MICRON SOLUTIONS INC /DE/ - Annual Report: 2007 (Form 10-K)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-K
[x] Annual report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31,
2007
[ ] Transition report pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
001-9731
(Commission
file number)
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC.
(Name
of registrant as specified in its charter)
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Delaware
(State
or other jurisdiction of incorporation of organization)
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72-0925679
(IRS
Employer Identification Number)
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25
Sawyer Passway, Fitchburg, MA
(Address
of principal executive offices)
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01420
(Zip
Code)
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(978)
345-5000
(Registrant's
telephone number)
Securities Registered pursuant to Section 12 (b) of the Act:
|
Common
Stock, $.01 par value
(Title
of Each Class)
|
American
Stock Exchange
(Name
of each exchange on which
registered)
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Securities
Registered Pursuant to Section 12 (g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 if the
Securities Act. Yes
No X
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act. Yes No
X
Indicate by check mark whether the
registrant (1) filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days. Yes X No
__
Indicate by check mark if disclosure of
delinquent filers in response to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
Accelerated filer [ ] Accelerated filer
[ ] Non-Accelerated filer
[ ] Smaller reporting company [ X
]
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No X_
State the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference
to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter
$29,258,857.
On March 21, 2008 there were 2,711,680
shares of the issuer's common stock, par value $.01, outstanding, which is the
only class of common or voting stock of the issuer.
DOCUMENTS
INCORPORATED BY REFERENCE
The registrant intends to file a
definitive proxy statement pursuant to Regulation 14A within 120 days of the end
of the fiscal year ended December 31, 2007. Portions of such proxy
statement are incorporated by reference into Part III of this Form
10-K.
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Arrhythmia
Research Technology, Inc.
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TABLE
OF CONTENTS
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| Part IV | |||
Item
1. BUSINESS.
OVERVIEW
Arrhythmia
Research Technology, Inc., a Delaware corporation ("ART"), is engaged in the
development of medical software, which acquires data and analyzes electrical
impulses of the heart to detect and aid in the treatment of potentially lethal
arrhythmias. ART’s patented products consist of signal-averaging
electrocardiographic (SAECG) software whose proprietary Windows based version is
named the Predictor®
series. Rather than having a direct sales force, our current intent
is to market ART’s product through licensing with original equipment
manufacturers. No sales of the software have been recorded in 2007 or
2006.
Our SAECG
product is currently used in a National Institutes for Health (“NIH”) funded
investigation into “Risk Stratification in MADIT II Type
Patients”. At the completion of this study and assuming favorable
study results, we intend to establish contracts with original equipment
manufacturers for this product.
Sudden
cardiac death afflicts over 400,000 individuals in the United States each
year. Sudden death is 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. Electric signals that emanate from
the heart are used to detect the presence of Late Potentials, which may
indicate a risk of life-threatening ventricular arrhythmias. The
SAECG processes enable Late Potentials to be amplified and enhanced, while
eliminating undesired electrical noise in these tests.
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ART’s
wholly owned subsidiary, Micron Products, Inc., a Massachusetts
corporation (“Micron”), is a manufacturer and distributor of silver plated
and non-silver plated conductive resin sensors ("sensors") used in the
manufacture of disposable integrated electrodes constituting a part of
electrocardiographic diagnostic and monitoring
instruments. Micron also acts as a distributor of metal snap
fasteners ("snaps"), another component used in the manufacture of
disposable electrodes. The sensors are a critical component of
the signal pathway in many different types of disposable
electrodes. For example, the disposable electrodes used to
capture the electric impulses of the heart and enable the analysis of Late
Potentials require sensors which provide for an accurate, low noise signal
to be transmitted to the monitoring device. Micron also
manufactures and sells or leases assembly machines to its sensor and snap
customers.
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 |
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Figure 1: Schematic of
Integrated ECG Electrode.
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Micron is
the largest of a few companies providing silver / silver-chloride sensors to the
medical device industry. Micron’s customers manufacture monitoring
and transmitting electrodes which are utilized in a variety of bio-feedback and
bio-stimulation applications including, among many others, electrocardiograms
(ECG’s), electroencephalograms (EEG’s), electro-muscular stimulation (EMS), and
thermo-electrical neural stimulation (TENS). Micron also produces
high volume precision plastic products. These high volume products
leverage the production skills for the resin sensors while providing a
diversification from the dependence on a single product line.
In 2004,
Micron completed the purchase of substantially all of the operating assets of
privately held Shrewsbury Molders Inc. formerly known as New England Molders,
Inc. of Shrewsbury, Massachusetts forming the New England Molders ("NEM")
division of Micron. This division is a custom thermoplastic injection
molder that produces a wide variety of consumable medical products, medical
device and equipment components, and other products for the consumer,
electronic, aerospace, and defense industries. The NEM division is
located at the Company’s Fitchburg complex in a renovated 100 year old brick
mill building. The location provides operational synergies between
Micron and NEM in manufacturing and administration. In early 2007, a
class 100,000 level clean room was constructed for precision injection molding
to meet NEM’s new customer requirement. This manufacturing space was
fully operational in February 2007.
3
The
Leominster Tool Division (“LTD”), formed following the December 2006 purchase of
substantially all of the operating assets of privately held Leominster Tool
Company, Inc. vertically integrates the design, manufacture, and repair of
production injection molding tooling used by Micron, NEM, and
MIT. The division enjoys a loyal customer base in die casting,
plastic blow molding as well as thermoplastic injection
molding. Micron and its divisions benefit from an in-house source for
injection molding tooling as well as new capabilities in the production of metal
components. By late 2008, LTD will be physically integrated into the
Fitchburg complex.
Micron
Integrated Technologies (“MIT”), a division of Micron, formed in January 2006,
specializes in the production of metal and plastic components and assemblies for
the medical and defense industries. Leveraging the high quality
manufacturing of the NEM division’s plastic production capacity and LTD’s
production capabilities with a comprehensive portfolio of value-added
manufacturing, design and engineering services, the division provides complete
product life cycle management: from concept to product development, prototyping,
volume production, and assembly. The success of the division which is
located in the Mill building in the Fitchburg complex is dependent on a
comprehensive network of small highly specialized manufacturing partners to
produce a wide variety of component parts for the manufacture of the division’s
products.
PRODUCTS
The
following table sets forth for the periods specified, the revenue derived from
the products of ART and its subsidiary Micron (collectively the
"Company"):
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Year
Ended December 31,
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2007
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%
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2006
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%
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|||||||||||||
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Sensors
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$ | 9,510,871 | 49 | $ | 10,840,418 | 56 | ||||||||||
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Other
molded products
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3,161,497 | 16 | 6,866,517 | 35 | ||||||||||||
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Snaps
and snap machines
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130,385 | 1 | 496,092 | 3 | ||||||||||||
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Other
products
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6,685,009 | 34 | 1,115,079 | 6 | ||||||||||||
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Total
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$ | 19,487,762 | 100 | $ | 19,318,106 | 100 | ||||||||||
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Sensors
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Micron is
a manufacturer and distributor of silver-plated and non-silver plated conductive
resin sensors for use in the manufacture of disposable electrodes for ECG
diagnostic, monitoring and related instrumentation. The type of
sensor manufactured by Micron consists of a molded plastic substrate plated with
a silver / silver chloride surface, which is a highly sensitive conductor of
electrical signals. Silver / silver chloride-plated disposable
electrodes are utilized in coronary care units, telemetry units, and for other
monitoring purposes. In addition to the traditional ECG tests,
disposable electrodes incorporating Micron’s sensor are used in connection with
stress tests, Holter monitoring and event recorders.
Micron
also manufactures sensors and conductive plastic studs used in the manufacture
of radio translucent electrodes. The radio translucent conductive
plastic studs are manufactured with uniquely engineered resin to enable
electrical conductivity between the sensor and the recording instrument
without the use of a metal snap. The radio translucent electrodes are
virtually invisible to X-rays and are preferred in some medical environments
such as nuclear medicine, cardiac catheterization laboratory and certain stress
procedures. Micron also manufactures the mating conductive resin
snaps, which replace traditional metal snap fasteners, used in the radio
translucent application.
Other
custom designed sensors are manufactured for specific unique applications in the
EEG, EMG or TENS markets. Recent growth in the volume of highly
engineered EEG sensors reflects the increasing demand for noninvasive measuring
of neurological impulses. Micron’s strength in design and low cost
manufacturing support enables our customers to grow into unique niche medical
applications and electrophysiological monitoring with custom designed
sensors.
4
Other
Molded Products
Micron
also sells high volume precision custom molded component parts. The
Company’s sales in these high volume molded products diversify our existing
product lines while utilizing previously unused manufacturing
capacity. To defray the customer’s upfront tooling costs and remain
competitive with global competition, some high volume customers require the
financing of a customer specific tool over several years. The cost of
the tool is guaranteed by the customer and repaid over time as the molded
product is shipped.
The
inclusion of the NEM division into the Micron molding facility in 2004 increased
production flexibility, and dramatically expanded the size and shape of
products. From consumable medical products to medical equipment
components, this division has decreased our dependence on sensor production for
manufacturing growth. In order to leverage the NEM division’s
thermoplastic injection molding capabilities, the MIT division produces
assemblies using plastic molded components produced by NEM and assembled
with outsourced and internally produced metal components.
Snaps
and Snap Machines
Metal
Snap Fasteners
Metal
snap fasteners are used as an attachment and conductive connection between the
disposable electrode and the lead wires of an ECG machine. Micron
purchases the metal snap fasteners for resale from multiple suppliers and
performs additional quality assurance tests, repackages and stocks product for
its customers who may or may not purchase the snaps in addition to Micron’s
sensors.
High
Speed Electrode Assembly Machine
Certain
manufacturers of disposable medical electrodes use the Company’s attaching
machines in the assembly of sensors and snaps into disposable
electrodes. Manufacturing, leasing, selling, and providing
replacement parts to medical sensor and snap application machines provide Micron
with a complimentary product to sell to existing sensor and snap
customers. As a value added service, a technician can be dispatched
to troubleshoot and improve the performance of our customers’ fully automated
electrode assembly production lines.
Other
Products
Subassembly
and metal component manufacturing
The MIT
division’s product life cycle management program is focused on the integration
of plastic and metal components into subassemblies. The value added
service of in house product capabilities combined with a network of
subcontracted specialty coatings, metallurgical treatments, and unique
production abilities has diversified this product line to include defense
industry consumables and equipment, and subassemblies for medical device
components.
Injection
Molding Tooling
The
design, manufacture, and rehabilitation of injection molding tools for our
customers are part of the service package provided by the NEM
division. The design and manufacture of tooling is a leading
indicator of future product revenue. Engineering and mold designers
work with our customers’ product development engineers to design and produce
unique tooling for their products. Micron’s expertise in cost
effective manufacturing creates a sustainable partnership with our customers as
prototyped parts move to full scale production.
The LTD’s
primary product is thermoplastic injection molding tooling. The
division provides cost savings to Micron by vertically integrating mold making
and repair into the structure of Micron’s sensor and custom injection molding
businesses, and providing in-house services for the NEM and MIT
divisions. The division continues to generate revenues from other
customers for similar industrial applications, metal die casting molds,
investment casting wax molds, and thermoplastic injection/extrusion blow
molds.
Custom
Manufactured Metal Medical Devices
During
2007, a medical machining cell was built for the custom computer aided design
and computer controlled metal machining of patient specific orthopedic medical
device components. The new manufacturing space includes a machine
programming office with the latest technology in computer programming for 5-axis
machining with CNC vertical milling machines and a state of the art 5-axis
machining center. These products involve complex machining of wrought
and cast cobalt-chromium-molybdenum alloy into unique customized
products. No two components are identical and require precision
manufacturing verified by complex automated computer
controlled coordinate measuring equipment that measure up to 25 points per
square inch. The new space can accommodate a 50% increase in
manufacturing capacity before any physical constraints are realized to this
climate controlled room.
5
Signal-Averaging
Electrocardiographic (SAECG) Products - Predictorâ
7
The
Predictor® 7
software is a Windows®
compatible version of Arrhythmia Research Technology’s analytical program for
the detection of Late Potentials. Predictor® 7
utilizes the unique, patented Bi-directional, Four-Pole Butterworth Filtering
technique defined as the “Standard” by the joint AHA/ACC/ESC task force on
Signal-Averaging Electrocardiography1. All clinically accepted measurement
criteria are provided: total QRS duration, duration of the QRS under
40 µV, the RMS voltage of the last 40 msec of the QRS and the noise
level. Graphical output of the analysis is presented both on screen
and in hard copy. Predictor® 7 also
incorporates additional signal processing capabilities for clinical
research. The IntraSpect™ module permits detection of ventricular
late potentials in patients with Bundle Branch Block. P-wave signal
averaging helps predict patients at risk for atrial fibrillation and
flutter. A Heart Rate Variability module can be incorporated on the
Predictor platform.
