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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998. (FEE REQUIRED)
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 0-27186
RAYTEL MEDICAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-2787342
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2755 CAMPUS DRIVE, SUITE 200, SAN MATEO, CA 94403
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(650) 349-0800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates as of November 30, 1998 was $43,361,405 based on the closing sale
price of the Common Stock, as reported on the Nasdaq National Market System on
that day.
The number of shares of the registrant's Common Stock outstanding on
November 30, 1998 was 8,672,281.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT WHERE INCORPORATED
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Annual Report to Stockholders for
fiscal year ended September 30, 1998........................ Part II
Proxy Statement for the Annual Meeting
to be held on February 25, 1999............................. Part III
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PART I.
This report 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 in "Item 17. Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Business
Environment and Future Financial Results" and elsewhere in this report, that
could cause actual results to differ materially from historical results or those
anticipated. In this report, the words "anticipates," "believes," "expects,"
"intends," "future," "goals" 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.
ITEM 1. BUSINESS
Raytel Medical Corporation is a provider of healthcare services, focusing
on the needs of patients with cardiovascular disease ("CVD"). The Company
believes, based on its industry experience, that it is the leading provider of
remote cardiac monitoring and testing services utilizing transtelephonic
monitoring technology in the United States. The Company's goal is to integrate
all of its cardiovascular services in order to become a nationwide provider of
cardiac health care services. Raytel intends to accomplish this by complementing
its existing nationwide cardiac telephonic testing services with a nationwide
network of fixed site cardiac diagnostic and therapeutic service facilities
including cardiac catheterization laboratories, heart centers and affiliated
cardiology and cardiovascular physician groups. Raytel intends to develop its
heart centers in affiliation with cardiology physician groups and hospitals
delivering high quality patient care. Raytel believes its planned heart centers
will address the cost containment pressures currently shaping the healthcare
industry.
Raytel currently manages two hospital-based heart centers, one of which is
in Southern California and the second of which is in Southeast Texas. The
Company also owns and operates seven freestanding cardiovascular diagnostic
facilities and two hospital-based cardiac catheterization laboratories, and
manages three physician practices. In addition, the Company provides outpatient
diagnostic imaging services through operating and investment interests in seven
freestanding imaging centers, and manages a diagnostic imaging provider network
that operates in eight mid-Atlantic states.
Raytel was incorporated in California in October 1981 under the name Ratel
Labs, Inc. and changed its name to Raytel Medical Imaging, Inc. in 1983 and to
Raytel Systems Corporation in 1985. In August 1987, the Company was
reincorporated in Delaware under the name Raytel Systems Corporation. Following
the organization of its majority-owned subsidiary Raytel Corporation in 1990,
the Company changed its name to Raytel Holding Corporation. In October 1992, the
Company changed its name to Raytel Medical Corporation. Unless the context
otherwise requires, "Raytel" or the "Company" as used herein refers to Raytel
Medical Corporation, a Delaware corporation, and its consolidated subsidiaries.
The Company's executive offices are located at 2755 Campus Drive, Suite 200, San
Mateo, California 94403, and its telephone number is (650) 349-0800.
RECENT CORPORATE DEVELOPMENTS
During the fiscal year ended September 30, 1998, the Company expanded its
CVD healthcare service operations and its physician practice management business
through several strategic developments.
The Baptist Hospital of Southeast Texas
In October 1997, the Company entered into an agreement with The Baptist
Hospital of Southeast Texas. Pursuant to this agreement, the Company undertook
the management of the existing cardiac catheterization facility located at the
hospital and the development of a portion of the hospital as the Raytel Heart
Center at Baptist Hospital, which began operations in September 1998.
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Acquisition of C.M. Cardiac Monitoring, Inc.
In June 1998, the Company acquired all of the assets of C.M. Cardiac
Monitoring, Inc. ("CMI"). CMI provides transtelephonic pacemaker and arrhythmia
testing services.
Granada Hills Community Hospital
In September 1998, the Company entered into a revised management consulting
agreement with Granada Hills Community Hospital under which the Company will
manage the heart program at the hospital, including the existing cardiac
catheterization facility located at the hospital.
Development Agreements with St. Jude Medical, Inc.
In June 1997, the Company entered into a licensing and joint development
agreement with Pacesetter, a wholly owned subsidiary of St. Jude Medical, Inc.
("St. Jude") for the development of a monitoring device for its new pacemaker
product. In November 1998, the Company entered into an exclusive agreement with
Ventritex, Inc., a wholly owned subsidiary of St. Jude to complete the
development of the Housecall(TM) dedicated transtelephonic system for monitoring
Ventritex's implantable cardioverter defibrillators ("ICDs") and to monitor all
of Ventritex's existing Housecall(TM) ICD patients.
OVERVIEW OF CARDIOVASCULAR DISEASE AND ITS TREATMENT
Cardiovascular disease is the leading cause of death in the United States
and represents the highest percentage of hospital patient days of stay. CVD is a
category of illnesses that generally develop progressively, and in many cases
asymptomatically, over a number of years. As a result, CVD frequently goes
undiagnosed until the patient suffers an acute episode such as a stroke or heart
attack. CVD manifests itself in a number of disease states, such as
atherosclerosis, electrophysiological defects, valvular dysfunction, congestive
heart failure, hypertension and congenital defects. Based upon 1995 data, the
American Heart Association (the "AHA") estimates that approximately 58.2 million
people in the United States suffer from one or more forms of CVD. According to
the 1995 estimates, CVD claimed approximately 960,000 lives in 1995,
representing 41.5% of all deaths, and of that total, coronary heart disease
(heart attack) caused approximately 481,000 deaths in the United States during
1995 -- the single leading cause of death in the U.S. Due to the aging of the
United States population, the Company believes that the need for medical
services to diagnose and treat CVD will continue to increase significantly in
the future.
BUSINESS STRATEGY
Raytel's objective is to be a vertically integrated provider of CVD
services through a network of therapeutic and diagnostic facilities,
complimented by its cardiac transtelephonic monitoring and testing services. The
Company is pursuing this objective through the following strategies:
Focus on Establishment of Heart Centers. Raytel is establishing heart
centers designed to coordinate or provide quality, integrated CVD services on a
cost-effective basis. The Company believes that these heart centers will offer
substantial benefits over the traditional healthcare delivery system to all of
the constituencies involved in CVD care. Patients will benefit from the
convenience of dealing with a single entity administering their CVD management
needs and providing many services at a single location. Referring physicians
will benefit from simplified referral patterns and more consistent patient
treatment. Cardiologists and other professionals affiliated with the centers
will benefit from local access to a wider range of complementary specialists and
diagnostic equipment as well as management, marketing and administrative
resources. The Company believes that its heart centers will be able to offer
more integrated services at a lower cost than traditional providers, thus
addressing the cost containment objectives of managed care plans and other
third-party payors. All of these constituencies will benefit from improved
accountability.
Leverage Expertise and Existing Businesses. Raytel has significant
experience in providing diagnostic and monitoring services to CVD patients and
in acquiring and operating geographically dispersed healthcare service
businesses. The Company believes that the expertise it has acquired through the
management and
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operation of these businesses has been and will continue to be a benefit to
Raytel as it moves forward with the development of heart centers.
Develop Affiliations with Providers. Raytel develops its heart centers on a
regional basis, in cooperation with cardiology groups and hospitals with a
reputation for the delivery of high quality services among referring primary
care physicians and the general population in the communities that they serve.
As part of its strategy to create a flexible format for its heart centers, the
Company establishes relationships with cardiovascular and thoracic surgeons and
other specialists who perform invasive therapeutic procedures not offered at the
heart center in order to create consistent referral patterns and assure the
seamless delivery of quality service throughout the continuum of cardiac care.
Expand Managed Care Relationships. The Company believes that interaction
with managed care organizations will become an increasingly important element in
the provision of cardiac care, including care for Medicare patients, and that
third-party payors will increasingly prefer to contract with providers offering
a wide range of cardiovascular services provided on a multistate or regional
basis. Raytel actively markets its existing healthcare services to managed care
plans and provides value added services, such as specialty clinics including
lipid management, chest pain clinics and congestive heart failure clinics, to
such organizations. The Company utilizes its experience in working with managed
care plans to market the services of its heart centers to such organizations.
Expand the Company's Telemedical Business. The Company believes that the
establishment of heart centers will enhance its ability to market its cardiac
monitoring and testing services.
Pursue Strategic Acquisitions. Raytel has built its existing organization
largely through a series of acquisitions. The Company believes that it is often
more cost-effective to acquire and reconfigure an existing business than to
establish a new business. The Company believes that its experience in
identifying, structuring and completing acquisitions of healthcare service
organizations and effectively integrating these organizations will enable it to
take advantage of future acquisition opportunities that arise as a result of the
trends toward consolidation of healthcare service providers. Raytel intends to
explore opportunities to establish heart centers and expand its other cardiac
businesses through additional strategic acquisitions, including the acquisition
of the assets of physician practices.
RAYTEL CARDIOVASCULAR FACILITIES
One of the elements of Raytel's strategy is the development and operation
of heart centers that will coordinate or provide integrated CVD services to
patients, including management of the patient's diagnostic, therapeutic and
follow-up needs. The Company anticipates that each heart center will include one
or more of the following capabilities: a cardiac catheterization laboratory,
specialized diagnostic equipment, examination and consultation rooms, an
operating room, cardiac care units or intensive care units, patient beds and
monitoring equipment. Personnel at the heart center will perform diagnostic
services, coordinate therapeutic care with affiliated physicians and/or
hospitals, conduct post-therapeutic follow-up programs and enroll patients in
cardiac monitoring and testing programs.
The Company currently operates two catheterization laboratories within
licensed acute care hospitals, has completed the construction of a diagnostic
catheterization laboratory in Fremont, California, which is awaiting licensing
by the California Department of Health Services (See Item 3. Legal Proceedings),
and operates eight additional freestanding diagnostic cardiovascular facilities,
one of which is associated with a multi-specialty medical practice in Florida.
Four of the seven cardiovascular diagnostic facilities are located in Texas, two
are located in Louisiana and one is located in Maryland. A cardiovascular
diagnostic facility located in Maryland and formerly operated by CVI was closed
and ceased operations in March 1998.
In September 1998, the Company entered into a revised 10-year management
consulting agreement with Granada Hills Community Hospital ("GHCH") in Southern
California under which it is managing an on-site heart center. In October 1997,
the Company entered into a 10-year agreement with The Baptist Hospital of
Southeast Texas in Beaumont, Texas. Pursuant to this agreement, the Company
developed and manages a
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fully integrated heart center with a cardiac catheterization laboratory. In
addition, Raytel is evaluating opportunities for the development and acquisition
of additional heart centers.
The Raytel Heart Center Approach
The Company plans to organize an integrated delivery system for
cardiovascular services in each region in which it develops a heart center.
Raytel heart centers will be designed and developed on a region-by-region basis
to maximize the available resources and address the specific needs of each
community served. The structure of the heart centers will be flexible to permit
the Company to proactively respond to the restructuring of the healthcare system
as it occurs. The Company prefers to develop its heart centers in conjunction
with academic medical centers, established hospitals and cardiology specialists.
In certain cases, the Company may coordinate its integrated delivery system by
acquiring the assets of cardiology practices and negotiating long-term
agreements to provide management services to such practices. The cardiovascular
facilities are usually located on hospital premises or in freestanding
facilities in close proximity to the hospitals. The cardiovascular facilities
will be designed to enable affiliated cardiologists and cardiovascular surgeons
to perform a comprehensive range of diagnostic procedures on site. Therapeutic
procedures will generally be performed by physicians either at the affiliated
hospital or the heart center. Post-therapeutic monitoring and follow-up programs
will be offered through the Company's cardiac monitoring services and through
on-site programs to be developed by the Company in conjunction with its
physician and hospital affiliates.
The Company believes that the heart centers and the related integrated
delivery systems will be well positioned in their local markets to capture
patients enrolled in HMOs and other managed care programs, as well as patient
referrals from local primary care physicians and the heart centers' affiliated
hospitals.
Cardiovascular Diagnostic Facilities
The Company operates four hospital-based cardiac catheterization
laboratories and eight free-standing cardiovascular diagnostic facilities (the
"Cardiovascular Diagnostic Facilities"). Cardiac catheterization utilizes
catheters and sophisticated diagnostic instruments to evaluate the functioning
of the heart and the coronary arteries. A narrow, flexible tube, or catheter, is
inserted through a main artery in the leg or arm and guided into the patient's
coronary arteries, where a cardiologist can use the catheter to perform various
tests to diagnose the nature and extent of the patient's coronary artery
disease.
