FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended MARCH 31, 1996 or
--------------
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
----- -----
1-9731
(COMMISSION FILE NO.)
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 72-0925679
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5910 COURTYARD DRIVE #300
AUSTIN, TEXAS 78731
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(512) 343-6912
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
--- ---
As of May 1, 1996 there were 3,563,101 shares of common stock outstanding.
This report consists of 9 pages.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
TABLE OF CONTENTS
FORM 10-Q
March 31, 1996
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 3
CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . . . . . . 3
CONSOLIDATED STATEMENTS OF INCOME. . . . . . . . . . . . . . . . . . . . . 4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY . . . . . . . . 5
CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . . . . . . 6
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 7
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 1. Legal Proceedings - none. . . . . . . . . . . . . . . . . . . . . 9
Item 2. Changes in Securities - none. . . . . . . . . . . . . . . . . . . 9
Item 3. Defaults Upon Senior Securities - none. . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders - none. . . . 9
Item 5. Other Information - none. . . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 9
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Page 2 of 9
PART 1- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 1996 1995
------------ ------------
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 141,711 $ 397,799
Trade accounts receivable, net of allowance for doubtful accounts of $13,043 and $18,820 . . 3,146,429 3,739,046
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,636,759 2,991,346
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,000 58,000
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . 170,702 283,184
------------ ------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,153,601 7,469,375
Property and equipment, net of accumulated depreciation of $1,384,799 and $1,263,364 . . . . . 2,606,089 2,591,888
Patent costs, net of accumulated amortization of $162,259 and $157,222 . . . . . . . . . . . . 97,705 100,727
Software development costs, net of accumulated amortization of $203,741 and $199,280 . . . . . 11,177 15,638
Goodwill, net of accumulated amortization of $418,300 and $389,584 . . . . . . . . . . . . . . 1,904,773 1,933,489
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670,683 670,683
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,013 186,235
------------ ------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,610,041 $12,968,035
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,687,431 $ 1,938,972
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308,448 199,486
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,065,738 2,105,928
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,171 -
Payable to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,059 30,899
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267,933 390,981
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,396,780 4,666,266
Long-term debt, net of current maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . 291,543 491,930
Bonds payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409,434 398,000
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,994 49,048
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,139,751 5,605,244
------------ ------------
Commitments & Contingencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Redeemable common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10,046
------------ ------------
Shareholders' equity:
Serial preferred stock, $1 par value; 2,000,000 shares authorized, none issued . . . . . . . - -
Common stock, $.01 par value; 10,000,000 shares authorized;
3,679,216 and 3,662,216 issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,792 36,792
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,909,307 8,899,261
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (878,787) (868,740)
Unearned ESOP compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (157,134) (167,848)
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (439,888) (546,720)
------------ ------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,470,290 7,352,745
------------ ------------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . $11,610,041 $12,968,035
------------ ------------
------------ ------------
The accompanying notes are an integral part of the
consolidated financial statements.
Page 3 of 9
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended March 31,
----------------------------
1996 1995
---------- ----------
Sales............................................. $5,432,858 $5,883,831
Cost of sales...................................... 4,356,563 4,634,390
---------- ----------
Gross profit....................................... 1,076,295 1,249,441
---------- ----------
Selling and marketing.............................. 150,700 138,216
General and administrative......................... 555,376 514,591
Research and development........................... 43,082 40,652
Amortization of goodwill........................... 28,716 28,716
---------- ----------
Total expenses..................................... 777,874 722,175
---------- ----------
Income from operations............................. 298,421 527,266
Other income (expense):
Interest expense................................. (64,694) (59,012)
Other............................................ (1,355) -
---------- ----------
Income before income taxes......................... 232,372 468,254
Income taxes expense............................... (125,540) (194,465)
---------- ----------
Net income........................................ $ 106,832 $ 273,789
---------- ----------
---------- ----------
Net income per share.............................. $ 0.03 $ 0.07
---------- ----------
---------- ----------
Weighted average number of common
and dilutive common equivalent
shares outstanding............................... 3,622,839 3,613,035
---------- ----------
---------- ----------
The accompanying notes are an integral part of the financial statements
Page 4 of 9
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Net Retained
Common Shares Unearned Unrealized Earnings
---------------------- Paid-in Treasury ESOP Securities (Accumulated
Outstanding Amount Capital Stock Compensation Gains Deficit) Total
----------- ------ ------- -------- ------------ ---------- ------------ -----
January 1, 1994. . . . . . . 3,657,216 $36,572 $7,378,486 $(253,564) $1,803,214 $8,964,708
Exercise of options. . . . . 5,000 50 19,950 20,000
Maturity and repurchases of
redeemable common stock. . 603,863 603,863
ESOP payments. . . . . . . . 42,859 42,859
Treasury stock purchase. . . (49,181) $(363,939) (363,939)
Unrealized securities gain . $53,130 53,130
Net loss . . . . . . . . . . (3,475,160) (3,475,160)
--------- ------- ---------- --------- --------- ------- ---------- ----------
December 31, 1994. . . . . . 3,613,035 36,622 8,002,299 (363,939) (210,705) 53,130 (1,671,946) 5,845,461
Exercise of options. . . . . 17,000 170 67,830 68,000
Issuance of warrants . . . . 202,000 202,000
Maturity and repurchases of
redeemable common stock. . 627,132 627,132
ESOP Payments. . . . . . . . 42,857 42,857
Treasury stock purchase. . . (65,524) (504,801) (504,801)
Sale of securities . . . . . (53,130) (53,130)
Net income . . . . . . . . . 1,125,226 1,125,226
--------- ------- ---------- --------- --------- ------- ---------- ----------
December 31, 1995. . . . . . 3,564,511 36,792 8,899,261 (868,740) (167,848) 0 (546,720) 7,352,745
Repurchase of redeemable
common stock . . . . . . . 10,046 10,046
Treasury stock purchase. . . (1,410) (10,046) (10,046)
ESOP Payments. . . . . . . . 10,714 10,714
Net income . . . . . . . . . 106,832 106,832
--------- ------- ---------- --------- --------- ------- ---------- ----------
March 31, 1996 (Unaudited) . 3,563,101 $36,792 $8,909,307 $(878,787) $(157,134) $ 0 $(439,888) $7,470,290
--------- ------- ---------- --------- --------- ------- ---------- ----------
--------- ------- ---------- --------- --------- ------- ---------- ----------
The accompanying notes are an integral part of the
consolidated financial statements.
