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 SEPTEMBER 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 November 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
September 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 - none.......................... 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)
September 30, December 31,
ASSETS 1996 1995
------------ ------------
Current assets:
Cash and cash equivalents.................................................................. $ 157,516 $ 397,799
Trade accounts receivable, net of allowance for doubtful accounts of $18,864 and $18,820... 4,734,476 3,739,046
Inventories................................................................................ 1,973,306 2,991,346
Deposits................................................................................... 54,000 58,000
Prepaid expenses and other current assets.................................................. 204,799 283,184
------------ ------------
Total current assets..................................................................... 7,124,097 7,469,375
Property and equipment, net of accumulated depreciation of $1,596,969 and $1,263,364......... 3,030,509 2,591,888
Patent costs, net of accumulated amortization of $173,036 and $157,222....................... 98,131 100,727
Software development costs, net of accumulated amortization of $212,873 and $199,280......... 4,545 15,638
Goodwill, net of accumulated amortization of $475,732 and $389,584........................... 1,847,341 1,933,489
Deferred income taxes........................................................................ 670,683 670,683
Other ....................................................................................... 170,079 186,235
------------ ------------
Total assets.............................................................................. $ 12,945,386 $ 12,968,035
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities................................................................ $ 1,484,598 $ 1,938,972
Current maturities of long-term debt....................................................... 172,069 199,486
Accounts payable........................................................................... 1,821,547 2,105,928
Income taxes payable....................................................................... 239,045 -
Payable to related parties................................................................. - 30,899
Accrued liabilities........................................................................ 383,733 390,981
------------ ------------
Total current liabilities................................................................ 4,100,992 4,666,266
Long-term debt, net of current maturities.................................................... 412,278 491,930
Bonds payable................................................................................ 426,500 398,000
Deferred revenue............................................................................. 93,770 49,048
------------ ------------
Total liabilities........................................................................ 5,033,540 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................................................................... (135,705) (167,848)
Retained deficit............................................................................. (19,761) (546,720)
------------ ------------
Total shareholders' equity............................................................... 7,911,846 7,352,745
------------ ------------
Total liabilities and shareholders' equity............................................... $ 12,945,386 $ 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 September 30, Nine months ended September 30,
-------------------------------- ------------------------------
1996 1995 1996 1995
------------ ------------ ------------- -------------
Sales................................. $ 6,464,147 $ 4,975,378 $ 18,567,323 $ 17,463,992
Cost of sales......................... 5,112,182 3,864,946 14,962,270 13,723,228
------------ ------------ ------------- -------------
Gross profit.......................... 1,351,966 1,110,432 3,605,053 3,740,764
------------ ------------ ------------- -------------
Selling and marketing................. 159,779 99,532 456,873 321,430
General and administrative............ 541,433 514,978 1,692,823 1,530,750
Research and development.............. 41,368 47,158 126,596 138,795
Amortization of goodwill.............. 28,716 28,716 86,148 86,148
------------ ------------ ------------- -------------
Total Expenses........................ 771,296 690,384 2,362,440 2,077,123
------------ ------------ ------------- -------------
Income from operations................ 580,670 420,048 1,242,613 1,663,641
------------ ------------ ------------- -------------
Other income (expense):
Interest expense.................... (67,338) (65,309) (211,733) (190,537)
Gain on sale of stock............... - - - 72,912
Other............................... (3,953) (979) (7,313) 1,429
------------ ------------ ------------- -------------
Income before income taxes............ 509,379 353,760 1,023,567 1,547,445
Income taxes.......................... (227,632) (154,972) (496,609) (644,193)
------------ ------------ ------------- -------------
Net income............................ $ 281,747 $ 198,788 $ 526,958 $ 903,252
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net income per share.................. $ 0.08 $ 0.06 $ 0.15 $ 0.25
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Weighted average number of common
and dilutive common equivalent
shares outstanding.................. 3,563,101 3,606,382 3,563,414 3,644,321
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
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
