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, 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 OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
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 August 11, 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
June 30, 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.............................................................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 1- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1998 1997
----------- -----------
Current assets:
Cash and cash equivalents ...................................................... $ 272,607 $ 214,938
Trade and other accounts receivable, net of allowance for
doubtful accounts of $55,345 and $61,318 ..................................... 2,447,435 2,397,269
Inventories, net ............................................................... 1,557,722 2,001,123
Income Tax Recoverable ......................................................... 320,278 262,810
Other current assets ........................................................... 119,677 63,861
----------- -----------
Total current assets ......................................................... 4,717,719 4,940,001
Property and equipment, net of accumulated depreciation of
$2,679,688 & $2,322,218 ........................................................ 3,999,263 4,195,167
Patent and software development costs, net of accumulated
amortization of $438,469 and $422,858 .......................................... 85,593 85,667
Goodwill, net of accumulated amortization of $870,568 & $635,476 ................. 1,790,505 2,025,597
Deferred income taxes, net ....................................................... 458,923 458,923
Other assets ..................................................................... 115,248 127,055
----------- -----------
Total assets ................................................................. $11,167,251 $11,832,410
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities .................................................... $ 466,705 $ 467,135
Current maturities of bonds payable and long-term debt ......................... 197,815 320,328
Current maturities of capital lease obligations ................................ 37,177 100,371
Accounts payable ............................................................... 677,919 1,091,550
Income taxes payable ........................................................... 40,607 0
Accrued liabilities and Other Liabilities ...................................... 549,436 667,172
----------- -----------
Total current liabilities .................................................... 1,969,659 2,646,556
Bonds payable, and other long-term debt, net of current
maturities .................................................................... 977,086 953,086
Capital lease obligations, net of current portion ................................ 92,082 92,082
Deferred revenue ................................................................. 39,413 53,896
----------- -----------
Total liabilities ............................................................ 3,078,240 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 ....................................................... 8,909,306 8,909,307
Treasury stock, 116,115 shares at cost ........................................... (878,787) (878,787)
Unearned ESOP compensation ....................................................... (60,705) (82,134)
Retained earnings ................................................................ 82,405 101,612
----------- -----------
Total shareholders' equity ................................................... 8,089,011 8,086,790
----------- -----------
Total liabilities and shareholders' equity ................................... $11,167,251 $11,832,410
----------- -----------
----------- -----------
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 OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales .................................. $2,845,232 $2,829,610 $5,274,344 $6,703,141
Cost of sales .............................. 1,727,490 1,784,481 3,163,721 4,522,616
---------- ---------- ---------- ----------
Gross profit ............................... 1,117,742 1,045,129 2,110,623 2,180,525
---------- ---------- ---------- ----------
Selling and marketing ...................... 86,530 170,913 183,492 311,867
General and administrative ................. 541,191 556,335 1,078,670 1,139,879
Research and development ................... 112,156 77,077 212,204 123,296
Amortization of goodwill ................... 27,911 31,799 56,627 60,515
---------- ---------- ---------- ----------
Total expenses ............................. 767,788 836,124 1,530,993 1,635,557
---------- ---------- ---------- ----------
Income from operations ..................... 349,954 209,005 579,630 544,968
Other income (expense):
Interest expense ......................... 36,376 59,998 67,589 112,193
Other .................................... 26,388 1,913 53,145 5,668
---------- ---------- ---------- ----------
Income before income taxes and other
charges.................................... 287,190 147,094 458,896 427,107
Provision for Asset Impairment ............. 453,529 0 453,529 0
---------- ---------- ---------- ----------
Income (loss) before income taxes .......... (166,339) 147,094 5,367 427,107
Income taxes (credit) ...................... (85,964) 66,301 24,573 179,475
---------- ---------- ---------- ----------
Net income ................................. $ (80,375) $ 80,793 $ (19,206) $ 247,632
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share ....................... $ (0.02) $ 0.02 $ (0.01) $ 0.07
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common
and dilutive common equivalent
shares outstanding ....................... 3,563,101 3,563,101 3,563,101 3,563,101
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes are an integral part
of the consolidated financial statements.
