<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the Quarterly period ended December 31, 1997;
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from
____________________ to ___________________.
Commission File Number: 0-27186
RAYTEL MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2787342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2755 CAMPUS DRIVE, SUITE 200, SAN MATEO, CALIFORNIA 94403
(Address of principal executive offices) (Zip code)
(650) 349-0800
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS SHARES OUTSTANDING AS OF JANUARY 30, 1998
----- -----------------------------------------
<S> <C>
COMMON STOCK 8,923,773
($.001 PAR VALUE)
</TABLE>
<PAGE> 2
RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1997 and September 30, 1997......................3
Condensed Consolidated Statements of Operations
for the three months ended December 31, 1997 and 1996..........4
Condensed Consolidated Statements of Cash Flows
for the three months ended December 31, 1997 and 1996..........5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................11
SIGNATURE.................................................................12
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
(000'S OMITTED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,246 $ 7,873
Receivables, net 30,634 30,345
Prepaid expenses and other 3,128 3,970
--------- ---------
Total current assets 42,008 42,188
Property and equipment, less accumulated
depreciation and amortization 19,492 19,712
Intangible assets, less accumulated
amortization 57,021 57,486
Other 39 35
--------- ---------
Total assets $ 118,560 $ 119,421
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 1,838 $ 1,893
Accounts payable 3,452 5,110
Accrued liabilities 10,407 10,794
--------- ---------
Total current liabilities 15,697 17,797
Long-term debt and capital lease obligations, net of current portion 34,780 34,461
Deferred liabilities 1,183 1,163
Minority interest in consolidated entities 3,867 4,101
--------- ---------
Total liabilities 55,527 57,522
--------- ---------
Stockholders' equity:
Common stock 9 9
Additional paid-in capital 61,469 61,261
Common stock to be issued 916 943
Retained earnings 2,423 1,097
--------- ---------
64,817 63,310
Less treasury stock, at cost (1,784) (1,411)
--------- ---------
Total stockholders' equity 63,033 61,899
--------- ---------
Total liabilities and stockholders' equity $ 118,560 $ 119,421
========= =========
</TABLE>
3
<PAGE> 4
RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
(000'S OMITTED, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Pacing, CEDS and Holter $ 11,352 $ 12,169
Diagnostic imaging service 4,291 4,524
Heart center, practice management and other 10,221 3,959
-------- --------
Total revenues 25,864 20,652
-------- --------
Costs and expenses:
Operating costs 12,348 8,237
Selling, general and administrative 8,234 7,668
Depreciation and amortization 2,153 1,481
-------- --------
Total costs and expenses 22,735 17,386
-------- --------
Operating income 3,129 3,266
Interest expense 729 148
Other expense (income) (70) (85)
Minority interest 260 102
-------- --------
Income before income taxes 2,210 3,101
Provision for income taxes 884 1,240
-------- --------
Net income $ 1,326 $ 1,861
======== ========
Net income per share:
Basic $ .15 $ .22
======== ========
Diluted $ .14 $ .21
======== ========
Weighted average shares:
Basic 8,919 8,329
======== ========
Diluted 9,539 8,958
======== ========
</TABLE>
4
<PAGE> 5
RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,326 $ 1,861
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,153 1,481
Minority interest 260 102
Other, net 12 61
Changes in operating accounts:
Receivables, net (289) (1,068)
Prepaid expenses and other 842 8
Accounts payable (1,658) 69
Accrued liabilities and other (498) 5,057
------- -------
Net cash provided by operating activities 2,148 7,571
------- -------
Cash flows from investing activities:
Capital expenditures (1,083) (1,383)
Purchase of physician practice -- (427)
Other, net (380) (338)
------- -------
Net cash used in investing activities (1,463) (2,148)
------- -------
Cash flows from financing activities:
Repurchase of company stock (373) (99)
Income distributions to noncontrolling investors (432) (131)
Proceeds from (paydown of) line of credit 733 (2,376)
Principal repayments of debt (474) (789)
Other, net 234 22
------- -------
Net cash used in financing activities (312) (3,373)
------- -------
Net increase in cash and cash equivalents 373 2,050
Cash and cash equivalents at beginning of period 7,873 5,737
------- -------
Cash and cash equivalents at end of period $ 8,246 $ 7,787
======= =======
</TABLE>
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating
5
<PAGE> 6
results for the three months ended December 31, 1997 are not necessarily
indicative of results that may be expected for the year ending September 30,
1998. For further information, refer to the consolidated financial statements
and notes included in Raytel Medical Corporation's (the "Company") Annual Report
on Form 10-K for the year ended September 30, 1997.
