bonds are subordinated to the bank, carry an 11% interest rate, and are payable in 5 years. ART issued the bondholders an aggregate of 279,000 warrants to purchase ART stock at $3.00 per share as part of the private placement. The warrants expire 5 years from the date of the bond. The bond proceeds were used to help ART meet common stock repurchase commitments and to provide working capital for new product acquisitions and development.
In September 1995, ART repurchased 48,958 shares of its common stock at $7.90 a share from a shareholder pursuant to a settlement agreement in connection with the purchase of Micron by the Company in 1992. The funds required to meet the repurchase obligation were obtained from cash on hand from the bond proceeds. The Company intends to hold the shares in treasury at this time. An additional 16,566 shares were repurchased in the fourth quarter of 1995 at a price of $7.13 per share. The funds required to repurchase the shares were drawn under the Company's working capital line of credit. The shares are held in treasury and are not expected to be retired. In 1996,
Net cash provided by operating activities for 1997, 1996 and 1995 was approximately $1,958,878, $1,972,000, and $1,252,000, respectively. The changes in cash provided by operations was due primarily to the changes in net income, reduction of inventories and increase in accounts receivables and payables, during 1997, 1996 and 1995.
Net cash used in investing activities in 1997 was approximately $1,462,932, principally as a result of expenditures on capital equipment for Micron's manufacturing. Micron spent approximately $700,000 for capital assets relating to the waste water treatment. Net cash used in investing activities in 1996 was approximately $1,141,000 as a result of expenditures on capital equipment for Micron's manufacturing facility partially offset by the proceeds received from the sales of investments and capital equipment.
Capital expenditures during 1997 and 1996 were due primarily to Micron's need to upgrade and maintain its manufacturing equipment and facilities. During 1997 significant capital expenditures were due to the purchase of a waste water system treatment plant which was financed partially by a term loan and in part from operating cash flows. During 1996, the Company's capital expenditures were funded from operating cash flows.
As discussed under Environmental Regulation, Micron had approximately $92,000 and $92,000 accrued at December 31, 1997 and 1996, respectively, to cover estimated costs to be incurred related to site assessment, monitoring, and remediation. Management estimates that these costs could approximate from $90,000 to $225,000 depending upon the final decision by the DEP.
During 1997, 1996 and 1995, Micron spent approximately $320,000, $137,000 and $139,000, on an extensive program to evaluate its manufacturing process, employee training, health and safety programs, air and waste water treatment systems, and to ensure compliance with current and future federal, state and local regulations as well as to evaluate the adequacy of such systems to facilitate future growth. The capitalized expenditures are related to future benefits as described below, whereas the other environmental costs expensed during 1997, 1996 and 1995 are normal expenses associated with industrial producers in the Commonwealth of Massachusetts. Using the results of the study, Micron implemented a manufacturing process and air and waste water treatment redesign. The actual redesign, which took place in 1997, required the purchase of capital equipment to upgrade, augment or replace existing manufacturing and waste treatment equipment. It is expected that Micron will benefit from a certain level of improved efficiency and savings related to recovery and recycling of water, silver and other chemicals to help offset some of the costs of the improvements. (See Environmental Regulation and Note 12 to the Financial Statements).
During 1997 and 1996, net cash used in financing activities totaled approximately $513,143 and $996,445 principally to pay down credit facilities and long-term debt.
Net cash used in financing activities during 1995 totaled approximately $567,000, principally as a result of repurchases of redeemable common stock totaling approximately $505,000 and repayment of debt of approximately $773,000 offset by the receipt of proceeds from a $600,000 private bond placement and $68,000 in cash received from the exercise of stock options.
For information on the impact of future changes in accounting principles, see Note 2 to the Consolidated Financial Statements, appearing elsewhere herein.
INFLATION
The Company does not believe that inflation in the domestic United States or international markets in recent years has had a significant effect on its results of operations.
YEAR 2000
The Company has and will continue to make certain investments in software systems and applications to ensure the Company is year 2000 compliant. The financial impact to the Company has not been and is not aticipated to be material to the financial position or results of operations in any given year.
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Cautionary statements under the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995: This Form 10-K contains certain statements of a forward looking nature relating to future events or the future financial performance of the Company. Such forward-looking statements are only predictions and are subject to risks and uncertainties that could cause actual results or events to differ materially and adversely form the results discussed in the forward-looking statements. When used in this Form 10-K, the words or phrases "believes," "anticipates," "expects," intends," "will likely result," "estimates," "projects" or similar expressions are intended to identify predictions and the actual events or results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, risks regarding demand for new and existing products; the success of new product development efforts; the uncertainty as to whether certain products will receive approval for sale in the United States; the Company's highly competitive industry and rapid technological change within the industry and the fact that the industry is dominated by large companies with much greater resources then the Company; and the reliance on key personnel.
The Company cautions investors and others to review the cautionary statements set forth in this Form 10-K and cautions that other factors may prove to be more important in affecting the Company's business and results of operations. These forward-looking statements speak only as of the date of this report. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of anticipated events.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants .................................. 21
Consolidated Balance Sheets as of December 31, 1997 and 1996 ....... 22
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 ................................. 23
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 ................. 24
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ................................. 25
Notes to Consolidated Financial Statements ......................... 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders Arrhythmia Research Technology, Inc.
We have audited the accompanying consolidated balance sheets of Arrhythmia Research Technology, Inc. and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arrhythmia Research Technology, Inc. and Subsidiary as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Austin, Texas March 20, 1998
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Arrhythmia Research Technology, Inc. ("ART"), a Delaware corporation, is engaged in marketing computerized medical instruments for monitoring, analyzing and treating heart disease. Micron Products Inc. ("Micron"), a wholly-owned subsidiary of ART, is a manufacturer of silver/silver chloride-plated sensor elements, a component used in the manufacture of disposable medical electrodes designed for electrocardiograph (ECG) and other instrumentation. Additionally, Micron also acts as a distributor of metal snap fasteners, another component used in the manufacture of disposable medical electrodes. Micron manufactures and leases high speed electrode assembly machines to its sensor and snap customers.
2. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of ART and Micron (collectively the "Company"). All intercompany balances and transactions have been eliminated in consolidation.
REVENUE Revenue from product sales is recognized upon shipment of the product when independent sales representatives or distributors are responsible for installation of systems, as the title and risk of loss passes to the customer at the time of shipment. However, in cases where ART personnel are scheduled to perform this in-service/installation, the revenue is not recognized until completion of such obligations. Revenue from the sale of extended warranties is deferred and amortized ratably over the life of the warranty.
CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand and on deposit at local banks. The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents.
INVESTMENTS Investment securities are classified into one of three categories: held-to-maturity, available-for-sale, or trading. Held-to- maturity securities are measured at amortized cost and available-for-sale and trading securities are measured at fair value. Unrealized holding gains and losses for trading securities are included in earnings. Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and reported net of deferred taxes in a separate component of shareholders' equity until realized. Realized gains and losses are computed on a specific identified cost basis and included in current period income. The Company adopted and implemented Statement of Financial Accounting Standards (SFAS) No. 115 effective January 1, 1994.
INVENTORIES Inventories are stated at the lower of cost or market. Cost of finished goods inventory of ECG products is determined using the specific identification method. Cost of inventories at Micron is determined by the first-in, first-out method.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts receivable cash and cash equivalents.
ART's customer base for ECG and electrophysiology products is primarily comprised of hospitals and to a much lesser extent of cardiologists and office based practitioners. Micron products are sold to manufacturers of disposable electrodes, who are typically large diversified medical product manufacturers. The Company does not generally require collateral for its sales; however, the Company believes that its terms of sale provide adequate protection against significant credit risk.
It is the Company's policy to place its cash and cash equivalents in high quality mutual funds, marketable equity securities and municipal revenue bonds. The Company does not believe significant credit risk exists with respect to these securities.
ADVERTISING EXPENSES. Advertising expenses consist primarily of costs incurred in promoting the Company's products, printed brochures and other activities. The Company expenses advertising costs as incurred. The Company's advertising expense was approximately $69,000, $89,000, and $20,000 in 1997, 1996, and 1995 respectively.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost and include expenditures which substantially extend their useful lives. Depreciation on property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged to earnings as incurred. When equipment is retired or sold, the resulting gain or loss is reflected in earnings.
GOODWILL AND OTHER INTANGIBLES The excess of the aggregate purchase price over the fair value of net assets of businesses acquired is amortized over 20 years using the straight-line method. The Company periodically reviews goodwill of acquired
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
businesses to assess recoverability based on future operating projections. Impairments would be recognized in operating results if a permanent diminution in value were to occur on an undiscounted basis.
Direct costs to acquire patent technology and legal costs associated with securing and defending patents are capitalized and amortized using the straight- line method over the remaining useful life of the patents. The Company periodically reviews its patent assets to assess recoverability based on future undiscounted projected earnings from operations. Impairments are recognized in operating results when a permanent diminution in value occurs.
Certain software development costs incurred subsequent to establishment of technological feasibility are capitalized and amortized using the straight-line method over the estimated economic life of the related product, generally three years. Amortization commences when the product is available for general release. Costs to establish the technological feasibility of the product are expensed as research and development. Amortization of software development costs amounted to $1,134, $16,047, and $42,409, for the years ended December 31, 1997, 1996, and 1995, respectively.
INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
NET INCOME PER SHARE DATA Earnings per share is calculated by dividing the net income (loss) by the weighted average number of common shares and common share equivalents outstanding during the year. In 1997 the Company adopted SFAS No. 128 "Earnings Per Share" which requires the Company to present its basic earnings per share and diluted earnings per share, and certain other earnings per share disclosures for each year presented. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. The computation of diluted loss per share is similar to the computation of basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversions of those potential shares. The Company adopted SFAS No. 128 for the year ended December 31, 1997. Previously reported EPS have been restated to conform to SFAS No. 128.
Basic and diluted EPS computation for the years ended December 31,1997, 1996, and 1995 are as follows:
In 1997 and 1996 the Company had common stock options outstanding during the years which were not included in the diluted earnings per share calculation because they would have been antidulutive. As of December 31, 1997 and 1996, the Company had 177,000 and 197,000 options outstanding, respectively.
RECLASSIFICATIONS Certain prior year financial statement items of the Company have been reclassified to conform to the current year presentation.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
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 FINANCIAL INSTRUMENTS In 1995, the Company adopted SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," which requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet.
The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximate their fair value due to the immediate or short-term maturity of such instruments. The carrying amounts reported for the term note, mortgage payable and bonds payable approximate fair value based on the Company's incremental borrowing rates.
RECENT ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose finacial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
YEAR 2000
The Company utilizes various mainframe and PC based computer software packages as tools in running its daily operations. Management does not believe that the Company will encounter any material problems with this software as a result of the change in the millennium on January 1, 2000.
3. ACQUISITIONS ACTIVITY
On April 14, 1997, ART acquired from Astro-Med, Inc. substantially all of the assets related to the following products (i) the basic cardiac catheterization monitoring system (the "K3-I"), (ii) the stand-alone hemodynamic analysis package (the "K3-II"), (iii) the network ready hemodynamic analysis package (the K3-III"), and (iv) the control work station (the K3-WI") (collectively, the "K3 Products"). The purchase price for the assets was $350,000, with $50,000 paid at closing and a promissory note issued in the amount of $300,000. The note is due and payable not later than the third anniversary of the closing date. Interest only payments are payable on the last day of each quarter during the first year after the closing and, thereafter, principal and interest payments, in an amount necessary to fully amortize the then-outstanding balance of the note in equal quarterly payments are payable on the last day of each quarter.