The Cardiovascular Diagnostic Facilities are located in Texas, Louisiana,
Florida and California. At each Cardiovascular Diagnostic Facility, the Company
provides the facilities, equipment, supplies and support personnel necessary for
the cardiologist to perform interventional cardiac imaging and peripheral
therapeutic procedures. In three of the Cardiovascular Diagnostic Facilities,
the Company also provides nuclear cardiology diagnostic services. Seven of the
Cardiovascular Diagnostic Facilities are owned by limited partnerships, and the
Company, through a separate wholly-owned subsidiary for each limited
partnership, serves as the corporate general partner which acts as the
day-to-day manager of each facility. The Company owns a majority interest in six
of the facilities and owns 100% of the Florida facility. The limited
partnerships have a term of 20 years or more in all but one facility and that
one expires on December 31, 2001.
Two of the hospital-based Cardiovascular Diagnostic Facilities are located
in Texas. Each is operated under contracts with the respective hospitals under
which Raytel provides equipment, technical staff and certain management and
administrative services. The hospitals provide space for the facility within the
hospital, all supplies, and credentialing of physicians. The Company receives a
fee from the hospital on a per procedure basis, with a guaranteed minimum
monthly payment. One contract expires in January 1999, and the other contract
expires in February 2000. In addition to diagnostic catheterization procedures,
one of these facilities currently performs pacemaker installations, peripheral
vascular angioplasty and peripheral stent installations. There can be no
assurance that the Company will be successful in negotiating extensions of the
terms of the contracts.
Physicians practicing at the Cardiovascular Diagnostic Facilities are not
obligated to refer patients to or practice at these facilities and in many cases
also practice at nearby hospitals.
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Northern California Heart Center
In January 1996, the Company initiated the development of a diagnostic
cardiac catheterization facility (the "Northern California Heart Center") in
Fremont, California. In November 1996, the Company completed the construction of
the facility. In September 1997, the regional office of Licensing and
Certification of the California Department of Health Services denied the request
for a license to operate the facility. The Company has filed an administrative
appeal of the decision by the regional office and the status of the appeal is
still pending. In addition, the Company filed a Petition for Writ of Mandate
requesting that the Superior Court of California order the Department of Health
Services to issue the appropriate license. The Superior Court denied the
Company's request for a Writ of Mandate and returned the matter to the
administrative appeals office of the Department of Health Services. In December
1997, the Company filed an appeal of the Department's decision denying the
application for the appropriate license to operate the facility. In July 1998,
the Company and the Department presented the case to an administrative law
judge. Final briefs were submitted during November 1998 and a final decision of
the administrative law judge is expected in early 1999. (See Item 3. Legal
Proceedings) There can be no assurance that the Company will be able to obtain
such licensure or any additional licenses that may be required to expand the
services offered at the facility.
Raytel Heart Center at Granada Hills Community Hospital
In September 1998, the Company entered into a revised agreement with GHCH,
in the San Fernando Valley north of Los Angeles, pursuant to which Raytel
manages an integrated heart center located on the premises of the hospital.
Granada Hills Community Hospital is a general acute care hospital. The
hospital's heart program includes cardiac catheterization procedures, stress
testing, ultrasound and other diagnostic services, cardiovascular and
cardiothoracic surgical procedures and cardiac rehabilitation programs.
Under the revised agreement, the Company is responsible for supervising and
coordinating all day-to-day operations of the heart center, including
administrative support and on-site management. The Company is also primarily
responsible for marketing and public relations activities and assists the
hospital in the negotiation and administration of contracts with managed care
organizations and other third-party payors and in its compliance with Medicare
coverage and accreditation requirements and governmental licensing and
certification matters. All medical services at the facility are the
responsibility of the hospital and its medical staff. In December 1997, the
Company filed a demand for arbitration pursuant to the terms of the original
agreement with GHCH requesting that an independent arbitrator order GHCH to
comply with the provisions of the agreement (See Item 3. Legal Proceedings). In
connection with the execution of the revised agreement, the Company and the
hospital resolved the arbitration claims and counter-claims, and withdrew their
respective demands for arbitration.
Through an affiliated medical group, the Company and GHCH entered into an
exclusive agreement for Raytel to be the exclusive provider of cardiac surgery
services at the hospital and to manage the hospital's cardiovascular surgery
program. The Company has entered into an agreement with a leading cardiothoracic
surgeon to provide the cardiac surgery services at the hospital. The initial
term of the agreement coincides with the term of the management consulting
agreement with the hospital to manage the heart program. The affiliated medical
group is owned by F. David Rollo, M.D., who serves as the Company's Executive
Medical Director. The Company, through a subsidiary, provides management
services to the medical group.
Raytel Heart Center at The Baptist Hospital of Southeast Texas
In October 1997, the Company entered into an agreement with The Baptist
Hospital of Southeast Texas in Beaumont, Texas. Pursuant to the agreement,
Raytel developed certain facilities and manages an integrated heart center
located on the premises of the hospital. The Baptist Hospital is a general acute
care hospital. The hospital's heart program includes cardiac catheterization
procedures, stress testing, ultrasound and other diagnostic services,
cardiovascular and cardiothoracic surgical procedures and cardiac rehabilitation
programs. The heart center is presently being operated on an interim basis while
the parties assess the impact of proposed
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regulations published by the Health Care Financing Administration and a revenue
ruling published by the Internal Revenue Service on certain economic and legal
provisions contained in the agreement.
RAYTEL PHYSICIAN PRACTICE MANAGEMENT
The Company expanded its physician practice management business during
fiscal 1997 through its acquisitions of certain non-medical assets of cardiology
practices in Beaumont, Texas, and Granada Hills, California. Through its
acquisition of CVI in August 1997, the Company acquired a 20-physician multi-
specialty medical group, which focuses on cardiology, located in Port St. Lucie,
Florida.
RAYTEL CARDIAC MONITORING AND TESTING SERVICES
The Company is the largest provider of cardiac monitoring and testing
services in the United States utilizing transtelephonic pacemaker monitoring
("TTM"), cardiac event detection ("CEDS") and Holter monitoring technologies.
The Company believes that its TTM-based services are the most cost-effective
means of testing the performance of implanted cardiac pacemakers and detecting
symptoms of transient arrhythmias.
Pacemaker Monitoring
The Company believes, based on its industry experience, that it is the
largest provider of transtelephonic pacemaker monitoring services in the United
States, currently serving over 80,000 patients with implanted pacemaker systems.
Pacemaker systems are designed to assist the human heart in maintaining an
adequate pumping rate. A pacemaker is an electronic device that is implanted in
the patient and is designed to monitor and, if necessary, to stimulate the
patient's heartbeat. As it senses the heart's failure to respond to normal
physiologic signals, the pacemaker emits electrical pulses directly into the
atrium and/or the ventricle of the heart, causing the heart muscle to contract
and pump blood through the patient's body. A pacemaker system consists of the
generator which includes the device and a battery and the leads from the device
to the patient's heart.
The purpose of pacemaker monitoring is to enable the patient to maintain a
normal lifestyle without the fear of an unexpected system failure. Pacemaker
monitoring can detect failures in the pacemaker system as well as changes in the
patient's heart rhythms that can cause the system to become ineffective. In
TTM-based pacemaker monitoring, the pacemaker system and its interaction with
the patient's heart is tested by conducting periodic, prescheduled ECG
examinations. The patient is provided with a battery-powered ECG transmitter
which detects the heart's impulses from the surface of the skin, converts these
impulses into an acoustic signal and transmits the signal over ordinary
telephone lines to one of the Company's three technical operations centers,
where the signal is converted and displayed on a computer screen or strip chart
recorder.
The Company's pacemaker monitoring services are prescribed by the patient's
physician. After receipt of a prescription and enrollment by the Company, the
patient is sent a transmitter and trained to use the device over the telephone
by one of the Company's technologists. Unlike most physician-operated monitoring
services, the Company's monitoring services are provided 24 hours a day, seven
days a week in order to accommodate unscheduled calls from patients experiencing
problems.
Each patient is tested on a schedule recommended by his or her prescribing
physician with such prescription updated annually. The Company generates most of
its pacemaker monitoring revenues from reimbursement by Medicare and payors of
supplemental Medicare benefits. Patients are typically tested between three and
twelve times per year. The Company is reimbursed for pacemaker monitoring
services on a per-call basis. Routine pacemaker testing is performed in
accordance with a prearranged, computer generated schedule. A trained
technologist telephones the patient and requests that the patient initiate
transmission of ECG data which is received by recorders in one of the Company's
technical operations centers. Once a continuous graph displaying the rhythm of
the heart and the pacemaker is generated, this data is interpreted by the
technologist to determine the status of the implanted pacemaker and its
relationship to the patient's
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cardiac rhythm. If problems with the pacemaker system are noted or a serious
abnormality is detected, including an abnormality in the heart's own rhythm (an
arrhythmia), the patient's physician is notified immediately by telephone. After
each test, the results are promptly reviewed by a supervising technologist and a
cardiologist and a written report is mailed to the patient's physician.
Cardiac Event Detection Service
The Company operates the Cardiac Event Detection Service ("CEDS"), which
tests and documents transtelephonically an ambulatory patient's cardiac rhythm
irregularities while the patient is experiencing symptoms. CEDS testing aids in
the diagnosis of transient cardiac arrhythmias, including atrial and ventricular
abnormalities, such as tachycardia, which causes the heart to beat at an
abnormally rapid and potentially life threatening rate. During its fiscal year
ended September 30, 1998, Raytel tested over 37,000 patients for potential
transient arrhythmic events. The Company believes, based on its industry
experience, that it is the largest provider of these services in the United
States.
Upon enrollment in its CEDS program, the Company provides the patient with
a cardiac event recorder for a testing period lasting up to 30 days. Upon
experiencing symptoms, the patient activates the event recorder to capture one
or more ECGs which the patient will later transmit to one of the Company's two
CEDS technical operations centers for analysis. Skilled technologists, under the
supervision of cardiac care nurses and cardiologists, make preliminary
evaluations of these transmissions for cardiac irregularities. Unlike similar
services offered by individuals or small clinics, the Company's centers are
staffed 24 hours a day, seven days a week to respond to a patient's needs on a
timely basis. Emergency medical response is initiated for CEDS patients when
necessary. Regardless of the number of calls placed, payors reimburse the
Company on a 30-day program basis for its CEDS service.
Holter Monitoring Services
The Company believes, based on its industry experience, that it is the
largest provider of Holter monitoring services in the United States, currently
serving over 51,000 patients annually. The Company processed approximately
70,000 Holter monitoring tapes during fiscal 1998. Holter monitoring tests and
documents an ambulatory patient's cardiac rhythm irregularities while the
patient is fitted with a recording device, with leads attached to the patient's
chest, typically for a single 24-hour period. Should Holter monitoring or other
testing procedures fail to detect an arrhythmia event in a symptomatic patient,
the patient's physician often will refer the patient to an event detection
service such as CEDS.
Implantable Cardioverter Defibrillators
Pursuant to an exclusive agreement signed in November 1998 with St. Jude
Medical, the Company will complete the development of the Housecall(TM)
dedicated transtelephonic system for monitoring Ventritex implantable
cardioverter defibrillators ("ICDs"). These ICDs are designed and manufactured
by St. Jude Medical's California-based Cardiac Rhythm Management Division. ICDs
are pacemaker-like devices that can sense ventricular tachyarrhythmias
(life-threatening fast heart rates) and automatically deliver an electrical
shock to restore a normal rhythm. Currently, patients with ICDs must return to
the physician's office on a routine basis in order to have the ICD's battery
tested and for an examination of the ICD system integrity. The number of times
the ICD was activated is also monitored. The Housecall(TM) system will reduce
the frequency of physician office visits by extending the transtelephonic
monitoring procedures presently used for pacemakers to ICDs. The new system will
enable trained technicians to interrogate the device's memory and transmit both
stored data as well as real-time clinical and technical information on the
patient's cardiac activity and ICD status. The test results are interpreted by
trained technicians and a comprehensive report is communicated to the patient's
physician for clinical evaluation.
Training and Quality Assurance
All of the Company's pacemaker monitoring technologists undergo a formal
six-week training program that includes basic cardiac physiology, the operation
of pacemaker devices, the interaction of pacemaker
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systems with the heart, and the administration and interpretation of ECG tests.
As technologists become more experienced, they are trained to monitor
increasingly complex pacemaker systems. Technologists administering the
Company's CEDS and Holter services undergo training in the interpretation of ECG
data to detect symptoms of cardiac arrhythmia.
The Company maintains a rigorous quality assurance program. Board-certified
cardiologists direct the Company's technologists with special training in the
fields of cardiac pacing and electrophysiology. Each pacemaker-monitoring test
is separately reviewed by a supervising technologist and a cardiologist. CEDS
transmissions and Holter test results are evaluated by technologists under the
supervision of cardiac care nurses and cardiologists. In order to comply with
certain requirements of new federal regulations regarding independent diagnostic
testing facilities (See Government Regulation), the State of Connecticut has
approved Raytel's training program for college credit toward a bachelor of
science degree within the Connecticut state university system.