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share. The adoption of this
accounting standard did not effect previously reported earnings per share.
For the three months ended December 31, 1997 and 1996, basic and diluted
earnings per share are calculated as follows:
<TABLE>
<CAPTION>
For the three months
ended December 31,
--------------------------
(000's omitted, except per share amounts) 1997 1996
------ ------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $1,326 $1,861
====== ======
Weighted average shares outstanding 8,919 8,329
====== ======
Per share $ .15 $ .22
====== ======
DILUTED EARNINGS PER SHARE:
Net income $1,326 $1,861
====== ======
Weighted average shares outstanding 8,919 8,329
Shares to be issued 132 132
Options 416 399
Warrants 72 98
------ ------
9,539 8,958
====== ======
Per share $ .14 $ .21
====== ======
</TABLE>
Options to purchase 500 shares of common stock at $12.625 per share and 400
shares of common stock at $13.50 per share were outstanding during the three
months ended December 31, 1997 but were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares for the period.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis includes a number of forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed under "Business
Environment and Future Results" and elsewhere in this Item, that could cause
actual results to differ materially from historical results or those
anticipated. In this Item, the words "anticipates," "believes," "expects,"
"intends," "future" and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
OVERVIEW
The Company generates the majority of its revenues from the provision of
transtelephonic monitoring services for cardiac pacemaker patients ("Pacing"),
cardiac event detection services ("CEDS") and Holter, diagnostic imaging
services and cardiac catheterization procedures. Following the Company's initial
public offering in December 1995, the Company has entered into a series of
transactions which have expanded its heart center and physician practice
management businesses. As a result, revenue is also being provided from: Raytel
Heart Center at Granada Hills ("RHCGH") beginning on February 1, 1996; the
management of Southeast Texas Cardiology Associates II P.A. ("SETCA") beginning
on September 18, 1996; the management of Comprehensive Cardiology Consultants, a
Medical Group, Inc. ("CCMG") beginning on November 1, 1996; and Cardiovascular
Ventures, Inc. ("CVI") beginning on August 15, 1997.
The Company's investments in two ventures ("Ventures") that operated four
of the consolidated diagnostic imaging centers terminated during fiscal 1997.
Revenues contributed by these ventures were $793,000 for the three months ended
December 31, 1996.
Under certain practice management contracts, revenues are recognized
pursuant to long-term arrangements with physician groups under which the Company
provides the physician group with a full range of services, including, but not
limited to, office space, specialized clinical and procedural facilities,
medical equipment, data processing and medical record keeping, billing and
collection procedures and services, non-physician licensed personnel, such as
nurses and technicians, as well as office staff and administrative personnel. In
the case of SETCA and CCMG, the Company's practice management revenues are
derived from the physician groups' revenues, generally as a purchased service,
except for certain physician compensation and employment benefits, which are
paid by the physician group on a priority basis. Under the above management
services arrangements, the Company's practice management revenues represent
approximately 56% and 50% of the revenues of the physician groups for the three
months ended December 31, 1997 and 1996, respectively. For the physician
practice acquired as part of the CVI acquisition, the Company recognizes 100% of
all medical revenue as the physicians are employees of the Company.
