<PAGE>
FORM 10-Q/A
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, 1997 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 December 9, 1997 there were 3,563,101 shares of common stock outstanding.
This report consists of 11 pages.
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q/A
September 30, 1997
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. . . . . . . . . . . . . . . . . . . . . . . . 11
Item 1. Legal Proceedings - none . . . . . . . . . . . . . . . . . . . 11
Item 2. Changes in Securities - none . . . . . . . . . . . . . . . . . 11
Item 3. Defaults Upon Senior Securities - none . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders - none . . 11
Item 5. Other Information - none . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K - none. . . . . . . . . . . . 11
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Page 2 of 11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
PART 1- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 572,393 $ 232,135
Trade and other accounts receivable, net of allowance for doubtful accounts
of $31,282 and $29,864 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,538,074 4,447,624
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,093,113 2,238,436
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,261 164,879
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,412,841 7,083,074
Property and equipment, net of accumulated depreciation of $2,182,735 and $1,744,302 . 4,407,369 3,177,862
Patent and software development costs, net of accumulated amortization of $415,526
and $394,122. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,000 99,613
Goodwill, net of accumulated amortization of $596,763 and $504,448 . . . . . . . . . . 1,911,310 1,818,625
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493,767 493,767
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,519 291,298
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,388,806 $ 12,964,239
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 711,763 $ 1,158,660
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 104,940 256,327
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,111,325 2,390,188
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,778 34,161
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545,965 353,101
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,534,771 4,192,437
Bonds payable, and other long-term debt, net of current maturities . . . . . . . . . . 1,477,915 671,915
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,484 87,706
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,071,170 4,952,058
------------ ------------
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 . . . . . . . . . . . . . . . . . . . . . . . . (878,786) (878,786)
Unearned ESOP compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (92,848) (124,991)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343,171 69,859
------------ ------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,317,636 8,012,181
------------ ------------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . $ 12,388,806 $ 12,964,239
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 3 of 11
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,825,939 $ 6,464,147 $ 9,529,080 $ 18,567,323
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 1,774,946 5,112,182 6,297,562 14,962,270
--------------- --------------- -------------- ---------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 1,050,993 1,351,965 3,231,518 3,605,053
--------------- --------------- -------------- ---------------
Selling and marketing. . . . . . . . . . . . . . . . . . . . 161,906 159,779 473,773 456,873
General and administrative . . . . . . . . . . . . . . . . . 635,699 541,433 1,775,578 1,692,823
Research and development . . . . . . . . . . . . . . . . . . 133,130 41,368 256,426 126,596
Amortization of goodwill . . . . . . . . . . . . . . . . . . 31,800 28,716 92,315 86,148
--------------- --------------- -------------- ---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . 962,535 771,296 2,598,092 2,362,440
--------------- --------------- -------------- ---------------
Income from operations . . . . . . . . . . . . . . . . . . . 88,458 580,669 633,426 1,242,613
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . (64,664) (67,338) (176,857) (211,733)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . (521) (3,953) (6,189) (7,313)
--------------- --------------- -------------- ---------------
Income before income taxes . . . . . . . . . . . . . . . . . 23,273 509,378 450,380 1,023,567
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 2,407 (227,632) (177,068) (496,609)
--------------- --------------- -------------- ---------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,680 $ 281,746 $ 273,312 $ 526,958
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Net income per share . . . . . . . . . . . . . . . . . . . . $ 0.01 $ 0.08 $ 0.08 $ 0.15
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Weighted average number of common
and dilutive common equivalent
shares outstanding . . . . . . . . . . . . . . . . . . . . 3,563,101 3,563,101 3,563,101 3,563,414
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 4 of 11
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Retained
Common Shares Additional Unearned Unrealized Earnings
---------------------- Paid-in Treasury ESOP Securities (Accumulated
Number Amount Capital Stock Compensation Gains Deficit) Total
------------ --------- ----------- ---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
ESOP payments................ 32,143 32,143
Net income................... 273,312 273,312
------------ ----------- ------------ ------------ ------------ ---------- ------------ ------------
September 30, 1997........... 3,563,101 $ 36,792 $ 8,909,307 $ (878,786) $ (92,848) $ 0 $ 343,171 $ 8,317,636
------------ ----------- ------------ ------------ ------------ ---------- ------------ ------------
------------ ----------- ------------ ------------ ------------ ---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 5 of 11
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 273,312 $ 526,958
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.......................................................... 438,433 333,604
Amortization.......................................................... 113,719 115,555
Changes in assets and liabilities:
Trade and other accounts receivable, net.............................. 1,909,550 (995,430)
Deposits, prepaid expenses and other current assets................... (44,382) 4,000
Inventories, net of effect of acquisition of $165,000................. 310,323 1,018,040
Accounts payable and accrued liabilities.............................. (1,085,999) (291,629)