Simultaneously, with the execution of the asset purchase agreement, ART entered into a manufacturing agreement with Astro-Med. The term of the agreement began on April 14, 1997 and continues for three years; provided, however, that ART may, on sixty days' prior written notice to Astro-Med, terminate the manufacturing agreement after the date of the first anniversary. During the term of the manufacturing agreement, Astro-Med will manufacture the K3 Products at prices which are specified in the agreement.
Pursuant to an asset purchase agreement dated March 5, 1997, Micron acquired from Newmark, Inc. substantially all of its assets used in the business of manufacturing, assembling, marketing, leasing and selling medical stud and eyelet application machines. The purchase price for the acquired assets was $400,000, payable as follows: (i) cash paid on account in the amount of $58,368; (ii) cash in the amount of $141,632 paid on March 31, 1997; and (iii) a non-interest bearing promissory note in the principal sum of $200,000, payable in twenty equal monthly installments of $10,000 each.
At the same time it entered into the asset purchase agreement, Micron executed a manufacturing agreement with Newmark pursuant to which Newmark will continue to manufacture and service the machines on behalf of Micron for a period of one year for a specified price. The manufacturing agreement is automatically renewable for successive one-year terms.
LITE- TECH, L.P.
In August 1994, the Company elected to terminate acquisition discussions with Lite-Tech, L.P. The Company had entered into a letter of intent with Lite- Tech, L.P. to acquire certain assets for cash and common stock and assume certain liabilities. As of December 31, 1996, the Company, through its Micron subsidiary, had a net note receivable from Lite-Tech in the amount of $54,000 for the return of an initial good-faith deposit. During 1997, the remaining good faith deposit of $54,000 was written off as a doubtful account receivable..
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consist of the following:
DECEMBER 31, 1997 1996 ----------- ---------- Raw materials .............. $ 288,255 $ 320,736 Work-in-process ............ 282,929 354,838 Finished goods ............. 1,429,939 1,562,862 ----------- ---------- Total .................. $ 2,001,123 $2,238,436 ----------- ---------- ----------- ----------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
The Company had approximately $244,000 and $244,000 of assets under capital leases, included in machinery and equipment, at December 31, 1997 and 1996, respectively. Accumulated depreciation on these assets was approximately $33,000 and $33,000 at December 31, 1997 and 1996, respectively. During 1994, equipment leased by the Company for Phoenix Polymers, Inc. ("Phoenix"), totaling $290,535, with related accumulated depreciation of $14,527, was written-down to its net realizable value of $80,000 and is included in other assets as of December 31, 1996.
EQUIPMENT LEASING
The Company leases attaching machines 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 $39,996 and $6,000 at December 31, 1997 and 1996.
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following:
December 31, --------------------------- 1997 1996 ------------ -------------
Goodwill ........................................ $ 2,661,073 $ 2,323,073 Accumulated amortization ........................ (635,476) (504,448) ------------ ------------- $ 2,025,597 $ 1,818,625 ------------ ------------- ------------ -------------
Patents .......................................... $ 286,108 $276,317 Software development costs ....................... 222,418 217,418 Accumulated amortization ......................... (422,859) (394,122) ------------ ------------- $ 85,667 $ 99,613 ------------ ------------- ------------ -------------
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
7. DEBT
REVOLVING CREDIT FACILITY
In November 1995, the Company entered into a credit facility with a bank which includes a $3,500,000 working capital line of credit and a $375,000 term loan maturing September 1997. In June 1997 the credit facility was amended increasing the term loan to $400,000 and extending the maturity date to December 2002. The line of credit is collateralized by the accounts receivable and inventory of the Company and bears interest at prime plus .75% (9.0% at December 31, 1997). The working capital line of credit replaced the individual lines of credit maintained by ART and Micron originally maturing September 1997 and was extended to December 15, 2002. The available balance of the working capital line of credit as of December 31, 1997 and 1996 was $467,135 and $1,158,660, respectively.
The weighted average interest rate during the year for the Company's credit facilities was 9%. The new loan agreement contains covenants which require ART to maintain certain specific financial ratios and limit asset acquisitions to $50,000 or less for ART and $500,000 or less for Micron without prior written approval. At December 31, 1997 the Company was in compliance with the terms of the new loan agreement or has obtained waivers for any event of non-compliance.
Long-term borrowings, excluding capital lease obligations, consist of:
In August 1995, the Company completed a $600,000 private bond placement. The bonds are subordinated to the credit facility, carry an 11% interest rate, and are payable in five years.
In connection with the private bond placement, ART issued an aggregate of 279,000 warrants to the bondholders to purchase ART common stock at $3.00 per share. The warrants were exercisable upon issuance and expire in five years. The Company recorded the allocation between the detachable warrants and debt securities based on their relative fair values, as determined by a third party appraisal as of the issuance date. Accordingly, the proceeds related to the warrants are reported as additional paid-in capital and a discount on the debt securities of $202,000, which is being amortized to interest expense over the five-year term of the warrants. For the year ended December 31, 1997, the Company recorded amortization of bond discount of $48,000 and interest expense of $66,000. The unamortized bond discount remaining as of December 31, 1997 and 1996 was $135,374 and $162,065, respectively.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
On March 5, 1997, Micron acquired assets used in the business of manufacturing, marketing, assembling, leasing and selling medical stud and eyelet application machines and obtained a promissory note in the principal sum of $200,000, payable in twenty equal monthly installments of $10,000 each with no interest.