On August 15, 1997, the Company acquired the stock of CVI, of New Orleans,
Louisiana. CVI manages, owns and operates cardiovascular diagnostic facilities
in Texas, Louisiana, Maryland and Florida and owns and manages a physician
clinic in Florida. Total consideration for the transaction consisted of cash and
transaction costs of approximately $16,980,000, contingent promissory notes in
the aggregate principal amount of $820,000 and 500,000 shares of Raytel Common
Stock.
7
<PAGE> 8
On October 9, 1997, the Company announced it had entered into an agreement
with The Baptist Hospital of Southeast Texas to develop a Raytel Heart Center at
the hospital. Under the agreement, Raytel will manage the heart center, which
will provide the entire continuum of cardiovascular services, including
diagnostic, therapeutic and patient wellness programs. Among other duties,
Raytel will be responsible for the day-to-day operations of the heart center,
including administrative support, information systems management, marketing and
public relations activities. The Company expects it will begin operations at
Baptist Hospital during its second quarter of fiscal 1998.
RESULTS OF OPERATIONS
The results of operations from the management service agreement with CCMG
are included in the Company's Condensed Consolidated Statements of Operations
since November 1, 1996, the effective date of the agreement. Accordingly, such
results are included in the three month period ended December 31, 1997, but are
only included for two months in the three month period ended December 31, 1996.
The operations of CVI are included in the Company's Condensed Consolidated
Statements of Operations since August 15, 1997, the effective date of the
Company's acquisition of CVI. Accordingly, such results are included in the
three month period ended December 31, 1997, but are not included in the three
month period ended December 31, 1996.
Revenues. Pacing, CEDS and Holter revenues decreased by $817,000, or 6.7%,
from $12,169,000 for the three months ended December 31, 1996 to $11,352,000 for
the three months ended December 31, 1997, due primarily to lower revenues from
Pacing due primarily to lower reimbursement rates and from CEDS due to
competitive pressures. Diagnostic imaging service revenues decreased by
$233,000, or 5.2%, from $4,524,000 for the three months ended December 31, 1996
to $4,291,000 for the three months ended December 31, 1997, due primarily to the
termination of two Ventures in fiscal 1997 partially offset by increases in
revenues from other Ventures. Heart Center, practice management and other
revenues increased by $6,262,000, or 158.2%, from $3,959,000 for the three
months ended December 31, 1996 to $10,221,000 for the three months ended
December 31, 1997, due primarily to the inclusion of revenues from CVI.
As a result of the foregoing factors, total revenues increased by
$5,212,000, or 25.2%, from $20,652,000 for the three months ended December 31,
1996 to $25,864,000 for the three months ended December 31, 1997.
Operating Expenses. Operating costs and selling, general and
administrative expenses increased by $4,677,000, or 29.4%, from $15,905,000 for
the three months ended December 31, 1996 to $20,582,000 for the three months
ended December 31, 1997, due primarily to inclusion of costs and expenses from
CVI partially offset by slight reductions in costs and expenses in
transtelephonic monitoring and diagnostic imaging services. Operating costs and
selling, general and administrative expenses as a percentage of total revenues
increased from 77.0% for the three months ended December 31, 1996 to 79.6% for
the three months ended December 31, 1997, due primarily to the inclusion of
revenues and expenses related to CVI. At RHCGH operating expenses were slightly
in excess of revenues.
Depreciation and Amortization. Depreciation and amortization expense
increased by $672,000, or 45.4%, from $1,481,000 for the three months ended
December 31, 1996 to $2,153,000 for the three months ended December 31, 1997 due
primarily to the inclusion of CVI, and increased as a percentage of revenues
from 7.2% for the three months ended December 31, 1996 to 8.3% for the three
months ended December 31, 1997.
Operating Income. As a result of the foregoing factors, operating income
decreased by $137,000, or 4.2% from $3,266,000 for the three months ended
December 31, 1996 to $3,129,000 for the three months ended December 31, 1997.