The SAECG
product is currently used in a National Institutes for Health (“NIH”) funded
investigation into “Risk Stratification in MADIT II Type
Patients”. The primary objectives of this study are: 1. To
evaluate the predictive value of a multivariate model consisting of
pre-specified clinical and ECG parameters for predicting arrhythmic events in
Multicenter Automatic Defibrillator Implantation Trial II (“MADIT II”) type
post-infarction patients; 2. To develop a multivariate
risk-stratification model, based on a broader spectrum of pre-specified clinical
covariates and ECG parameters, and from it a risk-scoring algorithm identifying
high-risk and low-risk patient groups; this algorithm will be validated by a
cross-validation study. Such an algorithm will enable an ordering of
patients who may benefit most, and benefit least, from implantable cardiac
defibrillator (“ICD”) therapy. At the completion of this study,
estimated in 2010, and assuming favorable study results, we intend to establish
contracts with original equipment manufacturers for this product.
GENERAL
Customers
and Sales
During
the year ended December 31, 2007, each of two major customers accounted for over
10% of the Company’s sales and a loss of this base would have a material adverse
effect on results. The two largest customers accounted for 27% and
25% of sales in 2007 as compared to 29% and 20% of sales for the year ended
December 31, 2006.
Micron
manufactures its sensors against purchase orders from electrode
manufacturers. The Company is aware of approximately 30 significant
manufacturers of disposable snap type, radio translucent and pre-wired
electrodes worldwide. Micron sells its sensors to most of these
manufacturers. Sales backlog is not material to Micron’s sensor
business due to the method of ordering employed by its customer base in this
competitive industry. Customers generally purchase on a single
purchase order basis without long-term commitments.
The
majority of the NEM and MIT divisions’ customers for injection molded
thermoplastic products are from the medical equipment, medical device and
defense industries. From single use medical or defense consumable
products to equipment components, the engineered production services provide
quality design and production capacity which exceed our customers’ manufacturing
requirements. Certain customers require that an inventory of their
products be maintained at all times to enable just in time delivery
schedules. A commitment from customers is required by NEM and MIT to
maintain the higher level of finished goods inventory and raw material required
for their products. These agreements allow for a more flexible
manufacturing schedule with longer more cost effective production
cycles. NEM’s primary target customer is a medical manufacturer or
development company with a need for complex custom injection molded
components. MIT’s primary target customer is a defense or medical
manufacturer or development company with a need for complete product life cycle
management from design to full production preferably combining multiple
manufacturing technologies such as plastic injection molding, metalworking,
assembly, and packaging.
Windows®
is a registered trademark of Microsoft Corporation
1
AHA/ACC/ESC
Policy Statement: "Standards for the Analysis of Ventricular Late Potentials
Using High Resolution or Signal-Averaged Electrocardiography: A Statement by a
Task Force Committee of the European Society of Cardiology, the American Heart
Association and the American College of Cardiology. JACC Vol. 17, No. 5, April
1991:999-1006
6
The
following table sets forth, for the periods indicated, the approximate
consolidated revenues and percentages of revenues derived from the sales of all
of the Company's products in its geographic markets:
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Revenues
for the Years Ended December 31,
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||||||||||||||||
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2007
|
%
|
2006
|
%
|
|||||||||||||
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United
States
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$
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10,824,992 | 55 |
$
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9,344,815 | 48 | ||||||||||
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Canada
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5,426,042 | 28 | 5,816,071 | 30 | ||||||||||||
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Europe
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2,496,012 | 13 | 3,415,235 | 18 | ||||||||||||
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Pacific
Rim
|
335,592 | 2 | 374,190 | 2 | ||||||||||||
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Other
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405,124 | 2 | 367,795 | 2 | ||||||||||||
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Total
|
$
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19,487,762 | 100 | $ | 19,318,106 | 100 | ||||||||||
While
some risks exist in foreign markets, the vast majority of the Company’s
customers are based in historically stable markets. To reduce the
risks associated with foreign shipment and currency exchange fluctuations, the
title to most of our products are transferred to our customers when
shipped, and payment is required in U.S. Dollars.
To offset
the risk from fluctuations in the market price of silver, sensor customers are
usually subject to a silver surcharge or discount based on the market price
of silver at the time of shipment. The silver surcharge has become a
greater component of our product pricing as the price of silver has increased by
65% since the beginning of 2006. The Company is sensitive to the
impact of recent increases in silver cost, and continues to explore options with
our customers to help mitigate the resulting increases in
surcharges.
Marketing
and Competition
Micron
sells its sensors to manufacturers of disposable snap type and radio translucent
ECG electrodes. The Company has one major domestic competitor and
several minor competitors worldwide for sensors, and believes that its sales of
sensors exceed those of its competition in the
aggregate. The sensor and snap market is extremely price
sensitive. In an effort to ensure higher volume without a firm long
term purchase order, Micron offered a rebate program to
customers. The rebates were typically paid to the customer after
the end of the calendar year if certain volume thresholds were
attained. These rebates were accrued and recorded with each sale as a
reduction of gross sales. There were no rebates recorded in 2007 as
compared with $65,263 in 2006.
The
Company markets Micron and its NEM division as a highly specialized custom
injection thermoplastic molder to new and existing customers. The
Company believes it competes effectively based on its expertise in low cost
manufacturing of high volume precision products. The complex medical
products produced by the NEM division have expanded our existing customer base
and extensively diversified the product mix. It is our intention to
continue these efforts to market to the expanded customer base and further
diversify our product offerings. Global competition creates a highly
competitive environment. To meet this challenge, the NEM and MIT
divisions focus their product development efforts on complex close tolerance
products not readily outsourced to offshore manufacturing.
Management
is currently pursuing licensing of the SAECG products to original equipment
manufacturers for integration into existing cardio diagnostic
equipment. As previously stated the SAECG product is currently used
in a National Institutes for Health (“NIH”) funded investigation into “Risk
Stratification in MADIT II Type Patients”. At the completion of this
study and assuming favorable study results, we intend to establish
multiple contracts with original equipment manufacturers for this
product.
Product
Suppliers and Manufacturing
Micron
manufactures its sensors at its Fitchburg, Massachusetts facility employing a
proprietary non-patented multi-step process. All employees sign
confidentiality agreements to protect this proprietary process. The
raw materials used by Micron are plastic resins used to mold the substrates and
silver / silver chloride chemical solutions for plating the molded plastic
substrates. Both the resins and the chemicals involved in the silver
/ silver chloride process are available in adequate supply from multiple
commodity sources. Fluctuations in the price of silver are generally
contractually passed to customers in the form of a surcharge or
discount. As insulation against unanticipated price increases, some
resins and chemicals used in the production of sensors are purchased in large
quantities to lower or stabilize prices.
7
Resins
used by the custom molding division are purchased for an individual customer
order, with most increases in resin costs passed on to the customer as orders
are acknowledged. Because the customer order determines the quantity
of material required, customers may, and have, guaranteed the purchase of
specific large quantities of product which allows the division to purchase raw
material at a more favorable cost thereby lowering the final cost to the
customer. The metal alloys used by the MIT division in its products
are subject to the same customer order limitations, and prices are fixed as the
customer guarantees an order.
Micron
distributes medical grade nickel-plated brass and stainless steel snap fasteners
purchased from multiple domestic and international sources. Micron
buys these snaps in bulk, performs additional quality assurance tests, and
stocks inventory to facilitate just-in-time shipments to its
customers. This business segment decreased
significantly in revenue as price pressure has forced metal snap customers to
buy direct from the manufacturer to remain competitive.
Inventory
Requirements
Our
larger customers benefit from our ability to maintain an inventory of standard
sensors and snaps. This inventory policy allows for predictable and
planned production resulting in cost efficiencies that we are able to pass on to
our customers.
Custom
molded product is manufactured on an order by order basis. Finished
goods inventory is product made in advance of an acknowledged sales order, part
of an annual blanket order quantity, or for a specific safety stock requested by
the customer.
Research
and Development
ART's
research and development efforts focus primarily on maintaining the software
library in the SAECG product lines in a compatible platform. Our
primary focus in 2007 and 2006 was to verify the integrity of the analytical
algorithms, facilitate use of the application in the previously discussed NIH
study, and improve the stability of the software on various
platforms. For the fiscal years ended December 31, 2007,
and 2006, ART had research and development expenses of approximately $38,900 and
$57,200, respectively.
In 2007
and 2006, Micron’s research and development efforts resulted in $73,500 and
$7,100 of expense. Included in these efforts was a unique process
improvement to eliminate certain hazardous materials from our manufacturing
processes and new products for the medical electrode market.
Patents
and Proprietary Technology
ART
acquired three patents related to time and frequency domain analysis of
electrocardiogram signals in 1993. The technologies are utilized in
the current version of Predictorâ
7. ART acquired U.S. Patent No. 5,117,833 entitled “Bi-Spectral Filtering of
Electrocardiogram Signals to Determine Selected QRS Potentials,” (the
“Bi-Spec Patent”) which expires in 2009. ART also acquired additional
patents, which cover the spectral-temporal, mapping post-processing software
packages. In March 1997, the U.S. Patent Office granted United States
Patent No. 5,609,158 entitled “Apparatus and Method for Predicting
Cardiac Arrhythmia, by Detection of Micropotentials and Analysis of all ECG
Segments and Intervals” which covers a frequency domain analysis
technique for SAECG data.
The
Company believes that ART's products do not and will not infringe on patents or
violate proprietary rights of others. In the event that ART's
products infringe patents or proprietary rights of others, ART may be required
to modify the design of its products or obtain a license. There can
be no assurance that ART will be able to do so in a timely manner upon
acceptable terms and conditions. In addition, there can be no
assurance that ART will have the financial or other resources necessary to
enforce or defend a patent infringement or proprietary rights violation
action. Moreover, if ART's products infringe patents or proprietary
rights of others, ART could, under certain circumstances, become liable for
damages, which could have a material adverse effect on earnings.
Micron
employs a highly complex, proprietary non-patented multi-step manufacturing
process for its silver / silver chloride-plated sensors. To maintain
our trade secrets associated with the manufacture of disposable electrode
sensors, key employees are required to sign non-disclosure and/or
non-competition agreements. Micron uses a patented material in the
production of some sensors. Micron paid $7,200 in 2007 and $7,100 in
2006 in royalties associated with this patent. A provisional patent
was applied for and received for a new type of product for the electrode
industry. Micron expects to have fully evaluated the commercial
viability of this product by the end of 2008.
8
Government
Regulation
ART’s
software products are subject to, and ART believes currently comply with,
material clearance and distribution requirements from governmental regulatory
authorities, principally the U.S. Food and Drug Administration (FDA) and the
European Union (EU) equivalent agency. These agencies promulgate
quality system requirements under which a medical device is to be developed,
validated and manufactured. The development of the product line will
be managed in accordance with applicable regulatory requirements.
Micron’s
sensor elements are components used in medical devices designed and manufactured
by original equipment manufacturers. As such, these elements are not
required to be listed with regulatory agencies and do not require regulatory
clearance for distribution. However, because Micron primarily
distributes sensors to manufacturers for use in finished medical devices, Micron
exercises as stringent controls over its manufacturing processes and finished
products as would be required if the sensors were considered medical
devices.
The NEM
and MIT divisions manufacture parts for invasive medical devices, components for
medical equipment, patented disposable medical laboratory products, and patented
military applications. Our customers own the product designs and are,
therefore, subject to FDA, Department of Defense and EU
regulations. While such products are a part of a medical device or
other regulated equipment, our customers are the regulated entity for the
clearance of those products. NEM and MIT exercise stringent controls
over all their manufacturing operations, and comply with any special controls
required by their customers.
Environmental
Regulation
Micron’s
operations involve use of hazardous and toxic materials, and generate hazardous,
toxic and other wastes. Its operations are subject to federal, state
and local laws and regulations governing the use, storage, handling and disposal
of such materials and certain waste products. Although management believes that
our safety procedures for using, handling, storing and disposing of such
materials comply with these standards required by state and federal laws and
regulations, we cannot completely eliminate the risk of accidental contamination
or injury from these materials. An insurance policy has been
purchased to mitigate this risk to the Company.
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 regularly review, monitor and upgrade its air
and waste water treatment activities. Management continues to
evaluate and test many possible technological advances that reduce or eliminate
the need for and use of hazardous materials in our processes. The
recent acquisition of equipment to eliminate a hazardous chemical from the
process further emphasizes the commitment to the reduction and elimination of
certain hazardous processes. In 2007 and 2006, the related
expenditures for waste treatment were approximately $40,250 and $50,000,
respectively. The operational costs are expected to be similar in
2008. Micron believes that the operation of its manufacturing
facility is in compliance with currently applicable safety, health and
environmental laws and regulations.
Employees
As of
December 31, 2007, the Company had 92 full-time and 2 part-time employees
including 29 administrative, sales and supervisory personnel, 11 quality control
personnel and 54 production personnel. The employees of the Company
are not represented by a union, and the Company believes its relationship with
the employees is satisfactory.