On April 14, 1997, ART incurred a promissory note in the amount of $300,000, bearing interest of 8% per annum, through the acquisition of property and equipment from a manufacturer. Interest only payments are payable on the last day of each quarter during the first year, thereafter, principal and interest payments, in an amount necessary to fully amortize the then-outstanding balance of the note in equal quarterly payments are payable on the last day of each quarter. The note contains a subjective acceleration clause which states that any material adverse change in the Company's financial condition would result in the note becoming due and payable without further notice.
CAPITAL LEASES
The Company leases equipment under agreements which are classified as capital leases and expire on various dates. The lease agreements generally provide purchase options at the end of the original lease. Future minimum lease payments under noncancelable leases consist of the following:
FISCAL YEAR 1997 - ------------------------------------------ ----------- 1998 $ 115,577 1999 49,269 2000 27,800 2001 22,639 2002 4,315 Total minimum lease payments 219,600 Less amounts representing interest (27,147) ----------- 192,453 Less current portion (100,371) ----------- Long-term obligations under capital leases $ 92,082 ----------- -----------
8. INCOME TAXES
The Company reports income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes a tax liability (or asset) approach to inter-period tax allocations and requires tax liabilities to be stated at current effective tax rates.
The income tax provision (benefit) for each of the three years in the period ended December 31, 1997 consists of the following:
Micron's net operating loss ("NOL") carryforwards for income tax purposes approximated $2,496,000 and $2,528,000 at December 31, 1997 and 1996, respectively. During the three years ended December 31, 1997, Micron utilized approximately $32,000, $425,000, and $773,000 of its NOL carryforwards. The NOL carryforwards expire through 2007. The use of the loss carryforwards to reduce future income tax obligations are limited in any given year due to restrictions defined in the Internal Revenue Code related to a change in ownership control.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
The components of the net deferred tax assets were as follows as of December 31:
1997 1996 ----------- ----------- Deferred tax liabilities: Software development costs .................. $ (1,558) $ (711) ----------- ----------- Total deferred tax liability ................ (1,558) (711) ----------- ----------- Deferred tax assets: Inventories ................................. 303,626 339,767 Mortgage participation certificates ......... 960,000 960,000 Corazonix Patents ........................... 313,826 344,983 Other ....................................... 298,176 291,782 Net operating loss carryforwards ............ 848,832 957,067 Valuation allowance ......................... (2,263,979) (2,399,121) ----------- ----------- Total deferred tax asset .................... 460,481 494,478 ----------- ----------- Net deferred tax asset ........................... $ 458,923 $ 493,767 ----------- ----------- ----------- -----------
Deferred tax assets are recognized by reducing the valuation allowance as the Company generates income, or when, in the opinion of management, significant positive evidence exists that the Company will be more likely than not to realize the tax benefits related to temporary differences which give rise to deferred tax assets
The significant components of deferred tax expense were as follows for the years ended December 31:
The Company files a consolidated federal income tax return. For financial statement purposes, the actual effective consolidated tax rates have been applied to the income from operations before taxes when calculating the tax provision. The actual income tax provision differs from the statutory income tax rate (34%) as follows:
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
9. EMPLOYEE BENEFIT PLANS
Micron established an Employee Stock Ownership Plan ("ESOP") as a result of a previous plan of reorganization The ESOP is noncontributory on the part of its participants. All employees of the Company are eligible for participation in the ESOP. The ESOP borrowed $300,000 to purchase the Company's shares. The proceeds were used to pay creditors electing to receive cash under the ESOP plan. The shares issued by the Company to the ESOP are reflected as a reduction in shareholders' equity. The Company accounts for its ESOP in accordance with Statement of Position 76-3. Accordingly, all shares held by the ESOP, allocated or unallocated, are treated as outstanding in the earnings per share calculation. The Company has elected to recognize compensation expense based on contributions made. There are no repurchase obligations by the Company. The Company contributed and recorded compensation expense of $42,857, $42,857, and $42,857 during the years ended December 31, 1997, 1996, and 1995, respectively.
The Company sponsors an Employee Savings and Investment Plan under Section 401(k) of the Internal Revenue Code covering all eligible employees of the Company. Employees can contribute up to 15% of their eligible compensation or up to the maximum allowable by the IRS. The Company does not make any matching contributions.
10. COMMITMENTS AND CONTINGENCIES
ROYALTIES
ART licenses its signal-averaging technology from an unrelated entity for a royalty fee of 4.5% of gross sales, less certain allowances for selling commissions and discounts. Costs of obtaining patents are offset against royalties due. To retain an exclusive license for the technology, ART is obligated to pay a minimum royalty of $60,000 annually.
ELECTROPHYSIOLOGY PRODUCTS CONTRACT
Effective April 1, 1994, ART and Prucka Engineering, Inc. ("Prucka"), the manufacturer of the CardioLab and CardioMapp products (the "Products"), executed an agreement related to ART's exclusive distribution of the Products. Under the agreement, during the distribution period which expired December 31, 1996, purchase orders for Products were received in ART's name; Prucka manufactured and invoiced ART for the Products at a predetermined discount and received payment from ART; and ART invoiced customers and received payments. Beginning January 1997 and thereafter, ART will receive commissions on certain Products sold through December 31, 2002.
During 1997 and 1998, ART will receive a 4% commission on net sales of CardioLab systems and accessories sold anywhere in the world, up to a ceiling of $10,000,000 in total annual net sales. From January 1, 1999 through December 31, 2002, ART will receive a commission of 3% of net sales of CardioLab systems sold anywhere in the world, up to a ceiling of $10,000,000 in total annual net sales. ART will receive a 4% commission on net sales of CardioMapp products and accessories sold anywhere in the world up to a ceiling of $10,000,000 in total annual net sales for the year 1997, the final year in which ART will receive commissions for CardioMapp products. ART will receive 25% of the commissions it would otherwise be entitled to receive for revenues attributable to Prucka products that exceed $10,000,000.
