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, 1998 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 (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) 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 10, 1998 there were 3,563,101 shares of common stock outstanding. This report consists of 10 pages. ARRHYTHMIA RESEARCH TECHNOLOGY, INC. TABLE OF CONTENTS FORM 10-Q March 31, 1998 PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 3 Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . 3 CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . . . . . . . 3 CONSOLIDATED STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . . . . 4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' 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. . . . . . . . . . . . . . 8 PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 1. Legal Proceedings - none . . . . . . . . . . . . . . . . . . . 10 Item 2. Changes in Securities - none . . . . . . . . . . . . . . . . . 10 Item 3. Defaults Upon Senior Securities - none . . . . . . . . . . . . 10 Item 4. Submission of Matters to a Vote of Security Holders - none . . 10 Item 5. Other Information - none . . . . . . . . . . . . . . . . . . . 10 Item 6. Exhibits and Reports on Form 8-K - none. . . . . . . . . . . . 10 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Page 2 of 10 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 31, December 31, ASSETS 1998 1997 ------------------ ----------------- CURRENT ASSETS: (UNAUDITED) Cash and cash equivalents.............................................................. $ 147,241 $ 214,938 Trade and other accounts receivable, net of allowance for doubtful accounts............ of $61,318 ...................................................................... 2,272,968 2,397,269 Inventories, net....................................................................... 2,132,452 2,001,123 Income Taxes Recoverable............................................................... 262,808 262,810 Other current assets................................................................... 139,683 63,861 ------------------ ----------------- Total current assets................................................................. 4,955,152 4,940,001 Property and equipment, net of accumulated depreciation of $2,489,507 and $2,322,218..... 4,053,157 4,195,167 Patent and software development costs, net of accumulated amortization of $430,192 and... $422,858.......................................................................... 84,245 85,667 Goodwill, net of accumulated amortization of $671,454 and $635,476....................... 1,989,619 2,025,597 Deferred income taxes, net............................................................... 458,923 458,923 Other assets............................................................................. 45,960 127,055 ------------------ ----------------- Total assets......................................................................... $ 11,587,056 $ 11,832,410 ------------------ ----------------- ------------------ ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Borrowings under revolving credit facilities........................................... $ 412,211 $ 467,135 Current maturities of bonds payable and long-term debt................................. 220,442 320,328 Current maturities of capital lease obligations........................................ 64,923 100,371 Accounts payable....................................................................... 984,224 1,091,550 Income taxes payable................................................................... 91,460 - Accrued liabilities and other liabilities.............................................. 554,727 667,172 ------------------ ----------------- Total current liabilities............................................................ 2,327,987 2,646,556 Bonds payable, and other long-term debt, net of current maturities....................... 965,086 953,086 Capital lease obligations, net of current maturities..................................... 92,081 92,082 Deferred revenue......................................................................... 43,230 53,896 ------------------ ----------------- Total liabilities.................................................................... 3,428,384 3,745,620 ------------------ ----------------- Shareholders' equity: 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 issued................................................................... 36,792 36,792 Additional paid-in capital............................................................... 8,909,307 8,909,307 Treasury stock, 116,115 shares at cost................................................... (878,787) (878,787) Unearned ESOP compensation............................................................... (71,420) (82,134) Retained earnings........................................................................ 162,780 101,612 ------------------ ----------------- Total shareholders' equity........................................................... 8,158,672 8,086,790 ------------------ ----------------- Total liabilities and shareholders' equity........................................... $ 11,587,056 $ 11,832,410 ------------------ ----------------- ------------------ ----------------- The accompanying notes are an integral part of the consolidated financial statements. Page 3 of 10 ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, ------------------------------------ 1998 1997 ---------------- ---------------- Net sales..................................... $ 2,429,112 $ 3,873,531 Cost of sales................................. 1,436,231 2,738,135 --------------- --------------- Gross profit.................................. 992,881 1,135,396 --------------- --------------- Selling and marketing......................... 96,962 140,954 General and administrative.................... 537,479 583,544 Research and development...................... 100,048 46,219 Amortization of goodwill...................... 28,716 28,716 --------------- --------------- Total expenses................................ 763,205 799,433 --------------- --------------- Income from operations........................ 229,676 335,963 Other income (expense): Interest expense............................ (31,213) (52,195) Other......................................... (26,757) (3,755) --------------- --------------- Income before income taxes.................... 