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,
2008
[ ] 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:
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Common
Stock, $.01 par value
(Title
of Each Class)
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NYSE
AMEX
(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 X
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. [ ]
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.
$14,254,890.
On March 21, 2009 there were 2,688,291
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, 2008. 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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Business
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Risk
Factors
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Properties
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Legal
Proceedings
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Submission
of Matters to a Vote of Security Holders
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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Selected
Financial Information
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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Quantitative
and Qualitative Disclosures about Market Risk
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Consolidated
Financial Statements and Supplementary Data
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
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Controls
and Procedures
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Other
Information
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Directors,
Executive Officers, and Corporate Governance
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Executive
Compensation
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Certain
Relationships and Related Transactions, and Director
Independence
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Principal
Accountant Fees and Services
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Exhibits
and Financial Statement Schedules
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Item
1. BUSINESS.
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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 Predictorâ
series. Rather than having a direct sales force, our current intent
is to market ART’s product through licensing with original equipment
manufacturers. There were no sales or licensing of the software in
2008 or 2007.
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 will seek to establish licensing contracts with original
equipment manufacturers for this product.
Sudden
cardiac death afflicts over 300,000 individuals in the United States each
year. Most sudden cardiac deaths are due to sustained ventricular
tachycardia (abnormally rapid heartbeat) or ventricular fibrillation (very fast,
completely irregular heartbeat). Ventricular Late Potentials 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.
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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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 |
| Figure 1: Schematic of Integrated ECG Electrode. |
Micron
is one 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
devices and equipment components, and other products for the consumer,
electronic, aerospace, and defense industries. The NEM division is
located along with Micron 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 10,000 level clean room was
constructed for precision injection molding. This manufacturing space
was fully operational in February 2007.
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 Leominster
Tool Division’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 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.
The
Leominster Tool Division (“LTD”), which was formed following the December 2006
purchase of substantially all of the operating assets of privately held
Leominster Tool Company, Inc., with a customer base in die casting, and
thermoplastic injection molding also vertically integrates the design,
manufacture, and repair of production injection molding tooling used by Micron,
NEM, and MIT. 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. In 2008, LTD was fully integrated
into the Fitchburg complex.
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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2008
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%
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2007
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%
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Sensors
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$ | 9,398,287 |
42
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$ | 9,510,871 | 49 | ||||||||||
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Other
molded products
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2,574,301 | 11 | 3,161,497 | 16 | ||||||||||||
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Snaps
and snap machines
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203,562 | 1 | 130,385 | 1 | ||||||||||||
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Subassembly
and metal component manufacturing
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7,384,790 | 33 | 5,129,586 | 26 | ||||||||||||
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Injection
molding tooling
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1,478,970 | 7 | 1,094,281 | 6 | ||||||||||||
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Custom
manufactured metal medical devices
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1,186,435 | 5 | 234,843 | 1 | ||||||||||||
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Other
products
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255,874 | 1 | 226,299 | 1 | ||||||||||||
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Total
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$ | 22,482,219 | 100 | $ | 19,487,762 | 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 laboratories, and certain
stress procedures. Micron also manufactures the mating conductive
resin snaps, which replace traditional metal snap fasteners in the radio
translucent applications.
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.
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Other
Molded Products
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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 in the Micron molding facility increased
production flexibility, and dramatically expanded the capability to produce an
increased size and complexity of products. From consumable medical
products to medical equipment components, this division has decreased Micron’s
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.
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Snaps
and Snap Machines
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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 these snap
fastners for its customers who 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.
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Other
Products and Services
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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 production 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 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. The Company’s engineering and
mold designers work with 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 provides 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 climate controlled 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 as well
as high molecular weight polymers into unique customized products. No
two components are identical and require precision manufacturing verified by
complex computer controlled automated 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 space.
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 will seek to
establish licensing contracts with original equipment manufacturers for this
product.
GENERAL
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Customers
and Sales
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During
the year ended December 31, 2008, there were three major customers, each of
which accounted for over 10% of the Company’s sales and a loss of this base may
have a material adverse effect on results. The three largest
customers accounted for 27%, 17%, and 12% of sales in 2008 as compared to the
two largest customers at 27% and 25% of sales for the year ended December 31,
2007.
Micron
manufactures its sensors against purchase orders from electrode
manufacturers. The Company is aware of approximately 20 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
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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2008
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%
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2007
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%
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United
States
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$ | 13,290,098 |
59
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$ | 10,824,992 |
55
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Canada
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5,118,913 |
23
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5,426,042 |
28
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Europe
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3,091,326 |
14
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2,496,012 | 13 | ||||||||||||
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Pacific
Rim
|
426,764 |
2
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335,592 | 2 | ||||||||||||
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Other
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555,118 |
2
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405,124 | 2 | ||||||||||||
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Total
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$ | 22,482,219 |
100
|
$ | 19,487,762 | 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 help
offset the risk from fluctuations in the market price of silver, sensor
customers have generally been subject to a silver surcharge or discount based on
the market price of silver at the time of shipment. 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.
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Marketing
and Competition
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Micron
sells its sensors to large, sophisticated OEM manufacturers of disposable snap
type and radio translucent ECG electrodes who compete internationally in the
electrode market against other OEM manufacturers as well as manufacturers of
tab-type electrodes. The Company has one major domestic competitor in
the sensor market along with an increasing number of minor competitors
worldwide. The sensor and snap market is extremely price sensitive
and barriers to entry are relatively low. The Company competes with
respect to its sensor products on the basis of pricing, technical capabilities,
quality of service and ability to meet customer requirements. With no
import restrictions, the Company’s foreign competitors with excess capacity can
be expected to expand sales in the U.S. In addition, many of the
major OEM customers, although not currently manufacturing silver-silver chloride
sensors, have the ability to do so with modest investment.
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
licensing contracts with original equipment manufacturers for this
product.
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Product
Suppliers and Manufacturing
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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. 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.