SALES TAX In 1997 the state of California gave notice to the Company that sales tax statements had not been filed by the Company since 1989. As a result, the Company has notified all applicable customers with invoices during the period that they would be responsible for sales and use taxes for the specific invoices. The Company has a reserve of $125,000 in 1997 for California sales tax liability. Going forward, the Company is charging and collecting sales tax as customers are billed.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
LEGAL PROCEEDINGS
The Company is a defendant in various civil lawsuits involving normal and usual claims arising in the ordinary course of its business. In the opinion of management, all such matters are either covered by insurance or involve amounts such that an unfavorable disposition of the proceedings would not have a material adverse impact on the consolidated financial position, results of operations or cash flows of the Company.
ENVIRONMENTAL
GROUNDWATER
Like many industial processes, the Micron manufactuing 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 fim to constantly review, monitor and upgrade its air and waste water treatrment activities. As a result, Micron believes that the operations of its manufacturing facility is in compliance with currently applicable safety, health and environmental laws and regulations.
Micron has been identified as a "potential responsible party" (PRP) under the Comprehensive Environmental Response and may be required to share in the cost of cleanup with respect to Fitchburg, Massachusetts manufacturing facility. In January 1998, Micron filed information with the Massachusetts Departement on Environmental Protection (DEP) to allow further subsurface investigation and a consequent risk assessment to be performed. The Company's environmental engineers have developed estimates of the possible remediation costs for this facility of $150,000 to $200,000. The Company accrues the best estimates of these costs whenit is probable that a liability has been incurred. At December 31, 1997 and 1996, the balance sheet included an accrual for these costs of approximately $92,000 and $92,000, respectively. In addition, to comply with environmental laws and regulations, the Company spent approximately $700,000 for capital improvements in 1997 and expects to spend approximately $200,000 in 1998, funded from operating cash flow.
Based on the Company's analyses and subject to the difficulty in estimating these future costs, the Company expects that any sum it may be required to pay in connection with environmental matters is not reasonably likely to exceed the amounts disclosed in an amount which would have a material adverse effect on financial condition, result of operations or liquidity.
OPERATING LEASES
The Company leases certain facilities and equipment under non-cancelable lease arrangements. During 1997, the Company leased 4,009 square feet of office space in an office building in Austin, Texas and 18,800 square feet of manufacturing and quality control space in an industrial building in Fitchburg, Massachusetts for part of the year. The lease on the office space will expire in November 1998 and the manufacturing facility lease expired in July 1997. Rent expense under all operating leases was approximately $157,749, $195,559 and $170,000 in 1997, 1996 and 1995, respectively.
Future minimum operating lease payments as of December 31, 1997 are as follows:
YEAR OPERATING LEASES -------------------------- ---------------- 1998 ..................... $ 64,600 Total .................... $ 64,600
11. SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for income taxes and interest for the years ended December 31:
1997 1996 1995 ------------ ----------- ----------- Income taxes $ 350,000 $ 230,000 $ 440,513 ------------ ----------- ----------- ------------ ----------- ----------- Interest $ 245,845 $ 276,719 $ 256,878 ------------ ----------- ----------- ------------ ----------- -----------
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
Non-cash activities:
12. RELATED PARTY TRANSACTIONS
The Company obtains legal services with respect to its patents from a law firm, a partner of which is a shareholder and Director of the Company. Fees for services and patent prosecution costs paid to this firm were approximately $20,000, $30,000 and $43,000 for years 1997, 1996 and 1995, respectively. The amounts owed to this firm at December 31, 1997, 1996 and 1995 were approximately $22,000, $21,000 and $23,000, respectively.
Cardio Digital Inc. ("CDI") has four shareholders who are also shareholders of the Company. Royalties to CDI were $6,300, $10,500, and $8,400 for years 1997, 1996, and 1995. The amounts owed to CDI at December 31, 1997, 1996 and 1995 were $16,300, $10,500, and $8,400, respectively.
During the years 1997, 1996, and 1995 healthcare coverage premiums of $8,900, $5,900 and $5,300 were paid on behalf of a Director of the Company in exchange for consulting services.
The Company obtains consulting services, with respect to acquisitions, SEC filings, financial road shows, and other negotiations, from a shareholder and Director of the Company. Fees for services paid to this Director were approximately $25,000 in 1997. The amounts owed to this Director at December 31, 1997 were approximately $4,200.
13. STOCK OPTIONS
The Company has reserved 250,000 shares of its Common Stock for issuance to officers and key employees pursuant to a Incentive Stock Option Plan (the "Option Plan"). Under the Option Plan, options become exercisable commencing one year from the date of grant at the rate of 20% of the total granted per year and expire ten years from the date of grant. The exercise price is the fair market value of the Common Stock on the date of grant, which was $2.25 to $6.50 per share for all options outstanding and granted under the Option Plan.
Transactions under the Option Plan are summarized as follows:
During 1989 and 1988, certain non-plan options (the "Non-plan options") were granted by the Board of Directors to six employees and an independent sales person. These Non-plan options were for 41,250 shares at an exercise price ranging from $2.00 to $4.00, the approximate market price at the date of grant. The options were approved by the shareholders and have all expired. During 1991, options for 219,000 shares, expiring in 1996, at an exercise price of $4.00 were granted to the Directors, the President and three employees. During 1994, options for 144,000 shares, expiring in 2004, at an exercise price of $3.00, were granted to eight current Directors. Additionally, options to purchase 5,200 shares of common stock, expiring in 1996, at an exercise price of $6.00, were granted to a former officer of the Company under a separation agreement. In 1996, the shares were terminated pursuant to a letter amendment to the original separation agreement. During 1995, Non-
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
plan options for 29,000 shares, expiring in 2005, at an exercise price of $3.00 were granted to two key officers of the Company.