8
<PAGE> 9
Interest Expense. Interest expense increased by $581,000, or 392.6%, from
$148,000 for the three months ended December 31, 1996 to $729,000 for the three
months ended December 31, 1997 due primarily to an increase in debt due to the
CVI acquisition.
Income Taxes. The provision for income taxes decreased by $356,000, or
28.7%, from $1,240,000 for the three months ended December 31, 1996 to $884,000
for the three months ended December 31, 1997 as a result of decreased taxable
income.
Net Income. As a result of the foregoing factors, net income decreased by
$535,000, or 28.7%, from $1,861,000 for the three months ended December 31, 1996
to $1,326,000 for the three months ended December 31, 1997.
BUSINESS ENVIRONMENT AND FUTURE RESULTS
The Company's future operating results may be affected by various trends
in the healthcare industry as well as by a variety of other factors, some of
which are beyond the Company's control.
The healthcare industry is undergoing significant change as third-party
payors attempt to control the cost, utilization and delivery of healthcare
services. Substantially all of the Company's revenues are derived from Medicare,
HMOs, and commercial insurers and other third-party payors. Both government and
private payment sources have instituted cost containment measures designed to
limit payments made to healthcare providers by reducing reimbursement rates,
limiting services covered, increasing utilization review of services,
negotiating prospective or discounted contract pricing, adopting capitation
strategies and seeking competitive bids. Although the Company's total revenues
have increased in each of the last three fiscal years, revenue of the Company's
Pacing operations during that period has been negatively impacted by Medicare
reimbursement rate reductions in certain geographic areas. Additional
reimbursement rate reductions applicable to the Company's Pacing procedures
became effective on January 1, 1996 and January 1, 1997. These reductions had a
negative effect on the Company's operating results for fiscal 1997 and the first
quarter of fiscal 1998 and, unless modified, will continue to have a negative
effect on its ongoing results. The Company cannot predict with any certainty
whether or when additional reductions or changes in Medicare or other
third-party reimbursement rates or policies will be implemented. There can be no
assurance that future changes, if any, will not adversely affect the amounts or
types of services that may be reimbursed to the Company, or that future
reimbursement of any service offered by the Company will be sufficient to cover
the costs and overhead allocated to such service.
From time to time Congress considers legislation to reduce Medicare and
Medicaid expenditures. Future legislation of this type could have a material
adverse effect on the Company's business, financial condition and operating
results.
A key element of the Company's long-range strategy is the development and
operation of integrated heart centers and the acquisition of healthcare
providers specializing in cardiology related services and the assets of
physician practices and other businesses related to its current operations. The
success of the Company's existing and future heart centers and physician
practices will depend upon several factors, including the Company's ability to:
obtain and operate in compliance with appropriate licenses; control costs and
realize operating efficiencies; educate patients, referring physicians and
third-party payors about the benefits of such heart centers; and provide
cost-effective services that meet or exceed existing standards of care.
An element of the Company's strategy is to expand, in part, through
acquisitions and investments in complementary healthcare businesses. The
implementation of this strategy may place significant strain on the Company's
administrative, operational and financial resources and increase demands on its
systems and controls. There can be no assurances that businesses acquired by the
Company, either recently or in the future, will be integrated successfully and
profitably into the Company's operations, that suitable acquisitions or
investment opportunities will be identified, or that any such transactions can
be consummated.
9
<PAGE> 10
Providers of healthcare services are subject to numerous federal, state
and local laws and regulations that govern various aspects of their business.
There can be no assurance that the Company will be able to obtain regulatory
approvals that may be required to expand its services or that new laws or
regulations will not be enacted or adopted that will have a material adverse
effect on the Company's business, financial condition or operating results.
The healthcare businesses in which the Company is engaged are highly
competitive. The Company expects competition to increase as a result of ongoing
consolidations and cost-containment pressures, among other factors.