DIAGNOSTIC IMAGING SERVICES
The Company provides outpatient diagnostic imaging services through
operating and investment interests in seven freestanding imaging centers (the
"Imaging Centers"). The Company also operates the Raytel Imaging Network, a
specialized preferred provider network currently consisting of 475 independent
imaging centers located from Virginia to New York, including five centers owned
and managed by the Company.
Diagnostic imaging technology consists of a number of medical diagnostic
modalities, many of which integrate computer hardware and software. These
modalities include magnetic resonance imaging (MRI), computed tomography ("CT"),
nuclear medicine, radiography/fluoroscopy ("R/F"), ultrasound, general x-ray and
mammography. These imaging modalities are generally non-invasive (with the
exception of the injection of contrast material in certain techniques and the
occasional use of sedating agents) and subject the patient either to sound waves
(ultrasound), X-rays (CT, R/F and X-ray mammography) or radio waves and magnetic
fields (MRI) to gather data that aid in medical diagnosis. These diagnostic
technologies enable physicians to view certain internal body anatomy and
pathology and in many instances provide early diagnostic capability and aid in
effective treatment planning without the need for more costly exploratory
surgery.
The principal diagnostic imaging modality in use at the Imaging Centers is
MRI. MRI is used to provide high resolution images of the soft tissue of the
body. In the field of cardiology, MRI is used for the assessment of congenital
and anatomical cardiac defects. Other MRI techniques, such as MR angiography,
are also used in the assessment of peripheral vascular and other cardiovascular
diseases. The Imaging Centers also provide a wide range of imaging services for
the diagnosis of neurological disorders of the head, neck and spine, as well as
imaging of the musculoskeletal system and a variety of internal organs,
including the liver and prostate, and the female pelvis.
Raytel Imaging Centers
The Imaging Centers are located in four states. All of the Imaging Centers
offer MRI services, and four offer other imaging modalities. The Company owns
four of the Imaging Centers and holds its interests in the other three through
investments in limited partnerships (the "Ventures"), to which the Company
provides management services, including data processing, billing and collection,
accounting, marketing services and operational supervision. The Ventures have
terms that expire between 1999 and 2026.
Raytel Imaging Network
The trends toward cost containment and managed care have resulted in
changes in the patterns of patient referrals to diagnostic imaging facilities,
adversely affecting the profitability of independent imaging centers and
encouraging the formation of networks of independent centers. Many independent
operators of diagnostic imaging facilities lack the management and marketing
expertise and systems, as well as the experience in dealing with large managed
care organizations, that are necessary to effectively establish and operate such
networks. The Company's experience in dealing with a wide variety of managed
care organizations and its established, centralized marketing, scheduling,
billing and accounting systems provide the Company with the
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capability to establish and operate networks of independent diagnostic imaging
centers. In addition, the Company's purchasing power allows it to provide
participating centers with supplies, such as contrast agents, film and other
medical and technical supplies, and with equipment maintenance and other
services at considerable cost savings.
The Raytel Imaging Network (the "Network") is a dedicated network of
diagnostic imaging facilities established to provide services to patients
participating in healthcare benefit programs offered by municipal and state
employers, corporations that self-insure, third-party insurance carriers, union
health and welfare plans and managed care providers. Independent imaging centers
enter into fixed fee contractual relationships with the Network to provide
imaging services to patients referred by payors which have contracted with the
Network for services at a negotiated fee. The Network handles scheduling for
patients whose healthcare benefit programs participate in the Network and
guarantees these participating entities a fixed fee for all radiology procedures
performed in Network centers. The Network also offers centralized billing
services for those procedures, promptly reports the results of the studies to
the patient's referring physician and the outcomes of the studies to the
administrators responsible for the management of the patient's healthcare
program.
The Network is a preferred provider organization with participating imaging
centers in the states of New Jersey, Pennsylvania, Delaware, Maryland, New York
and Virginia. The Network currently provides diagnostic imaging services under
referral arrangements with approximately 90 organizations administering
healthcare programs covering more than 600,000 individual participants.
SALES AND MARKETING
The Company's marketing activities are directed at managed care
organizations, cardiologists and referring physicians. The Company maintains a
central managed care sales group that negotiates and manages contracts with
managed care organizations. The Company's marketing organization also supervises
the marketing of its TTM-based services to physicians nationwide and supports
the efforts of local centers to market their services to referring physicians in
the communities they serve.
Raytel Cardiac Monitoring and Testing Services
The Company markets its cardiac monitoring and testing services nationwide
by using regional sales managers coordinating the activities of approximately
400 sales representatives who are employees of the pacemaker equipment
manufacturers. The sales organization is supported by the Company's customer
service and telemarketing personnel. Raytel works closely with all major
pacemaker manufacturers and has agreements with certain manufacturers for the
distribution of the Company's services through the direct sales forces of the
manufacturers. The Company's sales force works closely with the approximately
12,000 physicians currently prescribing the Company's pacemaker monitoring
services.
The Company differentiates its cardiac monitoring and testing services from
most of its competitors by providing its services 24 hours a day, seven days a
week. In addition, the Company offers technologists who specialize in monitoring
specific pacemaker models (the more complex the unit, the more expertise a
technologist is required to have), extensive quality control procedures,
computerized reports for complex pacemakers, detailed reporting procedures for
abnormal findings and an extensive database on pacemaker performance.
Diagnostic Imaging Services
The Company markets services of the Imaging Centers it manages through a
team approach tailored to the needs of each Imaging Center. The Company's
central sales organization coordinates the Imaging Center's marketing activities
with the Imaging Center's radiologists. The principal selling effort is directed
toward the local base of referring physicians. In support of the selling effort,
the Company provides marketing materials, including newsletters and brochures
and holds routine educational sessions for physicians. The Company also assists
the Imaging Center in addressing needs of managed care organizations by
negotiating
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contracts with these organizations and working closely with insurance plan
administrators, HMO personnel, workers' compensation coordinators and hospital
administrators.
Raytel Heart Centers and Cardiovascular Diagnostic Facilities
The Company markets the services of its Cardiovascular Diagnostic
Facilities using the basic approach employed with the Imaging Centers. Each
facility undertakes marketing activities specifically structured for its local
or regional market. The manager of each facility initiates and maintains contact
with local referring physicians. The Company's central sales organization
supports the local selling effort with marketing materials and assistance in the
development of clinical outreach programs designed to make the capabilities of
the center available to underserved segments of the community. The center
manager coordinates local physician contacts with the Company's cardiac
monitoring and testing sales force to cross-sell the Company's transtelephonic
pacemaker monitoring, Holter monitoring and cardiac event detection services.
The Company's central sales group negotiates contacts with managed care
organizations. This group also assists the center manager in addressing the
needs of such organizations.
Raytel Physician Practice Management Services
The Company markets services of the physician practices it manages through
a team approach tailored to the needs of each physician practice, in the same
fashion used to market the services of the Imaging Centers and its heart centers
and Cardiovascular Diagnostic Facilities.
BILLING AND COLLECTION
The Company's cardiac monitoring and testing operations generate a high
volume of relatively low-cost services delivered to patients living throughout
the United States. The Company derives substantially all of its transtelephonic
pacemaker monitoring, cardiac event detection services, and Holter monitoring
revenues from Medicare and other third-party payors and, in most cases, renders
bills to at least two payors for each procedure. In the year ended September 30,
1998 the Company generated more than one million bills to Medicare and other
third-party payors related to these businesses. Accordingly, the Company's
success in these businesses is substantially dependent upon the efficiency of
its billing and collection systems.
All of the billing and collection functions for the Company's cardiac
testing operations are centralized at the Company's facilities in Connecticut.
The Company has specialized data management systems that it uses to obtain and
record primary and secondary insurance data at the time of patient enrollment
and to maintain and update that information. The Company's billing and
collection staff is specially trained in third-party coverage and reimbursement
procedures. The Company communicates continuously with carriers administering
Medicare and has established procedures that allow it to submit most primary
Medicare claims electronically, on a batch-billing basis. In addition, the
Company maintains a database on the billing procedures and requirements of more
than 1,500 insurance carriers, which enables it to efficiently process claims to
primary, secondary and tertiary private insurers. Computerized billing and
collection reports allow the Company's personnel to continually monitor open
accounts.
Due to the complexity of the billing and collection process, the Company,
like many other healthcare service providers, experiences normal payment cycles
that are considerably longer than those customary in many other industries. The
Company typically experiences billing cycles of 60 to 240 days from the billing
date, depending on the type and number of third-party payors, although billing
cycles can be even longer in certain situations. Based upon its experience, the
Company believes that its specialized data processing system and its extensive
background in processing high volume, third-party claims serve to minimize
collection cycles and the incidence of rejected claims due to incomplete or
inaccurate information.
The Company bills and collects for the Imaging Centers, physician
practices, heart centers and other cardiac facilities that it manages.
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THIRD-PARTY REIMBURSEMENT
The Company derives substantially all of its revenues 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. There can be no assurance that such
measures will not adversely affect the amounts or types of services that may be
reimbursable to the Company in the future, or that the future reimbursement for
any service offered by the Company will be sufficient to cover the costs and
overhead allocated to such service by the Company, either of which could have a
material adverse effect on the Company's operating results. The Company cannot
predict with any certainty whether or when additional changes in Medicare,
Medicaid or other third-party reimbursement rates or policies will be
implemented. However, such future changes could have a material adverse effect
on the Company's business, financial condition or operating results.
Reimbursement rates vary depending on the type of third-party payors.
Changes in the composition of third-party payors from higher reimbursement rate
payors to lower reimbursement rate payors could have an adverse effect on the
Company's operating results. In addition, the Company anticipates that it may
increasingly offer its services to third party payors on a capitated or other
risk-sharing basis. To the extent that patients or enrollees covered by a
risk-sharing contract require more frequent or extensive services than is
anticipated by the Company, the revenue derived from such contract may be
insufficient to cover the costs of the services provided. Insufficient revenue
under capitated or other risk-sharing contracts could have a material adverse
effect on the Company's business, financial condition or operating results.
GOVERNMENT REGULATION
The healthcare industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly and adversely in the future. In general, the scrutiny of methods
and levels of payment of healthcare providers and companies is increasing.
On August 5, 1997, President Clinton signed the Balanced Budget Act of 1997
("BBA") into law. Two of the areas affected most profoundly by this law are (1)
fraud and abuse, and (2) the effort of the federal government to use its
purchasing power to expand health care options for Medicare beneficiaries while
using pressure from increased competition to control costs. The fraud and abuse
provisions build on many of the provisions that were enacted by the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). In addition to
the specific changes, the fraud and abuse provisions of the BBA signify an
apparent shift to the Office of the Inspector General of the Department of
Health and Human Services (the "OIG") of not only enforcement power, but
policy-making authority as well. In addition, the BBA broadened the authority
for the HCFA to enter into contracts for providing managed care to Medicare
beneficiaries by expanding the type of managed care options available to
Medicare beneficiaries.
On October 31, 1997, the Secretary of the Department of Health and Human
Services ("HHS") published final regulations implementing a number of changes
proposed in June 1997. One of the changes replaced the independent physiological
laboratory ("IPL") with the creation of the independent diagnostic testing
facility (the "IDTF"). An IDTF is a diagnostic facility, distinct from a
physician's office or hospital, which does not directly use test results to
treat patients. The facility exists to perform diagnostic testing procedures.
The Company's cardiac monitoring and testing services currently operate as an
IPL. The original implementation date was postponed until March 1999, and the
Company is in the process of replacing all of its designations as an IPL with
the new designation as an IDTF, as required by the new regulations.
The Company believes that healthcare legislation, regulations and
interpretations will continue to change and, as a result, routinely monitors
developments in healthcare law. The Company expects to modify its agreements and
operations from time to time as the business and regulatory environment changes.
While the Company believes it will be able to structure all of its agreements
and operations in accordance with applicable law, the lack of definitive
interpretations of many statutory and regulatory provisions means that there can
be
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no assurance that the Company's arrangements are in compliance with such
provisions or will not be successfully challenged.
Government Reimbursement Programs
The federal government maintains the Medicare health insurance program for
the aged. Individual states have programs for medical assistance to the indigent
known generally as Medicaid, which are partially financed by the federal
government. Federal Medicaid funds are currently conditioned on state compliance
with federal requirements. A significant portion of the Company's revenues is
received under Medicare and other government programs. Both the Medicare and
Medicaid programs are subject to statutory and regulatory changes, retroactive
and prospective rate adjustments, administrative rulings, interpretations of
policy, intermediary determinations, and government funding restrictions, all of
which may materially increase or decrease the rate of program payments to
healthcare facilities and other healthcare suppliers and practitioners.