During 1993, options for 48,000 shares at an exercise price of $4.00 were granted to two directors. The options vest at 1,000 per month to an aggregate of 24,000 per director. At the date of the grant the market price was $5.75. The difference between the grant price and the market price is compensation which is being amortized over the vesting period. Total compensation expense related to these options were recognized in the prior years. Compensation expense recorded during the years ended December 31, 1997, 1996 and 1995 was $0, $0, and $22,750 respectively.
Transactions relative to Non-plan options are summarized as follows:
The Company has applied Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations, in accounting for their stock option plans. Accordingly, no compensation expense has been recognized for the plans. Had compensation cost for the plans been determined based upon the fair value at the grant date for awards under the plans consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, ART's net income would have decreased by the pro forma amounts indicated below, for the years ended December 31, 1997 and December 31, 1996:
The fair value of each stock option granted is estimated on the date of grant using the option-pricing method with the following weighted average assumptions: dividend yield of 0.0%, expected volatility of 57%, risk-free interest rate of 6.22%, and an expected life of 5.8 years.
The underwriter of the June 1991 public offering was granted warrants to purchase 75,000 shares at $4.40 per share, expiring in 1996. The Common Stock to be issued upon exercise of the warrants was registered with the Securities and Exchange Commission under Form S-3 during 1993. The underwriter exercised warrant rights and shares were issued for 15,000 shares of common stock during 1993. The remaining underwriter's warrants expired unexercised in June 1996. In August 1995, warrants were issued to bondholders to purchase an aggregate of 279,000 shares of common B stock at $3.00 per share. The bondholders' warrants expire five years from the date of the bond.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS
14. EXPORT SALES AND SIGNIFICANT CUSTOMERS
The following table sets forth the geographic distribution of the Company's net sales:
During the year ended December 31, 1997 three major customers accounted for 35%, 23% and 13% of net sales of Micron. There was no single significant customer for ART during the three years in the period ended December 31, 1997.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
The Directors are divided into three classes with rotating three-year terms. Dr.Walter, Mr. Black, and Mr. McManus were elected to serve as Directors until the 2000 annual meeting of shareholders. Mr. McManus subsequently resigned. Dr.Chambers, Mr. Cetrone, and Mr. Barbanel have been elected to serve until the 1999 annual meeting of shareholders. Dr. Tabin and Mr. Marinos have been elected to serve as Directors until the 1998 annual meeting of shareholders. The Company's executive officers are appointed by the Board of Directors and serve at the pleasure of the Board.
E.P. (LOU) MARINOS was appointed President and Chief Executive Officer of the Company in March 1995 and resigned in May, 1997. Mr. Marinos, until he resigned, also served in the capacity of Chief Financial Officer and Chief Operating Officer since joining the Company in May, 1994. Prior to joining the Company Mr. Marinos held senior executive management or Director positions with Intermedics, Inc., Carbon Implants, Inc., Bio-International, Inc. and Endevco, Inc. He was also a senior partner with Deloitte & Touche. Mr. Marinos is presently President and Chief Executive Officer of Midcoast Interstate Transmission, Inc.
ANTHONY A. CETRONE has been President of Micron since 1988 and chairman of its Board from June 1990 to the present, Mr. Cetrone also served as President and Chief Executive Officer of the Company from January 1993 to March 1995. Mr. Cetrone was appointed Chairman of the Board in November 1996.
NANCY C. ARNOLD has been Secretary of the Company since March 1988 and General Counsel since January 1990. She was elected Vice President in 1997.
ERIC K. Y. CHAN, PH.D. has been Vice President of Engineering since April 1993, and was Director of Engineering from August 1991.
JULIUS TABIN, PH.D. has been a director of the Company since its inception. Since 1949, Dr. Tabin has been a partner in the law firm of Fitch, Even, Tabin & Flannery.
PAUL F. WALTER, MD. has been a director of the Company since its inception. Dr. Walter is a Professor of Medicine at Emory University where he has been on the faculty since 1971.
RUSSELL C. CHAMBERS, MD. has been a director of the Company since its inception and served as the Company's Chairman of the Board until August 1990. For more than the past five years, Dr. Chambers has been primarily engaged in the management of his personal investments.
LAWRENCE S. BLACK has been a director of the Company since October 1994. He is the Chairman and founder of Black & Company, Inc., investment bankers. Mr. Black is also a director of Mt. Bachelor Corp.
SIDNEY M. BARBANEL has been a director of the Company since September 1997. He was appointed President and Chief Executive Officer in September 1997. Prior to joining the Company, Mr. Barbanel held Senior Executive positions in ABAS Associates and Cook Pacemaker, Inc. for more than five years.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain information concerning compensation of and stock options held by the Company's President and Chief Executive Officer and the President of the Company's subsidiary, Micron:
SUMMARY COMPENSATION TABLE
(1) Mr. Marinos and Mr. Cetrone were granted 60,000 and 20,000 options to purchase shares, respectively, under the Option Plan. The shares vest at the rate of 20% per year for five years until fully vested. The exercise price was based on the market price on the date of grant. Mr. Marinos relinquished 36,000 options in June 1997. Mr. Marinos and Mr. Cetrone were granted 20,000 and 9,000 options to purchase shares at an exercise price of $3.00, respectively, outside the Option Plan. Twenty-five percent of the shares vest immediately and the remainder vest at twenty-five percent on each anniversary date, until fully vested. The shares granted outside the Option Plan were approved by the shareholders. The market price at the date of grant was $3.00. Mr. Marinos relinquished all 20,000 options in June 1997.