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 has decreased significantly in
revenue as price pressure has forced metal snap customers to buy direct from the
manufacturer to remain competitive.
The
Company’s 116,000 square foot manufacturing facilities are ISO 9001
certified. Micron’s molding capacity ranges from 15 to 300 tons and
includes a class 10,000 clean room used for processes sensitive to environmental
particulates. In addition, this facility includes a new
climate-controlled space for the manufacture of metal medical devices utilizing
the latest in 5-axis CNC technology.
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Inventory
Requirements
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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 endeavor 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.
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Research
and Development
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ART's
research and development efforts focus primarily on maintaining the software
library in the SAECG product lines in a compatible platform. Although
base development work on Predictor 7 has been completed, the Company continues
to provide technical support to the National Institutes of Health’s research
project utilizing ART’s software. Included in this expense is
development work to verify the integrity of the analytical algorithms, and
improve the stability of the software on various platforms. For the
fiscal years ended December 31, 2008 and 2007, ART had research and
development expenses of approximately $69,779 and $38,900,
respectively.
In 2008
and 2007, Micron’s research and development efforts resulted in $250,261 and
$73,500 of expense. These efforts include the development of a unique
process to eliminate certain hazardous materials from our manufacturing
processes. The 2008 expense included $52,000 for equipment tested in
a process improvement project for the sensor product line as well as the
impairment of equipment used for final product
testing. .
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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, all 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 $4,288 in 2008, and $7,200 in
2007 in royalties associated with this patent. A provisional patent
application was filed for a new type of product for the electrode
industry.
|
|
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.
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
acquisition of equipment to eliminate a hazardous chemical from the process
further emphasizes the commitment to the reduction and elimination of certain
hazardous processes. Costs of compliance are not currently material
to the Company’s operation. 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, 2008, the Company had 81 full-time and 4 part-time
employees. 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.
|
|
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;
|
|
·
|
our
ability to increase sales of higher margin
products;
|
|
·
|
variations
in the mix of products sold;
|
|
·
|
the
level of demand for our products and services and those that we may
develop;
|
|
·
|
volatility
in commodity and energy prices and our ability to offset higher costs with
price increases;
|
|
·
|
variability
of customer delivery requirements;
|
|
·
|
continued
availability of supplies or materials used in manufacturing at competitive
prices;
|
|
·
|
the
amount and timing of investments in capital equipment, sales and
marketing, engineering and information technology resources;
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.
Large
OEM customers can change their demand on short notice, further adding to the
unpredictability of our quarterly sales and earnings.
Our
quarterly results have in the past and may in the future vary due to the lack of
dependable long-term demand forecasts from our larger OEM
customers. In addition to this risk, many of our OEM customers have
the right to change their demand schedule, either up or down, within a
relatively short time horizon. These changes may result in us
incurring additional working capital costs and causing increased manufacturing
expenses due to these short-term fluctuations. In particular, our
quarterly operating results have in the past fluctuated as a result of some of
the larger OEM customers changing their orders within a fiscal
quarter. Our expense levels and inventory, to a large extent, are
based on shipment expectations in the quarter. If sales levels fall
below these expectations, through a delay in orders or otherwise, operating
results are likely to be adversely affected. Although we have tried
to lessen our dependency on a few large customers, this is the nature of the OEM
customers that we serve and we can provide no assurance that we will be able to
materially alter this dependency in the immediate future, if at
all.
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 and
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 2008 and 2007, 56% and 52%, 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 might 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.
A
significant portion of our revenues are derived from the sale of a single
product line.
In fiscal
years 2008 and 2007, the Company derived 42% and 49%, 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.
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 and continuous
improvement of the system 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, 2008. 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.
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 2009, 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 current and future production needs through fiscal year
ending December 31, 2009.
|
|
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 2008.
|
|
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 NYSE AMEX, formerly 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 NYSE AMEX.
|
High
|
Low
|
|||||||
|
Year
Ended December 31, 2008
|
||||||||
|
1st
Quarter
|
$ | 9.30 | $ | 5.00 | ||||
|
2nd
Quarter
|
7.00 | 5.40 | ||||||
|
3rd
Quarter
|
6.03 | 3.25 | ||||||
|
4th
Quarter
|
3.98 | 1.70 | ||||||
|
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 | ||||||
As of
March 1, 2009 the number of record holders of ART's common stock is estimated to
be 300 not including beneficial holders of our common stock held in street
name.
|
|
Dividend
Policy
|
No
dividends were declared in 2008 or 2007. 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, 2008, 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
|
208,000 | $ 8.75 | 239,000 (1) | |||||||||
|
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
|
Total
|
208,000 | $ 8.75 | 239,000 (1) | |||||||||
|
(1)
|
Includes
139,000 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
|
On
October 3, 2008, our Board of Directors authorized the repurchase in the open
market from time to time of up to $650,000 of our common stock. The
following table presents our repurchases in the open market during the fourth
quarter of 2008:
|
Period
|
Total
number of shares purchased
|
Average
price paid per share
|
Total
number of shares purchased as part of a publicly announced
program
|
Approximate
dollar value of shares that may yet be purchased under the
program
|
||||||||||||
|
October
1-31, 2008
|
- | - | - | $ | 650,000 | |||||||||||
|
November
1-30, 2008
|
15,717 | $ | 2.21 | 15,717 | 615,250 | |||||||||||
|
December
1-31, 2008
|
7,672 | 2.51 | 7,672 | 596,025 | ||||||||||||
|
Totals
|
23,389 |
$
|
2.36 | 23,389 | $ | 596,025 | ||||||||||
The Company’s purchases are subject to
trading restrictions including average volume of shares traded over the previous
four weeks, which greatly reduced our ability to repurchase shares.
|
|
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 consoliated 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”.