Periodic
Reporting and Financial Information
We have registered our
common stock under the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and have reporting obligations, including the requirement that we
file annual and quarterly reports with the SEC. The public may read and
copy materials we file with the SEC at the SEC’s Public Reference Room
at 100 F Street, NE, Washington, DC 20549, on official business days during
the hours of 10:00 am to 3:00 pm. You may obtain information about the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC at http://www.sec.gov.
9
Item 1A. RISK FACTORS.
Risk
factors that may affect future operating results
In
addition to the other information in this Form 10-K, the following factors
should be considered in evaluating the Company and its business. The
risks and uncertainties described below are not the only ones facing the
Company. Additional risks and uncertainties that the Company does not
presently know or currently deems immaterial may also impair the Company’s
business, results of operations and financial condition.
The
Company’s operating results may fluctuate significantly as a result of a variety
of factors.
Our
operating results may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside of our control. These
factors include our ability to maintain our current pricing model and/or
decrease our cost of sales; increasing sales of lower margin products; the level
of demand for the products that we may develop; our ability to attract and
retain personnel with the necessary strategic, technical and creative skills
required for effective operations; the amount and timing of expenditures by
customers; variability of customer delivery requirements, continued availability
of supplies or materials used in manufacturing at current prices; the amount and
timing of capital expenditures and other costs relating to the expansion of our
operations; government regulation and general economic conditions. As
a strategic response to changes in the competitive environment, we may from time
to time make certain pricing, service, technology or marketing decisions or
business or technology acquisitions that could have a material adverse effect on
our quarterly and annual results. Due to all of these factors, our
operating results may fall below the expectations of securities analysts,
stockholders and investors in any future period.
If
trade secrets are not kept confidential, the secrets may be used by others to
compete against us.
Micron
relies on unpatented trade secrets to protect its proprietary processes as there
are no assurances that others will not independently develop or acquire
substantially equivalent technologies or otherwise gain access to our
proprietary process. Ultimately the meaningful protection of such
unpatented proprietary technology cannot be guaranteed. The Company relies on
confidentiality agreements with its employees. Remedies for any
breach by a party of these confidentiality agreements may not be adequate to
prevent such actions. Failure to maintain trade secret protection, for any
reason, could have a material adverse effect on the Company.
Dependence
on a limited number of customers.
In the
fiscal years 2007 and 2006, 52% and 49%, respectively of the Company’s revenues
were derived from individual customers with 10% or more of the total
sales. The loss of any one or more of these customers would have an
immediate significant adverse effect on our financial results. In an
effort to maintain this customer base, more favorable terms than might otherwise
be agreed to could be granted. Currently, the Company generally does
not receive purchase volume commitments extending beyond several months. Large
corporations can shift focus away from a need for our product with little or no
warning.
The
majority of our revenues are derived from the sale of a single
product.
In fiscal
years 2007 and 2006, the Company derived 49% and 56%, respectively, of
its revenues from medical electrode sensors for use in disposable
electrodes. While the technology in electrode sensors has been used
for many years, there is no assurance that a new patented or unpatented
technology might not replace the existing market for disposable electrode
sensors. Any substantial technological advance that eliminates our
product will have a material adverse effect on our operating
results.
The
Company is subject to stringent environmental regulations.
The
Company is subject to a variety of federal, state and local requirements
governing the protection of the environment. These environmental
regulations include those related to the use, storage, handling, discharge and
disposal of toxic or otherwise hazardous materials used in or resulting from the
Company’s manufacturing processes. Failure to comply with
environmental law could subject the Company to substantial liability or force us
to significantly change our manufacturing operations. In addition,
under some of these laws and regulations, the Company could be held financially
responsible for remedial measures if its properties are contaminated, even if it
did not cause the contamination.
10
The
Company may make acquisitions of companies, products or technologies that may
disrupt the business and divert management’s attention, adversely impacting our
results of operations and financial condition.
The
Company may make acquisitions of complementary companies, products or
technologies from time to time. Any acquisitions will require the
assimilation of the operations, products and personnel of the acquired
businesses and the training and motivation of these
individuals. Management may be unable to maintain and improve upon
the uniform standards, controls, procedures and policies if the Company fails in
this integration. Acquisitions may cause disruptions in operations
and divert management’s attention from day-to-day operations, which could impair
our relationships with current employees, customers and strategic
partners. The Company also may have to, or choose to, incur debt or
issue equity securities to pay for any future acquisitions. The
issuance of equity securities for an acquisition could be substantially dilutive
to our stockholders’ holdings. In addition, our profitability may
suffer because of such acquisition-related costs or amortization costs for other
intangible assets. If management is unable to fully integrate
acquired businesses, products, technologies or personnel with existing
operations, the Company may not receive the intended benefits of such
acquisitions. The Company is not currently party to any agreements,
written or oral, for the acquisition of any company, product or
technology.
If
the Company is unable to keep up with rapid technological changes, our
processes, products or services may become obsolete and
unmarketable.
The
medical device and medical software industries are characterized by
technological change over time. Although the Company attempts to
expand our technological capabilities in order to remain competitive,
discoveries by others may make our processes or products obsolete. If
the Company cannot compete effectively in the marketplace, our potential for
profitability and financial position will suffer.
The
Company could become involved in litigation over intellectual property
rights.
The
medical device industry has been characterized by extensive litigation regarding
patents and other intellectual property rights. Litigation, which would likely
result in substantial cost to us, may be necessary to enforce any patents issued
or licensed to us and/or to determine the scope and validity of others'
proprietary rights. In particular, our competitors and other third
parties hold issued patents and are assumed to hold pending patent applications,
which may result in claims of infringement against us or other patent
litigation. The Company also may have to participate in interference
proceedings declared by the United States Patent and Trademark Office, which
could result in substantial cost, to determine the priority of
inventions.
A
product liability suit could adversely affect our operating
results.
The
testing, manufacture, marketing and sale of medical devices of our customers
entail the inherent risk of liability claims or product recalls. If our
customers are involved in a lawsuit, it is foreseeable that the Company would
also be named. Although the Company maintains product liability
insurance, coverage may not be adequate. Product liability insurance is
expensive, and in the future may not be available on acceptable terms, if at
all. A successful product liability claim or product recall could have a
material adverse effect on our business, financial condition, and ability to
market product in the future.
The
Company’s conversion to a new enterprise resource planning solution may not
provide expected benefits.
We have
recently converted substantially all of our operational and financial functions
to a new enterprise resource planning ("ERP") software system. The ERP system
impacts every aspect of our operations, including production, engineering,
finance, and sales. Although we have taken steps we believe are reasonable to
ensure a successful conversion of our operations to the ERP system, we can
provide no assurances that the conversion will be successful or that the ERP
system will achieve its expected benefits. Failure to achieve a successful
conversion or to obtain the expected benefits of the ERP system could have an
adverse material effect on us.
The
Company may be exposed to potential risks relating to our internal control over
financial reporting and our ability to have those controls attested to by our
independent registered public accounting firm.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the
Securities and Exchange Commission adopted rules requiring public companies to
include a report of management on the company’s internal control over financial
reporting in their annual reports, including Form 10-K. In addition,
the independent registered public accounting firm auditing a company’s financial
statements must also attest to and report on management’s assessment of the
effectiveness of the company’s internal control over financial reporting as well
as the operating effectiveness of the Company’s internal
controls. The Company was not subject to these requirements for the
fiscal year ended December 31, 2007. We are evaluating our internal
control systems in order to allow our management to report on, and our
independent auditors attest to, our internal controls, as a required part of our
Annual Report on Form 10-K beginning with our report for the fiscal year ended
December 31, 2009.
11
While
we expended significant resources beginning in the latter part of 2008 to
develop the necessary documentation and testing procedures required by SOX 404,
there is a risk that we will not comply with all of the requirements imposed
thereby. In the event the Company no longer qualifies as a
smaller reporting company at the end of 2008, we may be subject to more
stringent requirements under SOX 404. Accordingly, there can be no
assurance that the Company will receive any required attestation from the
independent registered public accounting firm. In the event we
identify significant deficiencies or material weaknesses in our internal
controls that we cannot remediate in a timely manner or we are unable to receive
an attestation from the independent registered public accounting firm with
respect to our internal controls, investors and others may lose confidence in
the reliability of our financial statements and our ability to obtain equity or
debt financing could suffer.
Item 2. PROPERTIES.
The
manufacturing facility and offices of the Company are located in two buildings
in an industrial area in Fitchburg, Massachusetts. The first
building, which was purchased in April 1994, consists of a 22,000 square foot,
six story building. The second building, which was purchased in
September 1996, is over 94,000 square feet, including an antique brick three
story mill building. Commencing in 2003, the 40,000 square foot
“Mill” building portion of the second building underwent major renovations to
preserve and create functional space from a previously unusable section of the
facility. The renovations created space currently occupied by the NEM
and MIT divisions. From October 2006 to February 2007, a third
building of approximately 40,000 square feet, a fourth building of 12,000 square
feet and vacant parcel between the buildings that abut the complex were
acquired without any specific requirement for space. The Company
believes the acquisition of the adjacent property positions the Company for
continued growth in its current location. The Company
believes its current facilities are sufficient to meet our current and
future production needs through fiscal year ending December 31,
2008.
Item 3. LEGAL PROCEEDINGS.
The
Company is from time to time subject to legal proceedings, threats of legal
action and claims which arise in the ordinary course of our
business. Management believes the resolution of these matters will
not have a material adverse effect on the results of operations or financial
condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
No
matters were submitted to a vote of security holders during the fourth quarter
of 2007.
12
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
ART's
Common Stock has been listed on the American Stock Exchange since March 3, 1992
and trades under the ticker symbol HRT.
The
following table sets forth, for the period indicated, the high and low sale
prices per share for ART's Common Stock as quoted by the American Stock
Exchange.
|
High
|
Low
|
|||||||
|
Year
Ended December 31, 2007
|
||||||||
|
1st
Quarter
|
$ | 33.89 | $ | 20.10 | ||||
|
2nd Quarter
|
26.76 | 11.05 | ||||||
|
3rd Quarter
|
14.27 | 8.48 | ||||||
|
4th Quarter
|
11.25 | 6.75 | ||||||
|
Year
Ended December 31, 2006
|
||||||||
|
1st Quarter
|
$ | 12.25 | $ | 8.75 | ||||
|
2nd Quarter
|
12.65 | 9.08 | ||||||
|
3rd Quarter
|
14.45 | 9.50 | ||||||
|
4th Quarter
|
29.50 | 14.00 | ||||||
As of
March 21, 2008 the number of record holders of ART's common stock is estimated
to be 328, not including beneficial holders of our common stock held in street
name.
Dividend
Policy
No
dividends were declared in 2007. In May 2006, the Company declared a
dividend of $0.06 per share payable on June 19, 2006 to holders of record on
June 12, 2006 payable from the Company’s cash reserves.
Future
determination as to the payment of cash dividends, if any, will be at the
discretion of the Board of Directors and will be dependent upon the Company’s
financial condition, results of operations, capital requirements, potential
acquisitions, and other such factors as the Board of Directors may deem
relevant, including any restrictions under any credit facilities in place now or
in the future. The Company's demand line of credit agreement contains
conditions including prior notification of the payment of
dividends.
Equity
Compensation Plan Information
The
following table provides information, as of December 31, 2007, with respect to
our equity compensation plans:
|
Plan
Category
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation plans
(excluding
securities
reflected
in column (a))
|
|
(a)
|
(b)
|
(c)
|
|
|
Equity compensation plans
approved by security holders
|
127,000
|
$ 10.45
|
320,000
(1)
|
|
Equity compensation plans not
approved by security holders
|
-
|
-
|
-
|
|
Total
|
127,000
|
$ 10.45
|
320,000
(1)
|
|
(1)
|
Includes
220,000 shares available under the 2001 Stock Option Plan and 100,000
shares available under the 2005 Stock Award
Plan.
|
Recent
Sales of Unregistered Securities
None
Purchases
of Equity Securities
None
13
Item
6. SELECTED FINANCIAL
INFORMATION.
Not
Applicable
Item
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
The
following discussions of the Company’s results of operations and financial
condition should be read in conjunction with the financial statements and notes
pertaining to them that appear elsewhere in this Form 10-K.
Any
forward looking statements made herein are based on current expectations of the
Company that involve a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are
made under the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements may be identified by
the use of words such as “expect,” “anticipate,” “believe,” “intend,” “plans,”
“predict,” or “will” . The factors that could cause actual results to
differ materially include: impact of competitive products and pricing, product
demand and market acceptance risks, the presence of competitors with greater
financial resources than the Company, product development and commercialization
risks, changing economic conditions in developing countries, and an inability to
arrange additional debt or equity financing.