The Company's existing cardiac monitoring and testing services derive a
substantial portion of its revenue from the Medicare program. The Company's
heart centers, diagnostic imaging, and Cardiovascular Diagnostic Facilities also
derive a substantial portion of their revenue from payments made under the
Medicare program, and the Company anticipates that future facilities and
services will also derive significant revenues from these sources. In order to
participate in this program, a newly-developed facility must be certified after
officials administering the Medicare program in the state where the facility is
located, or their designees, have conducted a survey of the facility, a process
that cannot commence until the facility opens and begins providing services to
patients. Once a facility is certified, it will be reimbursed by Medicare for
services performed from the date on which a satisfactory survey is conducted in
connection with the certification of the facility or such later date as an
acceptable plan is submitted to correct any deficiencies noted in the survey.
The Company expects that delays in the certification process may occur and may
increase with the funding limitations being imposed on certifying authorities.
Combined with the billing and collection cycle for Medicare reimbursement that
all healthcare facilities experience, these delays could result in a three to
six month working capital deficiency during the start-up phase for newly
developed cardiac centers. These working capital deficiencies will have to be
funded by the Company through working capital advances to the facilities using
funds provided by operating or financing activities.
The Stark Law and Medicare Fraud and Abuse Laws
The Company is subject to a variety of laws and regulations governing the
referral of patients to facilities with whom the referring physician has a
financial relationship.
Subject to certain exceptions, physicians who have a financial relationship
with an entity providing healthcare services are prohibited by federal law (the
"Stark Law") from referring or admitting patients to that entity for the
provision of certain designated services reimbursable under Medicare or
Medicaid, as well as certain other federally assisted state healthcare programs.
The entity providing healthcare services is also prohibited from presenting, or
causing to be presented, a claim or bill for the designated services furnished
pursuant to a prohibited referral. Possible sanctions for violations of the
Stark Law include civil monetary penalties, exclusion from the Medicare and
Medicaid programs and forfeiture of amounts collected in violation of such
prohibition. The Stark Law prohibits a physician who owns stock of a company
from referring patients to the medical facilities in which such company has an
ownership interest unless such Company's stockholders' equity exceeds $75.0
million.
On January 9, 1998, the Health Care Financing Administration ("HCFA")
published proposed rules implementing the Stark Law. The regulations have been
published in proposed form and HCFA has solicited comments on the proposed
regulations. The proposed regulations do not have the force of law, but they do
provide information regarding the views of enforcement agencies, such as the
Office of Inspector General.
The Stark Law was originally enacted in December 1989, and prohibited a
physician (or an immediate family member of a physician), with a financial
relationship with a clinical laboratory from making a referral to the clinical
laboratory for the furnishing of clinical laboratory services for which payment
otherwise would
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be made by the Medicare program. In 1993, the Stark Law was amended to expand
the referral prohibition to apply to certain "designated health services." The
1993 amendments are commonly referred to as "Stark II." Two years later, in
1995, HCFA issued regulations, but these applied only to the original 1989 Stark
Law. The recently promulgated regulations apply to the Stark II Law.
Generally, the Stark Law prohibits physicians from referring Medicare
patients to facilities for "designated health services" if the physician (or
immediate family member of the physician) has a financial arrangement with the
entity, unless the arrangement fits within an exception. The definition of
designated health services specifically includes radiology services, including
MRI, CT, ultrasound and nuclear medicine. However, the regulations specifically
exclude "invasive" radiology, which includes cardiac catheterization, PTCA and
similar imaging modalities used to guide a needle, probe or catheter accurately.
Thus, the Stark Law does not prohibit physician ownership of an entity or
facility which provides "invasive" radiology, such as cardiac catheterization
services provided at the Cardiovascular Diagnostic Facilities.
In addition to the limitations of the Stark Law, a number of states have
laws which apply to referrals made for services reimbursed by all payors, and
not simply Medicare or Medicaid. Some of these laws may extend to the services
furnished by medical facilities in which the Company has an ownership interest
and, absent the availability of an exception under such laws, could prohibit
physicians with ownership interests in the Company from referring any patients
to such facilities.
The Company is also subject to the illegal remuneration provisions of the
federal Social Security Act and similar state laws ("Fraud and Abuse Laws")
which collectively impose civil and criminal sanctions on persons who solicit,
offer, receive or pay any remuneration, directly or indirectly, for referring a
patient for treatment that is paid for in whole or in part by Medicare, Medicaid
or similar state or private programs. The courts and the OIG have stated that
the Fraud and Abuse Laws are violated where even one purpose, as opposed to a
primary or sole purpose, of the arrangement is to induce referrals. Violations
of the Fraud and Abuse Laws are punishable by criminal or civil penalties, which
may include exclusion or suspension of the provider from future participation in
the Medicare, Medicaid and similar state and federal programs, as well as
substantial fines. The federal government has published exemptions, or "safe
harbors," for business transactions that will be deemed not to violate the
federal Fraud and Abuse Laws. Although satisfaction of the requirements of these
safe harbors provides protection from criminal prosecution or penalties under
the federal anti-kickback legislation, failure to meet the safe harbors does not
necessarily mean a transaction violates the statutory prohibitions. Due to the
breadth of the statutory provisions of the Fraud and Abuse Laws and the absence
of definitive regulations or court decisions addressing the type of arrangements
by which the Company and its affiliated entities conduct and will conduct their
business, from time to time certain of their practices may be subject to
challenge under these laws. In October 1995, Congress passed a bill that would
extend the prohibitions of the Fraud and Abuse Laws to all third-party payors,
governmental and private. In the HIPAA and BBA, Congress expanded the government
fraud and abuse controls in a number of ways and added a provision for obtaining
advisory opinions from the OIG regarding physician self-referral compliance with
the Stark Law.
The Company has attempted to structure its business relations to comply
with the Stark Legislation, the Fraud and Abuse Laws and all other applicable
healthcare laws and regulations. However, there can be no assurance that such
laws will be interpreted in a manner consistent with the Company's practices. In
addition, state legislatures and other governmental entities are considering
additional measures restricting or regulating referrals, and there can be no
assurance that new laws or regulations will not be enacted which will require
restructuring of the Company's operations or otherwise have a material adverse
effect on the Company's business, financial condition or operating results.
Certificates of Need and Other Licensing Requirements
Certain states in which the Company operates or may operate in the future
prohibit the establishment, expansion or modification of certain healthcare
facilities and the services provided at such facilities, including heart
centers, catheterization laboratories and diagnostic imaging centers, without
first obtaining a certificate
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of need ("CON") or comparable license from the appropriate state regulatory
agency. In addition to any CON or comparable licensing requirements that may
apply, heart centers, catheterization laboratories and diagnostic imaging
centers developed or operated by the Company may also be required to comply with
other licensing requirements, which vary from state to state. Obtaining CON
approval or comparable licensing is typically an expensive and lengthy process
and may involve adversarial proceedings initiated by competing facilities or
taxpayer groups. The existence of these laws or future legislation changing
these laws may make it more difficult or prohibitive for the Company to develop
heart centers, catheterization laboratories or other diagnostic facilities,
maintain existing facilities or expand the services provided at such facilities
or its other diagnostic imaging facilities.
Under current California regulations, the performance of cardiac
catheterization procedures is generally restricted to licensed general acute
care hospitals. In 1996, the Company applied for a license for its freestanding
cardiac catheterization laboratory in Fremont, California under a pilot program.
Although this pilot program was repealed in 1993, the Company believes that it
meets all of the requirements for the granting of a license, because the entity
holding the permit for such a facility was in active status as of December 31,
1993. In September 1997, the regional office of the California Department of
Health Services notified the Company by letter dated September 8, 1997 that its
application for the license was denied. In December 1997, the Company filed an
appeal of the Department's decision and filed a Petition for Writ of Mandate
requesting that the Superior Court of California order the Department of Health
Services to issue the appropriate license. The Superior Court denied the
Company's request for a Writ of Mandate and returned the matter to the
administrative appeals office of the Department of Health Services. In July
1998, the Company and the Department presented the case to an administrative law
judge. Final briefs were submitted in November 1998 and a final decision of the
administrative law judge is expected in early 1999. There can be no assurance
that the court will enter the order requested by the Company or that the Company
will be successful in its appeal of the decision denying the application. If the
Company cannot obtain such license, it is uncertain under current California
regulations whether the Company could otherwise separately obtain a license to
operate a free standing catheterization laboratory.
The Company from time to time is required to upgrade or modify its
facilities in order to maintain its licenses. In many states, a facility, such
as a free-standing heart center, must be completed before a license will be
issued allowing the facility to operate, and even once the facility is built
there can be no assurances that a license or certification for operations will
be issued by the appropriate government agency.
Restrictions on Corporate Practice of Medicine
The laws of certain states in which the Company operates or may operate in
the future prohibit non-physician entities from practicing medicine, exercising
control over physicians or engaging in certain practices such as fee-splitting
with physicians. Although the Company has structured its affiliations with
physician groups so that the physicians maintain exclusive authority regarding
the delivery of medical care, there can be no assurance that these laws will be
interpreted in a manner consistent with the Company's practices or that other
laws or regulations will not be enacted in the future that could have a material
adverse effect on the Company's business. If a corporate practice of medicine
law is interpreted in a manner that is inconsistent with the Company's
practices, the Company would be required to restructure or terminate its
relationship with the applicable physician group to bring its activities into
compliance with such law. The termination of, or failure of the Company to
successfully restructure, any such relationship could result in fines or a loss
of revenue that could have a material adverse effect on the Company's business,
financial condition or operating results.
MEDICAL MALPRACTICE INSURANCE
In general, the Company does not, itself, engage in the practice of
medicine and requires physicians performing medical services at its facilities
to maintain medical malpractice insurance. In the case of HIPSL, a wholly owned
subsidiary, the Company employs approximately 20 physicians, who are performing
medical services as members of a multi-specialty medical group. The other
licensed professionals in this practice, such as registered nurses, nurse
practitioners and technicians, perform their professional duties under the
direct
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supervision of the physicians. With the exception of the physician employees of
HIPSL, the Company's employees do not practice medicine. However, certain of its
employees are or will be involved in the delivery of healthcare services to the
public under the supervision of physicians. To protect the Company from medical
malpractice claims, including claims associated with its employees' activities,
the Company, or the Ventures for which the Company serves as general partner,
maintains professional liability and general liability insurance on a "claims
made" basis in amounts deemed appropriate by management based upon the nature
and risks of the Company's business. Such policies provide malpractice coverage
in the amount of $1 million per occurrence with an aggregate limit of $3
million. Insurance coverage under such policies is contingent upon a policy
being in effect when a claim is made, regardless of when the events which caused
the claim occurred. The cost and availability of such coverage has varied widely
in recent years. While the Company believes its insurance policies are adequate
in amount and coverage for its current operations, there can be no assurance
that the coverage maintained by the Company is sufficient to cover all future
claims. In addition, there can be no assurance that the Company will be able to
obtain such insurance on commercially reasonable terms in the future.
COMPETITION
The healthcare service businesses in which the Company is currently engaged
are highly competitive. The restructuring of the healthcare system is leading to
rapid consolidation of the existing highly fragmented healthcare delivery system
into larger and more organized groups and networks of healthcare providers. The
Company expects competition to increase as a result of this consolidation and
ongoing cost containment pressures among other factors. In executing its
business strategy, the Company competes with management services organizations,
for-profit and nonprofit hospitals, HMOs and other competitors that are seeking
to form strategic alliances with physicians or provide management services to
physicians or to diagnostic and therapeutic facilities owned by such physicians.
In operating its heart centers, the Company encounters competition from
physician groups, general acute care hospitals and freestanding and
hospital-based cardiac care facilities located in the same markets.
The Company's cardiac monitoring and testing programs compete with a number
of smaller, regional commercial entities as well as hospitals, clinics and
physicians who generally provide these services as an adjunct to their primary
practice. Principal competitive factors are the availability and quality of
service. The Company believes that it competes favorably with most of its
smaller competitors based on its 24-hour a day, seven-day a week service,
specialized technical staff and sophisticated billing and collection system.
Certain of its competitors, including local physicians and hospitals, may have
certain competitive advantages over the Company based upon their direct
relationships with patients.
Cardiac catheterization and other cardiac diagnostic and therapeutic
procedures, as well as diagnostic imaging procedures, are performed in
hospitals, private physicians' offices, clinics operated by group practices of
physicians and independent catheterization facilities. Although the Company and
its affiliates operate in locations throughout the United States, competition
focuses on physician referrals at the local market level. Principal competitors
in each of the Company's markets are hospital and physician affiliated
facilities, some of which may have greater financial and other resources than
the Company, more experience and greater name recognition than the local
managers and physicians associated with the Company's Imaging Centers,
Cardiovascular Diagnostic Facilities and Catheterization Laboratories, or better
ties to the local medical community. Successful competition for referrals is a
result of many factors, including quality and timeliness of test results, type
and quality of equipment, facility location, convenience of scheduling and,
increasingly, relationships with managed care programs. Other independent
companies (including some which have substantially greater financial and
operating resources than the Company) are in the business of establishing
facilities similar to the facilities in which the Company has or may obtain
interests and providing management services to such facilities.
