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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended SEPTEMBER 30, 2000 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ______ to ______
1-9731
(COMMISSION FILE NO.)
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 72-0925679
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1101 SOUTH CAPITAL OF TEXAS HIGHWAY
BUILDING G - SUITE 200
AUSTIN, TEXAS 78746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(512) 347-9640
(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 October 30, 2000 there were 3,247,035 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
September 30, 2000
<TABLE>
<CAPTION>
<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 SHAREHOLDERS' EQUITY.......................................................5
CONSOLIDATED STATEMENTS OF CASH FLOWS............................................................................6
SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..........................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................7
PART II - OTHER INFORMATION.........................................................................................10
Item 1. Legal Proceedings .....................................................................................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>
2
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<TABLE>
<CAPTION>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 2000 1999
------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................................. $ 1,471,574 $ 455,674
Trade and other accounts receivable, net of allowance for doubtful accounts
of $22,025 and $83,203 ........................................................... 1,893,134 1,653,098
Inventories, net ....................................................................... 1,099,438 1,082,517
Income tax recoverable ................................................................. 156,680 329,408
Assets held for sale ................................................................... 50,000 0
Other current assets ................................................................... 55,688 52,172
------------------ ------------------
Total current assets ................................................................. 4,726,514 3,572,869
Property and equipment, net of accumulated depreciation of $4,246,765 and $3,699,282 ..... 3,443,986 3,835,831
Patent and software development costs, net of accumulated amortization of $499,554
and $474,712 ...................................................................... 106,895 122,887
Goodwill, net of accumulated amortization of $984,020 and $886,603 ....................... 1,489,306 1,586,723
Deferred leasing costs, net of accumulated amortization of $1,677 and $0 ................. 5,033 6,710
Deferred income taxes, net ............................................................... 323,923 423,923
Other assets ............................................................................. 9,357 152,743
------------------ ------------------
Total assets ......................................................................... $ 10,105,014 $ 9,701,686
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities ............................................................ $ 0 $ 0
Current maturities of long-term debt ................................................... 178,279 711,464
Current portion of capital lease obligations ........................................... 18,558 23,811
Accounts payable ....................................................................... 338,186 412,933
Accrued liabilities and other liabilities .............................................. 238,787 250,714
------------------ ------------------
Total current liabilities ............................................................ 773,810 1,398,922
Bonds payable and other long-term debt, net of current maturities ........................ 379,821 46,815
Capital lease obligations, net of current portion ........................................ 10,230 25,530
Deferred revenue ......................................................................... 3,342 8,680
------------------ ------------------
Total liabilities .................................................................... 1,167,203 1,479,947
------------------ ------------------
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized, none issued ................ 0 0
Common stock, $.01 par value; 10,000,000 shares authorized;
3,729,681 issued in 2000 and 3,711,883 issued in 1999 .............................. 37,297 37,119
Additional paid-in-capital ............................................................... 9,166,615 8,946,293
Common stock held in treasury, 433,446 and 298,406 shares at cost ........................ (1,424,826) (1,151,892)
Retained earnings ........................................................................ 1,158,725 390,219
------------------ ------------------
Total shareholders' equity ........................................................... 8,937,811 8,221,739
------------------ ------------------
Total liabilities and shareholders' equity ........................................... $ 10,105,014 $ 9,701,686
================== ==================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 2,108,247 $ 2,609,674 $ 7,515,164 $ 7,974,128
Cost of sales ................................. 1,520,090 1,474,603 4,477,320 5,016,092
--------------- ---------------- ---------------- ----------------
Gross profit .................................. 588,157 1,135,071 3,037,844 2,958,036
--------------- ---------------- ---------------- ----------------
Selling and marketing ......................... 29,868 101,527 159,065 247,897
General and administrative .................... 498,257 568,757 1,591,017 1,607,336
Research and development ...................... 40,953 54,581 120,287 121,236
Amortization of goodwill ...................... 32,472 32,472 97,417 98,047
--------------- ---------------- ---------------- ----------------