Although
the Company believes that our expectations are based on reasonable assumptions,
we can give no assurance that our expectations will materialize. Many factors
could cause actual results to differ materially from our forward looking
statements. Several of these factors include, in addition to those contained in
“Factors that may affect future operating results,” without
limitation:
| · | our ability to maintain our current pricing model and/or decrease our cost of sales; |
|
·
|
our
ability to finance our business;
|
|
·
|
a
stable interest rate market and/or a stable currency rate environment in
the world, and specifically the countries we are doing business in or plan
to do business in;
|
|
·
|
continued
availability of supplies or materials used in manufacturing at the
competitive prices;
|
|
·
|
adverse
regulatory developments in the United States or any other country we plan
to do business in;
|
|
·
|
entrance
of competitive products in our
markets;
|
|
·
|
the
ability of management to execute plans and motivate personnel in the
execution of those plans;
|
|
·
|
no
adverse publicity related to our products or the
Company;
|
|
·
|
no
adverse claims relating to our intellectual
property;
|
|
·
|
the
adoption of new, or changes in, accounting
principles;
|
|
·
|
the
passage of new, or changes in, regulations; legal
proceedings;
|
|
·
|
our
ability to maintain compliance with the American Stock Exchange
requirements for continued listing of our common
stock;
|
|
·
|
the
costs inherent with complying with new statutes and regulations applicable
to public reporting companies, such as the Sarbanes-Oxley Act
of 2002;
|
|
·
|
our
ability to efficiently integrate future acquisitions and other new lines
of business that the Company may enter in the future, if any;
and
|
|
·
|
other
risks referenced from time to time elsewhere in this report and in our
filings with the SEC.
|
The
Company is under no obligation and does not intend to update, revise or
otherwise publicly release any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of any unanticipated events.
Results
of Operations
The
Company’s primary source of revenue relates to the manufacturing of medical
device, equipment and defense industry components. The single largest
category of revenue relates to Micron’s production and sale of disposable
electrode sensors used as a component part in the manufacture of integrated
disposable electrophysiological sensors. These disposable medical
devices are used worldwide in the monitoring of electrical signals in various
medical applications. In an effort to leverage current skills, the
Company has expanded into custom thermoplastic injection molded
products. This sector includes revenues from both high volume
precision injection molding and custom injection molding. Management
continues to identify complementary and/or synergistic products, technologies
and lines of business in an effort to broaden the Company’s
offerings.
14
The
following table sets forth for the periods indicated, the percentages of the net
sales represented by certain items reflected in the Company's statements of
operations.
|
Years
ended December 31,
|
||||
|
2007
|
2006
|
|||
|
Net
sales
|
100.0
|
% |
100.0
|
% |
|
Cost of sales
|
75.5
|
70.1
|
||
|
Gross
profit
|
24.5
|
29.9
|
||
|
Selling and
marketing
|
3.9
|
3.2
|
||
|
General and
administrative
|
10.9
|
9.7
|
||
|
Research and
development
|
0.6
|
0.3
|
||
|
Other income,
net
|
0.0
|
(0.2
|
) | |
|
Income
before income tax provision
|
9.1
|
16.9
|
||
|
Income tax
provision
|
2.5
|
5.7
|
||
|
Net
income
|
6.6
|
% |
11.2
|
% |
Net
Sales
Net
sales for 2007 were $19,487,762, an increase of $169,656 or 1%, when compared to
the total net sales of $19,318,106 in 2006. The disposable electrode sensor
business continues to experience extreme price pressure in an increasingly
competitive market. The revenue associated with the sensor business, including
silver surcharge, decreased by more than $1,300,000 resulting from price erosion
and the loss of market share in Canada and Europe. The complementary metal snap
business decreased by $330,000 as the Company continues to move away from the
distribution of this product. The growth of the NEM and MIT divisions
combined to offset $720,000 of the decrease in sensor revenues as the Company’s
ability to creatively assist with and respond to our customer’s product
development and design needs continues to strengthen our position in unique
applications. Due to a change in customer demands, the precision
molded products from Micron Products increased approximately $330,000 when
compared to 2006. LTD added $770,000 in revenues above internal work
for other divisions. The remaining $20,000 of the revenue increase
related to the Snap Assembly machine business and other miscellaneous
revenues. Non-recurring engineering and tooling revenue accounted for
over $380,000 of the revenues in 2007 as compared to $990,000 in
2006. Engineering and tooling revenues typically occur at the
beginning of a product life cycle or when a customer changes its manufacturing
source. After the design and manufacture of the prototype and/or
production tooling, the Company should benefit from product sales as it begins
to utilize the customer owned tooling. There were no sales of SAECG
software in either 2007 or 2006.
Cost
of Sales
Cost of
sales was $14,709,035 (75.5% of net sales) in 2007 compared to $13,550,523
(70.1% of net sales) in 2006 an increase of $1,158,12 or 8.5%. A
significant portion of the increase in cost of sales can be attributed to
material costs. Gross margin is negatively affected by the increase in
material costs as not all increases can be passed along to the customer in the
form of price increases or surcharges. Management had been
successful in stabilizing a portion of the electricity costs by negotiating a
long-term purchase agreement. The contract ended in December of 2007
and the new electric contract is higher in cost. Other costs such as
natural gas, resin, diesel fuel and other freight related costs continue to
rise. Management continues to explore ways in which to lower or
stabilize these costs. Competition in the electrode sensor market
continues to erode margins as the product is seen as a commodity in the
marketplace. The competitive market occupied by MIT and NEM are
expected to have differing margins based on type of product, volume from
customer, and difficulty to produce. Management continues to
investigate strategies to increase the overall gross margin without sacrificing
product quality. The NEM division sells the majority of the
production and prototype molding tools that are designed and qualified for
production of plastic components. These tools have a significantly
lower margin than the product the tool produces.
Selling
and Marketing
Selling
and marketing expenses increased to $764,021 (3.9% of net sales) in 2007 from
$617,140 (3.2% of net sales) in 2006, an increase of $146,880, or
24%. This increase in selling and marketing expense is mainly
attributable to the commissions payable to the sales and business development
personnel along with increased travel and trade show costs incurred as business
development and marketing efforts were expanded. Management believes
this increase to be nominal and expects the expense as a percentage of sales to
decrease as the Company begins to see positive results from the increase in
business development efforts.
15
General
and Administrative Expenses
General
and administrative expenses were $2,131,694 (10.9% of net sales) in 2007 as
compared to $1,869,603 (9.7% of net sales) in 2006, an increase of $262,091 or
14%. The increased cost was related to executive salary increases and
additions, increased management and technology staff, and technology upgrades in
preparation for Section 404 compliance. In 2007, fees associated with
the internal control documentation required to comply with Section 404 of the
Sarbanes Oxley Act were $36,000. Due to the extension of the
implementation date relating to the internal control documentation, costs will
continue into 2008.
Research
and Development
Research
and development costs increased to $112,472 (0.6% of net sales) in 2007 from
$64,362 (0.3% of net sales) in 2006, an increase of $48,110, or
75%. For the fiscal years ended December 31, 2007, and
2006, ART had research and development expenses of approximately $38,900 and
$57,200, respectively. This expenditure was to verify the integrity
of the analytical algorithms and use of software on different platforms, and
facilitate use of the application in the previously discussed NIH
study. In 2007 and 2006, approximately $73,500 and $7,000,
respectively of the expenditure was related to Micron’s development of a unique
process to reduce the use of hazardous materials, and substitution of materials
for unique product applications.
Interest
Expense
Interest
expense in 2007 and 2006 related to an acquisition note and an equipment loan
totaling $21,188 and $537, respectively. The Company does not incur
an unused borrowing base fee under our unsecured credit
facility.
Other
Income (Expense)
Other
income was $27,711 in 2007 compared to $45,478 in 2006, a decrease of $17,767,
or 39%. The majority of other income was bank interest of $34,299 and
$65,326, in 2007 and 2006, respectively. Lower average balances and a
decrease in the rate of return account for the decrease in interest
income. The remainder of other income was from miscellaneous expense
items including a loss in the disposal of assets, and currency losses relating
to a foreign government’s import taxes and the timing of the
reimbursement.
Income
Taxes
The
Company’s combined federal and state effective income tax rate was 28% and 34%
in 2007 and 2006, respectively. The effective rates are lower than
the statutory rates primarily due to the reductions in tax from tax credits in
2007 and 2006. The Company utilized federal net operating loss
carryforwards of approximately $217,000 in 2007 and 2006. This
represents the complete utilization of the Company's Federal net operating loss
carryforwards. During
the third quarter of 2007, the IRS completed its audit of the Company’s tax
returns for several prior periods, and did not require any changes to be made to
those returns.
Goodwill
As of
December 31, 2007, the Company’s goodwill of $1,564,966 is related to three
reporting units, $1,244,000 associated with the acquisition of Micron Products,
Inc. in 1992, $235,727 associated with the acquisition of Shrewsbury Molders,
Inc. in 2004, and $85,239 associated with the acquisition of Leominster Tool Co.
Inc. in December 2006. There was no impairment to the goodwill
associated with or expected in any acquisition based on the first quarter annual
impairment test in 2007.
Earnings
Per Share
The basic
earnings per share was $0.47 in 2007 as compared to $0.81 in 2006, a decrease of
$0.34, or 42%. The decrease in earnings per share reflects the lower
gross margin product and increasing administrative expenses.
Off-Balance
Sheet Arrangements
The
Company does not have any off balance sheet arrangements.
Liquidity
and Capital Resources
Working
capital was $6,563,047 as of December 31, 2007 as compared to $6,501,191 as of
December 31, 2006. Operating results produced positive cash flows of
$1,472,005 of which $1,884,315 was spent on capital asset
investment. Cash and cash equivalents were $1,684,411 and $2,065,645
at December 31, 2007, and 2006, respectively. Substantially all of
these funds are invested in fixed rate bank instruments that are highly
liquid.
16
Inventories
increased to $3,001,520 at the end of 2007, an increase of $133,228 from the end
of 2006. The increased inventory was the result of raw material
requirements, the rising cost of silver and higher unit cost of resins
purchased. Some materials shipped from offshore are required to be
added to our inventories upon shipment. These items accounted for
$108,000 of the increase. In addiiton, some of the specialty
engineered resins used by Micron were offered at a substantial discount if
delivery was taken prior to year end. Several factors contributed to
the increase in finished goods inventory. First, the NEM division
builds product upon receipt of a firm customer order. This ability to
produce in longer runs lowers the per unit cost of the product while increasing
the finished goods inventory. Second, upon the request of a Micron
sensor customer, larger inventories of particular sensors are held in finished
goods in an effort to decrease delivery time. The quantity of sensor
inventory maintained has not changed, but the cost of silver has increased
resulting in higher inventory balances.
Capital
equipment expenditures were $2,638,000 in 2007 as compared to $846,000 in
2006. The majority of the expenditures were related to the
manufacturing operations. In 2007, the largest expenditure of
$1,086,000 included the installation of four (4) machining centers and creation
of a medical machining cell. This climate controlled space includes a
computer programming office to control the machines and the latest in 5-axis
three dimensional computer technology. The second largest expenditure
of $450,000 in computer software and equipment related to the installation and
upgrade of our enterprise resource planning package. The total budget
for this project is over $500,000 and improves all aspects of the information
technology at all levels of the organization. The software will ease
the Company’s transition with Section 404 compliance, and is expected to
facilitate integration of future acquisitions. Other administrative
improvements included a new phone system, facility security and expansion of the
internal network with full replication of data for disaster
recovery. The majority of remaining capital expenditures related to
manufacturing equipment replacements and additions including computer controlled
inspection equipment.
In 2006,
the equipment purchased included $338,000 for three new injection molding
machines, $201,000 in sensor tooling, and $162,000 in other manufacturing
equipment for the manufacturing operation. An additional $145,000 was
spent on computer hardware, technical software, and a vehicle. At the
end of 2006, a total of $546,000 in capital equipment expenditures were not in
service. This included the 100,000 level clean room, three molding
machines two of which were purchased at auction, and miscellaneous tooling and
equipment.
Between
2004 and 2006, a total of approximately $1,210,000 was spent on property and
building improvements with the renovation of the previously unused 40,000 square
feet of space in a 100 year old brick building, located at the Fitchburg
complex. The building improvements included $210,000 in process
equipment specific to plastic injection molding. The NEM and MIT
divisions occupy the majority of the renovated space. In October
2006, an additional four story 40,000 square foot abutting property was
purchased for $430,000. In February 2007, another adjoining property
for an additional 13,000 square feet and vacant lot was purchased for
$205,000.
An
unsecured $1,000,000 credit facility was available in 2007 and
2006. The agreement provides for borrowings up to 80% of eligible
accounts receivable plus 50% of raw material and finished goods inventories up
to a $300,000 maximum. This facility has no borrowing base
charge. There were no outstanding borrowings on our lines of credit
as of December 31, 2007 and 2006. The agreement contains covenants
that apply upon drawing on the line. The covenants relate to various matters
including notice prior to executing further borrowings and security interests,
merger or consolidation, acquisitions, guarantees, sales of assets other than in
the normal course of business, leasing, changes in ownership and payment of
dividends.
The
Company has a one year term note secured by equipment with a limit of
$813,000. The loan was drawn down by $383,000 for equipment delivered
and installed in October. A second payment of $383,000 was made in
January of 2008 for this equipment. The loan has a fixed interest
rate of 6.75%, payments amortized over 7 years with a balloon payment for the
remaining balance at September 30, 2008.
Funding
for future research and development is expected to be provided by ongoing
operations and at this time there are no plans for projects that would require
outside funding.