EMPLOYEES
As of November 30, 1998, the Company employed approximately 849 full time
equivalent employees. None of the Company's employees are covered by collective
bargaining contracts.
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ITEM 2. PROPERTIES
The principal operations of the Company and its subsidiaries are conducted
at facilities located in Windsor, Connecticut; New York, New York; Haddonfield,
New Jersey; San Mateo, California; and Port St. Lucie, Florida. The Windsor
facility, consisting of approximately 33,000 square feet, is occupied under a
lease expiring in July 1999. In August 1997, the Windsor facility was expanded
by the addition of approximately 8,500 square feet in an adjoining building that
is occupied under a lease expiring in November 2002. The New York facility,
consisting of approximately 23,300 square feet, is occupied under a lease
expiring in September 2001. The Haddonfield facility, consisting of
approximately 11,000 square feet, is occupied under a lease expiring in June
1999. The San Mateo facility, consisting of approximately 2,400 square feet, is
occupied under a lease expiring in May 2003. The Port St. Lucie facility,
consisting of approximately 28,680 square feet, is occupied under a lease
expiring in December 2002. In addition, through seven of its consolidated
Imaging Centers, the Company leases a total of approximately 31,000 square feet
in facilities located in New York, New Jersey, California and Pennsylvania.
Through its acquisition of CVI in August 1997, the Company acquired eight
Cardiovascular Diagnostic Facilities in Texas, Louisiana, Maryland and Florida.
The joint ventures that operate the Cardiovascular Diagnostic Facilities lease a
total of approximately 89,000 square feet in these facilities. The Company
generally considers its properties to be in good condition and suitable for the
Company's anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
In September 1997, the California Department of Health Services denied the
Company's application for a license to operate a freestanding diagnostic
catheterization facility in Fremont, California. The Company filed an
administrative appeal requesting that the Department of Health Services
reconsider the denial of the application by the regional office of Licensing and
Certification. In addition, in November 1997, the Company filed a Petition for
Writ of Mandate requesting that the Superior Court of the State of California
for the County of Sacramento order the Department of Health Services to issue
the appropriate license, or in the alternative, to find that the Department of
Health Services lacks jurisdiction to regulate the operation of the diagnostic
catheterization facility. The Court denied the Company's Petition for a Writ of
Mandate and remanded the case the administrative law office of the Department of
Health Services. In July 1998, the Company and the Department presented their
case to an administrative law judge. Final briefs were filed in November 1998
and the judge is expected to enter her decision in early 1999.
In December 1997, the Company filed a demand for binding arbitration
pursuant to the terms of its 10-year agreement with GHCH requesting that an
independent arbitrator order GHCH to comply with the provisions of the
agreement. In response, the hospital filed its own claim for arbitration. In
connection with the execution of a revised management services agreement in
September 1998, the parties resolved their dispute and withdrew their respective
demands for arbitration.
Raytel and its subsidiaries are parties to other litigation and claims
arising out of its ongoing business operations. The Company believes that none
of these matters, either individually or in the aggregate, are likely to have a
material adverse effect on the Company's business, financial condition or
operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to
information set forth under the heading "Stock Data Nasdaq Symbol: RTEL" on page
30 of the Company's 1998 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to the
information set forth under the heading "Five Year Financial Summary" on page 5
of the Company's 1998 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference to
information set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 6 to 12 of the Company's
1998 Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold any marketable equity securities, foreign
currencies, or derivative financial instruments in its investment portfolio. At
the end of the fiscal year 1998, the Company did not hold any investments that
are subject to interest rate risk, except for approximately $1,610,000 in
investment grade commercial paper with maturities of less than 60 days. These
securities, like all fixed income instruments, are subject to interest rate risk
and will fall in value if market interest rates increase. However, because
commercial paper has such short maturities, the Company has the ability to hold
its fixed income investments until maturity. Therefore, the Company would not
expect to recognize an adverse impact in income or cash flows if there were an
increase or decrease in interest rates. The Company has not issued any debt
securities other than promissory notes with fixed interest rates in connection
with certain acquisitions, and therefore does not have any interest rate risk
with respect to this type of financing activity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
financial statements and supplementary data on pages 13 to 28 of the Company's
1998 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
17
<PAGE> 19
PART III
Certain information required by Part III is omitted from this report in
that the Company intends to file its definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this report, and certain information therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Proposal No.
1 -- Election of Directors -- Executive Officers and Directors."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the Proxy Statement under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Executive
Compensation and Other Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Certain
Transactions."
18
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
Report of Independent Public Accountants
Consolidated Statements of Operations for the Years Ended September 30,
1998, 1997 and 1996
Consolidated Balance Sheets as of September 30, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Supplementary Data: Quarterly Financial Data (unaudited)
2. FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants
Schedule II -- Valuation and Qualifying Accounts
3. EXHIBITS:
The exhibits which are filed with this Form 10-K, or incorporated herein
by reference, are set forth in the Exhibit Index, which immediately
precedes the exhibits to this Report.
(b)REPORTS ON FORM 8-K DURING THE QUARTER ENDED SEPTEMBER 30, 1998
The Company filed no report on Form 8-K during the quarter ended September
30, 1998.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: December 28, 1998 By: /s/ RICHARD F. BADER
------------------------------------
Richard F. Bader
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD F. BADER Chairman of the Board and December 28, 1998
- ----------------------------------------------------- Chief Executive Officer
(Richard F. Bader) (Principal Executive
Officer)
/s/ ALLAN ZINBERG President, Chief Operating December 28, 1998
- ----------------------------------------------------- Officer and Director
(Allan Zinberg)
/s/ E. PAYSON SMITH, JR. Senior Vice President and December 28, 1998
- ----------------------------------------------------- Chief Financial Officer
(E. Payson Smith, Jr.) (Principal Financial and
Accounting Officer)
/s/ DAVID E. WERTHEIMER Senior Vice President, December 28, 1998
- ----------------------------------------------------- Development, and Director
(David E. Wertheimer)
/s/ JOSEPH T. SEBASTIANELLI Director December 28, 1998
- -----------------------------------------------------
(Joseph T. Sebastianelli)
Director December 28, 1998
- -----------------------------------------------------
(Gene I. Miller)
/s/ THOMAS J. FOGARTY Director December 28, 1998
- -----------------------------------------------------
(Thomas J. Fogarty)
</TABLE>
20
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders of
Raytel Medical Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Raytel Medical Corporation and
Subsidiaries included in this Form 10-K, and have issued our report thereon
dated November 12, 1998. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The accompanying
schedule is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission rules and is
not part of the basic financial statements. The information reflected on the
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial data, and in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
Hartford, Connecticut
November 12, 1998
21
<PAGE> 23
SCHEDULE II
RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30,1998, 1997 AND 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COST AND BALANCE AT
OF YEAR EXPENSES OTHER(1) DEDUCTIONS END OF YEAR
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DESCRIPTION
September 30, 1998
Allowance for doubtful
accounts............... $6,189,000 $5,767,000 $(4,863,000) $7,093,000
September 30, 1997
Allowance for doubtful
accounts............... $5,855,000 $5,387,000 $1,946,000 $(6,999,000) $6,189,000
September 30, 1996
Allowance for doubtful
Accounts............... $7,709,000 $5,352,000 $(7,206,000) $5,855,000
</TABLE>
- ---------------
(1) The majority represents a reserve acquired in connection with the purchase
of CVI on August 15, 1997.
22
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
2.1(1) Stock Purchase Agreement, dated as of August 11, 1997, by
and among Raytel Medical Corporation, Cardiovascular
Ventures, Inc. ("CVI") and the stockholders of CVI, together
with the form of the Escrow Agreement attached thereto as
Exhibit B and the form of the Contingent Promissory Note
attached thereto as Exhibit M.
3.1(2) Restated Certificate of Incorporation of the Registrant.
3.2(3) Bylaws of the Registrant, as amended.
4.1(3) Rights Agreement dated as of August 14, 1998 between the
Registrant and BankBoston N.A., as Rights Agent
*10.1(4) 1983 Incentive Stock Option Plan, as amended.
*10.2(4) 1990 Stock Option Plan, as amended.
*10.3(4) 1995 Outside Directors Stock Option Plan.
*10.5(4) Executive Deferred Compensation Plan.
*10.7(4) Form of Indemnity Agreement for officers and directors.
*10.8(4) Employment Agreement dated September 28, 1995 between the
Registrant and Richard F. Bader.
*10.9(4) Employment Agreement dated September 28, 1995 between the
Registrant and Allan Zinberg.
*10.10(4) Employment Agreement dated September 28, 1995 between the
Registrant and E. Payson Smith, Jr.
10.22(4) Lease Agreement dated March 6, 1992 between the Registrant
and Peninsula Office Park, as amended.
10.23(4) Lease dated August 27, 1993 between the Registrant and USGC
Joint Venture.
10.24(4) Agreement of Lease dated July 22, 1983 between the
Registrant and C.E. Towers Co., as amended, with Lease
Assignment and Assumption Agreement dated February 26, 1993
between the Registrant and Medtronic, Inc. and Consent of
C.E. Towers Co. dated February 12, 1993.
10.25(4) Letter of Intent dated May 31, 1995 between the Registrant
and Stanford Health Services and related letter dated June
12, 1995 from Bruce A. Reitz, M.D.
+10.26(4) American Diagnostics and Management, Inc. Diagnostic
Catheterization Services Agreement dated September 2, 1992
between American Diagnostics And Management, Inc. ("ADAM")
and Southmore Medical Center, as assumed from ADAM by
Registrant.
+10.27(4) American Diagnostics And Management, Inc. Diagnostic
Catheterization Services Agreement dated June 10, 1993
between ADAM and Southmore Medical Center, as assumed from
ADAM by Registrant.
10.28(4) Joint Venture Agreement dated March 3, 1988 between Medical
Imaging Partners, L.P. and California Medical Imaging
Services, Inc., as amended, and related agreements.
10.29(4) Joint Venture Agreement dated November 25, 1987 between
Medical Imaging Partners, L.P. and Mastercare Diagnostic
Limited Partners, as amended, and related agreements.
10.30(4) MRI Diagnostic Partners I, L.P. 1986 Limited Partnership
Agreement dated December 31, 1986, and related agreements
and MRI Building Partners, L.P. 1986 Agreement of Limited
Partnership dated December 31, 1986.
+10.34(5) Cardiac Catheterization Facility and Administrative Services
Agreement dated January 10, 1996 between the Company and
Stanford Health Services.
+10.35(6) Letter Agreement dated January 9, 1996 between the Company
and International Philanthropic Hospital Foundation, doing
business as Granada Hills Community Hospital.
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
+10.36(7) Cardiac Catheterization Facility and Administrative Services
Agreement dated January 10, 1996 between the Company and
Stanford Health Services.
+10.38(9) Master Transaction Agreement, dated as of August 21, 1996,
but effective as of September 18, 1996, between and among
Raytel Medical Corporation, Raytel Texas Physician Services,
Inc., Raytel Southeast Management, L.P., Southeast Texas
Cardiology Associates, P.A., Southeast Texas Cardiology
Associates II, P.A., Rodolfo P. Sotolongo, M.D., Wayne S.
Margolis, M.D., Michael L. Smith, M.D., and Miguel
Castellanos, M.D. Reference is made to Exhibit 2.1.
+10.39(10) Agreement for the Purchase and Sale of Assets, dated as of
August 21, 1996, but effective as of September 18, 1996,
between and among Raytel Medical Corporation, Raytel Texas
Physician Services, Inc., Raytel Southeast Management, L.P.,
Southeast Texas Cardiology Associates, P.A., Southeast Texas
Cardiology Associates II, P.A., Rodolfo P. Sotolongo, M.D.,
Wayne S. Margolis, M.D., and Michael L. Smith, M.D.
Reference is made to Exhibit 2.2.
+10.40(11) Management Services Agreement, dated and effective as of
September 18, 1996, between Cardiology Management
Partnership, a Texas general partnership, and Southeast
Texas Cardiology Associates II, P.A., as assigned to Raytel
Southeast Management, L.P. Reference is made to Exhibit 2.3.
*10.41(12) Employee Stock Purchase Plan dated May 8, 1996
10.42(12) Amended and Restated Credit Agreement and form of Promissory
Note dated August 14, 1996 among the Registrant, Bank of
Boston Connecticut and Banque Paribas, and Bank of Boston
Connecticut, as agent.