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;
|
|
·
|
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 competitive
prices;
|
|
·
|
volatility
in commodity and energy prices and our ability to offset higher costs with
price increases;
|
|
·
|
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 NYSE AMEX 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 components,
devices and equipment primarily for the medical and defense
industries. The single largest category of revenue relates to
Micron’s production and sale of silver/silver chloride coated and conductive
resin sensors used as component parts 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 and
product life cycle management. This sector includes revenues from
both high volume precision injection molding and custom injection
molding. With the addition of a medical machining cell in 2007, the
Company began production of patient specific metal medical
devices. Management continues to identify complementary and/or
synergistic products, technologies and lines of business in an effort to broaden
the Company’s offerings.
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,
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
sales
|
100.0 | % | 100.0 | % | ||||
|
Cost of sales
|
81.0 | 75.5 | ||||||
|
Gross
profit
|
19.0 | 24.5 | ||||||
|
Selling and
marketing
|
3.5 | 3.9 | ||||||
|
General and
administrative
|
11.3 | 10.9 | ||||||
|
Research and
development
|
1.4 | 0.6 | ||||||
|
Other income,
net
|
0.0 | 0.0 | ||||||
|
Income
before income tax provision
|
2.8 | 9.1 | ||||||
|
Income tax
provision
|
1.2 | 2.5 | ||||||
|
Net
income
|
1.6 | % | 6.6 | % | ||||
Net
Sales
Net sales
for 2008 were $22,482,219, an increase of $2,994,457 or 15%, when compared to
the total net sales of $19,487,762 in 2007. 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 $112,584 as a result of price erosion and the
loss of market share in Canada and Europe. The complementary metal snap business
increased by $44,170. The growth of the NEM and MIT divisions
increased revenue by $2,928,841. Included in the increase is
$3,800,000 of sales related to imported forgings that are being phased out in
the first three months of 2009. Due to a change in customer demands,
the precision molded products from Micron Products decreased approximately
$72,981 when compared to 2007. LTD increased revenues by $118,137
excluding internal work for other divisions when compared to
2007. The remaining increase of $89,525 was related to the snap
assembly machine business and other miscellaneous revenues. Included
in the revenues detailed above, non-recurring engineering and tooling revenue
accounted for over $214,000 of the revenues in 2008 as compared to $380,000 in
2007. 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 2008 or 2007.
Cost
of Sales
Cost of
sales was $18,204,526 (81% of net sales) in 2008 compared to $14,709,035 (75.5%
of net sales) in 2007 an increase of $3,495,491 or 24%. 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. Silver pricing has generally
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 13% and 14% of total net sales for years ended December 31, 2008
and 2007, respectively. Energy costs for 2008 were $223,000 higher
than 2007. The stabilization of manufacturing costs continues to be a
major focus of management efforts. The forged products in the MIT
division had higher than expected costs as quality problems from a subcontractor
required extensive internal time and effort and freight costs exceeded
expectations for most of 2008. All current products, services and
programs, including those in development, are being evaluated for contribution
and value to our overall business strategy and results. Products,
services and programs that are underperforming from an overall contribution
standpoint and not expected to improve will be phased out or discontinued so
that the Company’s resources can be put to use in developing those of more
strategic value.
Selling
and Marketing
Selling
and marketing expenses increased to $781,456 (3.5% of net sales) in 2008 from
$764,021 (3.9% of net sales) in 2007, an increase of $17,435, or
2%. 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
continue to decrease as the Company begins to see positive results from the
increase in business development efforts.
General
and Administrative Expenses
General
and administrative expenses were $2,536,648 (11.3% of net sales) in 2008 as
compared to $2,131,694 (10.9% of net sales) in 2007, an increase of $404,954 or
19%. Included in the increase of expense for the year ended December
31, 2008 is a one time charge of $250,000 for costs associated with a terminated
acquisition following due diligence. During this same period, the
cost of additional administrative personnel of $32,000, and $71,000 of
additional depreciation for the technology upgrades in preparation for Section
404 of the Sarbanes-Oxley Act of 2002 (“SOX”) compliance increased the expense
when compared to the similar period in 2007. Although the delay by
the SEC for outside auditor attestation requirements of SOX Section 404 will
limit a previously expected increase in audit fees for 2008, the costs
associated with internal control documentation with outside consultants cost
$88,258 for the twelve months in 2008, and continues as planned. The
new enterprise resource planning solution continues to improve data collection
and reporting in all aspects of the business.
Research
and Development
Research
and development costs increased to $320,040 (1.4% of net sales) in 2008 from
$112,472 (0.6% of net sales) in 2007, an increase of $207,567, or
185%. For the fiscal years ended December 31, 2008, and
2007, ART had research and development expenses of approximately $69,779 and
$36,501, respectively. Expenses include the technical support of a
National Institutes of Health research project utilizing ART’s proprietary
Signal Averaged ECG products and patented algorithms. In 2008 and
2007, Micron’s research and development efforts resulted in $250,261 and $73,500
of expense. The expense is associated with continued work on
patentable technologies and process improvements on the Micron sensor and snap
product lines. The twelve months ended December 31, 2008 included
$52,000 of expense for equipment tested in a process improvement project with
the sensor product line as well as the impairment of equipment used for final
product testing.
Interest
Expense
Interest
expense was $46,230 in 2008 compared to $21,188 in 2007, an increase of $25,042,
or 118%. This expense is a result of the acquisition note and an
equipment loan. The Company does not incur an unused borrowing base
fee under our unsecured credit facility.
Other
Income
Other
income was $29,464 in 2008 compared to $27,711 in 2007, an increase of $1,753,
or 6%. The majority of other income was bank interest of $29,861 and
$34,299, in 2008 and 2007, 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 42% and 28%
in 2008 and 2007, respectively. The effective rates in 2007 were
lower than the statutory rates primarily due to the reductions in tax from tax
credits. In 2007, the Company utilized all remaining 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, 2008, 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 2008.