During
2004, the Company filed a registration statement on Form S-3 with the Securities
and Exchange Commission which was declared effective in September
2004. The registration statement covers 500,000 shares of the
Company’s common stock. While there are no immediate plans to offer
and sell the registered shares, the Company believes that the shelf registration
statement will provide greater flexibility in accessing capital markets when
market conditions are conducive to an offering. Proceeds from such a
sale will be used for product development and general corporate purposes or to
pursue complementary new opportunities including acquisitions.
17
Inflation
The
Company believes that inflation in the United States or international
markets has had a significant effect on its results of operations
particularly the cost of silver. Silver pricing has been passed on to
our customers in the form of a surcharge, but this does not preclude the Company
from being pressured to reduce its margins as the price continues to
climb. Silver surcharge collected from our customers is approximately
14% and 15% of total net sales for years ended December 31, 2007 and 2006,
respectively.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 prescribes a single definition
of fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The Company does not believe the adoption of
SFAS No. 157 will have a material impact on its financial condition or
results of operations. SFAS No. 157 is effective for the
Company’s interim reporting period beginning January 1, 2008.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No.
115. SFAS No. 159 permits an entity to elect fair value
as the initial and subsequent measurement attribute for many financial assets
and liabilities. Entities electing the fair value option would be required
to recognize changes in fair value in earnings. Entities electing the fair
value option would also be required to distinguish, on the face of the statement
of financial position, the fair value of assets and liabilities for which the
fair value option has been elected and similar assets and liabilities measured
using another measurement attribute. The Company does not believe the
adoption of SFAS No. 159 will have a material impact on its financial
condition or results of operations. SFAS No. 159 is effective
for the Company’s interim reporting period beginning January 1,
2008.
In
December 2007, the SEC issued SAB No. 110. SAB 110 allows for the
continued use of a "simplified" method, as discussed in SAB No. 107, in
developing an estimate of expected term of "plain vanilla" share options in
accordance with SFAS 123 (revised 2004). Originally the staff stated
in SAB 107 that it would not expect a company to use the simplified method for
share option grants after December 31, 2007. Accordingly, the SEC staff
will continue to accept, under certain circumstances, the use of the simplified
method beyond December 31, 2007. The Company will evaluate the use of
the simplified method for determining the value of options granted after
December 31, 2007.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations.
SFAS No. 141(R) establishes principles and requirements for how
the acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. SFAS No. 141(R) also
provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. The provisions of SFAS No. 141(R) are applicable
to business combinations consummated on or after December 15, 2008 with early
adoption prohibited.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51.
SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary for the deconsolidation of a subsidiary.
SFAS No. 160 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim statements within
those fiscal years. The Company does not currently have any noncontrolling
interests.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
generally accepted accounting principles requires management to make judgments,
assumptions and estimates that affect the amounts reported. Note 2 of
Notes to Consolidated Financial Statements describe the significant accounting
policies used in the preparation of the consolidated financial
statements. Certain of these significant accounting policies are
considered to be critical accounting policies, as defined below.
A
critical accounting policy is defined as one that is both material to the
presentation of the Company’s financial statements and requires management to
make difficult, subjective or complex judgments that could have a material
effect on the Company’s financial condition and results of
operations. Specifically, critical accounting estimates have the
following attributes: 1) the Company is required to make assumptions about
matters that are highly uncertain at the time of the estimate; and 2) different
estimates the Company could reasonably have used, or changes in the estimate
that are reasonably likely to occur, would have a material effect on the
Company’s financial condition or results of operations.
18
Estimates
and assumptions about future events and their effects cannot be determined with
certainty. The Company bases its estimates on historical experience
and on various other assumptions believed to be applicable and reasonable under
the circumstances. These estimates may change as new events occur, as
additional information is obtained and as the Company’s operating environment
changes. These changes have historically been minor and have been
included in the consolidated financial statements as soon as they became
known. In addition, management is periodically faced with
uncertainties, the outcomes of which are not within its control and will not be
known for prolonged periods of time. These uncertainties are
discussed in the section above entitled “Factors that may affect future
operating results.” Based on a critical assessment of its
accounting policies and the underlying judgments and uncertainties affecting the
application of those policies, management believes that the Company‘s
consolidated financial statements are fairly stated in accordance with generally
accepted accounting principles, and present a meaningful presentation of the
Company’s financial condition and results of operations.
Management
believes that the following are critical accounting policies:
Revenue
Recognition and Accounts Receivable
The
Company recognizes revenue upon product shipment, provided that there exists
persuasive evidence of an arrangement, the fee is fixed or determinable, and
collectability of the related receivable is reasonably assured.
The
financing of customer purchased tooling utilizes the direct financing method of
revenue recognition. This requires the gain or loss on the sale of
the tooling to be recorded at the time the tool is put into service while the
customer’s stream of payments is reflected as a lease receivable.
Based on
management’s on-going analysis of accounts receivable balances, and after the
initial recognition of the revenue, as to any event that adversely affects the
ultimate ability to collect the related receivable, management will record an
allowance for bad debts. Bad debts have not had a significant impact
on the Company's financial position, results of operations and cash
flows.
Inventory
and Inventory Reserves
The
Company values its inventory at the lower of average cost or
market. The Company reviews its inventory for quantities in excess of
production requirements, obsolescence and for compliance with internal quality
specifications. Any adjustments to inventory would be equal to the
difference between the cost of inventory and the estimated net market value
based upon assumptions about future demand, market conditions and expected cost
to distribute those products to market.
The
Company maintains a reserve for excess, slow moving, and obsolete inventory as
well as inventory with a carrying value in excess of its net realizable
value. A review of inventory on hand is made at least annually and
any provision for excess and obsolete inventory is recorded. The
review is based on several factors including a current assessment of future
product demand, historical experience, and product expiration.
Deferred
Tax Assets
The
Company assesses its deferred tax assets based upon a more likely than not to be
realized criteria. The Company considers future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance. In
accordance with FIN 48 we recognize the benefits of a tax position if that
position is more likely than not to be sustained on audit, based on the
technical merit of the position.
Asset
Impairment – Goodwill
The
Company reviews the valuation of goodwill and intangible assets to assess
potential impairments. Management reassesses the useful lives of
other intangible assets with identifiable useful lives in accordance with the
guidelines set forth in the Statement of Financial Accounting Standard No. 142,
“Goodwill and Other Intangible
Assets”. The value assigned to intangible assets is determined
by a valuation based on estimates and judgment regarding expectations for the
success and life cycle of products previously acquired or others likely to be
acquired in the future. If the actual sale of product and market
acceptance differs significantly from the estimates, management may be required
to record an impairment charge to write down the asset to its realizable
value. To test for impairment, a present value of an estimate of
future cash flows related to goodwill or intangible assets with indefinite lives
are calculated and compared to the value of the intangible asset during the
first quarter annually. When impairment exists it could have a
material adverse effect on the Company’s business, financial condition and
results of operations.
19
Asset
Impairment – Long Lived Assets
The
Company assesses the impairment of long-lived assets and intangible assets with
finite lives whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable. When the Company's
management determines that the carrying value of such assets may not be
recoverable, management generally measures any impairment on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in its current business
model.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not Applicable
Item 8. CONSOLIDATED
FINANCIAL STATEMENTS.
The
information required by this item may be found on pages F-1 through F-18 of this
Annual Report on Form 10-K.
Item 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.
Not Applicable
Item 9A. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this annual report the Company’s management, with
the participation of the Company’s Chief Executive Officer and Chief Financial
Officer (“the Certifying Officer”), conducted evaluations of the Company’s
disclosure controls and procedures. As defined under Sections 13a –
15(e) and 15d – 15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), the term “disclosure controls and procedures” means controls
and other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and
forms. Disclosure controls and procedures include without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer’s management,
including the Certifying Officer, to allow timely decisions regarding required
disclosure. Based on this evaluation, the Certifying Officer has
concluded that the Company’s disclosure controls and procedures were effective
to ensure that material information is recorded, processed, summarized and
reported by management of the Company on a timely basis in order to comply with
the Company’s disclosure obligations under the Exchange Act and the rules and
regulations promulgated thereunder.
Changes
in Internal Control over Financial Reporting
Further,
there were no changes in the Company’s internal control over financial reporting
during the Company’s last fiscal quarter that materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Our Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”).
20
Internal
control over financial reporting is defined in Rule 13a-15(f) promulgated under
the Exchange Act as a process designed by, or under the supervision of, our CEO
and CFO and effected by our board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition or disposition of our assets that could have a
material effect on the financial
statements.
|
Readers
are cautioned that internal control over financial reporting, no matter how well
designed, has inherent limitations and may not prevent or detect misstatements.
Therefore, even effective internal control over financial reporting can only
provide reasonable assurance with respect to the financial statement preparation
and presentation.
Our
management, under the supervision and with the participation of our CEO and CFO,
has evaluated the effectiveness of our disclosure controls and procedures as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the
period covered by this Report based upon the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on such evaluation, our management has made an
assessment that our internal control over financial reporting is effective as of
December 31, 2007.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by
the Company’s independent registered public accounting firm due to a transition
period established by the rules of the Securities and Exchange Commission that
permit the Company to provide only managment's report in this annual
report
| Item 9B. | OTHER INFORMATION. |
None.
The
information with respect to directors and executive officers required under this
item is incorporated by reference to the applicable information set forth in our
Proxy Statement for our 2008 Annual Meeting of Shareholders.
The
information required under this item is incorporated by reference to the
applicable information in our Proxy Statement for our 2008 Annual Meeting of
Shareholders.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
The
information required under this item is incorporated by reference to the
applicable information in our Proxy Statement for our 2008 Annual Meeting of
Shareholders.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
|
The
information required under this item is incorporated by reference to the
applicable information in our Proxy Statement for our 2008 Annual Meeting of
Shareholders.
21
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
The
information required under this item is incorporated by reference to the
applicable information in our Proxy Statement for our 2008 Annual Meeting of
Shareholders.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
|
The
Company hereby furnishes the exhibits listed on the attached exhibit
index. Exhibits, which are incorporated herein by reference, may be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1580, Washington, D.C. 20549. Copies of such material may be
obtained by mail from the Public Reference Section of the SEC at 100 F Street,
N.E., Washington, D.C. 20549, at prescribed rates. The SEC also
maintains a website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC at
the address “http://www.sec.gov”.
22
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC.
By: /s/
James E Rouse
James E.
Rouse,
President and Chief Executive
Officer
March 31, 2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Capacity
|
Date
|
||
|
/s/
James E. Rouse
|
President,
Chief Executive Officer and
|
March
31, 2008
|
||
|
James
E. Rouse
/s/
David A. Garrison
|
Director
(Principal Executive Officer)
Executive
Vice President of Finance
and
Chief Financial Officer
|
March
31, 2008
|
||
|
David
A. Garrison
/s/
E. P. Marinos
|
(Principal
Financial and Accounting Officer)
Chairman
of the Board
|
March
31, 2008
|
||
|
E.
P. Marinos
/s/
Julius Tabin
|
Director
|
March
31, 2008
|
||
|
Julius
Tabin
/s/
Paul F. Walter
|
Director
|
March
31, 2008
|
||
|
Paul
F. Walter
/s/
Jason R. Chambers
|
Director
|
March
31, 2008
|
||
|
Jason
R. Chambers
|
||||
23
Arrhythmia
Research Technology, Inc.
And
Subsidiary
Contents
F-1
To the
Board of Directors and the Shareholders of
Arrhythmia
Research Technology, Inc.