Income taxes payable.................................................. 26,617 239,045
Bonds and accrued interest payable.................................... 36,000
Deferred revenue...................................................... (29,222) 44,722
Payable to related parties............................................ (30,899)
Other assets.......................................................... 220,779 123,075
--------------- ---------------
Net cash provided by operating activities................................. 2,169,130 1,087,041
--------------- ---------------
Cash flows from investing activities:
Capital expenditures.................................................... (1,267,940) (584,458)
Astro-Med acquisition................................................... (50,000)
Newmark acquisition..................................................... (200,000)
Patent and software development expenditures............................ (14,791) (15,718)
--------------- ---------------
Net cash used in investing activities................................. (1,532,731) (600,176)
--------------- ---------------
Cash flows from financing activities:
Net repayments of revolving credit facilities........................... (446,897) (454,374)
Purchase of treasury stock.............................................. (10,047)
Reduction of unearned ESOP compensation................................. 32,143 32,143
Principal proceeds on long term debt, net............................... 400,000
Principal payments on long-term debt, net............................... (281,387) (294,870)
--------------- ---------------
Net cash used in financing activities................................. (296,141) (727,148)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents...................... 340,258 (240,283)
Cash and cash equivalents at beginning of period.......................... 232,135 397,799
--------------- ---------------
Cash and cash equivalents at end of period................................ $ 572,393 $ 157,516
--------------- ---------------
--------------- ---------------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Astro-med acquisition and related note payable $ 300,000
Newmark acquisition and related note payable 200,000
---------------
Total non-cash activity $ 500,000
---------------
---------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 6 of 11
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. The accompanying unaudited interim consolidated financial
statements and related notes should be read in conjunction with the consolidated
financial statements and notes thereto included in Arrhythmia Research
Technology, Inc.'s ("ART" or the "Company") most recent Form 10-K covering the
year ended December 31, 1996.
The information furnished reflects, in the opinion of the management of the
Company, 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 an audit by independent certified public accountants.
INVENTORIES:
Inventories consist of the following as of:
September 30, December 31,
1997 1996
------------ ------------
Raw materials.......................... $ 249,565 $ 320,736
Work-in-process........................ 335,206 354,838
Finished goods......................... 2,394,619 2,475,814
------------ ------------
2,979,390 3,151,388
Allowance for slow-moving inventories.. (886,277) (912,952)
------------ ------------
Total................................ $ 2,093,113 $ 2,238,436
------------ ------------
------------ ------------
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.
Page 7 of 11
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
PRODUCT LINE ACQUISITIONS:
In the second quarter of 1997, ART acquired the K-3 product family of
hemodynamic systems for the cath lab from Astro-Med, Inc. ART has been the
exclusive distributor of the K-3 product family in the U.S., Canada, Eastern
Block countries and Russia since December, 1995. The K-3 cath lab product line
will now be sold worldwide by ART. It is a fully optioned, competitive
state-of-the-art system with a price benchmark significantly less than similar
systems on the market. The system is currently installed in locations overseas
and in the U.S. ART's gross margins on K-3 sales will improve over margins
under the previous distribution agreement. In addition, ART has contracted with
a third party developer to convert the K-3 operating software from a DOS
platform to a Windows platform in order to respond to changes in the marketplace
and meet customer needs. Completion of this software conversion is expected in
the first quarter of 1998.
ART'S Micron Products Inc. ("Micron") subsidiary acquired a product line from
Newmark related to its high-speed electrode assembly machines. Newmark will
continue to manufacture and service the machines for one year. The acquisition
of this product line is consistent with ART's long-term growth strategy into
related product and market areas.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had working capital of approximately
$2,878,000 and a $3,500,000 working capital line of credit with a commercial
bank, collateralized by accounts receivable and inventory of ART and Micron,
bearing interest at prime plus .75% (9.25% at September 30, 1997). The working
capital line of credit matures December 15, 1999 and had an outstanding balance
of approximately $712,000 at September 30, 1997. For the nine months ended
September 30, 1997, the Company generated positive operating cash flows of
approximately $2,169,000 as compared to positive operating cash flows of
approximately $1,087,000 for the nine months ended September 30, 1996. The
increase in operating cash flows has been driven primarily by improved
collections on trade and other accounts receivable.
Capital expenditures excluding assets acquired in asset purchase agreements
during the first nine months of 1997 were approximately $1,268,000 compared to
approximately $584,000 in 1996. Capital expenditures have increased in the first
nine months of 1997 compared to 1996 as a result of additional equipment
acquired by Micron in the installation of a waste-water treatment and filtration
system completed in the second quarter. Capital expenditures are expected to
be higher in 1997 than they were in 1996. Normal capital expenditures are
funded from operating cash flows and capital projects, such as the new
waste-water treatment and filtration system, are typically financed through long
term debt. The waste-water treatment facility equipment was purchased at a cost
of $480,000 of which $400,000 was financed by a bank facility. This note is
payable in equal monthly installments over four years and bears interest at a
rate of prime plus .75% (9.25% at September 30, 1997).