Page 5 of 9
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
Three Months Ended
March 31,
-------------------
1996 1995
-------- --------
Cash flows provided by (used in) operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 106,832 $273,789
Adjustments to reconcile net income to net cash:
Depreciation . . . . . . . . . . . . . . . . . . . . 121,435 114,719
Amortization . . . . . . . . . . . . . . . . . . . . 49,648 43,940
Deferred revenue . . . . . . . . . . . . . . . . . . (7,054) (8,597)
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . 592,617 (643,821)
Inventory. . . . . . . . . . . . . . . . . . . . . . 354,587 262,358
Deposits . . . . . . . . . . . . . . . . . . . . . . - 4,000
Accounts payable and accrued liabilities . . . . . . (1,163,238) 395,036
Income taxes payable . . . . . . . . . . . . . . . . 48,171 216,009
Payable to related parties . . . . . . . . . . . . . (11,840) (11,658)
Prepaid expenses and other . . . . . . . . . . . . . 132,703 (49,179)
----------- --------
Net cash provided by operating activities. . . . . . 223,861 596,596
----------- --------
Cash flows used in investing activities
Capital expenditures . . . . . . . . . . . . . . . . . (135,636) (50,059)
Patent expenditures. . . . . . . . . . . . . . . . . . (2,015) -
----------- --------
Net cash used in investing activities. . . . . . . . (137,651) (50,059)
----------- --------
Cash flows provided by (used in) financing activities:
Net repayments under credit facilities . . . . . . . . (251,541) (246,834)
Repayment of notes payable . . . . . . . . . . . . . . - (100,000)
Principal payments on long-term debt . . . . . . . . . (91,425) (92,245)
Proceeds from issuance of common stock under
stock option plan . . . . . . . . . . . . . . . . . . - 20,000
Purchase of treasury stock . . . . . . . . . . . . . . (10,046) -
Reduction of unearned ESOP compensation. . . . . . . . 10,714 10,714
----------- --------
Net cash used in financing activities. . . . . . . . (342,298) (408,365)
----------- --------
Net increase (decrease) in cash and cash equivalents . . (256,088) 138,172
Cash and cash equivalents at beginning of period . . . . 397,799 189,393
----------- --------
Cash and cash equivalents at end of period . . . . . . . $ 141,711 $327,565
----------- --------
----------- --------
The accompanying notes are an integral part of the
consolidated financial statements.
Page 6 of 9
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements and related notes
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. The accompanying unaudited interim consolidated financial
statements and related notes should be read in conjunction with the consolidated
financial statements and notes thereto, included in the Corporation's most
recent Form 10-K covering the year ended December 31, 1995.
The information furnished reflects, in the opinion of the management of
Arrhythmia Research Technology, Inc., all adjustments necessary for a fair
presentation of the financial results for the interim period presented. Certain
reclassifications were made to the 1995 financial statements to conform to the
1996 presentation.
Interim results are subject to year-end adjustments and audit by
independent certified public accountants.
INVENTORIES:
Inventories consist of the following as of:
MARCH 31, DECEMBER 31,
1996 1995
------------ -------------
Raw materials. . . . . . . . . . . . . . . . . $ 508,508 $ 467,895
Work-in-process. . . . . . . . . . . . . . . . 322,555 277,296
Finished goods . . . . . . . . . . . . . . . . 2,906,982 3,359,407
----------- -----------
Total . . . . . . . . . . . . . . . . . . 3,738,045 4,104,598
Allowance for slow-moving inventories. . . . . (1,101,286) (1,113,252)
----------- -----------
Total . . . . . . . . . . . . . . . . . . $ 2,636,759 $ 2,991,346
----------- -----------
----------- -----------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had working capital of approximately
$2,757,000. At March 31, 1996, the Company has a $3,500,000 working capital
line of credit with a bank, collateralized by the accounts receivable and
inventory of ART and Micron, which bears interest at prime plus .75% (9% at
March 31, 1996). The working capital line of credit matures September 30, 1997
and had an outstanding balance of approximately $1,687,000 at March 31, 1996.