Fitchburg, Massachusetts
We have
audited the accompanying consolidated balance sheets of Arrhythmia Research
Technology, Inc. and Subsidiary as of December 31, 2007 and 2006, and the
related consolidated statements of income, changes in shareholders’ equity and
cash flows for the years then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Arrhythmia Research
Technology, Inc. and Subsidiary as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/
Carlin, Charron & Rosen LLP
Westborough,
Massachusetts
March 31,
2008
F-2
and
Subsidiary
Consolidated
Balance Sheets
|
December
31,
|
2007
|
2006
|
||||||
|
Assets
|
||||||||
| Current assets: | ||||||||
|
Cash
and cash equivalents
|
$ | 1,684,411 | $ | 2,065,645 | ||||
|
Trade accounts receivable, net of
allowance
for doubtful accounts
of $49,800 and $29,800
|
2,759,491 | 2,857,937 | ||||||
|
Inventories (Note
3)
|
3,001,520 | 2,868,292 | ||||||
|
Deferred income taxes (Note
6)
|
46,000 | 57,000 | ||||||
|
Deposits, prepaid expenses and
other current assets
|
926,970 | 476,153 | ||||||
|
Total current
assets
|
8,418,392 | 8,325,027 | ||||||
|
Property, plant and equipment,
net (Note 4)
|
7,610,258 | 6,045,736 | ||||||
|
Goodwill (Note
2)
|
1,564,966 | 1,564,966 | ||||||
|
Other
intangible assets, net
|
221,482 | 310,802 | ||||||
|
Deferred income taxes
(Note 6)
|
- | 70,000 | ||||||
|
Other
assets
|
24,785 | 87,349 | ||||||
|
Total assets
|
$ | 17,839,883 | $ | 16,403,880 | ||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
F-3
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Consolidated
Balance Sheets
(Continued)
|
December
31,
|
2007
|
2006
|
||||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
| Current liabilities: | ||||||||
|
Accounts
payable
|
$ | 633,413 | $ | 1,347,464 | ||||
|
Accrued expenses
|
352,194 | 414,739 | ||||||
|
Current portion of acquisition
note payable (Note 2)
|
134,083 | 61,633 | ||||||
|
Current note
payable
|
735,655 | - | ||||||
|
Total current
liabilities
|
1,855,345 | 1,823,836 | ||||||
| Long term liabilities: | ||||||||
|
Long
term payables
|
- | 25,836 | ||||||
|
Acquisition note payable, net of
current portion
|
- | 134,083 | ||||||
|
Long term deferred tax
liability
|
139,000 | - | ||||||
|
Total long term
liabilities
|
139,000 | 159,919 | ||||||
|
Total liabilities
|
1,994,345 | 1,983,755 | ||||||
|
Commitments and
contingencies (Note 8):
|
||||||||
|
Shareholders’ equity
(Notes 7 and 11):
|
||||||||
|
Common stock, $.01 par value;
10,000,000 shares authorized;
3,926,491 issued, 2,711,680 and
2,705,680 outstanding respectively
|
39,265 | 39,265 | ||||||
|
Additional
paid-in-capital
|
10,143,339 | 10,021,417 | ||||||
|
Treasury stock at cost, 1,214,811
and 1,220,811 shares respectively
|
(3,326,579 | ) | (3,343,007 | ) | ||||
|
Retained earnings
|
8,989,513 | 7,702,450 | ||||||
|
Total shareholders’
equity
|
15,845,538 | 14,420,125 | ||||||
|
Total liabilities and
shareholders’ equity
|
$ | 17,839,883 | $ | 16,403,880 | ||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
F-4
and
Subsidiary
Consolidated
Statements of Income
|
Years
ended December 31,
|
2007
|
2006
|
||||||
|
Net
sales (Note 12)
|
$ | 19,487,762 | $ | 19,318,106 | ||||
|
Cost
of sales
|
14,709,035 | 13,550,523 | ||||||
|
Gross profit
|
4,778,727 | 5,767,583 | ||||||
|
Selling
and marketing
|
764,021 | 617,140 | ||||||
|
General
and administrative
|
2,131,694 | 1,869,603 | ||||||
|
Research
and development
|
112,472 | 64,362 | ||||||
|
Income from
operations
|
1,770,540 | 3,216,478 | ||||||
|
Other
income (expense):
|
||||||||
|
Interest expense
|
(21,188 | ) | (537 | ) | ||||
|
Other income
|
27,711 | 45,478 | ||||||
|
Total other
income
|
6,523 | 44,941 | ||||||
|
Income
before income taxes
|
1,777,063 | 3,261,419 | ||||||
|
Income tax provision
(Note 6)
|
490,000 | 1,097,000 | ||||||
|
Net
income
|
$ | 1,287,063 | $ | 2,164,419 | ||||
|
Earnings per share (Note
2):
|
||||||||
|
Basic
|
$ | 0.47 | $ | 0.81 | ||||
|
Diluted
|
$ | 0.47 | $ | 0.80 | ||||
|
Cash
dividend paid per share:
|
$ | 0.00 | $ | 0.06 | ||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
F-5
and
Subsidiary
Consolidated
Statements of Changes in Shareholder’s Equity
(Notes 1
and 7)
|
Common
Stock
|
Additional
|
Treasury
|
Retained
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Paid-in
Capital
|
Stock
|
Earnings
|
Total
|
|||||||||||||||||||
|
December
31, 2005
|
3,926,491 | $ | 39,265 | $ | 9,731,469 | $ | (3,451,120 | ) | $ | 5,698,003 | $ | 12,017,617 | ||||||||||||
|
Share based
compensation
|
10,813 | 10,813 | ||||||||||||||||||||||
|
Tax benefit from exercise of
stock options
|
63,628 | 63,628 | ||||||||||||||||||||||
|
Stock issued with exercise of
stock options
|
107,791 | 95,829 | 203,620 | |||||||||||||||||||||
|
Stock issued in acquisition
(4,486 shares)
|
107,716 | 12,284 | 120,000 | |||||||||||||||||||||
|
Cash dividends ($.06 per
share)
|
(159,972 | ) | (159,972 | ) | ||||||||||||||||||||
|
Net income
|
2,164,419 | 2,164,419 | ||||||||||||||||||||||
|
December
31, 2006
|
3,926,491 | $ | 39,265 | 10,021,417 | (3,343,007 | ) | 7,702,450 | 14,420,125 | ||||||||||||||||
|
Share based
compensation
|
45,641 | 45,641 | ||||||||||||||||||||||
|
Tax benefit from exercise of
stock options
|
33,549 | 33,549 | ||||||||||||||||||||||
|
Stock issued with exercise of
stock options
|
42,732 | 16,428 | 59,160 | |||||||||||||||||||||
|
Net income
|
1,287,063 | 1,287,063 | ||||||||||||||||||||||
|
December
31, 2007
|
3,926,491 | $ | 39,265 | 10,143,339 | (3,326,579 | ) | 8,989,513 | 15,845,538 | ||||||||||||||||
See
accompanying notes to consolidated financial statements.
F-6
and
Subsidiary
Consolidated
Statements of Cash Flows
(Note
9)
|
Years
ended December 31,
|
2007
|
2006
|
||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
|
$ | 1,287,063 | $ | 2,164,419 | ||||
|
Adjustments to reconcile net
income to net cash provided
by operating
activities, net of effects of acquisition:
|
||||||||
|
Depreciation and
amortization
|
1,148,463 | 847,714 | ||||||
|
Provision for doubtful
accounts
|
20,000 | 11,236 | ||||||
|
Deferred income tax
provision
|
220,000 | 53,000 | ||||||
|
Share based
compensation
|
45,641 | 10,813 | ||||||
|
Changes in operating assets and
liabilities:
|
||||||||
|
Trade accounts
receivable
|
78,446 | (667,499 | ) | |||||
|
Inventories
|
(133,228 | ) | (1,072,207 | ) | ||||
|
Deposits, prepaid expenses and
other assets
|
(391,948 | ) | (103,772 | ) | ||||
|
Accounts payable and accrued
expenses
|
(802,432 | ) | 873,200 | |||||
|
Net cash provided by operating
activities
|
1,472,005 | 2,116,904 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Capital expenditures, net of
disposals
|
(1,884,315 | ) | (1,710,219 | ) | ||||
|
Cash paid for
acquisition
|
- | (380,000 | ) | |||||
|
Net cash used in investing
activities
|
(1,884,315 | ) | (2,090,219 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Payments to notes
payable
|
(61,633 | ) | - | |||||
|
Cash dividend paid
|
- | (160,111 | ) | |||||
|
Proceeds from exercise of stock
options
|
59,160 | 203,620 | ||||||
|
Tax benefit from exercise of stock
options
|
33,549 | 63,628 | ||||||
|
Net cash provided by financing
activities
|
31,076 | 107,137 | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(381,234 | ) | 133,822 | |||||
|
Cash and cash
equivalents, beginning of year
|
2,065,645 | 1,931,823 | ||||||
|
Cash and cash
equivalents, end of year
|
$ | 1,684,411 | $ | 2,065,645 | ||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
1. Description
of Business
Arrhythmia
Research Technology, Inc. (“ART”) is engaged in the licensing of medical
software, which acquires data and analyzes electrical impulses of the heart to
detect and aid in the treatment of potentially lethal
arrhythmias. Micron Products, Inc. (“Micron”), a wholly owned
subsidiary, is the primary source of consolidated revenues. Micron
manufactures disposable electrode sensors used as a component part in the
manufacture of integrated disposable electro-physiological
sensors. These disposable medical devices are used world wide in the
monitoring of electric signals in various medical
applications. Micron has expanded into custom plastic injection
molded products and product life cycle management. Revenues in this
sector are primarily custom injection molding, and end-to-end product life cycle
management through a comprehensive portfolio of value-added services such as
design, engineering, prototyping, manufacturing, machining, assembly and
packaging.
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
Recognition
The
Company recognizes revenue upon product shipment, provided that there exists
persuasive evidence of an arrangement, the fee is fixed or determinable, and
collectability of the related receivable is reasonably assured.
Financing
Customer Purchased Tooling
In order
to lessen the impact of the initial cost of a custom mold, Micron provides a
tooling financing package for select customers. The cost of the tool
is charged in conjunction with the product shipments over the first 3 or 4 years
of the agreed upon purchasing program. The customer agrees to pay for
the tool in full upon any delay or termination in the program. The
income is recognized utilizing the direct financing method.
Cash
and Cash Equivalents
Cash and
cash equivalents consist of cash on hand and on deposit in high quality
financial institutions. The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Inventories
Inventories
are stated at the lower of average cost or market. Silver is
inventoried with approximately one month’s usage and is not re-priced as
inventory turns make the changes immaterial. Cost of inventories is
determined by the first-in, first-out method.
Concentration
of Credit Risk
Financial
instruments which potentially expose the Company to concentrations of credit
risk, as defined by Statement of Financial Accounting Standard (“SFAS”)
No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, consist primarily of trade accounts receivable and cash and cash
equivalents.
Accounts
receivable are customer obligations due under normal trade terms. A
large portion of Micron’s products are sold to large diversified medical and
defense product manufacturers. The Company does not generally require
collateral for its sales; however, the Company believes that its terms of sale
provide adequate protection against significant credit risk.
Senior
management regularly reviews accounts receivable to determine if any receivables
will potentially be uncollectible. The Company includes any accounts
receivable balances that are determined to be uncollectible, along with a
general reserve, in our overall allowance for doubtful accounts. After
all attempts to collect a receivable have failed, the receivable is written off
against the allowance. Based on the information available to us,
management believes the allowance for doubtful accounts as of December 31, 2007
is adequate. However, actual write offs might exceed the recorded
allowance.
F-8
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Notes
to Consolidated Financial Statements
2. Accounting
Policies (Continued)
Concentration
of Credit Risk (Continued)
It is the
Company’s policy to place its cash and cash equivalents in high quality
financial institutions. The Company does not believe significant
credit risk exists above federally insured limits with respect to these
institutions.
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
The
Company accounts for goodwill and intangibles in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that companies test goodwill
for impairment at least annually. In addition, SFAS No. 142
requires that the Company identify reporting units for the purpose of assessing
potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidelines in SFAS No. 142. SFAS No. 142 is
required to be applied to all goodwill and other intangible assets regardless of
when those assets were initially recognized.
There was
no impairment to goodwill as of first quarter of 2007 and no indicators
have arisen to require the Company to review goodwill in the interim
period. The Company performs its annual impairment testing for the
goodwill valuation during the first quarter of the fiscal year.
Long-Lived
Assets
The
Company accounts for long lived assets in accordance to the
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. None of the assets was deemed to be impaired as of December
31, 2007.
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 bases of assets and
liabilities using tax rates in effect for the year in which the differences are
expected to reverse.
In
accordance with FIN 48 we recognize the benefits of a tax position if that
position is more likely than not of being sustained on audit, based on the
technical merit of the position. Management believes it be more
likely than not that the Company can sustain management’s tax positions on
audit.
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
The
carrying amount reported in the balance sheets for cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximate their
fair value due to the immediate or short-term maturity of such
instruments.
F-9
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Notes
to Consolidated Financial Statements
|
|
2.
|
Accounting Policies (Continued)
|
Earnings
Per Share Data
The
Company follows the provisions of 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 earnings per share is
similar to the computation of basic earnings per share except that the
denominator is increased to include the average number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. In addition, the numerator is adjusted for any
changes in income that would result from the assumed conversions of those
potential shares.
Basic and
diluted EPS computations are as follows:
|
Years
ended December 31,
|
2007
|
2006
|
||||||
|
Net
income available to common shareholders
|
$ | 1,287,063 | $ | 2,164,419 | ||||
|
Weighted
average common shares outstanding
|
2,710,403 | 2,669,497 | ||||||
|
Basic
EPS
|
$ | 0.47 | $ | 0.81 | ||||
|
Diluted
EPS:
|
||||||||
|
Net income available to common
shareholders
|
$ | 1,287,063 | $ | 2,164,419 | ||||
|
Weighted average common shares
outstanding, basic
|
2,710,403 | 2,669,497 | ||||||
|
Assumed conversion of net common
shares
issuable
under stock option plans
|
49,903 | 38,237 | ||||||
|
Weighted average common and
common
equivalent
shares outstanding, diluted
|
2,760,306 | 2,707,734 | ||||||
|
Diluted
EPS
|
$ | 0.47 | $ | 0.80 | ||||
Stock-Based
Compensation
The
Company accounts for share based compensation under the provisions of
SFAS No. 123(R), Share-Based Payment, which establishes accounting for
equity instruments exchanged for employee services. Under
SFAS No. 123(R), share-based compensation cost is measured at the
grant date, based on the fair value of the award, and is recognized as an
expense over the employee’s requisite service period (generally the vesting
period of the equity grant). Prior to January 1, 2006, the Company
accounted for share-based compensation to employees in accordance with APB No.