Earnings
Per Share
The basic
earnings per share was $0.13 in 2008 as compared to $0.47 in 2007, a decrease of
$0.34, or 72%. The increase in expenses described above had a direct
impact to the earnings per share when comparing 2008 to 2007. The
decrease in earnings per share for 2008 includes non-recurring charges totaling
$302,000, related to an acquisition and research and development
activities. This charge, net of tax, decreased basic earnings per
share for 2008 by $0.07.
Off-Balance
Sheet Arrangements
The
Company does not have any off balance sheet arrangements.
Liquidity
and Capital Resources
Working
capital was $7,440,721 as of December 31, 2008 as compared to $6,454,847 as of
December 31, 2007, as restated. Operating results produced positive
cash flows of $1,937,379 of which $1,015,702 was spent on capital asset
investment. Cash and cash equivalents were $2,320,467 and $1,684,411
at December 31, 2008, and 2007, respectively. Substantially all of
these funds are invested in fixed rate bank instruments that are highly
liquid.
Inventories
increased to $3,727,492 at the end of 2008, an increase of $725,972 from the end
of 2007. The increased inventory was the result of raw material
requirements, the rising cost of silver and higher unit cost of resins
purchased. Several factors contributed to the increase in finished
goods inventory. The MIT division had product shipments in the first
week of 2009 which were built in 2008. In the NEM division, the
ability to produce in longer runs lowers the per unit cost of the product while
increasing the finished goods inventory. For one major Micron sensor
customer, larger inventories of particular sensors are held in finished goods in
an effort to decrease delivery time. The quantity of this sensor
inventory maintained has not materially changed, but the cost of silver has
increased resulting in higher inventory balances.
Net
capital equipment expenditures were $1,015,702 in 2008 as compared to $2,638,000
in 2007. In 2008, the majority of the expenditures were for the
acquisition of additional production machinery and equipment, including upgrades
in and replacement of existing machinery and tooling. A climate
controlled mold manufacturing space built for LTD and the addition of an
ultrasonic cleaning production line cost $306,000 and $55,000,
respectively. 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 SOX 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 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 2008 and
2007. 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 line of credit as
of December 31, 2008 and 2007. 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 2007. A second payment of $383,000 was made
in January of 2008 for this equipment. In the third quarter of 2008
the equipment note was extended for one year with a decrease in the fixed rate
from 6.75% to 6.5% per annum. The equipment note is amortized over 6
years with a balloon payment for the remaining balance at September 15,
2009.
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.
In
October 2008, the Company’s Board of Directors authorized the repurchase in the
open market from time to time of up to $650,000 of the Company’s outstanding
stock. An aggregate of 23,389 shares were purchased in the fourth
quarter under the program for an aggregate of $53,975.
Inflation
The
Company believes that inflation in the United States or international markets
has not had a significant effect on its results of operations except for the
impact of the increase in volatility of materials and energy prices particularly
the cost of silver.
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 was 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 was
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 continue the use of
the simplified method for determining the value of options granted as allowed by
SAB 110.
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 describes the significant accounting
policies used in the preparation of the consolidated financial
statements. Certain of these significant accounting policies are
considered to be critical accounting policies, as defined below.
A
critical accounting policy is defined as one that is both material to the
presentation of the Company’s financial statements and requires management to
make difficult, subjective or complex judgments that could have a material
effect on the Company’s financial condition and results of
operations. Specifically, critical accounting estimates have the
following attributes: 1) the Company is required to make assumptions about
matters that are highly uncertain at the time of the estimate; and 2) different
estimates the Company could reasonably have used, or changes in the estimate
that are reasonably likely to occur, would have a material effect on the
Company’s financial condition or results of operations.
Estimates
and assumptions about future events and their effects cannot be determined with
certainty. The Company bases its estimates on historical experience
and on various other assumptions believed to be applicable and reasonable under
the circumstances. These estimates may change as new events occur, as
additional information is obtained and as the Company’s operating environment
changes. These changes have historically been minor and have been
included in the consolidated financial statements as soon as they became
known. In addition, management is periodically faced with
uncertainties, the outcomes of which are not within its control and will not be
known for prolonged periods of time. These uncertainties are
discussed in the section 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.
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 management to be
commensurate with the risk inherent in its current business model.
|
|
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
|
Not Applicable
|
CONSOLIDATED
FINANCIAL STATEMENTS.
|
The
information required by this item may be found on pages F-1 through F-19 of this
Annual Report on Form 10-K.
|
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”).
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, 2008.
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 management’s report in this
annual report.
|
OTHER
INFORMATION.
|
None.
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CORPORATE
GOVERNANCE.
|
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 2009 Annual Meeting of Shareholders.
|
EXECUTIVE
COMPENSATION.
|
The
information required under this item is incorporated by reference to the
applicable information in our Proxy Statement for our 2009 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 2009 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 2009 Annual Meeting of
Shareholders.
|
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 2009 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”.
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 25, 2009
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 Director (Principal Executive
Officer)
|
March
25, 2009
|
||
|
James
E. Rouse
/s/
David A. Garrison
|
Executive Vice President of Finance and
Chief Financial Officer
|
March
25, 2009
|
||
|
David
A. Garrison
/s/
E. P. Marinos
|
(Principal
Financial and Accounting Officer)
Chairman
of the Board
|
March
25, 2009
|
||
|
E.
P. Marinos
/s/
Julius Tabin
|
Director
|
March
25, 2009
|
||
|
Julius
Tabin
/s/
Paul F. Walter
|
Director
|
March
25, 2009
|
||
|
Paul
F. Walter
/s/
Jason R. Chambers
|
Director
|
March
25, 2009
|
||
|
Jason
R. Chambers
|
||||
Arrhythmia
Research Technology, Inc.