Total expenses ................................ 601,550 757,337 1,967,786 2,074,516
--------------- ---------------- ---------------- ----------------
Income (loss) from operations ................. (13,393) 377,734 1,070,058 883,520
Other (income) expense:
Interest expense ............................ 7,191 3,790 21,510 46,029
Other, net .................................. 15,483 38,595 103,042 146,252
--------------- ---------------- ---------------- ----------------
Income (loss) before income taxes ............. (36,067) 335,349 945,506 691,239
Income taxes .................................. (58,000) 159,411 177,000 319,050
--------------- ---------------- ---------------- ----------------
Net income .................................... $ 21,933 $ 175,938 $ 768,506 $ 372,189
=============== ================ ================ ================
Net income per share - Basic .................. $ 0.01 $ 0.05 $ 0.23 $ 0.11
=============== ================ ================ ================
Weighted average number of common
shares outstanding .......................... 3,323,229 3,439,310 3,403,422 3,439,310
=============== ================ ================ ================
Net income per share - Dilutive ............... $ 0.01 $ 0.05 $ 0.22 $ 0.11
=============== ================ ================ ================
Dilutive average number of common
equivalent shares outstanding ............... 3,480,313 3,439,310 3,484,301 3,439,310
=============== ================ ================ ================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Retained
Additional Unearned Earnings
Common Shares Paid-in Treasury ESOP (Accumulated
Number Amount Capital Stock Compensation Deficit) Total
-------------- ------------- ------------- -------------- ------------- ------------- --------------
<S> <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
Treasury stock purchase ... (28,400) (34,297) (34,297)
ESOP payments ............. 42,857 42,857
Net (loss) ................ (136,438) (136,438)
-------------- ------------- ------------- -------------- ------------- ------------- --------------
December 31, 1998 ......... 3,534,701 36,792 8,909,307 (913,084) (39,277) (34,826) 7,958,912
Issuance of common stock .. 32,667 327 36,986 37,313
Treasury stock purchase ... (153,891) (238,808) (238,808)
ESOP payments ............. 39,277 39,277
Net income ................ 425,045 425,045
-------------- ------------- ------------- -------------- ------------- ------------- --------------
December 31, 1999 ......... 3,413,477 37,119 8,946,293 (1,151,892) 0 390,219 8,221,739
Issuance of common stock .. 17,798 178 26,322 26,500
Treasury stock purchase ... (135,040) (272,934) (272,934)
Value of warrants issued
with bond renewal ....... 194,000 194,000
Net income ................ 768,506 768,506
-------------- ------------- ------------- -------------- ------------- ------------- --------------
September 30, 2000 ........ 3,296,235 $ 37,297 $ 9,166,615 $ (1,424,826) $ 0 $ 1,158,725 $ 8,937,811
============== ============= ============= ============== ============= ============= ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
--------------------------------------
2000 1999
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................................. $ 768,506 $ 372,189
Adjustments to reconcile net income to net cash provided by operating
activities:
Directors fees paid in stock .......................................................... 26,500 0
Depreciation .......................................................................... 567,072 519,146
Amortization .......................................................................... 123,936 131,068
Deferred income tax provision ......................................................... 100,000 0
Changes in assets and liabilities:
(Increase) Decrease in trade and other accounts receivable ............................ (240,036) (438,991)
(Increase) Decrease in inventories (16,921) 295,490
(Increase) Decrease in income tax recoverable and other current assets ................ 169,212 14,342
Increase (Decrease) in accounts payable, accrued liabilities and other liabilities .... (92,012) (45,816)
----------------- ------------------
Net cash provided by operating activities ............................................ 1,406,257 847,428
----------------- ------------------
Cash flows from investing activities:
Capital expenditures, net of disposals .................................................. (175,227) (382,815)
Increase in assets for sale ............................................................. (50,000) -
Deposits on capital equipment and other assets .......................................... 143,386 (1,784)
Patent and software development expenditures ............................................ (8,850) (132,137)
----------------- ------------------
Net cash used in investing activities ................................................. (90,691) (516,736)
----------------- ------------------
Cash flows from financing activities:
Increase in bonds payable due to amortization ........................................... 43,821 36,000
Reduction of unearned ESOP compensation ................................................. 0 32,143
Purchases of treasury stock ............................................................. (272,934) (118,730)
Principal payments on long-term debt, net ............................................... (70,553) (141,669)
----------------- ------------------
Net cash used in financing activities ................................................. (299,666) (192,256)
----------------- ------------------
Net increase (decrease) in cash and cash equivalents ...................................... 1,015,900 138,436
Cash and cash equivalents at beginning of period .......................................... 455,674 557,533
----------------- ------------------
Cash and cash equivalents at end of period ................................................ $ 1,471,574 $ 695,969
================= ==================
Supplemental Note: Non-cash flow items from financing activities
of $194,000 (bond discount and paid in capital).
