<PAGE>
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.
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ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
TABLE OF CONTENTS
FORM 10-Q
March 31, 1998
<TABLE>
<S> <C>
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
</TABLE>
Page 2 of 10
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1998 1997
------------------ -----------------
CURRENT ASSETS: (UNAUDITED)
<S> <C> <C>
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.
</TABLE>
Page 3 of 10
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<TABLE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
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.
</TABLE>
Page 4 of 10
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<TABLE>
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
--------- ------- ---------- --------- ------------ -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
Page 5 of 10
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<TABLE>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
---------------------------------------------
1998 1997
---------------------- ----------------------
<S> <C> <C>
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.
</TABLE>
Page 6 of 10
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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:
<TABLE>
March 31, December 31,
--------- ------------
1998 1997
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
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
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Basic and diluted EPS computation for the three months ended March 31,
1998 and 1997 are as follows:
<TABLE>
----------------------------
Three Months Ended March 31,
1998 1997
----------------------------
<S> <C> <C>
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
</TABLE>
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
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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:
<TABLE>
FIRST QUARTER
-------------
1998 % 1997 %
---------- ------ ----------- -----
<S> <C> <C> <C> <C>
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
---------- ------ ----------- -----
---------- ------ ----------- -----
</TABLE>
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
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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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 147,241
<SECURITIES> 0
<RECEIVABLES> 2,334,286
<ALLOWANCES> (61,318)
<INVENTORY> 2,132,452
<CURRENT-ASSETS> 4,955,152
<PP&E> 6,542,664
<DEPRECIATION> 2,489,507
<TOTAL-ASSETS> 11,587,056
<CURRENT-LIABILITIES> 2,327,987
<BONDS> 0
0
0
<COMMON> 36,792
<OTHER-SE> 8,121,880
<TOTAL-LIABILITY-AND-EQUITY> 8,158,672
<SALES> 2,429,112
<TOTAL-REVENUES> 0
<CGS> 1,436,231
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 763,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 110,538
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,169
<EPS-PRIMARY> 0
<EPS-DILUTED> .02
</TABLE>