Page 4 of 9
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Net Retained
Common Shares Additional Unearned Unrealized Earnings
-------------------- Paid-in Treasury ESOP Securities (Accumulated
Number Amount Capital Stock Compensation Gains Deficit) Total
---------- ------- ---------- --------- ------------ ---------- ------------ ----------
January 1, 1995 ........... 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)
Unrealized securities
gain .................... (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
Exercise of options
Maturity and repurchases of
redeemable common stock . 10,046 10,046
ESOP payments ............. 42,857 42,857
Treasury stock purchase ... (1,410) (10,046) (10,046)
Sale of securities ........ 0
Net income ................ 616,579 616,579
---------- ------- ---------- --------- --------- -------- ----------- ----------
December 31, 1996 ......... 3,563,101 36,792 8,909,307 (878,786) (124,991) 0 69,859 8,012,181
Maturity and repurchases of
redeemable common
stock....................
Treasury stock purchase....
ESOP payments ............. 42,857 42,857
Net income ................ 31,752 31,752
---------- ------- ---------- --------- --------- -------- ----------- ----------
December 31, 1997 ......... 3,563,101 36,792 8,909,307 (878,786) (82,134) 0 101,611 8,086,790
ESOP payments ............. 21,428
Net income ................ (19,207)
---------- ------- ---------- --------- --------- -------- ----------- ----------
June 30, 1998 ............. $3,563,101 $36,792 $8,909,307 $(878,786) $ (60,706) $ 0 $ 82,404 $8,089,011
---------- ------- ---------- --------- --------- -------- ----------- ----------
---------- ------- ---------- --------- --------- -------- ----------- ----------
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,
--------------------------
1998 1997
--------- -----------
Cash flows from operating activities:
Net Income ........................................................................ $ (19,206) $ 247,632
Provision for Asset Impairment .................................................... 453,529 0
--------- -----------
Adjusted Net Income ............................................................... 434,323 247,632
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation .................................................................... 330,142 284,981
Amortization .................................................................... 78,502 74,585
Deferred Revenue ................................................................ 0 259
Changes in assets and liabilities:
(Increase) Decrease in Trade and other accounts receivable, net ................. (50,166) 1,690,477
(Increase) Deposits, prepaid expenses and other current assets .................. (113,284) (102,246)
(Increase) Decrease in Inventories .............................................. 209,401 (178,555)
(Decrease) in Accounts payable, accrued liabilities and other
current liabilities............................................................. (619,841) (959,010)
Increase in Income taxes payable ................................................ 40,607 23,426
(Increase) Decrease in Other assets ............................................. (4,057) 205,081
--------- -----------
Net cash provided by operating activities ........................................... 305,627 1,286,630
--------- -----------
Cash flows from investing activities:
Net capital expenditures and fixed asset decrease ................................. (161,566) (858,834)
Deposits on capital equipment, acquisitions and other ............................. 15,862 (250,000)
Patent and software development expenditures ...................................... (15,537) (14,790)
--------- -----------
Net cash used in investing activities ........................................... (161,241) (1,123,624)
--------- -----------
Cash flows from financing activities:
Net repayments of revolving credit facilities ..................................... (430) (237,102)
Increase in bonds payable due to amortization ..................................... 24,000 24,000
Reduction of unearned ESOP compensation ........................................... 21,429 21,429
Principal proceeds on long term debt, net ......................................... 0 400,000
Principal payments on long-term debt, net ......................................... (131,716) (189,520)
--------- -----------
Net cash used in financing activities ........................................... (86,717) 18,807
--------- -----------
Net increase (decrease) in cash and cash equivalents ................................ 57,669 181,813
Cash and cash equivalents at beginning of period .................................... 214,938 232,135
--------- -----------
Cash and cash equivalents at end of period .......................................... $ 272,607 $ 413,948
--------- -----------
--------- -----------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
AstroMed acquisition and related note payable .................................... $ 300,000
Newmark acquisition and related note payable ..................................... 200,000
-----------
Total non-cash activity ..................................................... $ 500,000
-----------
-----------
The accompanying notes are an integral part of
the consolidated financial statements.