10.43(12) Promissory Note in the amount of $15,000,000 between the
Registrant and Bank of Boston Connecticut dated September 2,
1996.
10.44(12) Promissory Note in the amount of $10,000,000 between the
Registrant and Banque Paribas dated September 2, 1996.
10.45(13) First Amendment to Amended and Restated Credit Agreement
dated June 4, 1997 among the Registrant, Bank of Boston
Connecticut and Banque Paribas, and Bank of Boston
Connecticut, as agent.
10.46(13) Second Amendment to Amended and Restated Credit Agreement,
dated September 26, 1997 among the Registrant, Bank of
Boston Connecticut and Banque Paribas, and Bank of Boston
Connecticut, as agent.
10.47(13) Promissory Note in the amount of $27,000,000 between the
Registrant and Bank of Boston Connecticut dated September
26, 1997.
10.48(13) Promissory Note in the amount of $18,000,000 between the
Registrant and Banque Paribas dated September 26, 1997.
10.49(14) Stock Purchase Agreement, dated as of August 11, 1997, by
and among Raytel Medical Corporation, Cardiovascular
Ventures, Inc. and the stockholders of CVI, together with
the form of the Escrow Agreement attached thereto as Exhibit
B and the form of the Contingent Promissory Note attached
thereto as Exhibit M.
10.50(13) Noncompetition Agreement, dated as of August 15, 1997, by
and between David E. Wertheimer and Raytel Medical
Corporation
*10.51(13) Employment Agreement, dated as of January 1, 1996, by and
between David E. Wertheimer, M.D., and Heart Institute of
Port St. Lucie, Inc., an indirect wholly-owned subsidiary of
Registrant as a result of the CVI acquisition.
*10.52(15) Employment Agreement dated as of March 1, 1998, by and
between Swapan Sen and Raytel Medical Corporation.
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
*10.53(16) Employment Agreement dated as of March 1, 1998, by and
between F. David Rollo, M.D., Ph.D., and Raytel Medical
Corporation.
*10.54(17) Employment Agreement dated as of March 1, 1998, by and
between Michael O. Kokesh and Raytel Medical Corporation.
10.55 Third Amendment to Amended and Restated Credit Agreement,
dated July 24, 1998 among the Registrant, Bank of Boston
Connecticut and Banque Paribas, and BankBoston, as agent.
10.56 Succession Agreement, dated July 1, 1998, by and among David
E. Wertheimer, M.D., Advanced Magnetic Resonance Imaging,
P.C., Raytel Medical Corporation and Raytel Imaging
Holdings, Inc. as General Partner for Forest Hills Imaging
Venture.
10.57 Succession Agreement, dated February 3, 1998, by and among
F. David Rollo, M.D., Raytel Medical Group, Inc., P.C.,
Raytel Medical Corporation and Raytel California Physician
Services, Inc.
13.1 Portions of Annual Report to Stockholders incorporated by
reference in this Report on Form 10-K.
21.1 List of subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule
</TABLE>
- ---------------
* Constitutes a management contract or compensatory plan required to be filed
pursuant to Item 14(c) of Form 10-K.
+ Confidential treatment has been granted as to a portion of this Exhibit.
(1) Incorporated by reference to identically numbered exhibits to the
Registrant's Form 10-Q Report for the quarter ended December 31, 1995 (the
"December 1995 Form 10-Q").
(2) Incorporated by reference to Exhibit 7 to the Registrant's Form 8-K Report
filed on October 23, 1998 (the "October 1998 Form 8-K").
(3) Incorporated by reference to Exhibit 1 to the October 1998 Form 8-K.
(4) Incorporated by reference to the identically numbered exhibit to the
Registrant's Registration Statement on Form S-1, No. 33-97860, which became
effective on November 30, 1995 (the "1995 Registration Statement").
(5) Incorporated by reference to Exhibit 10.1 to the December 1995 Form 10-Q.
(6) Incorporated by reference to Exhibit 10.2 to the December 1995 Form 10-Q.
(7) Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
Report for the quarter ended June 30, 1996 (the "June 1996 Form 10-Q").
(8) Incorporated by reference to Exhibit 10.2 to the June 1996 Form 10-Q.
(9) Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K
Report filed on October 3, 1996 (the "October 1996 Form 8-K").
(10) Incorporated by reference to Exhibit 2.2 to the October 1996 Form 8-K.
(11) Incorporated by reference to Exhibit 2.3 to the October 1996 Form 8-K.
(12) Incorporated by reference to identically numbered exhibits to the
Registrant's Form 10-K Report for the year ended September 30, 1996.
(13) Incorporated by reference to identically numbered exhibits to the
Registrant's Form 10-K Report for the year ended September 30, 1997.
<PAGE> 27
(14) Incorporated by reference to Exhibit 2.1 to the August 1997 Form 8-K.
(15) Incorporated by reference to Exhibit 2.1 to the March 1998 Form 10-Q.
(16) Incorporated by reference to Exhibit 2.1 to the March 1998 Form 10-Q.
(17) Incorporated by reference to Exhibit 2.1 to the March 1998 Form 10-Q.
<PAGE> 1
THIRD AMENDMENT TO AMENDED
AND RESTATED CREDIT AGREEMENT
This THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"AMENDMENT") dated as of July 24, 1998, is by and among Raytel Medical
Corporation (the "BORROWER"), BankBoston, N.A., formerly known as Bank of Boston
Connecticut ("BANKBOSTON") and Banque Paribas (collectively, the "BANKS") and
BankBoston, as agent for the Banks (in such capacity, the "AGENT").
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks and the Agent entered into a certain
Amended and Restated Credit Agreement dated as of August 14, 1996, as amended by
the First Amendment to Amended and Restated Credit Agreement dated as of June 4,
1997 and by the Second Amendment to Amended and Restated Credit Agreement dated
as of September 26, 1997 (as amended from time to time, the "CREDIT AGREEMENT");
and
WHEREAS, the Borrower has requested that the Credit Agreement be amended
in certain respects; and
WHEREAS, the Agent and the Banks have agreed to amend the Credit
Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS. Capitalized terms used herein without definition
that are defined in the Credit Agreement shall have the same meanings herein as
therein.
SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats
on and as of the date hereof the representations and warranties made by it in
the Credit Agreement, provided that all references therein to the Credit
Agreement shall refer to the Credit Agreement as amended hereby.
SECTION 3. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement and all documents, instruments and agreements related thereto
are hereby ratified and confirmed in all respects and shall continue in full
force and effect. This Amendment and the Credit Agreement shall hereafter be
read and construed together as a single document, and all references in the
Credit Agreement or any related agreement or instrument to the Credit Agreement
shall hereafter refer to the Credit Agreement as amended by this Amendment.
<PAGE> 2
-2-
SECTION 4. AMENDMENTS TO CREDIT AGREEMENT.
SECTION 4.1. AMENDMENT TO SECTION 10.3. Section 10.3 of the
Credit Agreement is hereby amended in its entirety to read as follows:
"SECTION 10.3 CONSOLIDATED TOTAL FUNDED DEBT TO EBITDA. The
Borrower will not permit the ratio of Consolidated Total Funded Debt of the
Borrower and its Subsidiaries to Earnings Before Interest and Taxes,
Depreciation and Amortization of the Borrower and its Subsidiaries for any
period consisting of four (4) consecutive fiscal quarters of the Borrower ending
after the Effective Date to exceed 2.5:1.0."
SECTION 4.2. AMENDMENTS TO SCHEDULE 2.
(a) The definition of "Consolidated Total Funded Debt"
appearing in Schedule 2 of the Credit Agreement is hereby amended in its
entirety to read as follows:
"Consolidated Total Funded Debt. As to any Person and
whether recourse is secured by or is otherwise available against all or
only a portion of the assets of such Person and whether or not
contingent, but without duplication:
(i) every obligation of such Person for money borrowed,
(ii) every obligation of such Person evidenced by
bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the
acquisition of property, assets or businesses,
(iii) every reimbursement obligation of such Person
with respect to letters of credit, bankers' acceptances or
similar facilities issued for the account of such Person,
(iv) every obligation of such Person issued or assumed
as the deferred purchase price of property or services
(including securities repurchase agreements but excluding
trade accounts payable or accrued liabilities arising in the
ordinary course of business which are not overdue or which
are being contested in good faith),
(v) every obligation of such Person under any
Capitalized Lease,
(vi) every obligation of such Person under any lease (a
"synthetic lease") treated as an operating lease under
generally
<PAGE> 3
-3-
accepted accounting principles and as a loan or financing
for U.S. income tax purposes,
(vii) all sales by such Person of (A) accounts or
general intangibles for money due or to become due, (B)
chattel paper, instruments or documents creating or
evidencing a right to payment of money or (C) other
receivables (collectively "receivables"), whether pursuant
to a purchase facility or otherwise, other than in
connection with the disposition of the business operations
of such Person relating thereto or a disposition of
defaulted receivables for collection and not as a financing
arrangement, and together with any obligation of such Person
to pay any discount, interest, fees, indemnities, penalties,
recourse, expenses or other amounts in connection therewith,
(viii) every obligation of such Person (an "equity
related purchase obligation") to purchase, redeem, retire or
otherwise acquire for value any shares of capital stock of
any class issued by such Person, any warrants, options or
other rights to acquire any such shares, or any rights
measured by the value of such shares, warrants, options or
other rights,
(ix) every obligation of such Person under any forward
contract, futures contract, swap, option or other financing
agreement or arrangement (including, without limitation,
caps, floors, collars and similar agreements), the value of
which is dependent upon interest rates, currency exchange
rates, commodities or other indices (a "derivative
contract"),
(x) every obligation in respect of Indebtedness of any
other entity (including any partnership in which such Person
is a general partner) to the extent that such Person is
liable therefor as a result of such Person's ownership
interest in or other relationship with such entity, except
(1) to the extent that the terms of such Indebtedness
provide that such Person is not liable therefor and such
terms are enforceable under applicable law and (2) any
obligation arising in connection with the Joint Ventures,
(xi) every obligation, contingent or otherwise, of such
Person guaranteeing, or having the economic effect of
guarantying or otherwise acting as surety for, any
obligation of a type described in any of clauses (i) through
(x) (the "primary obligation") of another Person (the
"primary obligor"), in any manner, whether directly or
indirectly, and including, without limitation, any
obligation of such Person (A) to purchase or pay (or advance
or supply funds for the
<PAGE> 4
-4-
purchase of) any security for the payment of such primary
obligation, (B) to purchase property, securities or services for
the purpose of assuring the payment of such primary obligation,
or (C) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor
so as to enable the primary obligor to pay such primary
obligation.
The "amount" or "principal amount" of any Indebtedness at any
time of determination represented by (u) any Indebtedness, issued at a
price that is less than the principal amount at maturity thereof, shall
be the amount of the liability in respect thereof determined in
accordance with generally accepted accounting principles, (v) any
Capitalized Lease shall be the principal component of the aggregate of
the rentals obligation under such Capitalized Lease payable over the
term thereof that is not subject to termination by the lessee, (w) any
sale of receivables shall be the amount of unrecovered capital or
principal investment of the purchaser (other than the Borrower or any of
its wholly-owned Subsidiaries) thereof, excluding amounts representative
of yield or interest earned on such investment, (x) any synthetic lease
shall be the stipulated loss value, termination value or other
equivalent amount, (y) any derivative contract shall be the maximum
amount of any termination or loss payment required to be paid by such
Person if such derivative contract were, at the time of determination,
to be terminated by reason of any event of default or early termination
event thereunder, whether or not such event of default or early
termination event has in fact occurred and (z) any equity related
purchase obligation shall be the maximum fixed redemption or purchase
price thereof inclusive of any accrued and unpaid dividends to be
comprised in such redemption or purchase price."
(b) The following new definition of "Earnings Before Interest and Taxes,
Depreciation and Amortization" is hereby added to Schedule 2 of the Credit
Agreement in alphabetical order to read as follows:
"Earnings Before Interest and Taxes, Depreciation and
Amortization. For any period, an amount equal to the sum of (a) the
consolidated earnings (or loss) from the operations of any Person for
such period, after all expenses and other proper charges but before
payment or provision for any income taxes or interest expense for such
period, plus (b) depreciation, amortization and other non-cash charges
for such period, all determined in accordance with generally accepted
accounting principles."
SECTION 5. CONDITIONS TO EFFECTIVENESS. The effectiveness of this
Amendment is subject to the prior satisfaction, on or before the date hereof, of
the following conditions precedent (the date of such satisfaction herein
referred to as the "AMENDMENT EFFECTIVE DATE"):
<PAGE> 5
-5-
(a) Representations and Warranties. The representations and
warranties contained in paragraph 7 of the Credit Agreement shall have
been correct at and as of the date made. Such representations and
warranties shall also be correct at and as of the date thereof, except
to the extent that such representations and warranties expressly related
to a specific date or were based on facts which have changes in the
ordinary course of business, which changes, either singly or in the
aggregate, are not materially adverse.