171,706 280,013 Income taxes.................................. 110,538 113,174 --------------- --------------- Net income.................................... $ 61,168 $ 166,839 --------------- --------------- --------------- --------------- Basic & diluted net income per share.......... $ 0.02 $ 0.05 --------------- --------------- --------------- --------------- Weighted average number of common and dilutive common equivalent shares outstanding.......................... 3,563,101 3,607,614 --------------- --------------- --------------- --------------- The accompanying notes are an integral part of the consolidated financial statements. Page 4 of 10 ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) Net Retained Common Shares Additional Unearned Unrealized Earnings --------------------- Paid-in Treasury ESOP Securities (Accumulated Number Amount Capital Stock Compensation Gains Deficit) Total --------- ------- ---------- --------- ------------ -------- ----------- ---------- December 31, 1997....... 3,563,101 $36,792 $8,909,307 ($878,787) ($82,134) - 101,612 $8,086,790 ESOP payments........... 10,714 10,714 Net income.............. 61,168 61,168 --------- ------- ---------- --------- ------------ -------- ----------- ---------- March 31, 1998 3,563,101 $36,792 $8,909,307 ($878,787) ($71,420) $0 $162,780 $8,158,672 --------- ------- ---------- --------- ------------ -------- ----------- ---------- --------- ------- ---------- --------- ------------ -------- ----------- ---------- The accompanying notes are an integral part of the consolidated financial statements. Page 5 of 10 ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, --------------------------------------------- 1998 1997 ---------------------- ---------------------- Cash flows from operating activities: Net income........................................................................ $ 61,168 $ 166,839 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................................................ 167,289 132,659 Amortization........................................................................ 55,312 46,250 Changes in assets and liabilities: Trade and other accounts receivable, net........................................ 124,301 1,016,357 Deposits, prepaid expenses and other current assets............................. 4,180 (8,427) Inventories..................................................................... (131,329) 81,766 Accounts payable, accrued liabilities and other current liabilities............. (219,771) (333,048) Income taxes payable............................................................ 91,460 136,931 Deferred revenue................................................................ (10,666) 334 Other assets .................................................................... 1,095 0 --------------------- --------------------- Net cash provided by operating activities........................................... 143,039 1,239,661 --------------------- --------------------- Cash flows from investing activities: Capital expenditures ............................................................. (31,191) (268,798) Deposits on capital equipment and other........................................... 0 (412,816) Patent and software development expenditures...................................... 0 (3,004) --------------------- --------------------- Net cash used in investing activities........................................... (31,191) (684,618) --------------------- --------------------- Cash flows from financing activities: Net repayments of revolving credit facilities..................................... (54,924) (665,745) Reduction of unearned ESOP compensation........................................... 10,714 10,714 Principal payments on long-term debt, net......................................... (135,335) (102,660) --------------------- --------------------- Net cash used in financing activities........................................... (179,545) (757,691) --------------------- --------------------- Net increase (decrease) in cash and cash equivalents................................ (67,697) (202,648) Cash and cash equivalents at beginning of period.................................... 214,938 232,135 --------------------- --------------------- Cash and cash equivalents at end of period.......................................... $ 147,241 $ 29,487 --------------------- --------------------- --------------------- --------------------- The accompanying notes are an integral part of the consolidated financial statements. Page 6 of 10 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, 1997. 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: March 31, December 31, --------- ------------ 1998 1997 Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . $ 306,485 $ 288,255 Work-in-process. . . . . . . . . . . . . . . . . . . . . . . . . 202,604 282,929 Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . 2,428,411 2,250,549 ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 2,937,500 2,821,733 Allowance for slow-moving inventories. . . . . . . . . . . . . . (805,048) (820,610) ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . $2,132,452 $2,001,123 ---------- ---------- ---------- ---------- RECENT PRONOUNCEMENTS: In February of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128") which establishes standards for computing and presenting earnings per share. SFAS No. 128 is effective for fiscal years ending after December 15, 1997. Management does not believe the implementation of SFAS No. 128 will have a material effect on its financial statements. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 129 "Disclosure of Information About Capital Structure" ("SFAS No. 129") which establishes disclosure requirements for an entity's capital structure. SFAS No. 129 is effective for fiscal years ending after December 15, 1997. Management does not believe the implementation of SFAS No. 129 will have a material effect on its financial statements. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way the public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. NET INCOME PER SHARE DATA Earnings per share is calculated by dividing the net income (loss) by the weighted average number of common shares and common share equivalents outstanding during the year. In 1997 the Company adopted 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 loss per share is similar to the computation of basic loss per share except that the denominator is increased to include the 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 or loss that would result from the assumed conversions of those potential shares. The Company adopted SFAS No. 128 for the year ended December 31, 1997. Previously reported EPS have been restated to conform to SFAS No. 128. Page 7 of 10 Basic and diluted EPS computation for the three months ended March 31, 1998 and 1997 are as follows: ---------------------------- Three Months Ended March 31, 1998 1997 ---------------------------- BASIC EPS Net income available to common stockholders . . . . . 61,169 $ 166,839 Weighted average common shares outstanding. . . . . . 3,563,101 3,607,614 Basic EPS . . . . . . . . . . . . . . . . . . . . . . 02 $ .05 DILUTED EPS Net income available to common stockholders . . . . . 61,169 166,839 Weighted average common share outstanding . . . . . . 3,563,101 3,607,614 Assumed conversion of common shares issuable under stock option plan.. . . . . . . . . . . . . . . - Weighted average common and common equivalent shares outstanding. . . . . . . . . . . . . . . . . . 3,563,101 3,607,614 Diluted EPS. . . . . . . . . . . . . . . . 0.02 $ 0.05 In 1998 and 1997 the Company had common stock options outstanding during the years which were not included in the diluted earnings per share calculation because they would have been antidulutive. As of March 31, 1998 and 1997, the Company had 177,000 and 197,000 options outstanding, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had working capital of approximately $2,547,000. At March 31, 1998, the Company had 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% (9.25% at March 31, 1998). The working capital line of credit matures December 15, 1999 and had an outstanding balance of approximately $412,000 at March 31, 1998. The Company's lines of credit are its primary source of operating funds and liquidity. Capital expenditures during the first three months of 1998 were approximately $42,000 compared to $269,000 in 1997. Capital expenditures decreased in the first quarter of 1998 compared to 1997 because Micron completed its wastewater treatment and filtration system in l997. Capital expenditures are expected to be lower in 1998 than they were in 1997. Normal capital expenditures are funded from operating cash flows. RESULTS OF OPERATIONS REVENUES for the first quarter ended March 31, 1998 decreased approximately 37% when compared to the first quarter ended March 31, 1997. The reason for the reduced sales revenues is that in 1997 approximately $730,000 in electrophysiology ("EP") product sales was recorded for products ordered in 1996 and shipped in 1997. 1996 was the final year ART acted as the exclusive distributor for EP products under its contract with their manufacturer, Prucka Engineering, Inc. EP product sales and cost of sales approximated $730,000 and $678,000 respectively for the three months ended March 31, 1997. During 1998, 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. 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. For revenues attributable to Prucka products that exceed $10,000,000 in any year, ART will be entitled to receive 25% of the commission rate in effect that respective year. Revenues from sales of electrocardiographic ("ECG") sensors decreased 21% for the quarter ended March 31, 1998, as compared to the same period in 1997 due to a deferral of orders in January 1998 caused by uncertainty in the silver market. Page 8 of 10 February and March sales returned to normal levels. The sales mix for the Company continues with ECG sensors making up a greater proportion of sales and the related cost of sales. Domestic and foreign sales for the first quarter are as follows: FIRST QUARTER ------------- 1998 % 1997 % ---------- ------ ----------- ----- Domestic . . . . . . . . . . $ 1,357,476 56 $ 2,636,889 68 Foreign. . . . . . . . . . . 1,071,636 44 1,236,642 32 ---------- ------ ----------- ----- Total. . . . . . . . . . . . $ 2,429,112 100 $ 3,873,531 100 ---------- ------ ----------- ----- ---------- ------ ----------- ----- COST OF SALES decreased significantly for the quarter ended March 31, 1998, as compared to the same period in 1997 because of the absence of EP sales as noted above. Overhead costs at Micron for the first quarter ended March 31, 1998, decreased as compared to the same period of the prior year due to lower than normal repairs and maintenance, utilities and waste treatment expenses. Overhead costs for ART have remained consistent for the three months ended March 31, 1998 as compared to 1997. Cost of sales as a percent of sales is not expected to change significantly for the remainder of the year. SELLING AND MARKETING expenses remained consistent as a percent of sales during the first quarter ended March 31, 1998 as compared to the same period for 1997. The primary components of marketing and selling expenses for the first quarter ended March 31, 1998 are salaries and trade show expenses. The current level of marketing operations is expected to increase during the remainder of the year as a result of worldwide marketing and sales efforts. GENERAL AND ADMINISTRATIVE expenses decreased $46,000 in the first quarter ended March 31, 1998, as compared to 1997 primarily due to lower insurance premiums and a decrease in environmental consultation fees. 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 increased significantly by $54,000 for the first quarter ended March 31, 1998, as compared to the same period in 1997. The increase is due primarily to development costs associated with converting the signal averaging software from DOS to Windows and with converting the Cath Lab software to a Windows NT platform. Salaries and related costs also increased during the first quarter of 1998. SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Forward looking statements made herein are based on current expectations of the Company that involves 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. The factors that could cause actual results to differ materially include: interruptions or cancellation of existing contracts, impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources than the Company, product development and commercialization risks and an inability to arrange additional debt or equity financing. Page 9 of 10 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/ Sid Barbanel Sid Barbanel, President and Chief Executive Officer /s/ Anthony A. Cetrone, President, Micron Products Inc. Chairman of the Board May 13, 1998 Page 10 of 10