OPTION GRANTS IN LAST FISCAL YEAR
There were no option grants/SARS in fiscal year 1997.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
Mr. David Jenkins, previous President and Chairman of the Board of Directors, submitted his resignation effective on January 25, 1993.. In March, 1994, Mr. Jenkins exercised options for 5,000 shares at $4.00 per share. In August 1995, Mr. Jenkins exercised options for 12,000 shares at $4.00 per share. In September 1995, Mr. Jenkins exercised the balance of his options for 5,000 shares at $4.00 per share.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Based solely upon the Company's review of the copies of such forms it has received, the Company believes that all its officers, directors and greater than ten percent beneficial owners complied with the filing requirements applicable to them pursuant to Section 16(a) of the Securities Exchange Act during 1997.
EMPLOYMENT ARRANGEMENTS
ANTHONY A. CETRONE
Mr. Cetrone's employment agreement expired in 1996 It is currently being renegotiated. He is receiving the same compensation he received pursuant to his agreement. He is being paid a base salary of $98,000 per annum and he is entitled to bonus compensation in the amount of 5% of Micron's net income after taxes. .
SIDNEY M. BARBANEL
Sidney M. Barbanel receives a salary of $100,000 per annum and participates in such bonus and compensation plans as the Board may institute from time to time. Although Mr. Barbanel does not have an employment agreement with the Company, he has signed a confidentiality and non-compete agreement.
STOCK OPTIONS
1987 INCENTIVE STOCK OPTION PLAN
In 1987, the Company adopted a stock option plan (the "Option Plan") pursuant to which 250,000 shares of Common Stock have been reserved for issuance to officers and other key employees and to certain other persons who are employed or engaged by the Company. Options are designated as "incentive stock options" within the meaning of the Internal Revenue Code of 1986, as amended. The purpose of the Option Plan is to encourage stock ownership by persons instrumental to the success of the Company, in order to give them a greater personal interest in the Company's business. The exercise price of any stock option granted to an eligible employee may not be less than 100% of the fair market value of the shares underlying such option on the date of grant, unless such employee owns more than 10% of the outstanding Common Stock, in which case the exercise price of any incentive stock option may not be less than 110% of such fair market value. The term of each option and the manner in which it may be exercised is determined by the Board of Directors provided that no option may be exercisable more than 10 years after the date of grant and, in the case of a stock option granted to an eligible employee owning more than 10% of the Common Stock, no more than five years. Generally, options become exercisable one year from the date of grant and each year thereafter at a rate of 20% per year. Options are not transferable, except upon death of the option holder.
Options to purchase an aggregate of 229,009 shares of Common Stock at an exercise price of $2.25 to $6.50 per share have been granted under the Option Plan to twenty current and former employees. Of these, options for 2,000 shares were exercised and options to purchase 87,500 shares granted to ten former employees were canceled due to termination of employment or death of the employees. During 1993, 2,000 shares were exercised. As of December 31, 1995, included in the total are options to purchase 97,000, 60,000, 25,000, and 30,000 shares, granted to E.P. Marinos, Anthony Cetrone, Nancy C. Garbade, and William E. Cooper, respectively. Mr. Coopers' options terminated upon his resignation in 1996. During the year ended December 31, 1997, 25,000 options to purchase shares were granted to one employee. Mr. Marinos forfeited 56,000 options upon his resignation in 1997. During the year ended December 31, 1996, no options were granted. During the year ended December 31, 1995, options to purchase 130,000 shares were granted to eight employees.
OTHER OPTIONS
In addition, options to purchase an aggregate of 518,450 shares of Common Stock have been granted at exercise prices ranging from $2.00 to $4.00; such options were not granted under the Option Plan. At December 31, 1997, options for 55,251 shares have been exercised and options for 260,700 shares have been terminated/forfeited
During 1988 and 1989 options to purchase 18,750 shares were granted to four employees, all of which have been exercised or terminated as of December 31, 1993. During 1988, options to purchase 7,500 shares were granted to Wayne Schroeder at an exercise price of $2.00 per share. The options were exercised during 1993.
During 1990, options to purchase 25,000 shares of Common Stock were granted to Robert A. Simms, at an exercise price of $4.00 per share, all of which were terminated in 1997 upon the resignation of Mr. Simms as director. Options to purchase an aggregate of 125,000 shares were granted to David Jenkins, from 1988 to 1991, at exercise prices ranging from $2.00 to $4.00 per share, of which 95,500 were terminated in January, 1993 when Mr. Jenkins resigned as President of the Company. Also in January, 1993, Mr. Jenkins exercised options for 7,500 shares at $2.00, and relinquished the balance of his options, except for 22,000 options in which he is fully vested, which were granted him as a director of the Company. In March, 1994, Mr. Jenkins exercised 5,000 options at an exercise price of $4.00 per share. In August 1995, Mr. Jenkins exercised 12,000 options at an exercise price of $4.00 per share. In September 1995, Mr. Jenkins exercised the balance of his options for 5,000 shares at an exercise price of $4.00 per share.
During 1991, options to purchase 25,000 shares of common stock were granted to three employees, of which 17,500 shares have been exercised or terminated.
In March 1991, five-year options to purchase 24,000 shares were granted to each of the six current directors of the Company (including Mr. Jenkins), exercisable at a rate of 1,000 shares per month at an exercise price of $4.00 per share. All such options expired unexercised in 1996. During 1991, options to purchase 25,000 shares at $4.00, expiring in 1996, were granted to three employees.
In March 1993, options for 48,000 shares at an exercise price of $4.00 were granted to two directors. The options vest at 1,000 per month to an aggregate of 24,000 per director. At the date of the grant the market price was $5.75. The difference between the grant price and the market price is compensation which is being amortized over the vesting period. All compensation expenses related to these options were recognized in the prior years. Compensation expense recorded during 1995 and 1994 was $22,750 and $29,750, respectively.
In October 1994, options for 144,000 shares, expiring in 2004, at an exercise price of $3.00, were granted to eight current Directors. The shares were immediately exercisable. Additionally, options to purchase 5,200 shares of common stock, expiring in 1996, at an exercise price of $6.00, were granted to a former officer of the Company under a separation agreement.
