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 JUNE 30, 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 August 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
June 30, 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 I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1996 1995
----------- ------------
Current assets:
Cash and cash equivalents......................... $ 25,917 $ 397,799
Trade accounts receivable, net of allowance for
doubtful accounts of $18,864 and $18,820......... 4,372,217 3,739,046
Inventories....................................... 2,504,612 2,991,346
Deposits.......................................... 54,000 58,000
Prepaid expenses and other current assets......... 220,710 283,184
----------- -----------
Total current assets............................ 7,177,456 7,469,375
Property and equipment, net of accumulated
depreciation of $1,487,957 and $1,263,364.......... 2,522,004 2,591,888
Patent costs, net of accumulated amortization
of $167,478 and $157,222........................... 94,943 100,727
Software development costs, net of accumulated
amortization of $208,202 and $199,280.............. 9,216 15,638
Goodwill, net of accumulated amortization of
$447,016 and $389,584............................. 1,876,057 1,933,489
Deferred income taxes............................... 670,683 670,683
Other .............................................. 180,058 186,235
----------- -----------
Total assets.................................... $12,530,417 $12,968,035
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities....................... $ 1,727,048 $ 1,938,972
Current maturities of long-term debt.............. 234,796 199,486
Accounts payable.................................. 1,740,202 2,105,928
Income taxes payable.............................. 121,414 -
Payable to related parties........................ 6,834 30,899
Accrued liabilities............................... 323,894 390,981
----------- -----------
Total current liabilities....................... 4,154,188 4,666,266
Long-term debt, net of current maturities........... 262,254 491,930
Bonds payable....................................... 414,370 398,000
Deferred revenue.................................... 79,892 49,048
----------- -----------
Total liabilities............................... 4,910,704 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 3,679,216 issued...... 36,792 36,792
Additional paid-in-capital.......................... 8,909,307 8,899,261
Treasury stock...................................... (878,787) (868,740)
Unearned ESOP compensation.......................... (146,419) (167,848)
Retained deficit.................................... (301,180) (546,720)
----------- -----------
Total shareholders' equity...................... 7,619,713 7,352,745
----------- -----------
Total liabilities and shareholders' equity...... $12,530,417 $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 Six months
ended June 30, ended June 30,
---------------------- ------------------------
1996 1995 1996 1995
---------- ---------- ----------- -----------
Sales....................... $6,670,317 $6,604,783 $12,103,175 $12,488,614
Cost of sales............... 5,493,525 5,213,244 9,850,088 9,858,282
---------- ---------- ----------- -----------
Gross profit................ 1,176,792 1,391,539 2,253,087 2,630,332
---------- ---------- ----------- -----------
Selling and marketing....... 146,393 82,891 297,093 221,898
General and administrative.. 595,686 513,296 1,151,062 1,015,772
Research and development.... 42,146 50,985 85,228 91,637
Amortization of goodwill.... 28,716 28,716 57,432 57,432
---------- ---------- ----------- -----------
Total Expenses.............. 812,941 675,888 1,590,815 1,386,739
---------- ---------- ----------- -----------
Income from operations...... 362,851 715,651 662,272 1,243,593
---------- ---------- ----------- -----------
Other income (expense):
Interest expense.......... (79,701) (66,215) (144,395) (125,228)
Gain on sale of stock..... - 72,912 - 72,912
Other..................... (2,005) 2,408 (3,360) 2,408
---------- ---------- ----------- -----------
Income before income taxes.. 282,145 724,756 514,517 1,193,685
Income taxes................ (143,437) (294,756) (268,977) (489,221)
---------- ---------- ----------- -----------
Net income.................. $ 138,708 $ 430,000 $ 245,540 $ 704,464
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net income per share........ $ 0.04 $ 0.12 $ 0.07 $ 0.19
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted average number of
common and dilutive common
equivalent shares
outstanding................ 3,563,101 3,613,035 3,592,443 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) (10,047) (10,047)
ESOP Payments................ 21,429 21,429
Net income................... 245,540 245,540
--------- ------- ---------- --------- --------- ------- ----------- -----------
June 30, 1996 (Unaudited).... 3,563,101 $36,792 $8,909,307 $(878,787) $(146,419) $ 0 $ (301,180) $ 7,619,713
--------- ------- ---------- --------- --------- ------- ----------- -----------
--------- ------- ---------- --------- --------- ------- ----------- -----------
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
(Unaudited)
Six months
ended June 30,
---------------------
1996 1995
--------- ---------
Cash flows provided by (used in) operating activities:
Net income.......................................... $ 245,540 $ 704,464