And
Subsidiary
Contents
Consolidated
Financial Statements:
Balance
sheets
F-3, F-4
Notes to consolidated financial
statements F-8 to F-19
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, 2008 and 2007, 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, 2008 and 2007, 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/ CCR LLP
Westborough,
Massachusetts
March 25, 2009
Arrhythmia
Research Technology, Inc.
and
Subsidiary
|
December
31,
|
2008
|
2007
|
||||||
|
Restated
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
Cash and cash
equivalents
|
$ | 2,320,467 | $ | 1,684,411 | ||||
|
Trade accounts receivable, net of
allowance
for doubtful accounts
of $45,619 and $49,830
|
2,705,145 | 2,759,491 | ||||||
|
Inventories (Note
3)
|
3,727,492 | 3,001,520 | ||||||
|
Deferred income taxes (Note
6)
|
21,000 | 35,000 | ||||||
|
Prepaid tax
|
309,000 | 400,395 | ||||||
|
Deposits, prepaid expenses and
other current assets
|
392,209 | 429,375 | ||||||
|
Total current
assets
|
9,475,313 | 8,310,192 | ||||||
|
Property, plant and equipment,
net (Note 4)
|
7,305,278 | 7,610,258 | ||||||
|
Goodwill (Note
2)
|
1,564,966 | 1,564,966 | ||||||
|
Other
intangible assets, net
|
143,010 | 221,482 | ||||||
|
Other
assets
|
- | 24,785 | ||||||
|
Total assets
|
$ | 18,488,567 | $ | 17,731,683 | ||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
Arrhythmia
Research Technology, Inc.
and
Subsidiary
Consolidated
Balance Sheets
(Continued)
|
December
31,
|
2008
|
2007
|
||||||
|
Restated
|
||||||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Current
liabilities:
Accounts payable
|
$ | 1,106,974 | $ | 633,413 | ||||
|
Accrued expenses
|
289,527 | 352,194 | ||||||
|
Current portion of acquisition
note payable (Note 2)
|
- | 134,083 | ||||||
|
Current note
payable
|
638,091 | 735,655 | ||||||
|
Total current
liabilities
|
2,034,592 | 1,855,345 | ||||||
|
Long
term liabilities:
|
||||||||
|
Long term deferred tax liability
(Note 6)
|
315,500 | 145,500 | ||||||
|
Total long term
liabilities
|
315,500 | 145,500 | ||||||
|
Total liabilities
|
2,350,092 | 2,000,845 | ||||||
|
Commitments and
contingencies (Note 8):
|
||||||||
|
Shareholders’ equity
(Notes 7 and 10):
|
||||||||
|
Common stock, $.01 par value;
10,000,000 shares authorized;
3,926,491 issued, 2,688,291 and
2,711,680 outstanding respectively
|
39,265 | 39,265 | ||||||
|
Additional
paid-in-capital
|
10,243,568 | 10,143,339 | ||||||
|
Treasury stock at cost, 1,238,200
and 1,214,811 shares respectively
|
(3,380,554 | ) | (3,326,579 | ) | ||||
|
Retained earnings
|
9,236,196 | 8,874,813 | ||||||
|
Total shareholders’
equity
|
16,138,475 | 15,730,838 | ||||||
|
Total liabilities and
shareholders’ equity
|
$ | 18,488,567 | $ | 17,731,683 | ||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
Arrhythmia
Research Technology, Inc.
and
Subsidiary
|
Years
ended December 31,
|
2008
|
2007
|
||||||
|
Net
sales (Note 12)
|
$ | 22,482,219 | $ | 19,487,762 | ||||
|
Cost
of sales
|
18,204,526 | 14,709,035 | ||||||
|
Gross profit
|
4,277,693 | 4,778,727 | ||||||
|
Selling
and marketing
|
781,456 | 764,021 | ||||||
|
General
and administrative
|
2,536,648 | 2,131,694 | ||||||
|
Research
and development
|
320,040 | 112,472 | ||||||
|
Income from
operations
|
639,549 | 1,770,540 | ||||||
|
Other
income (expense):
|
||||||||
|
Interest expense
|
(46,230 | ) | (21,188 | ) | ||||
|
Other income
|
29,464 | 27,711 | ||||||
|
Total other income
(expense)
|
(16,766 | ) | 6,523 | |||||
|
Income
before income taxes
|
622,783 | 1,777,063 | ||||||
|
Income tax provision
(Note 6)
|
261,400 | 490,000 | ||||||
|
Net
income
|
$ | 361,383 | $ | 1,287,063 | ||||
|
Earnings per share (Note
2):
|
||||||||
|
Basic
|
$ 0.13
|
$ 0.47 | ||||||
|
Diluted
|
$ 0.13
|
$ 0.47 | ||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
Arrhythmia
Research Technology, Inc.
and
Subsidiary
(Notes
1, 2 and 7)
|
Common
Stock
|
Additional
|
Treasury
|
Retained
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Paid-in
Capital
|
Stock
|
Earnings
|
Total
|
|||||||||||||||||||
|
December
31, 2006, as filed
|
3,926,491 | $ | 39,265 | $ | 10,021,417 | $ | (3,343,007 | ) | $ | 7,702,450 | $ | 14,420,125 | ||||||||||||
|
Prior period
adjustment
|
(114,700 | ) | (114,700 | ) | ||||||||||||||||||||
|
December
31, 2006, as adjusted
|
3,926,491 | $ | 39,265 | $ | 10,021,416 | $ | (3,343,007 | ) | $ | 7,587,750 | $ | 14,305,425 | ||||||||||||
|
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 | ) | $ | 8,874,813 | $ | 15,730,838 | ||||||||||||
|
Share based
compensation
|
100,229 | 100,229 | ||||||||||||||||||||||
|
Treasury stock repurchased 23,389
shares
|
(53,975 | ) | (53,975 | ) | ||||||||||||||||||||
|
Net income
|
361,383 | 361,383 | ||||||||||||||||||||||
|
December
31, 2008
|
3,926,491 | $ | 39,265 | $ | 10,243,568 | $ | (3,380,554 | ) | $ | 9,236,196 | $ | 16,138,475 | ||||||||||||
See
accompanying notes to consolidated financial statements.