25, Accounting for Stock Issued to Employees and related
interpretations. The Company also followed the disclosure
requirements of SFAS 123, Accounting for Stock-Based
Compensation. Therefore, no stock-based employee compensation expense
had been recorded in connection with the issuance of employee and director stock
options as all stock options granted under the plans were fixed awards and had
an exercise price equal to the market value of the Company's common stock
at the time of the grant.
Comprehensive
Income
The
Company follows the provisions of SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and display of
comprehensive income, its components, and accumulated
balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. The Company did not have any components of comprehensive
income, exclusive of net income, for the years ended December 31, 2007 and
2006.
Preferred
Stock
The
Company has 2,000,000 shares of $1 par value preferred stock
authorized. No shares have been issued.
F-10
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Notes
to Consolidated Financial Statements
|
|
2.
|
Accounting Policies (Continued)
|
Industry
Segments
The
Company follows the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information, which requires reporting of
selected information about operating segments in interim and annual financial
statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas, and major
customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Shipping
and Handling Costs
Shipping
and handling costs are classified as a cost of sales in the consolidated
statements of income. The NEM and MIT divisions as a normal course of
business charge their customer base for shipping and handling, and therefore
classify the amounts billed as revenue in the consolidated statements of
income.
Research
and Development
Research
and development expenses include costs directly attributable to the conduct of
research and development programs primarily related to the development of our
software products and improving the efficiency and capabilities of our
manufacturing processes. Such costs include salaries, payroll taxes,
employee benefit costs, materials, supplies, depreciation on research equipment,
and services provided by outside contractors. All costs associated
with research and development are expensed as incurred.
Business
Combinations (Leominster Tool Co., Inc.)
On
December 27, 2006, Micron completed the purchase of substantially all of the
operating assets of privately-held Leominster Tool Co., Inc. ("LTD") of
Leominster, Massachusetts. Micron paid LTD approximately $380,000 in
cash, $120,000 in ART common stock, and recorded a note payable of approximately
$200,000 payable in monthly installments of $6,290 including interest of 8.25%
through December 2009. Micron funded the cash portion of the purchase
price out of working capital. At closing 4,486 treasury shares were
issued to cover the $120,000 stock payment. The purchase price has
been allocated to net assets acquired based on their estimated fair
values. Currently, it is a division of the Company’s wholly owned
subsidiary Micron.
Recent
accounting pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. SFAS No. 157 prescribes a single
definition of fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The Company does not believe
the adoption of SFAS No. 157 will have a material impact on its
financial condition or results of operations. SFAS No. 157
is effective for the Company’s interim reporting period beginning January 1,
2008.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No.
115”. SFAS No. 159 permits an entity to elect fair
value as the initial and subsequent measurement attribute for many financial
assets and liabilities. Entities electing the fair value option would
be required to recognize changes in fair value in earnings. Entities
electing the fair value option would also be required to distinguish, on the
face of the statement of financial position, the fair value of assets and
liabilities for which the fair value option has been elected and similar assets
and liabilities measured using another measurement attribute. The
Company does not believe the adoption of SFAS No. 159 will have a
material impact on its financial condition or results of
operations. SFAS No. 159 is effective for the Company’s
interim reporting period beginning January 1, 2008.
In
December 2007, the SEC issued SAB No. 110. SAB 110
allows for the continued use of a "simplified" method, as discussed in
SAB No. 107, in developing an estimate of expected term of "plain
vanilla" share options in accordance with SFAS 123 (revised
2004). Originally the staff stated in SAB 107 that it would not
expect a company to use the simplified method for share option grants after
December 31, 2007. Accordingly, the staff will continue to
accept, under certain circumstances, the use of the simplified method beyond
December 31, 2007. The Company will evaluate the use of the
simplified method for determining the value of options granted after
December 31, 2007.
F-11
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Notes
to Consolidated Financial Statements
|
|
2.
|
Accounting Policies (Continued)
|
Recent
accounting pronouncements (Continued)
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations”. SFAS No. 141(R) establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquiree. SFAS No. 141(R) also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The provisions of SFAS No. 141(R) are applicable to
business combinations consummated on or after December 15, 2008 with
early adoption prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements - an amendment of ARB No.
51”. SFAS No. 160 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary for the
deconsolidation of a subsidiary. SFAS No. 160 is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim statements within those fiscal
years. The Company does not currently have any noncontrolling
interests.
3. Inventories
Inventories
consist of the following:
|
December
31,
|
2007
|
2006
|
||||||
|
Raw
materials
|
$ | 872,758 | $ | 1,171,803 | ||||
|
Work-in-process
|
538,309 | 525,515 | ||||||
|
Finished
goods
|
1,590,453 | 1,170,974 | ||||||
|
Total
|
$ | 3,001,520 | $ | 2,868,292 | ||||
|
|
4.
|
Property,
Plant and Equipment, Net
|
Property,
plant and equipment consist of the following:
|
December
31,
|
Asset
Lives
|
2007
|
2006
|
||||||
|
Machinery
and equipment
|
5
to 15 years
|
$ | 10,049,906 | $ | 7,921,821 | ||||
|
Equipment
held for lease
|
10
years
|
166,003 | 166,003 | ||||||
|
Building
and improvements
|
20
years
|
3,667,011 | 3,591,347 | ||||||
|
Vehicles
|
3
to 5 years
|
158,908 | 118,183 | ||||||
|
Furniture,
fixtures, computers and software
|
3
to 5 years
|
1,163,380 | 552,632 | ||||||
|
Land
|
202,492 | - | |||||||
|
Construction
in progress
|
75,445 | 545,555 | |||||||
|
Total
property, plant and equipment
|
15,483,145 | 12,895,541 | |||||||
|
Less:
accumulated depreciation
|
(7,872,887 | ) | (6,849,805 | ) | |||||
|
Property,
plant and equipment, net
|
$ | 7,610,258 | $ | 6,045,736 | |||||
The
Company leases attaching machines to customers 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 $142,950 and
$132,798 at December 31, 2007 and 2006, respectively. The Company
sold two leased machines to its customers in 2006 and none in 2007.
F-12
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Notes
to Consolidated Financial Statements
|
|
5.
|
Debt
|
The
Company has a note payable resulting from the acquisition of Leominster Tool Co.
Inc. of approximately $200,000 with a balance of $134,083 at December 31,
2007. This note is payable in monthly installments of $6,290
including interest of 8.25% through December 2009. This note was paid
in full during the first three months of 2008.
The
Company has a one year term note secured by equipment for a maximum of
$813,000. The loan was drawn down by $383,000 for equipment delivered
and installed in October. A second payment of $383,000 was made in
January 2008 for this equipment. The loan has a fixed interest rate
of 6.75%, payments amortized over 7 years with a balloon payment for the
remaining balance at the end of one year.
The
Company has an unsecured $1,000,000 renewable credit facility which provides for
borrowings up to 80% of eligible accounts receivable plus 50% of raw material
and finished goods inventories up to a $300,000 maximum. This
facility has no borrowing base charge. There are no outstanding
borrowings on the line of credit at December 31, 2007 and 2006.
The
agreement contains covenants that apply upon drawing on the line. The covenants
relate to various matters including notice prior to executing further borrowings
and security interests, merger or consolidation, acquisitions, guarantees, sales
of assets other than in the normal course of business, leasing, changes in
ownership and payment of dividends.
|
|
6.
|
Income
Taxes
|
The
income tax provision consists of the following:
|
Years
Ended December 31,
|
2007
|
2006
|
||||||
| Current: | ||||||||
|
Federal
|
$ | 220,000 | $ | 883,000 | ||||
|
State
|
50,000 | 161,000 | ||||||
| 270,000 | 1,044,000 | |||||||
| Deferred: | ||||||||
|
Federal
|
189,000 | 58,000 | ||||||
|
State
|
31,000 | (5,000 | ) | |||||
| 220,000 | 53,000 | |||||||
|
Total
income tax provision
|
$ | 490,000 | $ | 1,097,000 | ||||
The
components of deferred income taxes are as follows:
|
December
31,
|
2007
|
2006
|
||||||
| Deferred income taxes: | ||||||||
|
Inventories
|
$ | 7,000 | $ | 32,000 | ||||
|
Property, plant and
equipment
|
(199,000 | ) | (34,000 | ) | ||||
|
Patents and
intangibles
|
60,000 | 104,000 | ||||||
|
Other current
|
3,600 | 25,000 | ||||||
|
Unused Massachusetts tax
credits
|
35,400 | - | ||||||
|
Net operating loss
carryforwards
|
- | - | ||||||
|
Deferred
income taxes
|
$ | (93,000 | ) | $ | 127,000 | |||
The
Company files a consolidated federal income tax return. The actual
income tax provision differs from the federal statutory income tax rate (34%) as
follows:
|
Years
Ended December 31,
|
2007
|
2006
|
||||||
|
Tax
provision computed at statutory rate
|
$ | 604,000 | $ | 1,109,000 | ||||
| Increases (reductions) due to: | ||||||||
|
State
income taxes, net of federal benefit
|
111,000 | 204,000 | ||||||
|
Tax credits
|
(213,000 | ) | (120,000 | ) | ||||
|
Other
|
(12,000 | ) | (96,000 | ) | ||||
|
Income
tax expense
|
$ | 490,000 | $ | 1,097,000 | ||||
F-13
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Notes to Consolidated
Financial Statements
7. Employee
Benefit Plans
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 90% of their eligible
compensation to the maximum allowable by the IRS. The Company’s
matching contributions are at the discretion of the Company. The
Company matching contributions in 2007 and 2006 were $28,853 and $20,843,
respectively.
On
December 14, 2007, the Board of Directors, after a recommendation from
management and approval by the Compensation Committee, granted 107,500 incentive
stock options to vest over five years with an effective grant date of January 2,
2008 priced at the average closing price for the prior ten trading
days. Forty percent of the options were granted to non-executive
management. These options were granted from the shareholder approved
2001 stock option plan described in Note 11.
On April
28, 2005, the Company’s Board of Directors adopted the 2005 Stock Award
Plan. The Board’s objective in adopting the Plan, based on the
recommendation of management and approved by the Compensation Committee, was to
assist the Company in attracting and retaining the services of certain
employees, directors, and consultants deemed to be key and to secure the
benefits of the incentive inherent in ownership of the Company’s
securities. An aggregate of 100,000 shares were available for
issuance to employees, directors, and consultants. No awards have
been granted under the Stock Award Plan.
8. Commitments
and Contingencies
Legal
Matters
The
Company is from time to time subject to legal proceedings, threats of legal
action and claims which arise in the ordinary course of our
business. Management believes the resolution of these matters will
not have a material adverse effect on our results of operations or financial
condition.
Environmental
Groundwater
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 retain an independent environmental consulting firm to
constantly review, monitor and upgrade its air and waste water treatment
activities. As a result, Micron believes that the operations of its
manufacturing facility are in compliance with currently applicable safety,
health and environmental laws and regulations.
Based on
the Company’s analyses and subject to the difficulty in estimating these future
costs, the Company does not expect future costs in connection with environmental
matters to have a material adverse effect on its financial condition, result of
operations or liquidity. To further guard against any future
contingencies, the Company has purchased environmental release liability
insurance to protect against a catastrophic loss which releases hazardous
materials into the environment.
Employment
Agreements
The
Company has employment agreements with trhee executives extending through June
3, 2008, October 5, 2011 and January 1, 2012. The
agreements provide for a base compensation and certain other
benefits. The agreements also contain other terms and conditions of
employment, including termination payments under certain
circumstances.
Operating
Leases
The
Company leases vehicles and equipment under non-cancelable lease
arrangements. Lease expense under all operating leases was
approximately $12,400 in 2007 and 2006.
Future
minimum operating lease payments as of December 31, 2007 are approximately as
follows:
|
Year
|
Amount
|
|||
|
2008
|
$ | 10,700 | ||
|
2009
|
8,100 | |||
|
2010
|
6,700 | |||
|
Total
|
$ | 25,500 | ||
F-14
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Notes
to Consolidated Financial Statements
9. Supplemental
Cash Flow Information
Cash paid
for income taxes and interest for the years ended December 31 are as
follows:
|
2007
|
2006
|
|||||||
|
Income
taxes
|
$ | 458,000 | $ | 890,000 | ||||
|
Interest
|
21,000 | - | ||||||
At
December 31, 2007 the Company has $1,118 of dividends payable.
The
acquisition of Leominster Tool Co. Inc. resulted in a note payable of $200,000
at December 31, 2006.
In 2006,
a total of $120,000 worth of treasury stock was issued in connection with the
acquisition of Leominster Tool Co., Inc.
An
additional capital expenditure of $765,000 made use of a term note and did
not require a cash outlay from the Company.