(b) No Event of Default. There shall exist no Event of Default or
condition which, with either or both the giving of notice of the lapse
of time, would result in an Event of Default upon the execution and
delivery of this Amendment.
(c) Corporate Action. The Banks and the Agent shall have received
evidence reasonably satisfactory to the Bank and the Agent that all
requisite corporate action necessary for the valid execution, delivery
and performance by the Borrower and Subsidiaries of this Amendment and
all other instruments and documents delivered by the Borrower and
Subsidiaries in connection herewith.
(d) Delivery of Amendment. The parties hereto shall have executed
and delivered this Amendment in form and substance satisfactory to the
Banks and the Agent.
SECTION 6. EFFECTIVE DATE This Amendment shall become effective among
the parties hereto as of the Amendment Effective Date. Until the Amendment
Effective Date, the terms of the Credit Agreement prior to its amendment hereby
shall remain in full force and effect.
SECTION 7. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
counterparts taken together shall be deemed to constitute one and the same
instrument.
<PAGE> 6
-6-
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their duly authorized officers, as of the day and year first above
written.
RAYTEL MEDICAL CORPORATION
By: /s/ E. Payson Smith, Jr.
--------------------------
Its: Chief Financial Officer
BANQUE PARIBAS, now known as Paribas
By: /s/ Clare Bailhe
--------------------------
Its: Director
BANKBOSTON, N.A.,
individually and as Agent
By: /s/ Christopher Phelan
--------------------------
Its: Vice President
Each of the undersigned Subsidiaries acknowledges and accepts the foregoing and
ratifies and confirms in all respects such Subsidiary's obligations under the
Guarantees:
RAYTEL CARDIAC SERVICES, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
<PAGE> 7
-7-
RAYTEL MEDICAL IMAGING, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
MEDICAL IMAGING PARTNERS L.P.
By: RAYTEL MEDICAL IMAGING, INC.,
Its General Partner
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
RAYTEL IMAGING HOLDINGS, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
RAYTEL CARDIOVASCULAR LABS, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
RAYTEL IMAGING NETWORK, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
RAYTEL IMAGING WEST INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
RAYTEL IMAGING EAST INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
<PAGE> 8
-8-
RAYTEL IMAGING MID-ATLANTIC INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
RAYTEL GRANADA HILLS INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
CARDIOVASCULAR VENTURES, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
RAYTEL MANAGEMENT HOLDINGS, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
RAYTEL CALIFORNIA PHYSICIAN
SERVICES, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
<PAGE> 9
-9-
RAYTEL TEXAS PHYSICIAN SERVICES, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
CARDIOVASCULAR VENTURES OF
TEXAS, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
CARDIOVASCULAR VENTURES OF
WEST HOUSTON, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
CARDIOVASCULAR VENTURES OF
CENTRAL SAN ANTONIO, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
CARDIOVASCULAR VENTURES OF
TOWSON, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
<PAGE> 10
-10-
CARDIOVASCULAR CENTERS OF
PORT ST. LUCIE, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
CARDIOVASCULAR VENTURES OF
ALEXANDRIA, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
CARDIOVASCULAR VENTURES OF
EAST NEW ORLEANS, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
FORT WORTH CARDIAC LABORATORY,
INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
PHYSICIAN PARTNERS OF PORT ST.
LUCIE, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
<PAGE> 11
-11-
HEART INSTITUTE OF PORT ST.
LUCIE, INC.
By: /s/ E. Payson Smith, Jr.
---------------------------
E. Payson Smith, Jr.
Its Chief Financial Officer
<PAGE> 1
SUCCESSION AGREEMENT
This Succession Agreement (the "Agreement") is made and entered into this 1st
day of July, 1998 by and among David E. Wertheimer, M.D. ("Dr. Wertheimer"), and
the Advanced Magnetic Resonance Imaging, PC, a New York professional corporation
(the "Medical Group").
RECITALS
This Agreement is made with reference to the following facts:
A. The Medical Group is a professional medical corporation (a
"Professional Medical Corporation") within the meaning of the New York
Professional Corporation Act (the "Professional Corporation Act").
B. The Medical Group has authorized stock consisting of 1,000 shares.
The Medical Group currently has one hundred (100 shares issued and outstanding.
C. The legal and beneficial owners of all of the issued and outstanding
shares of the Medical Group (the "Shares") is David E. Wertheimer, M.D. (100
Shares).
D. The only member of the Board of Directors of the Medical Group is
David E. Wertheimer, M.D. (hereinafter referred to as the "Director").
E. The parties hereto desire to promote their mutual interests by
imposing certain restrictions on the sale, transfer or other disposition of the
shares of the Medical Group and provide for certain disposition of the shares in
the event of the death, permanent disability, permanent incapacity or the
termination of employment of Dr. Wertheimer, thus insuring the continued
successful operation of the business of the Medical Group through continuous
harmonious management and share ownership. Further, the parties hereto desire to
set forth certain of their understandings with reference to other matters
pertaining to the Medical Group.
F. The Medical Group is entering into that certain management agreement
(the "Management Agreement") dated as of the date hereof, between the Medical
Group and Forest Hills Imaging Venture, a New York joint venture (hereinafter
the "Joint Venture" or "Raytel"). The parties hereto acknowledge that, but for
the execution of this Agreement, neither the Joint Venture nor Raytel would
enter into the Management Agreement.
G. Each of the parties has agreed to be bound by the covenants and
agreements set forth herein, all of which are for the mutual benefit of the
parties hereto, collectively and individually.
-1-
<PAGE> 2
NOW THEREFORE, the parties hereto hereby agree as follows:
AGREEMENT
1. GENERAL PURPOSE: CONSTRUCTIONS.
The purpose of this Agreement is to provide, in the event of the death
or permanent disability or permanent incapacity of Dr. Wertheimer, or the
termination (for any reason whatsoever) of Dr. Wertheimer, as an employee of
Raytel Medical Corporation (collectively, "Succession Events") for (i) the
orderly transfer of ownership of the stock of the Medical Group and (ii) the
directors of the Medical Group. In connection therewith, it is the intent of the
parties hereto that:
(a) The Medical Group maintain its continuous existence as a
Professional Medical Corporation.
(b) In the event of a Succession Event, the Medical Group
shall have at least one (1) shareholder.
(c) The Medical Group shall continue to honor the Management
Agreement.
2. EVENTS PRIOR TO SUCCESSION EVENTS.
2.1 Dr. Wertheimer agrees to maintain at all times throughout the
Medical Group's existence a Board of Directors of one (1) member who is a person
licensed to practice medicine in New York and such licensed persons shall be
designated as a licensed physician in accordance with the New York Professional
Corporation Act. In addition, each member of the Board of Directors must not be
a "disqualified person" as defined in the Professional Corporation Act as being
legally disqualified (temporary or permanently) or not licensed to render
professional services in the medical industry. A licensed person who is legally
qualified is hereinafter referred to as a "Qualified Medical Professional". Dr.
Wertheimer (or any other shareholder who becomes a party hereto (a "Successor
Shareholder"), will vote only for directors who are Qualified Medical
Professionals.
2.2 Dr. Wertheimer agrees that he will vote the Shares to elect
at least one (1) member to the Board of Directors, who will be a Qualified
Medical Professional. Initially, Dr. Wertheimer has voted his Shares to elect
himself to the Board of Directors of the Medical Group. If another person is
elected to succeed any him, such successor shall be a Qualified Medical
professional and qualified to serve on the Board of Directors.
2.3 During the term of this Agreement, Dr. Wertheimer shall not
sell, transfer, pledge or otherwise hypothecate the Shares. The Shares will be
marked with a restrictive legend with respect thereto.
-2-
<PAGE> 3
2.4 Dr. Wertheimer agrees to, and shall cause all directors of
the Medical Group to, take all steps necessary to ensure that the Medical Group
complies with all provisions of the Professional Corporation Act and remains in
good standing as a Professional Corporation in the State of New York.
3. EVENT OF DEATH.
3.1 Shareholder Issues. If Dr. Wertheimer is the remaining sole
shareholder of the Medical Group, then in the event of death of the last
survivor, if legal counsel for the Medical Group determines that ownership of
the Shares by the representative or successor-in-interest to the survivor is not
permitted or legal under the Professional Corporation Act, then such Shares
shall be sold and transferred to the Medical Group in accordance with Article
III of the Bylaws of the Medical Group. In such event, the Medical Group shall,
in order to have one (1) shareholder, do one of the following:
(a) The Medical Group shall sell one hundred (100) newly
issued shares to Thomas J. Fogarty, M.D., or his designee,
who shall be designated the "Successor Shareholder"
hereunder, and shall agree to purchase such shares;
provided that such sale shall be consummated only if Dr.
Fogarty or his designee is a Qualified Medical
Professional on the Board of Directors of Raytel Medical
Corporation; or
(b) If Dr. Fogarty or his designee is not a member of the
Board of Directors of Raytel Medical Corporation , then
the Medical Group shall sell one hundred (100) newly
issued shares to a Qualified Medical Professional who is a
member of the Board of Directors of Raytel Medical
Corporation. The Successor Shareholder shall be selected
in the manner set forth in sub-paragraph (d) herein. Such
Successor Shareholder shall become a party to this
Agreement and agree to be bound by the terms hereof.
(c) All purchases of shares hereunder shall be at a price of
Ten Dollars ($10.00) per share.
(d) Each Successor Shareholder shall be a Qualified Medical
Professional, and each Successor Shareholder (other than
the Personal Representative of the Estate of Dr.
Wertheimer) shall also be a member of the Board of
Directors of Raytel Medical Corporation. Each Successor
Shareholder shall be designated as being eligible to be a
shareholder and director of the Medical Group by the Board
of Directors of Raytel Medical Corporation.
-3-
<PAGE> 4
3.2 Director Issues.
(a) Dr. Fogarty, or his designee, shall agree that when he
becomes the Successor Shareholder and a party to this
Agreement in accordance with the provisions of paragraph
3.1(d), herein above, that in the event of the death of
Dr. Wertheimer, he shall fill the vacancy on the Board of
Directors of the Medical Group by electing the Successor
Shareholder, selected pursuant to paragraph 3.1(b), above
to the Board.
(b) In the event that Dr. Fogarty predeceases Dr. Wertheimer
or becomes disqualified from becoming the Successor
Shareholder in accordance with the terms set forth in this
Agreement, then in such event, Dr. Wertheimer (if he is
still the sole stockholder) will appoint either one (1) or
more Qualified Medical Professionals to the Board of
Directors of the Medical Group as the replacement for Dr.
Fogarty, hereunder, pursuant to the requirements of
paragraph 3.1(d).
(c) Each Successor Shareholder shall exert good faith best
efforts to vote his or her shares hereunder to elect all
Successor Shareholders to the Board of Directors of the
Medical Group; provided, however, no Successor Shareholder
shall be obligated to elect any such person if he or she
believes it is not in the best interest of the Medical
Group. In such event, the Successor Shareholder shall
select a person from among the qualified and licensed
professionals in the medical industry in New York who is
reasonably acceptable to the Board of Directors of Raytel
Medical Corporation.
4. PERMANENT DISABILITY AND PERMANENT INCAPACITY.
4.1 Shareholder Issues. In the event of the permanent disability
or permanent incapacity of Dr. Wertheimer as determined by a recognized medical
authority, then the Shares shall be sold and transferred to the Medical Group in
accordance with Article III of the Bylaws of the Medical Group. In such event,
the Medical Group shall sell newly issued shares to a Successor Shareholder in
the manner set forth in paragraph 3.1 herein.
4.2 Director Issues. Within thirty (30) days from the sale of
shares pursuant to this section 4, a special meeting of the shareholder shall be
called in accordance with Article IV, Section 2 of the Bylaws of the Medical
Group to elect new directors to the Board.
-4-
<PAGE> 5
5. TERMINATION OF DR. WERTHEIMER AS AN OFFICER AND RESIGNATION AS
DIRECTOR OF MEDICAL GROUP.
5.1 Shareholder Issues. In the event of:
(a) voluntary resignation by Dr. Wertheimer as an officer and
director of the Medical Group;
(b) mutual agreement of termination by Dr. Wertheimer and
Raytel Medical Corporation resulting in his resignation as
an officer of Raytel Medical Corporation;
(c) termination by Heart Institute of Port St. Lucie, Inc. of
the employment agreement between Dr. Wertheimer and Heart
Institute of Port St. Lucie, Inc., dated January 1, 1996,
as the same may be amended and/or renewed from time to
time;
the Corporation shall sell one hundred (100) newly issued shares to Thomas J.