Arrhythmia
Research Technology, Inc.
and
Subsidiary
(Note
9)
|
Years
ended December 31,
|
2008
|
2007
|
||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
|
$ | 361,383 | $ | 1,287,063 | ||||
|
Adjustments to reconcile net
income to net cash provided
by operating
activities:
|
||||||||
|
Depreciation and
amortization
|
1,399,154 | 1,148,463 | ||||||
|
Provision for doubtful
accounts
|
(4,211 | ) | 20,000 | |||||
|
Deferred income tax
provision
|
184,000 | 220,000 | ||||||
|
Share based
compensation
|
100,229 | 45,641 | ||||||
|
Changes in operating assets and
liabilities:
|
||||||||
|
Trade accounts
receivable
|
58,557 | 78,446 | ||||||
|
Inventories
|
(725,972 | ) | (133,228 | ) | ||||
|
Deposits, prepaid expenses and
other assets
|
153,346 | (391,948 | ) | |||||
|
Accounts payable and accrued
expenses
|
410,894 | (802,432 | ) | |||||
|
Net cash provided by operating
activities
|
1,937,380 | 1,472,005 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Capital expenditures, net of
disposals
|
(1,015,702 | ) | (1,884,315 | ) | ||||
|
Net cash (used in) investing
activities
|
(1,015,702 | ) | (1, 884,315 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Payments to notes
payable
|
(231,647 | ) | (61,633 | ) | ||||
|
Proceeds from exercise of stock
options
|
- | 59,160 | ||||||
|
Tax benefit from exercise of stock
options
|
- | 33,549 | ||||||
|
Repurchase of
stock
|
(53,975 | ) | - | |||||
|
Net cash (used in) provided by
financing activities
|
(285,622 | ) | 31,076 | |||||
|
Net
(decrease) increase in cash and cash equivalents
|
636,056 | (381,234 | ) | |||||
|
Cash and cash
equivalents, beginning of year
|
1,684,411 | 2,065,645 | ||||||
|
Cash and cash
equivalents, end of year
|
$ | 2,320,467 | $ | 1,684,411 | ||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
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 worldwide 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, 2008 is adequate. However, actual write offs might
exceed the recorded allowance.
|
|
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 2008 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. A long lived asset used in research and development was
impaired for $22,378 as of December 31, 2008.
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.
|
|
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,
|
2008
|
2007
|
||||||
|
Net
income available to common shareholders
|
$ | 361,283 | $ | 1,287,063 | ||||
|
Weighted
average common shares outstanding
|
2,709,382 | 2,710,403 | ||||||
|
Basic
EPS
|
$ | 0.13 | $ | 0.47 | ||||
|
Diluted
EPS:
|
||||||||
|
Net income available to common
shareholders
|
$ | 361,283 | $ | 1,287,063 | ||||
|
Weighted average common shares
outstanding, basic
|
2,709,382 | 2,710,403 | ||||||
|
Assumed conversion of net common
sharesissuable under stock option plans
|
1,638 | 49,903 | ||||||
|
Weighted average common and
commonequivalent shares outstanding, diluted
|
2,711,020 | 2,760,306 | ||||||
|
Diluted
EPS
|
$ | 0.13 | $ | 0.47 | ||||
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).
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, 2008 and
2007.
Preferred
Stock
The
Company has 2,000,000 shares of $1 par value preferred stock
authorized. No shares have been issued.
Shipping
and Handling Costs
Shipping
and handling costs are classified as a cost of sales in the consolidated
statements of income. The custom manufacturing 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.
|
|
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.
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. This note was paid in full during the first three
months of 2008.
Restatement
Related to Deferred Income Taxes
In 2008,
the Company determined that there had been an understatement of the non-current
deferred tax liability and an overstatement of the prepaid income taxes in prior
periods.
During
2006, an error in the number of periods that the net operating losses could be
carried forward was identified and amended returns for the periods ended
December 31, 2005 and 2006 were filed. These amended returns resulted
in tax refunds of $147,609 which were collected in 2008. In addition,
Federal and State research and development tax credits totaling related to 2003
and 2004 were filed through amendment, and refunded in the periods ended
December 31, 2007 and 2008. The cumulative effect of the
adjustment on the company’s balance sheet as of December 31, 2007 was a
$114,700 reduction in retained earnings, a $97,200 decrease in prepaid taxes and
a $17,500 increase in non-current deferred tax liability. The adjustment did not
have any impact on the company’s cash flow statements for any
period.
Prior to
the year ended December 31, 2003, the company’s deferred tax assets,
including its NOLs, had been fully offset by a valuation allowance until the
year ended December 31, 2004 when the valuation allowance was reversed. As
a result, the NOL understatement did not have any impact on the company’s income
statements or balance sheets for periods prior to 2004 due to the deferred tax
asset valuation allowance.
Based on
the materiality guidelines contained in SEC Staff Accounting
Bulletin No. 99, “Materiality”, and SEC Staff
Accounting Bulletin No. 108, “Considering the Effects of Prior
Year Misstatements in Current Year Financial Statements” (SAB 108), the
Company determined that the overall variance between the actual calculations and
original estimates was not material in any individual period subsequent to and
including the year ended December 31, 2004. However, the Company
believes that these adjustments have accumulated to a material amount as of
December 31, 2008. In accordance with SAB 108, the Company
will not amend its previously filed affected Annual Reports on Form 10-K
because the adjustments are not material to the individual prior
years.