Retained
Common Shares Unearned Earnings
-------------------- Paid-in Treasury ESOP (Accumulated
Outstanding Amount Capital Stock Compensation 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... 0
Net loss..................... (3,475,160) (3,475,160)
--------- ------- ---------- --------- --------- ----------- -----------
December 31, 1994............ 3,613,035 36,622 8,002,299 (363,939) (210,705) (1,671,946) 5,792,331
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........... 0
Net income................... 1,125,226 1,125,226
--------- ------- ---------- --------- --------- ----------- -----------
December 31, 1995............ 3,564,511 36,792 8,899,261 (868,740) (167,848) (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................ 32,143 32,143
Net income................... 526,958 526,958
--------- ------- ---------- --------- --------- ----------- -----------
September 30, 1996
(Unaudited)................. 3,563,101 $36,792 $8,909,307 $(878,787) $(135,705) $ (19,761) $ 7,911,846
--------- ------- ---------- --------- --------- ----------- -----------
--------- ------- ---------- --------- --------- ----------- -----------
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)
Nine months ended
September 30,
----------------------
1996 1995
--------- ---------
Cash flows provided by (used in) operating activities:
Net income.......................................... $ 526,958 $ 903,252
Adjustments to reconcile net income to net cash:
Depreciation...................................... 333,604 353,017
Amortization...................................... 115,555 129,999
Gain on sales of investments...................... - (72,912)
Deferred revenue.................................. 44,722 (12,579)
Changes in assets and liabilities:
Accounts receivable............................... (995,430) (49,998)
Deposits.......................................... 4,000 8,000
Inventory......................................... 1,018,040 38,777
Accounts payable and accrued expenses............. (291,629) (416,613)
Income taxes payable.............................. 239,045
Payable to related parties........................ (30,899) (15,470)
Other............................................. 123,075 35,634
--------- ---------
Net cash provided by operating activities............. 1,087,041 901,107
--------- ---------
Cash flows provided by (used in) investing activities:
Proceeds from sale of short-term investments........ - 119,787
Software expenditures............................... (2,500)
Capital expenditures................................ (584,458) (244,760)
Patent expenditures................................. (13,218) (12,650)
--------- ---------
Net cash used in investing activities............. (600,176) (137,623)
--------- ---------
Cash flows provided by (used in) financing activities:
Net repayments of revolving credit facilities....... (454,374) (287,035)
Repayment of notes payable.......................... - (253,000)
Proceeds from issuance of bonds payable............. - 600,000
Proceeds from issuance of common stock.............. - 68,000
Purchase of treasury stock.......................... (10,047) (386,769)
Reduction of unearned ESOP compensation............. 32,143 28,571
Principal payments on long-term debt................ (294,870) (301,961)
--------- ---------
Net cash used in financing activities............. (727,148) (532,194)
--------- ---------
Net increase (decrease) in cash and cash equivalents.. (240,283) 231,290
Cash and cash equivalents at beginning of period...... 397,799 22,790
--------- ---------
Cash and cash equivalents at end of period............ $ 157,516 $ 254,080
--------- ---------
--------- ---------
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:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Raw materials............................... $ 416,144 $ 467,895
Work-in-process............................. 215,190 277,296
Finished goods.............................. 2,443,258 3,359,407
----------- -----------
Total..................................... 3,074,592 4,104,598
Allowance for slow-moving inventories....... (1,101,286) (1,113,252)
----------- -----------
Total..................................... $ 1,973,306 $ 2,991,346
----------- -----------
----------- -----------
PROPERTY, PLANT & EQUIPMENT:
In September 1996, Micron completed the purchase of a building adjacent to
the current manufacturing facility ("the Century building"). The purchase
price of the Century building was $480,000. Micron paid $380,000 in cash and
financed the balance through a capital lease of $100,000 with the building's
current owner. The building is subject to the typical environmental
monitoring and reporting for a building in the area. Micron has received an
indemnification for the first $200,000 of environmental costs other than
normal monitoring and reporting expenditures from the seller of the Century
building. The Company and its environmental engineering firm believe that the
idemnification and the Company's reserves are sufficient to cover any
possible potential future environmental remediation costs. The Company
expenses the costs of ongoing environmental monitoring and reporting in the
period in which they occur.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of approximately
$3,023,000. At September 30, 1996, the Company has a $3,500,000 working
capital line of credit with a bank, collateralized by accounts receivable and
inventory of ART and Micron Products Inc., which bears interest at prime plus
.75% (9% at September 30, 1996). The working capital line of credit matures
September 30, 1997 and had an outstanding balance of approximately $1,485,000
at September 30, 1996. The Company's lines of credit are its primary source
of operating funds and liquidity.