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
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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 the Company's most recent Form 10-K covering the year ended
December 31, 1999.
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>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Raw materials................................................... $ 192,856 $ 252,237
Work-in-process................................................. 178,604 233,966
Finished goods.................................................. 1,155,145 1,054,814
--------------- ---------------
Total...................................................... 1,526,605 1,541,017
Allowance for slow-moving inventories........................... (427,167) (458,500)
--------------- ---------------
Total...................................................... $ 1,099,438 $ 1,082,517
=============== ===============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had working capital of $3,952,704,
up from $2,173,947 as of December 31, 1999. The $1,778,757 increase in working
capital is mainly due to a lump sum payment of $1,000,000 from GE/Prucka to
terminate a commission agreement, $580,000 of bonds payable reclassified in
2000 from a current to a non-current liability, and $295,000 from the sale of a
machine from the polymer operation which was discontinued in the first quarter
of 2000.
In July of 2000, the Company collected $1,000,000 from GE/Prucka
representing commission income that was reported in the second quarter of
2000 and was related to the sales of CardioLab systems. The commission
agreement was scheduled to expire on December 31, 2002, however, GE/Prucka
negotiated to buy out the remainder of the contract with no further
obligations to either party.
The Company has renewed $550,000 of private placement bonds, which
were due to mature May 31, 2000. The bondholders also accepted an extension
until May 31, 2002 for warrants to acquire 254,980 shares of the Company's
stock at $1.50 per share. The bonds are subordinated to the bank's line of
credit, carry an 11% interest rate and mature May 31, 2002.
Capital expenditures, net of disposals, for the first nine months of
2000 were approximately $175,000 compared to $383,000 in 1999. The 1999 total
included several large purchases of equipment and tooling for the Micron
molding operation.
The Company has available $800,000 of borrowing under a working
capital line of credit with a bank, collateralized by accounts receivable and
inventory, which bears interest at the bank "base rate" (prime). The working
capital line of credit had no outstanding balance at September 30, 2000. The
Company's cash flow and its lines of credit are its primary source of operating
funds and liquidity.
RESULTS OF OPERATIONS
TOTAL REVENUES for the third quarter of 2000 was $2,108,247, a
slight increase over the second quarter 2000 revenues of $1,863,091
(excluding GE/Prucka commissions). Compared to the third quarter of 1999,
revenues decreased $501,427 or 19%. In 1999, the GE/Prucka commissions were
$116,104 versus $0 in 2000. In addition, the sales of Micron's sensors and
snaps were lower by $352,704 due to reduced orders from two major customers.
Net income for the third quarter of 2000 was $21,933 as operations generated
a pretax loss of $(36,067) without any GE/Prucka commissions.
7
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The Selling and G & A expenses for the third quarter of 2000 were
$142,159 less than 1999, which reflects the continuing consolidation of
corporate costs and reductions made while new software applications for ART's
signal averaging products are developed.
Revenue for the nine-month period was $7,515,164 in 2000 compared to
$7,974,128 in 1999. Without GE/Prucka commissions of $1,000,000 ($760,000 net
of tax), revenue was $6,515,164 in 2000, compared to $7,603,005 in 1999. The
majority of the decline is in Micron's sensor and snap sales.
Net income for the nine month period was $768,506 in 2000 compared to
$372,189 in 1999. Without GE/Prucka commissions, net income would be $8,506 in
2000 compared to $93,432 in 1999. In addition to the lower profits on reduced
sales, legal expenses of $121,710 were incurred in the nine months ended
September 30, 2000 in connection with the environmental investigation of Micron
by the Attorney General's office of Massachusetts, which has been concluded
with no adverse actions.
A Polymer line that began in 1999 was discontinued in early 2000.
The effect of this decision was to avoid a loss similar to that of $121,751
reported in the nine months of 1999. Federal income taxes in 2000 are
substantially less due to the higher utilization of tax deductions than
provided for in the 1999 valuation allowance for deferred tax assets as a
result of the large GE/Prucka commission income.