The
following table shows the restated line items in the accompanying balance sheet
as of December 31, 2007 that were impacted by the deferred income tax
adjustment:
|
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||
|
Deposits,
prepaid expenses and other current assets
|
$ | 926,970 | $ | (97,200 | ) | $ | 829,770 | |||||
|
Total
current assets
|
8,418,392 | (97,200 | ) | 8,321,192 | ||||||||
|
Total
assets
|
17,839,883 | (97,200 | ) | 17,742,683 | ||||||||
|
Long
term deferred tax liability
|
139,000 | 17,500 | 156,500 | |||||||||
|
Total
long term liabilities
|
139,000 | 17,500 | 156,500 | |||||||||
|
Total
liabilities
|
1,994,345 | 17,500 | 2,011,845 | |||||||||
|
Retained
earnings
|
8,989,513 | (114,700 | ) | 8,874,813 | ||||||||
|
Total
stockholders’ equity
|
15,845,538 | (114,700 | ) | 15,730,838 | ||||||||
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
was 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 was 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
|
|
2.
|
Accounting Policies (Continued)
|
Recent
accounting pronouncements (Continued)
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 continue the use of the simplified method for determining the value of
options granted as allowed by SAB 110.
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,
|
2008
|
2007
|
||||||
|
Raw
materials
|
$ | 1,099,876 | $ | 872,758 | ||||
|
Work-in-process
|
773,245 | 538,309 | ||||||
|
Finished
goods
|
1,854,371 | 1,590,453 | ||||||
|
Total
|
$ | 3,727,492 | $ | 3,001,520 | ||||
|
|
4.
|
Property,
Plant and Equipment, Net
|
Property,
plant and equipment consist of the following:
|
December
31,
|
Asset
Lives
|
2008
|
2007
|
||||||
|
Machinery
and equipment
|
5
to 15 years
|
$ | 10,532,555 | $ | 10,049,906 | ||||
|
Equipment
held for lease
|
10
years
|
69,400 | 166,003 | ||||||
|
Building
and improvements
|
20
years
|
4,038,610 | 3,667,011 | ||||||
|
Vehicles
|
3
to 5 years
|
158,908 | 158,908 | ||||||
|
Furniture,
fixtures, computers and software
|
3
to 5 years
|
1,319,551 | 1,163,380 | ||||||
|
Land
|
202,492 | 202,492 | |||||||
|
Construction
in progress
|
94,829 | 75,445 | |||||||
|
Total
property, plant and equipment
|
16,416,345 | 15,483,145 | |||||||
|
Less:
accumulated depreciation
|
(9,111,067 | ) | (7,872,887 | ) | |||||
|
Property,
plant and equipment, net
|
$ | 7,305,278 | $ | 7,610,258 | |||||
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 at
December 31, 2008 and 2007. The Company sold two leased machines to
its customers in 2008 and none in 2007.
|
|
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 $0 and $134,083 at December 31,
2008 and 2007, respectively. This note was paid in full during the
first three months of 2008.
|
|
5.
|
Debt (Continued)
|
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 In the third quarter of 2008 the equipment note
was extended for one year with a decrease in the fixed rate from 6.75% to 6.5%
per annum. The equipment note is amortized over 6 years with a
balloon payment for the remaining balance at September 15, 2009. The
balance of this note was $ 638,091 at December 31, 2008.
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, 2008 and 2007.
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,
|
2008
|
2007
|
||||||
|
Current:
Federal
|
$ | 73,400 | $ | 220,000 | ||||
|
State
|
4,000 | 50,000 | ||||||
| 77,400 | 270,000 | |||||||
|
Deferred:
Federal
|
171,000 | 189,000 | ||||||
|
State
|
13,000 | 31,000 | ||||||
| 184,000 | 220,000 | |||||||
|
Total
income tax provision
|
$ | 261,400 | $ | 490,000 | ||||
The
components of deferred income taxes are as follows:
|
December
31,
|
2008
|
2007
as
restated
|
||||||
|
Deferred
income taxes:
Inventories
|
$ | 7,000 | $ | 7,000 | ||||
|
Other current
|
14,000 | 28,000 | ||||||
|
Total current deferred tax
assets
|
21,000 | 35,000 | ||||||
|
Property, plant and
equipment
|
(345,500 | ) | (204,500 | ) | ||||
|
Patents and
intangibles
|
30,000 | 59,000 | ||||||
|
Total long term deferred tax
liability
|
(315,500 | ) | (145,500 | ) | ||||
|
Deferred
income taxes, net
|
$ | (294,500 | ) | $ | (110,500 | ) | ||
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,
|
2008
|
2007
|
||||||
|
Tax
provision computed at statutory rate
|
$ | 212,000 | $ | 604,000 | ||||
|
Increases
(reductions) due to:
State income taxes, net of
federal benefit
|
39,000 | 111,000 | ||||||
|
Permanent
differences
|
28,000 | - | ||||||
|
Tax credits (Federal &
State)
|
(68,400 | ) | (213,000 | ) | ||||
|
Other
|
50,800 | (12,000 | ) | |||||
|
Income
tax expense
|
$ | 261,400 | $ | 490,000 | ||||
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’s matching contributions in 2008 and 2007 were $30,747 and $28,853,
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 10.
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.
Employment
Agreements
The
Company has employment agreements with two executives extending through
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 $10,700 and $12,400 in 2008 and 2007, respectively.
Future
minimum operating lease payments as of December 31, 2008 are approximately as
follows:
|
Year
|
Amount
|
|||
|
2009
|
8,100 | |||
|
2010
|
6,700 | |||
|
Total
|
$ | 14,800 | ||
9. Supplemental
Cash Flow Information
Cash paid
for income taxes and interest for the years ended December 31 are as
follows:
|
2008
|
2007
|
|||||||
|
Income
taxes
|
$ | 109,000 | $ | 458,000 | ||||
|
Interest
|
47,826 | 21,000 | ||||||
At
December 31, 2008 the Company has $1,118 of dividends payable.
In 2007,
an additional capital expenditure of $765,000 made use of a term note and did
not require a cash outlay from the Company.
10. 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).
For the
year ended December 31, 2008 and 2007, share-based compensation included in
general and administrative expenses amounted to $100,229 and $45,641,
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 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, 2008 and
2007. Estimates of fair values are not intended to predict actual
future events or the value ultimately realized by persons who receive equity
awards.