Page 6 of 9
SUPPLEMENT 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:
June 30, December 31,
1998 1997
----------- ----------
Raw Materials ....................... $ 284,338 $ 288,255
Work-in-process ..................... 327,966 282,929
Finished goods ...................... 1,982,066 2,250,549
----------- ----------
Total ............................ 2,594,370 2,821,733
Allowance for slow-moving
inventories......................... (1,036,648) (820,610)
----------- ----------
Total ............................ $ 1,557,722 $2,001,123
----------- ----------
----------- ----------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of approximately
$2,750,000. At June 30, 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. ("Micron"), which bears interest at
prime plus .75% (9.25% at June 30, 1998). The working capital line of credit
matures December 15, 1999 and had an outstanding balance of approximately
$467,000 at June 30, 1998. The Company's lines of credit are its primary
source of operating funds and liquidity.
Capital expenditures during the first six months of 1998 were
approximately $160,000 compared to $859,000 in 1997. Capital expenditures
decreased primarily because Micron completed its wastewater treatment
filtration system in 1997. Capital expenditures are expected to continue to
be lower in 1998. Capital expenditures are funded by operating cash flows.
RESULTS OF OPERATIONS
REVENUES for the six months ended June 30, 1998 decreased 21% when
compared to the six months ended June 30, 1997. The reason for the reduced
sales is due to an absence of Electrophysiology ("EP") Lab sales this year.
EP Lab sales were $835,847 in the first six months of 1997 verses $0 this
year. 1996 was the final year ART acted as the exclusive distributor for EP
products under its contract with their manufacturer, Prucka Engineering, Inc.
("Prucka"). 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
Page 7 of 9
annual net sales. From January 1, 1999 through December 31, 2002, ART will
receive a commission of 3% of 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 ECG (Electrocardiograph) sensors decreased by 5%
for the six months ending June 30, 1998 as compared to 1997. The sales mix
for the Company continues with ECG sensors making up a greater proportion of
sales and the related cost of sales.
SECOND QUARTER FIRST SIX MONTHS
1998 % 1997 % 1998 % 1997 %
---------- --- ---------- --- ---------- --- ---------- ---
Domestic $1,446,816 51 $1,625,218 57 $2,804,291 53 $4,262,107 63
Foreign 1,398,416 49 1,204,392 43 2,470,053 47 2,441,034 37
---------- --- ---------- --- ---------- --- ---------- ---
Total $2,845,232 100 $2,829,610 100 $5,274,344 100 $6,703,141 100
---------- --- ---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- --- ---------- ---
COST OF SALES decreased 30% for the six months ended June 30, 1998,
compared to the same period in 1997 because of the absence of EP sales noted
above and the absence of the K-3 Cath Lab sales. K-3 Cath Lab sales in the
first six months of 1997 were $177,000, related cost of sales were $117,000,
compared to $0 sales and cost of sales in the same period of 1998.
SELLING AND MARKETING expenses decreased 41% compared to the same period
in 1997 due to lower sales activity. The primary components of selling and
marketing are salaries and tradeshow expenses. The continuing level of these
expenses is expected to be somewhat lower.
GENERAL AND ADMINISTRATIVE remained consistent in the first six months
of 1998 compared to 1997. The primary components of general and
administrative expenses are salaries and related payroll taxes and benefits,
environmental monitoring expenses, professional fees and insurance costs. Due
to the consolidation of the Austin operation with Micron, (See "Provision for
Asset Impairments" below), it is expected that general and administrative
expenses will decrease.
RESEARCH AND DEVELOPMENT expenses for the first six months in 1998
increased by 72% compared to the same period in 1997 due to an increase in
software development costs related to Windows software projects for the K-3
Cath Lab and Predictor I and Predictor II units.
PROVISION FOR ASSET IMPAIRMENTS. In the second quarter of 1998, ART made
a provision of $453,529 to write off goodwill relating to the Astro-Med
acquisition ($172,201), to increase the inventory reserve of the K-3 Cath Lab
inventory ($131,328), to increase the inventory reserve for SAECG inventory
($130,000), and to reflect certain costs associated with reducing and
consolidating the Austin operation with Micron, ($20,000). The per share
effect, after taxes, was a charge of $.08 per share and without the
provision, operating results would have been reported as earnings per share
of $.05.
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 involve a number of risks and uncertainties and should not
be considered as guarantees of future performance. These statements are made
under the Safe Harbor Provisions of the Private Securities Litigation Reform
Act of 1995. 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 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/ Anthony A. Cetrone,
President, Micron Products Inc.
Chairman of the Board
August 11, 1998
Page 9 of 9