The Astro-Med and Newmark product line acquisitions were financed in part
through seller originated notes of $300,000 and $200,000 respectively. The
Astro-Med note bears interest at a rate of 8% per annum with quarterly interest
only payments in the first year beginning on June 30, 1997. Principal and
interest payments are due quarterly thereafter to amortize the note in full by
the April 30, 2000. The promissory note with Newmark is non-interest bearing
and is payable in twenty equal installments beginning in May 1997.
Page 8 of 11
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
RESULTS OF OPERATIONS
REVENUES for the three months ended September 30, 1997 decreased approximately
56% when compared to the same period in the prior year, and revenues for the
nine months ended September 30, 1997 decreased approximately 49% as compared to
the same period in the prior year. The reason for the reduced sales revenue is
that 1996 was the final year in which ART acted as the exclusive distributor for
CardioLab products under its contract with their manufacturer, Prucka
Engineering, Inc. For 1997, ART has not reported the gross revenues nor the
related cost of sales for CardioLab products except for certain carry over
orders shipped in 1997 of approximately $872,000. CardioLab product sales and
cost of sales approximated $10,741,000 and $9,869,000, respectively for the nine
months ended September 30, 1996. During 1997 and 1998, ART will receive a 4%
commission on net sales of CardioLab 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. ART will receive 25% of the
commissions it would otherwise be entitled to receive for revenues attributable
to CardioLab sales that exceed $10,000,000 in any given year.
Revenues from sales of ECG sensors increased approximately 3% for the nine
months ended September 30, 1997, as compared to the same period in 1996. The
increase in sensor sales is due to increased demand in the international market.
Pricing on all products remained approximately the same for the third quarter
and first nine months of 1997 as compared to 1996. The sales mix for the
Company has changed with ECG sensors making up a greater proportion of sales and
the related cost of sales, as a result of the reduction in CardioLab sales. For
the nine months ended September 30, 1997, ECG sensor sales accounted for
approximately 77% of total sales as compared to approximately 39% for the nine
months ended September 30, 1996.
The following table sets forth the domestic and foreign sales of the Company:
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------------------------------------ -----------------------------------------------
1997 % 1996 % 1997 % 1996 %
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Domestic.................... $ 1,661,007 59 $ 4,452,075 69 $ 5,867,785 62 $ 12,328,202 66
Foreign..................... 1,164,932 41 2,012,072 31 3,661,295 38 6,239,121 34
---------------------- ---------------------- ---------------------- ----------------------
Total....................... $ 2,825,939 100 $ 6,464,147 100 $ 9,529,080 100 $ 18,567,323 100
---------------------- ---------------------- ---------------------- ----------------------
---------------------- ---------------------- ---------------------- ----------------------
</TABLE>
COST OF SALES for the quarter and nine months ended September 30, 1997 decreased
approximately 65% and 58%, respectively, as compared to the same periods in
1996, primarily due to a decrease in revenues as noted above. Micron has
experienced significant improvements of silver yields in the manufacturing of
ECG sensors, however, these lower costs have been offset by increased overhead
costs which have increased primarily due to higher maintenance, salary and
utility costs. The increased costs were in preparation for an ISO 9001
certification, which will be obtained in the fourth quarter. Cost of sales as
a percent of sales is expected to remain similar for the remainder of the year.
SELLING AND MARKETING expenses as a percent of sales have increased
approximately130% and 100% for the quarter and nine months ended September 30,
1997, compared to the third quarter and first nine months of 1996. The
percentage increases are due primarily to reduced CardioLab sales as noted
above. The primary components of marketing and selling expenses for the nine
months ended September 30, 1997 are salaries and trade show expenses. The
current level of marketing operations is expected to continue to increase for
the remainder of the year as a result of the acquisition of the K-3 product line
and increased worldwide marketing and sales efforts.
Page 9 of 11
<PAGE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
RESULTS OF OPERATIONS, CONTINUED
GENERAL AND ADMINISTRATIVE expenses have increased approximately 17% and 5% for
the three months and nine months ended September 30, 1997, as compared to 1996
primarily because of higher environmental monitoring expenses and salaries. 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 increased approximately 230% for the
quarter and approximately 100% for the nine months ended September 30, 1997, as
compared to the same periods in 1996. The increases are due primarily to higher
outside consulting fees and software development expenses. The thrust of the
research and development effort is to develop new software applications for
existing signal averaging products, new products utilizing the patented Simson
method of signal averaging, and upgrading the K-3 operating software from a DOS
platform to a Windows platform.
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:
interruption 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 10 of 11
<PAGE>
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
- ----------------------
ANTHONY A. CETRONE,
President, Micron Products Inc.
Chairman of the Board
December 9, 1997
Page 11 of 11
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