The fair
value of each option grant in 2008 and 2007 were estimated on the grant date
using the Black-Scholes option pricing model with the following
assumptions:
|
2008
|
2007
|
|
|
Expected
option term (1)
|
4.5
years
|
6
years
|
|
Expected
volatility factor (2)
|
41%
|
43%
|
|
Risk-free
interest rate (3)
|
3.3%
|
5.5%
|
|
Expected
annual dividend yield
|
0.0%
|
0.44%
|
|
(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.
|
10. Stock
Options (Continued)
Share-Based
Incentive Plan
At
December 31, 2008, 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, 2008, there were 139,000 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, 2008:
|
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
|
$ | 1,412,490 | ||||||||
|
Granted
|
20,000 | 18.60 | |||||||||||
|
Exercised
|
(6,000) | 9.86 | |||||||||||
|
Cancelled/expired
|
- | - | |||||||||||
|
Outstanding
at December 31, 2007
|
27,000 | $ 10.45 |
3.8
years
|
$ | 50,750 | ||||||||
|
Granted
|
107,500 | $ 7.15 | |||||||||||
|
Exercised
|
- | - | |||||||||||
|
Cancelled/expired
|
(26,500) | $ 10.39 | |||||||||||
|
Outstanding
at December 31, 2008
|
208,000 | $ 10.45 |
3.7
years
|
$ | - | ||||||||
|
Exercisable
at end of year
|
97,000 | $ 8.85 |
2.4
years
|
$ | - | ||||||||
The
weighted average fair value of stock options granted during 2008 and 2007 was
$2.73 and $8.83, respectively.
During
the year ended December 31, 2008, no options were exercised. At
December 31, 2008, the intrinsic value of the exercisable options is
$0.
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.
The
following table sets forth the status of the Company’s non-vested options for
the year ended December 31, 2008:
|
Number
of shares
|
Weighted
average Fair Value
|
|||||||
|
Non-vested
at December 31, 2007
|
33,000 | $ 7.15 | ||||||
|
Granted
|
107,500 | 2.74 | ||||||
|
Vested (with an intrinsic
value of $0)
|
(9,000) | 3.95 | ||||||
|
Cancelled/expired
|
(20,500) | 4.76 | ||||||
|
Non-vested
at December 31, 2008
|
111,000 | $ 3.46 | ||||||
10. Stock
Options (Continued)
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 | 0.58 | 25,000 | |||||||||||
| 7.15 | 97,000 | 5.00 | - | |||||||||||
| 9.86 | 66,000 | 2.97 | 66,000 | |||||||||||
| 12.42 | 10,000 | 3.59 | 4,000 | |||||||||||
| 23.10 | 10,000 | 4.18 | 2,000 | |||||||||||
As of
December 31, 2008, there was $297,169 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, 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.
11. 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,
2008 and 2007:
|
Year
ended December 31, 2008
|
Medical
Electrode Components and Plastic Molding
|
Computerized
Medical Instruments
|
Corporate
|
Consolidated
|
||||||||||||
|
Sales
|
$ | 22,482,219 | $ | - | $ | - | $ | 22,482,219 | ||||||||
|
Operating
income (loss)
|
$ | 2,185,345 | $ | (375,832 | ) | $ | (1,169,964 | ) | $ | 639,549 | ||||||
|
Capital
Expenditures
|
$ | 991,646 | $ | - | $ | 24,056 | $ | 1,015,702 | ||||||||
|
Depreciation
and Amortization
|
$ | 1,316,097 | $ | - | $ | 83,057 | $ | 1,399,154 | ||||||||
|
Total
Assets at December 31, 2008
|
$ | 15,590,769 | $ | 72,217 | $ | 2,825,581 | $ | 18,488,567 | ||||||||
|
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 | ) | $ | (975,993 | ) | $ | 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 as restated
|
$ | 15,044,362 | $ | 338,052 | $ | 2,349,269 | $ | 17,731,683 | ||||||||
11. Industry and Geographic
Segments (Continued)
The
following table sets forth the geographic distribution of the Company’s net
sales:
|
2008
|
2007
|
|||||||
|
United
States
|
$ | 13,290,098 | $ | 10,824,992 | ||||
|
Canada
|
5,118,913 | 5,426,042 | ||||||
|
Europe
|
3,091,326 | 2,496,012 | ||||||
|
Pacific
Rim
|
426,764 | 335,592 | ||||||
|
Other
|
555,118 | 405,124 | ||||||
|
Net
Sales
|
$ | 22,482,219 | $ | 19,487,762 | ||||
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
|
2008
|
2007
|
|
A
|
27%
|
27%
|
|
B
|
12%
|
25%
|
|
C
|
17%
|
12. Quarterly
Financial Data
|
(unaudited)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||
|
2008
Net
Sales
|
$ | 5,459,742 | $ | 6,426,120 | $ | 5,838,390 | $ | 4,757,967 | ||||||||
|
Gross
Profit
|
1,111,438 | 1,346,471 | 841,560 | 978,224 | ||||||||||||
|
Net
Income
|
149,372 | 134,119 | 68,139 | 9,753 | ||||||||||||
|
Basic
Earnings per share
|
0.06 | 0.05 | 0.03 | 0.00 | ||||||||||||
|
Diluted
Earnings per share
|
0.05 | 0.05 | 0.03 | 0.00 | ||||||||||||
|
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 | ||||||||||||
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)
|
||
|
10.43*
|
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)
|
||
|
21.0
|
Subsidiaries
|
(g)
|
||
|
Consent
of CCR LLP
|
X-1
|
|||
|
Certification
of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
|
X-2
|
|||
|
Certification
of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
|
X-3
|
|||
|
Certification
pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
X-4
|
|||
|
Certification
pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
X-5
|
|||
*
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 10-KSB for fiscal year ended December
31, 2002 as filed with the Commission in March 2003.
|
|
(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-K for the fiscal year ended December
31, 2007 as filed with the Commission in March
2008.
|