Capital expenditures during the first nine months of 1996 were
approximately $772,000 (including approximately $188,000 of capital
expenditures added through capital leases) as compared to $245,000 in 1995.
Capital expenditures have increased significantly due to the purchase of the
Century building. The purchase price of the Century building was $480,000.
Micron paid $380,000 in cash and financed the balance through a capital lease
of $100,000 with the building's current owner. The remaining capital
expenditures during 1996 consist of the purchase of a K3 Cath-Lab
demonstration system by ART and normal capital equipment expenditures for the
manufacturing facility in Fitchburg, Massachusetts. Micron has also incurred
preliminary design and testing costs for a proposed new waste-water treatment
and filtration system which will be installed in the Century building in the
next twelve months. 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 third quarter ended September 30, 1996 increased 30% when
compared to the third quarter ended September 30, 1995, and revenues for the
nine months ended September 30, 1996 increased 6% as compared to the same
Page 7 of 9
period of the prior year. CardioLab and CardioMapp ("EP") product revenues
increased 19% for the quarter ended September 30, 1996 as compared to 1995.
EP product revenues increased 3% for the nine months ended September 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 nor the related cost of sales
for EP products which approximated $10,759,000 and $9,869,000 for the nine
months ended September 30, 1996 and $10,431,000 and $9,267,000 for the nine
months ended September 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 increased 50% and 10% for the quarter
and nine months ended September 30, 1996, as compared to the same periods in
1995. The increase in sensor sales is due to increased demand in the
domestic market. Pricing on all products remained approximately the same for
the third quarter and first nine 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.
THIRD QUARTER FIRST NINE MONTHS
------------------------------ --------------------------------
1996 % 1995 % 1996 % 1995 %
---------- --- ---------- --- ----------- --- ----------- ---
Domestic...... $4,452,075 69 $3,961,324 80 $12,328,202 66 $12,677,999 73
Foreign....... 2,012,072 31 1,014,054 20 6,239,121 34 4,785,993 27
---------- --- ---------- --- ----------- --- ----------- ---
Total......... $6,464,147 100 $4,975,378 100 $18,567,323 100 $17,463,992 100
---------- --- ---------- --- ----------- --- ----------- ---
---------- --- ---------- --- ----------- --- ----------- ---
COST OF SALES increased slightly for the quarter and nine months ended
September 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 third quarter ended September 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 nine months September 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:
THIRD QUARTER FIRST NINE MONTHS
------------------------------ --------------------------------
1996 % 1995 % 1996 % 1995 %
---------- --- ---------- --- ----------- --- ----------- ---
Components.... $4,727,598 73 $3,457,912 70 $13,777,791 74 $12,543,162 72
Overhead...... 384,584 6 407,034 8 1,184,479 6 1,180,066 7
---------- --- ---------- --- ----------- --- ----------- ---
Total......... $5,112,182 79 $3,864,946 78 $14,962,270 80 $13,723,228 79
---------- --- ---------- --- ----------- --- ----------- ---
---------- --- ---------- --- ----------- --- ----------- ---
SELLING AND MARKETING expenses have increased in gross dollars and as a
percent of sales during the third quarter and nine months ended September 30,
1996 as compared to the same periods for 1995. The increase is due to lower
than normal personnel costs during the first nine 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 third quarter and nine months ended September 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 third
quarter ended September 30, 1996, as compared to 1995. The increase in
general and administrative expenses for the nine months ended September 30,
1996 as compared to 1995 is due to higher environmental monitoring costs and
debt cost amortization. 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 third
quarter and nine months ended September 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 - NONE
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 and Financial Officer
/s/ Anthony A. Cetrone,
President, Micron Products Inc.
November 12, 1996
Page 9 of 9