Domestic and foreign sales for the third quarter and nine months are
as follows:
<TABLE>
<CAPTION>
THIRD QUARTER FIRST NINE MONTHS
2000 % 1999 % 2000 % 1999 %
---- -- ---- -- ---- -- ---- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic ....... $ 651,744 30 $ 846,495 32 $2,981,942 40 $3,352,208 42
Foreign ........ 1,456,603 70 1,763,179 68 4,533,222 60 4,621,920 58
---------- ---------- ---------- ----------
Total .......... $2,108,247 100 $2,609,674 100 $7,515,164 100 $7,974,128 100
========== === ========== === ========== === ========== ===
</TABLE>
The higher percentage of foreign sales in 2000 compared to 1999
reflects the transfer of production of a major Micron customer who closed a
U.S. plant and moved it's volume into a Canadian plant. For the nine months in
1999, the U.S. plant had $809,000 included in domestic sales.
GROSS PROFIT as a percentage of net sales was 28% and 43% for the
third quarter of fiscal 2000 and 1999, respectively. Of the 15% decline, 4% was
attributed to the absence of GE/Prucka commissions in the third quarter of 2000
and 11% due to the unabsorbed manufacturing costs at the Micron operation which
ran well below normal production capacity in the summer months due to the lower
sales volume. Manufacturing staff and other expenses at Micron have been
reduced based on the lower sales and margins are expected to improve in the
fourth quarter of 2000 and into 2001. Gross profit was 40% and 37% for the nine
months ended September 30, 2000 and 1999, respectively. The higher percentage
in 2000 is all attributable to the lump sum GE/Prucka commission recorded in
the second quarter of 2000. Micron's gross profit was 31% and 34% for the nine
months ended September 30, 2000 and 1999, the decrease reflecting the lower
production efficiencies on the sales decline in 2000.
SELLING AND MARKETING EXPENSES for the third quarter and nine months
of 2000 are significantly below those of 1999 due to the elimination of a
direct sales staff in 2000. This will continue until the new version of
signal averaging products is available for market introduction.
RESEARCH & DEVELOPMENT EXPENSES are spent primarily on the conversion
and enhancing the software related to ART's signal averaging product. The
program is on schedule for the Predictor series to be completed in the fourth
quarter of 2000.
GENERAL AND ADMINISTRATIVE EXPENSES were $498,257 for the third
quarter of 2000 compared to $568,757 in 1999. The savings result from the
contractions of operations in the Texas facility and lower legal expenses. For
the nine months of 2000, general and administrative expenses included $121,710
of legal expenses, which were incurred in connection with the environmental
investigation by the Attorney General's office of Massachusetts. The Company
has been informed the investigation has concluded with no adverse actions. All
significant legal costs associated with the investigation were expensed in the
first six months of 2000.
8
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OTHER (INCOME) EXPENSE includes interest income in 2000 of $35,000 and
$44,000 in the third quarter and nine months of 2000 related to the large cash
and cash equivalent balances. No appreciable interest income was earned in 1999.
INCOME TAXES as a percent of income before taxes in the nine months
were 19% for 2000 and 46% in 1999. At December 31, 1999, the Company had
approximately $1,480,000 in potential deferred tax assets of which only
$424,000 had been recorded. The unplanned receipt of the commission income of
$1,000,000 has resulted in higher utilization of tax deductions than provided
for in the 1999 valuation allowance for deferred tax assets.
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Any 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.
9
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - In March 2000, Astro-Med, Inc. ("Astro-Med") filed
suit against ART in Superior Court of Kent County, Rhode Island (the "RI
Litigation) alleging breach of contract, book account and unjust enrichment.
The suit is based upon the purchase by ART of the K-3 hemodynamic monitoring
system product line from Astro-Med. In April 1997, ART and Astro-Med entered
into an Asset Purchase Agreement (the "Agreement"). In September 1999, ART
ceased to make payments to Astro-Med pursuant to the Agreement. Astro-Med
claims that ART is indebted to Astro-Med in the principal amount of $178,279,
plus interest and late fees.
ART has removed the RI Litigation to the United States District Court
for the District of Rhode Island and has filed a motion to dismiss. In July,
ART's motion to dismiss was denied. ART has filed a complaint and counter claim
for breach of warranty. The Company has been advised that, pursuant to the
District Court's Alternative Dispute Resolution Program, the matter will be
subject to a mandatory settlement conference on November 17, 2000.
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
EXHIBIT 27 FINANCIAL DATA SCHEDULE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
------------------------------------
/s/ E. P. MARINOS
-----------------
Chairman of the Board
/s/ RICHARD A CAMPBELL,
----------------------
Vice President of Finance
November 10, 2000
10