10. Related
Party Transactions
The
Company obtains legal services believed to be at arm’s length terms 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 $2,200 in 2006, and zero in 2007.
11. Stock
Options
The
Company accounts for its share based payments under the provisions of
SFAS No. 123(R), Share Based Payment, which
establishes accounting for equity instruments exchanged for employee
services. Under SFAS No. 123(R), share-based compensation
cost is measured at the grant date, based on the fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally
the vesting period of the equity grant). Prior to January 1, 2006,
the Company accounted for share-based compensation to employees in accordance
with APB No. 25, Accounting
for Stock Issued to Employees and related interpretations. The
Company also followed the disclosure requirements of SFAS No. 123,
Accounting for Stock Based
Compensation. Therefore, no stock-based employee compensation
expense had been recorded in connection with the issuance of employee and
director stock options as all stock options granted under the plans were fixed
awards and had an exercise price equal to the market value of our common stock
at the time of the grant.
For the
year ended December 31, 2007 and 2006, share-based compensation included in
general and administrative expenses amounted to $45,641 and $10,813,
respectively.
The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. Key assumptions used to estimate
the fair value of the stock options include the exercise price of the award, the
expected option term, the expected forfeiture rate, the expected volatility of
the Company’s stock over the option’s expected term, the risk free interest rate
over the option’s expected term, and the Company’s expected annual dividend
yield. The Company believes that the valuation technique and the
approach utilized to develop the underlying assumptions are appropriate in
calculating the fair values of the Company’s stock options for the year ended
December 31, 2007 and 2006. Estimates of fair values are not intended
to predict actual future events or the value ultimately realized by persons who
receive equity awards.
F-15
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Notes
to Consolidated Financial Statements
11. Stock
Options (Continued)
The fair
value of each option grant in 2007 and 2006 were estimated on the grant date
using the Black-Scholes option pricing model with the following
assumptions:
|
2007
|
2006
|
|
|
Expected
option term (1)
|
6
years
|
4.5 years
|
|
Expected
volatility factor (2)
|
43%
|
64%
|
|
Risk-free
interest rate (3)
|
5.5%
|
4.84%
|
|
Expected
annual dividend yield
|
0.44%
|
1.11%
|
|
(1)
|
The
option life was determined using the simplified method for estimated
expected option life, which qualifies as “plain-vanilla”
options.
|
|
(2)
|
The
stock volatility for each grant is determined based on the review of the
experience of the weighted average of historical daily price changes of
the Company’s common stock over the most recent year.
|
|
(3)
|
The
risk-free interest rate for periods equal to the expected term of the
share option is based on the U.S. Treasury yield curve in effect at the
time of grant.
|
Share-Based
Incentive Plan
At
December 31, 2007, the Company had one stock option plan that includes both
incentive and non-qualified stock options to be granted to certain eligible
employees, non-employee directors, or consultants. The maximum number
of shares reserved for issuance is 400,000 shares. The options
granted have six-year contractual terms and either vest immediately or vest
annually over a five-year term.
At
December 31, 2007, there were 220,000 shares available for future grants under
the above stock option plan.
The
following table sets forth the stock option transactions for the year ended
December 31, 2007:
|
Number
of
shares
|
Weighted
average
Exercise
Price
|
Weighted
average
remaining
contractual
term
|
Aggregate
Intrinsic
Value
|
||||||||
|
Outstanding
at December 31, 2006
|
113,000 | $ | 8.98 |
4.5
years
|
|
||||||
|
Granted
|
20,000 | 18.60 | |||||||||
|
Exercised
|
(6,000 | ) | 9.86 | ||||||||
|
Cancelled/expired
|
- | - | |||||||||
|
Outstanding
at December 31, 2007
|
127,000 | $ | 10.45 |
3.8
years
|
$ |
50,750
|
|||||
|
Exercisable
at end of year
|
94,000 | $ | 8.85 |
4.8
years
|
$ |
40,600
|
|||||
The
weighted average fair value of stock options granted during 2007 and 2006 was
$8.83 and $6.68, respectively.
During
the year ended December 31, 2007, the total intrinsic value of options exercised
(the difference between the market price and the price paid by the employee to
exercise the options) was $98,950 and the total amount of cash received from the
exercise of these options was $59,160. The actual tax benefit
realized for the tax deductions from options exercised totaled
$33,549. At December 31, 2007, the intrinsic value of the
exercisable options is $40,600.
During
the year ended December 31, 2006, the total intrinsic value of options exercised
(the difference between the market price and the price paid by the employee to
exercise the options) was $716,070 and the total amount of cash received from
the exercise of these options was $203,620. The actual tax benefit
realized for the tax deductions from options exercised totaled
$63,628. At December 31, 2006, the intrinsic value of the
exercisable options is $1,412,490.
F-16
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Notes
to Consolidated Financial Statements
11. Stock
Options (Continued)
The
following table sets forth the status of the Company’s non-vested options for
the year ended December 31, 2007:
|
Number
of
shares
|
Weighted
average
Fair
Value
|
|||||||
|
Non-vested
at December 31, 2006
|
20,000 |
$
|
3.67 | |||||
|
Granted
|
20,000 | 8.83 | ||||||
|
Vested (with an intrinsic
value
of $ 78,590)
|
(7,000 | ) | 2.01 | |||||
|
Cancelled/expired
|
- | - | ||||||
|
Non-vested
at December 31, 2007
|
33,000 | $ | 7.15 | |||||
The
following table presents the average price and contractual life information
about options outstanding and exercisable at December 31, 2007:
|
Exercise
Price
|
Number
of
Outstanding
Shares
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
Options
Currently
Exercisable
|
|||||||||||
|
$
|
4.85 |
25,000
|
1.58
|
20,000 | ||||||||||
| 9.86 |
72,000
|
3.97
|
72,000 | |||||||||||
| 12.42 |
10,000
|
4.59
|
2,000 | |||||||||||
| 14.10 |
10,000
|
5.43
|
- | |||||||||||
| 23.10 |
10,000
|
5.18
|
- | |||||||||||
As of
December 31, 2007, there was $184,291 of unrecognized compensation cost related
to non-vested share based compensation arrangements granted under the stock
option plan. This cost is expected to be recognized over a weighted
average period of 5.1 years.
As of
December 31, 2006, there was $66,432 of unrecognized compensation cost related
to non-vested share based compensation arrangements granted under the stock
option plan. This cost is expected to be recognized over a weighted
average period of 2.7 years.
12. Industry
and Geographic Segments
The
Company’s operations are classified into two business segments: medical
electrode components and plastic molding, and computerized medical
instruments.
The
following table shows sales, operating income (loss) and other financial
information by industry segment as of and for the years ended December 31,
2007 and 2006:
|
Year
ended December 31, 2007
|
Medical Electrode Components and Plastic Molding | Computerized Medical Instruments | Corporate | Consolidated | ||||||||||||
|
Sales
|
$ | 19,487,111 | $ | 651 | $ | - | $ | 19,487,762 | ||||||||
|
Operating
income (loss)
|
$ | 2,820,492 | $ | (73,959 | ) | $ | (975,994 | ) | $ | 1,770,540 | ||||||
|
Capital
Expenditures
|
$ | 2,242,530 | $ | - | $ | 395,105 | $ | 2,637,635 | ||||||||
|
Depreciation
and Amortization
|
$ | 1,128,708 | $ | - | $ | 19,755 | $ | 1,148,463 | ||||||||
|
Total
Assets at December 31, 2007
|
$ | 15,152,562 | $ | 338,052 | $ | 2,349,269 | $ | 17,839,883 | ||||||||
F-17
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Notes
to Consolidated Financial Statements
|
|
12.
|
Industry and Geographic
Segments (Continued)
|
|
Year
ended December 31, 2006
|
Medical
Electrode
Components
and
Plastic
Molding
|
Computerized
Medical Instruments
|
Corporate
|
Consolidated
|
|||||||||||||
|
Sales
|
$ | 19,318,106 | $ | - | $ | - | $ | 19,318,106 | |||||||||
|
Operating
income (loss)
|
$ | 3,772,268 | $ | (86,510 | ) | $ | (469,280 | ) | $ | 3,216,478 | |||||||
|
Capital
Expenditures
|
$ | 1,710,219 | $ | - | $ | - | $ | 1,710,219 | |||||||||
|
Depreciation
and Amortization
|
$ | 847,714 | $ | - | $ | - | $ | 847,714 | |||||||||
|
Total
Assets at December 31, 2006
|
$ | 14,010,668 | $ | 189,338 | $ | 2,203,874 | $ | 16,403,880 | |||||||||
The
following table sets forth the geographic distribution of the Company’s net
sales:
|
2007
|
2006
|
||||||||
|
United
States
|
$ | 10,824,992 | $ | 9,344,815 | |||||
|
Canada
|
5,426,042 | 5,816,071 | |||||||
|
Europe
|
2,496,012 | 3,415,235 | |||||||
|
Pacific
Rim
|
335,592
|
374,190 | |||||||
|
Other
|
405,124 | 367,795 | |||||||
|
Net
Sales
|
$ | 19,487,762 | $ | 19,318,106 | |||||
The
following table sets forth the percentage of net sales to significant customers
of the medical electrode and injection molded component segment in relation to
total segment sales:
|
Customers
|
2007
|
2006
|
|
A
|
27%
|
29%
|
|
B
|
25%
|
20%
|
13. Quarterly
Financial Data
|
(unaudited)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||
| 2007 | ||||||||||||||||
|
Net
Sales
|
$ | 5,009,276 | $ | 5,400,218 | $ | 4,457,688 | $ | 4,620,580 | ||||||||
|
Gross
Profit
|
1,062,929 | 1,269,025 | 1,254,395 | 1,192,378 | ||||||||||||
|
Net
Income
|
233,780 | 446,400 | 420,542 | 186,341 | ||||||||||||
|
Basic
Earnings per share
|
0.09 | 0.16 | 0.16 | 0.07 | ||||||||||||
| Diluted Earnings per share | 0.08 | 0.16 | 0.15 | 0.07 | ||||||||||||
| 2006 | ||||||||||||||||
|
Net
Sales
|
$ | 4,269,047 | $ | 4,656,360 | $ | 4,412,628 | $ | 5,980,071 | ||||||||
|
Gross
Profit
|
1,365,780 | 1,546,808 | 1,269,360 | 1,585,635 | ||||||||||||
|
Net
Income
|
521,006 | 577,469 | 509,975 | 555,969 | ||||||||||||
|
Basic
Earnings per share
|
0.20 | 0.22 | 0.19 | 0.21 | ||||||||||||
| Diluted Earnings per share | 0.19 | 0.21 | 0.19 | 0.20 | ||||||||||||
F-18
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
of Exhibit
|
Page
|
||
|
3.0
|
Articles
of Incorporation
|
(a)
|
||
|
3.1
|
Amended
and Restated By-laws
|
(c)
|
||
|
4.0
|
Form
of Certificate evidencing shares of the Company's Common
Stock.
|
(a)
|
||
|
4.6*
|
2001
Stock Option Plan
|
(b)
|
||
|
4.8*
|
2005
Stock Award
Plan
|
(e)
|
||
|
10.41
|
Asset
Purchase Agreement, dated May 7, 2004, between Micron Products, Inc. and
Shrewsbury Molders, Inc.
|
(d)
|
||
|
10.43*
|
Employment
agreement between James E. Rouse and the Company dated
December 26th, 2006.
|
(f)
|
||
|
10.44*
|
Employment
agreement between David A. Garrison and the Company dated
January 1, 2007.
|
(f)
|
||
|
10.45*
|
Employment agreement between Michael F. Nolan and the Company dated June 4, 2007. |
(g)
|
||
|
21.0
|
X-1
|
|||
|
23.1
|
X-2
|
|||
|
31.1
|
X-3
|
|||
|
31.2
|
X-4
|
|||
|
32.1
|
X-5
|
|||
|
32.2
|
X-6
|
|||
|
99.01
|
Press Release dated March 28, 2008 announcing its financial results for the year and quarter ended December 31, 2007 |
X-7
|
*
Indicates a management contract or compensatory plan required to be filed as an
exhibit.
|
(a)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-18 as filed
with the Commission in April 1988, Registration Statement No.
33-20945-FW.
|
|
(b)
|
Incorporated
by reference to the Company’s Form 10-K for fiscal year ended December 31,
2001 as filed with the Commission in March 2002.
|
|
(c)
|
Incorporated
by reference to the Company's Current Report on Form 8-K as filed
with the Commission in December 2007.
|
|
(d)
|
Incorporated
by reference to the Company’s Form 8-K as filed with the Commission in May
2004.
|
|
(e)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-8 as filed
with the Commission in December 2005, Registration Statement No.
333-130678.
|
|
(f)
|
Incorporated
by reference to the Company’s Form 10-KSB for fiscal year ended December
31, 2006, as filed with the Commission in March 2007.
|
|
(g)
|
Incorporated
by reference to the Company’s Form 10-QSB for the quarter ended June 30,
2007, as filed with the Commission in August 2007.
|