In November 1995, options to purchase 29,000 shares, expiring in 2005, at an exercise price of $3.00, were granted to two Officers and Directors of the Company. Twenty-five percent of the shares vest immediately and the remaining shares vest at twenty-five percent per year on each anniversary date until fully vested.
MEDICAL CONSULTANTS
From time to time, the Company consults with medical advisors who report on advances in technology and on developments in their respective fields. During 1995 , 1996 and 1997, the Company used consultants on a specific project basis. Amounts paid to consultants during 1995, 1996 and 1997 were not material.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of March 20, 1998 based on information obtained from the persons named below, with respect to the beneficial ownership of shares of Common Stock by (i) each person known by the Company to be the owner of more than five percent of the outstanding shares of Common Stock, (ii) each director of the Company and (iii) all officers and directors as a group.
1. Unless otherwise noted, each person has sole voting and investment power with respect to the shares of Common Stock beneficially owned.
2. The beneficiary of all of the trust's income is Dr. Chambers' son. Dr. Chamber's son has a 50% ownership interest in the assets held by the trust and Dr. Chamber's wife's estate has the remaining 50% ownership interest. Dr. Chambers disclaims any beneficial ownership of the Common Stock held by the trust.
3. Includes 2,500 shares over which Dr. Chambers has voting power pursuant to an agreement, 12,500 shares held as custodian for his son and 2,500 shares held as custodian for a niece.
4. Includes 67,567 shares held by the Micron Employee Stock Ownership Plan over which Mr. Cetrone shares voting power as Trustee.
5. Includes options to purchase shares of Common Stock, all of which are exercisable at December 31, 1997, as follows:
NAME NUMBER ----------------------------------- ------------ Russell C. Chambers, M.D. ......... 18,000 Julius Tabin ...................... 18,000 Paul F. Walter, M.D. .............. 18,000 Nancy C. Arnold ................... 13,000 Anthony A. Cetrone ................ 76,100 Eric Chan ......................... 12,000 E.P. Marinos ...................... 42,000 Lawrence S. Black ................. 18,000 ----------- Total ........................ 215,100 ----------- -----------
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To date, all transactions between the Company and its officers, directors, or their affiliates have been approved or ratified by a majority of the directors who did not have an interest in, and who were not employed by the Company at the time of, such transaction. The Company's Board of Directors adopted resolutions providing that any transaction between the Company and its officers, directors or their affiliates must be approved by a majority of the Board of Directors who do not have an interest in, and who are not employed by the Company at the time of, such transaction. The Company believes that all transactions entered into with affiliates of the Company were on terms no less favorable than could have been obtained from unaffiliated third parties.
In May 1983, ART entered into an agreement with Cardiodigital Industries, Inc., a Texas corporation ("CDI"), pursuant to which ART granted an exclusive license to CDI to use the technology covered by the Simson Patent in connection with research and development of signal-averaging devices. In consideration for the license, CDI provided $175,000 of financing and granted ART an option to acquire any technology developed by CDI on an exclusive basis at a price of either $1,250,000 or a royalty fee of $150 per cardiac signal-averaging device sold by ART, up to a maximum of $1,250,000. ART exercised its option to purchase such technology at the fee of $150 per signal-averaging device sold by ART. Dr. Julius Tabin, is a director of ART and a shareholder of CDI. In addition, the estate of G. Russell Chambers (Dr. Chambers' father), is a principal shareholder of CDI. Royalty fees for the years ended December 31, 1997, 1996 and 1995 were $7,300, $5,800, and $5,500, respectively.
Dr. Julius Tabin, a member of the law firm of Fitch, Even, Tabin & Flannery, the Company's patent counsel, has been a director of the Company since its inception and he and other members of the firm are shareholders of the Company. For the years ended December 31, 1997, 1996 and 1995, the law firm billed the Company approximately $20,000, $30,000, and $43,000 respectively, for legal services rendered and patent prosecution costs. The amounts owed to the firm at December 31, 1997, 1996, and 1995 were approximately $22,000, $21,000, and $23,000 respectively.
Dr. Russell C. Chambers, a director and shareholder of the Company, is engaged as a consultant to the Company. For the years ended December 31, 1997, 1996 and 1995, health insurance premiums paid on Dr. Chambers behalf amounted to approximately $8,900, $5,900 and $5,300, respectively.
In October, 1994, the Marshalled Cherubs Trust loaned the Company $100,000, with interest accruing at 11% per annum, under a demand note. The loan, plus accrued interest, was repaid in August 1995. The Marshalled Cherubs Trust is for the benefit of the Jason Chambers, the son of Dr. Russell C. Chambers, a director and shareholder of the Company. However, Dr. Chambers holds no voting or dispositive power with respect to Company shares hold by the Trust.
PART IV ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as a part of this report:
(1) All Financial Statements
See index to financial statements on page 20 for a list of all financial statements filed as part of this report.
(2) Financial Statement Schedules
(A) Schedule II
All schedules for which provision is made in Regulation S-X of the Securities and Exchange Commission not included here are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
(3) Exhibits
The following exhibits, required by Item 601 of Regulation S-K are submitted herewith:
(b) Reports filed in the fourth quarter on Form 8-K:
None
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/ SIDNEY M. BARBANEL -------------------------------------- Sidney M. Barbanel President & 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.
REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE
To the Shareholders Arrhythmia Research Technology, Inc.
Our report on the consolidated financial statements of Arrhythmia Research Technology, Inc. and Subsidiary is included on page 21 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the financial statement schedule listed in Item 14(a)(2) herein. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Austin, Texas March 20, 1998
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(1) Uncollectible accounts written off, net of recoveries. (2) Obsolete inventory written off.