Adjustments to reconcile net income to net cash:
Depreciation...................................... 241,324 233,948
Amortization...................................... 76,610 88,038
Gain on sales of investments...................... - (72,912)
Deferred revenue.................................. 30,844 (153)
Changes in assets and liabilities:
Accounts receivable............................... (633,171) (809,280)
Deposits.......................................... 4,000 8,000
Inventory......................................... 486,734 381,314
Accounts payable and accrued expenses............. (432,813) (34,565)
Income taxes payable.............................. 121,414 -
Payable to related parties........................ (24,065) (4,083)
Other............................................. 91,455 179,948
--------- ---------
Net cash provided by operating activities............. 207,872 674,719
--------- ---------
Cash flows provided by (used in) investing activities:
Proceeds from sale of short-term investments........ - 119,787
Software expenditures............................... (2,500) -
Capital expenditures................................ (177,874) (143,890)
Patent expenditures................................. (4,472) (6,636)
--------- ---------
Net cash used in investing activities............. (184,846) (30,739)
--------- ---------
Cash flows provided by (used in) financing activities:
Net repayments of revolving credit facilities....... (211,924) (321,277)
Repayment of notes payable.......................... - (153,000)
Purchase of treasury stock.......................... (10,047) -
Reduction of unearned ESOP compensation............. 21,429 17,857
Principal payments on long-term debt................ (194,366) (157,485)
--------- ---------
Net cash used in financing activities............. (394,908) (613,905)
--------- ---------
Net increase (decrease) in cash and cash equivalents.. (371,882) 30,075
Cash and cash equivalents at beginning of period...... 397,799 22,790
--------- ---------
Cash and cash equivalents at end of period............ $ 25,917 $ 52,865
--------- ---------
--------- ---------
The accompanying notes are an integral part of the financial statements
Page 6 of 9
SUPPLEMENTAL NOTES TO 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 Company'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. ("ART"), all adjustments necessary for a
fair presentation of the financial results for the interim period presented.
Interim results are subject to year-end adjustments and audit by
independent certified public accountants.
INVENTORIES:
Inventories consist of the following as of:
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
Raw materials.................... $ 474,092 $ 467,895
Work-in-process.................. 251,318 277,296
Finished goods................... 2,880,488 3,359,407
----------- -----------
Total.......................... 3,605,898 4,104,598
Allowance for slow-moving
inventories..................... (1,101,286) (1,113,252)
----------- -----------
Total.......................... $ 2,504,612 $ 2,991,346
----------- -----------
----------- -----------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital of approximately
$3,023,000. At June 30, 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 Products Inc., which bears interest at prime plus
.75% (9% at June 30, 1996). The working capital line of credit matures
September 30, 1997 and had an outstanding balance of approximately $1,778,000
at June 30, 1996. The Company's lines of credit are its primary source of
operating funds and liquidity.
Capital expenditures during the first six months of 1996 were
approximately $178,000 as compared to $144,000 in 1995. Capital expenditures
have increased due to the purchase of a K3 Cath-Lab demonstration system by
ART and 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
REVENUES for the second quarter ended June 30, 1996 increased 1% when
compared to the second quarter ended June 30, 1995, while revenues for the
six months ended June 30, 1996 decreased 3% as compared to the same period of
the prior year. CardioLab and CardioMapp ("EP") product revenues increased
8% and unit volume increased 3% for the quarter ended June 30, 1996 as
compared to 1995. EP product revenues decreased 4% and unit volume decreased
5% for the six months ended June 30, 1996 as compared to the same period in
1995. Sales of EP products in 1996 are expected to be consistent with the
prior year. However, 1996 will be the final year in which ART will act as
the exclusive distributor for EP products under its contract with their
manufacturer, Prucka Engineering, Inc. In 1997, ART will not report the gross
revenues or the related cost of sales for EP products which approximated
$7,134,000 and $6,568,000 for the six months ended June 30, 1996 and
$7,388,000 and $6,531,000 for the six months ended June 30, 1995. During
1997, ART will receive a 4% commission on net sales of EP systems and
accessories sold anywhere in the world, up to a ceiling of $10,000,000 in
total annual net sales. During 1998, ART will receive a commission of 4% on
CardioLab systems sold anywhere in the world, up to a ceiling of $10,000,000
in total annual net sales. From January 1, 1999 through December 31, 2002,
ART will receive a commission of 3% of the net sales of CardioLab systems
sold anywhere in the world, up to a ceiling of $10,000,000 in total net
sales.