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in the Company's operating
results, shortfalls in such operating results from levels forecasted by
securities analysts and other events or factors. In addition, the stock market
has, from time to time, experienced extreme price and volume fluctuations that
have particularly affected the market prices of companies in the healthcare
service industries and that have often been unrelated to the operating
performance of the affected companies. Announcements of changes in reimbursement
policies of third-party payors, regulatory developments, economic news and other
external factors may have a significant impact on the market price of healthcare
stocks.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity was materially improved as a result of the
completion of the initial public offering of its Common Stock in December 1995
and its receipt of $20,400,000 in net proceeds therefrom. The Company acquired
certain assets and assumed certain liabilities of CDS in June 1996 for cash in
the amount of $14,254,000, SETCA in September 1996 for cash in the amount of
$4,010,000, CCMG in November 1996 for cash in the amount of $427,000 and
acquired the stock of CVI in August 1997 for cash and transaction costs in the
amount of $16,980,000. At December 31, 1997, the Company had working capital of
$26,311,000, compared to $24,391,000 at September 30, 1997. At December 31,
1997, the Company had cash and temporary cash investments of $8,246,000. At
December 31, 1997, $26,694,000 was outstanding under the Company's line of
credit.
The Company batch-bills Medicare insurance carriers for most cardiac
testing services performed during the first few months of each calendar year.
This practice results in a temporary build-up of accounts receivable during the
Company's second and third fiscal quarters and the collection of these
receivables primarily during the subsequent fourth fiscal quarter.
The Company has a revolving line of credit with two banks in the amount of
$45,000,000 to fund working capital needs, future acquisitions, equipment
purchases and other business needs. Amounts outstanding under the line of credit
bear interest based on a defined formula and are subject to certain covenants.
The line of credit expires in August 1999 at which time any outstanding balance
will be converted to a five year term loan.
The Company's long-term capital requirements will depend on numerous
factors, including the rate at which the Company develops and opens new heart
centers or acquires existing heart centers, physician practices or other
businesses, if any. The Company believes that its cash and cash equivalent
balances, together with amounts available from bank borrowings and cash
generated by its operating activities, will be adequate to meet the Company's
anticipated needs for working capital and capital expenditures through fiscal
1998.
10
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
The following exhibits are filed as a part of this Report:
Exhibit
Number Title
------ -----
27 Financial data schedule
B. REPORTS ON FORM 8-K:
The Company filed one report on Form 8-K during the quarter ended
December 31, 1997. The report was filed on October 21, 1997 and was an amendment
to a previously filed Form 8-K. The Company reported under Item 7 the pro forma
information relating to CVI as required to be filed pursuant to Item 7 and
Regulation S-X.
11
<PAGE> 12
SIGNATURE
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.
RAYTEL MEDICAL CORPORATION
Dated: February 12, 1998 By: /s/ E. Payson Smith, Jr.
------------------------
E. Payson Smith, Jr.
Senior Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
12
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EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) RAYTEL
MEDICAL CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,246
<SECURITIES> 0
<RECEIVABLES> 30,634<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,008
<PP&E> 37,317
<DEPRECIATION> (17,825)
<TOTAL-ASSETS> 118,560
<CURRENT-LIABILITIES> 15,697
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 63,024
<TOTAL-LIABILITY-AND-EQUITY> 118,560
<SALES> 0
<TOTAL-REVENUES> 25,864
<CGS> 0
<TOTAL-COSTS> 22,735
<OTHER-EXPENSES> 190
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 729
<INCOME-PRETAX> 2,210
<INCOME-TAX> 884
<INCOME-CONTINUING> 1,326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,326
<EPS-PRIMARY> .15
<EPS-DILUTED> .14
<FN>
<F1>(RECEIVABLES) REPRESENTS NET RECEIVABLES.
<F2>(LOSS PROVISION) INCLUDED IN (TOTAL COSTS)
</FN>
</TABLE>