The Company's working capital line of credit is its primary source of operating
funds and liquidity.
Capital expenditures during the first three months of 1996 were
approximately $136,000, as compared to $50,000 in 1995. Capital expenditures
have increased due to the purchase of a K3 Cath-Lab demonstration system by ART
and additional expenditures made by Micron for normal capital equipment
expenditures for the manufacturing facility in Fitchburg, Massachusetts as
well as preliminary design and testing costs for a proposed new waste-water
treatment and filtration system. Capital expenditures are expected to be higher
in 1996 than they were in 1995. Normal capital expenditures are funded from
operating cash flows and capital projects, such as the proposed new
waste-water treatment and filtration system, are typically financed by capital
equipment leases.
RESULTS OF OPERATIONS
SALES for the first quarter decreased 8% for the three months ended March
31, 1996, when compared to 1995. Electrophysiology (EP) product revenue
decreased 16% for the quarter ended March 31, 1996, as compared to 1995. The
decrease in domestic EP product sales for the first quarter of 1996 as compared
to 1995 is due to slower demand in the domestic market. In the first quarter of
1995 there was heavy demand for EP units by domestic hospitals, previously
these hospitals had put off capital intensive equipment purchases due to concern
regarding proposed national healthcare reform. Revenues from sales of ECG
sensors increased 2% for the quarter ended March 31, 1996 as compared to 1995.
Pricing on all products remained approximately the same for the first quarter of
1996 as compared to 1995. The sales mix for the Company has remained stable
with EP systems and ECG sensors making up most sales and the related cost of
sales.
FIRST QUARTER
-------------------------------------------------
1996 % 1995 %
---------- ---- ---------- ----
Domestic . . . . . . . . . . $3,626,151 67 $4,067,802 69
Foreign. . . . . . . . . . . 1,806,707 33 1,816,029 31
---------- ---- ---------- ----
Total. . . . . . . . . . . . $5,432,858 100 $5,883,831 100
---------- ---- ---------- ----
---------- ---- ---------- ----
COST OF SALES remained approximately the same for the quarter ended March
31, 1996, as compared to 1995. The cost of components has remained consistent,
as expected, as the majority of cost of sales is made up of EP systems, the cost
of which is set by contract. Overhead costs increased by 1% for the first
quarter of 1996 as compared to 1995 due primarily to
Page 7 of 9
increased repair & maintenance costs on the Fitchburg facility, environmental
monitoring costs, and utility costs. Cost of sales as a percent of sales is
expected to remain similar for the remainder of the year. The following table
details the make-up of cost of sales between overhead and component costs:
FIRST QUARTER
-------------------------------------------------
1996 % 1995 %
---------- ---- ---------- ----
Components . . . . . . . . . $3,944,882 73 $4,306,116 73
Overhead . . . . . . . . . . 411,681 7 328,274 6
---------- ---- ---------- ----
Total. . . . . . . . . . . . $4,356,563 80 $4,634,390 79
---------- ---- ---------- ----
---------- ---- ---------- ----
SELLING AND MARKETING expenses increased to 3% of sales for the quarter
ended March 31, 1996, as compared to 2% of sales for the first quarter of
1995. The primary components of selling and marketing expenses for the first
quarters ended March 31, 1996 and 1995 were salaries and trade show expenses.
The higher expense in the first quarter of 1996 is due to increased
advertising costs to promote the new K3 Cath-Lab product line and existing
signal averaging electrocardiographic products. The current level of
marketing operations is expected to continue for the remainder of the year.
GENERAL AND ADMINISTRATIVE expenses have remained comparable at 10% of
sales for the first quarter of 1996 as compared to 9% of sales in the first
quarter of 1995. The primary components of general and administrative expenses
are salaries and related payroll taxes and benefits, environmental monitoring
expenses, professional fees, and insurance costs. General and administrative
expenses are expected to continue at this level for the remainder of the year.
The table below shows the major components:
RESEARCH AND DEVELOPMENT expenses have remained approximately the same for
the first quarter of 1996 as compared to 1995. The primary component of
research and development expenses for the quarters ended March 31, 1996 and 1995
is salaries. The thrust of the research and development effort is to develop
new software applications for existing signal averaging products and new
products utilizing the patented Simson method of signal averaging.
Page 8 of 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - NONE
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27.1 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
/s/ E.P. Marinos
E. P. Marinos, President and
Chief Executive Officer
/s/ William E. Cooper
William E. Cooper, CPA
Chief Financial and Accounting Officer
May 10, 1996
Page 9 of 9