Revenues from sales of ECG sensors decreased 11% and 5% for the quarter
and six months ended June 30, 1996, as compared to the same periods in 1995.
The decline in sensor sales is due to lower demand in the domestic market.
Pricing
Page 7 of 9
on all products remained approximately the same for the second quarter and
first six months of 1996 as compared to 1995. The sales mix for the Company
has remained stable with electrophysiology product systems and ECG sensors
making up most sales and the related cost of sales.
SECOND QUARTER FIRST SIX MONTHS
--------------------------------- -----------------------------------
1996 % 1995 % 1996 % 1995 %
---------- --- ---------- --- ----------- --- ----------- ---
Domestic.... $4,329,663 65 $4,634,679 70 $ 7,926,360 65 $ 8,778,624 70
Foreign..... 2,340,654 35 1,970,104 30 4,176,815 35 3,709,990 30
---------- --- ---------- --- ----------- --- ----------- ---
Total....... $6,670,317 100 $6,604,783 100 $12,103,175 100 $12,488,614 100
---------- --- ---------- --- ----------- --- ----------- ---
---------- --- ---------- --- ----------- --- ----------- ---
COST OF SALES increased slightly for the quarter and six months ended
June 30, 1996, as compared to the same periods in 1995. The cost of
components has increased as the majority of cost of sales is made up of EP
systems, which are purchased at a pre-determined price under contract from
the manufacturer. The contract contained a price increase from 1995 to 1996,
thereby increasing the cost of the systems in 1996 resulting in higher cost
of sales. Overhead costs for the second quarter ended June 30, 1996,
decreased as compared to the same period of the prior year due to lower than
normal overtime, maintenance, and utility costs. Overhead costs have
remained consistent for the six months June 30, 1996 as compared to 1995.
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:
SECOND QUARTER FIRST SIX MONTHS
--------------------------------- -----------------------------------
1996 % 1995 % 1996 % 1995 %
---------- --- ---------- --- ---------- --- ---------- ---
Components.. $5,112,239 76 $4,769,774 72 $9,050,193 75 $9,060,058 73
Overhead.... 381,286 6 443,470 7 799,895 6 798,224 6
---------- --- ---------- --- ----------- --- ----------- ---
Total....... $5,493,525 82 $5,213,244 79 $9,850,088 81 $9,858,282 79
---------- --- ---------- --- ----------- --- ----------- ---
---------- --- ---------- --- ----------- --- ----------- ---
SELLING AND MARKETING expenses have increased slightly as a percent of
sales during the second quarter and six months ended June 30, 1996 as
compared to the same periods for 1995. The increase is due principally to
lower than normal personnel costs during the first six months of 1995 and
increased marketing activity related to the Astro-Med/ART K3 cardiac
catheterization Lab. The primary components of marketing and selling expenses
for the second quarter and six months ended June 30, 1996 are salaries and
trade show expenses. The current level of marketing operations is expected
to continue for the remainder of the year.
GENERAL AND ADMINISTRATIVE expenses have remained comparable for the
second quarter and six months ended June 30, 1996, as compared to the same
periods of the prior year. 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.
RESEARCH AND DEVELOPMENT expenses have decreased slightly for the second
quarter and six months ended June 30, 1996, as compared to the same periods
in 1995. The decrease is due primarily to lower travel costs. 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
V.P. Finance and Chief Accounting Officer
August 8, 1996
Page 9 of 9