Fogarty, M.D., or his designee, who shall then become the Successor Shareholder
in the manner set forth in paragraph 3.1(b) at a price of Ten Dollars ($10.00)
per share.
5.2 Director Issues. Within thirty (30) days from the sale of
shares pursuant to this section 5, a special meeting of the shareholder shall be
called in accordance with Article IV, Section 2 of the Bylaws of the Medical
Group to elect directors.
6. EVENTS AFFECTING SUCCESSOR SHAREHOLDERS. Anytime there is only one
(1) shareholder in the Medical Group, in the event of death, permanent
disability, permanent incapacity of such Successor Shareholder, the
disqualification of such Shareholder as a Qualified Medical Professional or the
removal of such Successor Shareholder who is a director from the Medical Group's
Board of Directors in accordance with the provisions of the Medical Group's
Bylaws, all shares held by such Successor Shareholder shall be sold and
transferred to the Medical Group in accordance with Article III of the Medical
Group's Bylaws, and the Medical Group shall sell shares to a new Successor
Shareholder in the manner set forth in paragraph 3.1(b). Within thirty (30) days
from the sale of shares to a Successor Shareholder pursuant to this paragraph 6,
a special meeting of the shareholder shall be called in accordance with Article
IV, Section 2 of the Bylaws of the Medical Group to elect directors.
7. TERM AND AMENDMENT TO BYLAWS. This Agreement shall be in full force
and effect for so long as the Management Agreement is in full force and effect.
This Agreement shall terminate upon the earlier termination of the Management
Agreement (whether it be the Initial Term or any Renewal Term as defined
therein). Dr. Wertheimer and each Successor Shareholder agree that they will not
amend the Bylaws of the Medical Group in
-5-
<PAGE> 6
a manner adverse to the purposes set forth and specified in paragraphs 1, 4.1,
5.2 or 6 hereof so long as this Agreement is in effect.
8. COMMUNITY PROPERTY INTEREST. It is intended by this Agreement
that the parties hereto shall subject their entire interest in the shares owned
by them to the terms of this Agreement, irrespective of any community property
interest of any spouse.
9. DELIVERY OF SHARES, STOCK ASSIGNMENTS. Upon the purchase of any
shares hereunder, the Medical Group or the person selling the shares shall
deliver to the Medical Group and/or the purchasing shareholder, as the case may
be, the stock certificate or certificate evidencing the shares purchased,
together with all necessary or appropriate stock assignments separate from
certificate.
10. FURTHER AGREEMENTS.
10.1 Party to Agreement. Any Successor Shareholder shall become a
party to this Agreement and agree to be bound by the term hereof.
10.2 Transfer of Shares. During the term of this Agreement, a
Successor Shareholder shall not sell, transfer, pledge or otherwise
hypothecate his/her shares. The shares will be marked with a restrictive
legend with respect thereto.
10.3 Compliance. Any Successive Shareholder agrees to, and shall
cause all directors of the Medical Group to, take all steps necessary to
ensure that the Medical Group complies with all provisions of the
Professional Corporation Act and remains in good standing as a
Professional Medical Corporation in the State of New York.
11. COPY OF AGREEMENT. The Medical Group shall keep a copy of this
Agreement on file in the principal business office of the Medical Group.
12. NOTICE.Any and all notices or other matters required or permitted by
this Agreement to be served on, given to or delivered to a party shall in
writing and shall be deemed duly served, given or delivered when personally
delivered to such party, or in lieu of such personal service, when deposited in
the United States mail, certified, postage prepaid, or by facsimile transmission
followed by mail delivery, addressed to such person as follows:
<TABLE>
<S> <C>
To:"Raytel" or Forest Hills Imaging Venture" To: "Medical Group" or "Dr. Wertheimer"
Swapan Sen, Senior Vice President David E. Wertheimer, M.D., President
Forest Hills Imaging Venture Advanced Magnetic Resonance Imaging, PC
7 Waterside Crossing 2755 Campus Drive, Suite 200
Windsor, CT 06095 San Mateo, CA 94403
</TABLE>
-6-
<PAGE> 7
Any party hereto may change its address for the purpose of receiving
notices, demands and other communications as herein provided by a written notice
given in the manner aforesaid to the other parties hereto.
13. ATTORNEYS' FEES. Should any parties hereto institute any action
or proceeding at law or in equity or in connection with an arbitration, to
enforce any provision of this Agreement, including an action for declaratory
relief, or for damages by reason of an alleged breach of any provision of this
Agreement, or otherwise in connection with this Agreement, or any provision
thereof, the prevailing party shall be entitled to recover from the losing party
or parties reasonable attorneys' fees and costs for services rendered to the
prevailing party in such action or proceeding.
14. MISCELLANEOUS.
14.1 Applicable Law. This Agreement shall, in all respects, be
governed by the laws of the State of New York applicable to agreements executed
and to be performed in New York.
14.2 Severability. Nothing contained herein shall be construed so
as to require the commission of any act contrary to law, and wherever there is
any conflict between any provisions contained herein and any present or future
statute, law, ordinance or regulation, the latter shall prevail; but the
provision of this Agreement which is affected shall be curtailed and limited
only to the extent necessary to bring it in the requirements of the law.
14.3 Further Assurances. Each of the parties hereto shall execute
and deliver any and all additional papers, documents, and other assurance, and
shall do any and all acts and things reasonably necessary in connection with the
performance of his or her obligations hereunder to carry out the intent of the
parties hereto.
14.4 Modifications or Amendments. No amendment, change or
modification of this Agreement shall be valid, unless in writing and signed by
all of the parties hereto.
14.5 Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties with respect to its subject matter
and any and all prior agreements, understandings or representations with respect
to its subject matter are hereby terminated and canceled in their entirety and
are of no further force or effect.
14.6 Non-Waiver. No Waiver by any party hereto for a breach of
any provision of this Agreement shall constitute a waiver of any preceding or
succeeding breach of the same or any other provision hereof.
-7-
<PAGE> 8
14.7 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.8 Number and Gender. In this Agreement, the masculine,
feminine or neuter gender, and the singular or plural number, shall each be
deemed to include the other, whenever the context so requires.
14.9 Captions. The Captions appearing at the commencement of the
sections hereof are descriptive only and for convenience in reference. Should
there be any conflict between any such caption and the section at the head of
which it appears, the section and not such caption shall control and govern in
the construction of this Agreement.
14.10 Continued Tenure. The parties hereto acknowledge that
nothing contained in this Agreement shall be deemed as a guarantee of continued
tenure on the Board of Directors of the Medical Group.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
"Medical Group"
<TABLE>
<S> <C>
Advanced Magnetic Resonance Imaging, PC David E. Wertheimer, M.D.
a New York professional corporation
By: /s/ David E. Wertheimer, M.D. By: /s/ David E. Wertheimer, M.D.
----------------------------- -----------------------------
David E. Wertheimer, M.D. David E. Wertheimer, M.D.
Its: President
Raytel Medical Corporation Forest Hills Imaging Venture
a New York joint venture
By: /s/ Swapan Sen By: /s/ Swapan Sen
----------------------------- -----------------------------
Swapan Sen Swapan Sen, Senior Vice President
on behalf of Raytel Imaging Holdings, Inc.
Its: Senior Vice President Its: General Partner
</TABLE>
-8-
<PAGE> 1
SUCCESSION AGREEMENT
This Succession Agreement (the "Agreement") is made and entered into this 3rd
day of February, 1998 by and among F. David Rollo, M.D. ("Dr. Rollo"), and the
Raytel Medical Group, Ltd., a California professional corporation (the "Medical
Group").
RECITALS
This Agreement is made with reference to the following facts:
A. The Medical Group is a professional medical corporation (a
"Professional Medical Corporation") within the meaning of the California
Moscone-Knox Professional Corporation Act (the "Professional Corporation Act").
B. The Medical Group has authorized stock consisting of 1,000 shares.
The Medical Group currently has one hundred (100 shares issued and outstanding.
C. The legal and beneficial owners of all of the issued and outstanding
shares of the Medical Group (the "Shares") is F. David Rollo, M.D. (100 Shares).
D. The only member of the Board of Directors of the Medical Group is F.
David Rollo, M.D. (hereinafter referred to as the "Director").
E. The parties hereto desire to promote their mutual interests by
imposing certain restrictions on the sale, transfer or other disposition of the
shares of the Medical Group and provide for certain disposition of the shares in
the event of the death, permanent disability, permanent incapacity or the
termination of employment of Dr. Rollo, thus insuring the continued successful
operation of the business of the Medical Group through continuous harmonious
management and share ownership. Further, the parties hereto desire to set forth
certain of their understandings with reference to other matters pertaining to
the Medical Group.
F. The Medical Group is entering into that certain management agreement
(the "Management Agreement") dated as of the date hereof, between the Medical
Group and Raytel California Physician Services, Inc., a Delaware corporation
("Raytel"). The parties hereto acknowledge that, but for the execution of this
Agreement, Raytel would not enter into the Management Agreement.
G. Each of the parties has agreed to be bound by the covenants and
agreements set forth herein, all of which are for the mutual benefit of the
parties hereto, collectively and individually.
NOW THEREFORE, the parties hereto hereby agree as follows:
1
<PAGE> 2
AGREEMENT
1. GENERAL PURPOSE: CONSTRUCTIONS.
The purpose of this Agreement is to provide, in the event of the death
or permanent disability or permanent incapacity of Dr. Rollo, or the termination
(for any reason whatsoever) of Dr. Rollo, as an employee of Raytel Medical
Corporation (collectively, "Succession Events") for (i) the orderly transfer of
ownership of the stock of the Medical Group and (ii) the directors of the
Medical Group. In connection therewith, it is the intent of the parties hereto
that:
(a) The Medical Group maintain its continuous existence as a
Professional Medical Corporation.
(b) In the event of a Succession Event, the Medical Group
shall have at least one (1) shareholder.
(c) The Medical Group shall continue to honor the Management
Agreement.
2. EVENTS PRIOR TO SUCCESSION EVENTS.
2.1 Dr. Rollo agrees to maintain at all times throughout the
Medical Group's existence a Board of Directors of one (1) member who is a person
licensed to practice medicine in California and such licensed persons shall be
designated as a licensed physician in accordance with the California
Professional Corporation Act. In addition, each member of the Board of Directors
must not be a "disqualified person" as defined in the Professional Corporation
Act as being legally disqualified (temporary or permanently) or not licensed to
render professional services in the medical industry. A licensed person who is
legally qualified is hereinafter referred to as a "Qualified Medical
Professional". Dr. Rollo (or any other shareholder who becomes a party hereto (a
"Successor Shareholder"), will vote only for directors who are Qualified Medical
Professionals.
2.2 Dr. Rollo agrees that he will vote the Shares to elect at
least one (1) member to the Board of Directors, who will be a Qualified Medical
Professional. Initially, Dr. Rollo has voted his Shares to elect himself to the
Board of Directors of the Medical Group. If another person is elected to succeed
any him, such successor shall be a Qualified Medical professional and qualified
to serve on the Board of Directors.
2.3 During the term of this Agreement, Dr. Rollo shall not sell,
transfer, pledge or otherwise hypothecate the Shares. The Shares will be marked
with a restrictive legend with respect thereto.
2
<PAGE> 3
2.4 Dr. Rollo agrees to, and shall cause all directors of the
Medical Group to, take all steps necessary to ensure that the Medical Group
complies with all provisions of the Professional Corporation Act and remains in
good standing as a Professional Corporation in the State of California.
3. EVENT OF DEATH.
3.1 Shareholder Issues. If Dr. Rollo is the remaining sole
shareholder of the Medical Group, then in the event of death of the last
survivor, if legal counsel for the Medical Group determines that ownership of
the Shares by the representative or successor-in-interest to the survivor is not
permitted or legal under the Professional Corporation Act, then such Shares
shall be sold and transferred to the Medical Group in accordance with Article
III of the Bylaws of the Medical Group. In such event, the Medical Group shall,
in order to have one (1) shareholder, do one of the following:
(a) The Medical Group shall sell one hundred (100) newly
issued shares to Thomas J. Fogarty, M.D., or his designee,
who shall be designated the "Successor Shareholder"
hereunder, and shall agree to purchase such shares;
provided that such sale shall be consummated only if Dr.
Fogarty or his designee is a Qualified Medical
Professional on the Board of Directors of Raytel Medical
Corporation; or
(b) If Dr. Fogarty or his designee is not a member of the
Board of Directors of Raytel Medical Corporation , then
the Medical Group shall sell one hundred (100) newly
issued shares to a Qualified Medical Professional who is a
member of the Board of Directors of Raytel Medical
Corporation. The Successor Shareholder shall be selected
in the manner set forth in sub-paragraph (d) herein. Such
Successor Shareholder shall become a party to this
Agreement and agree to be bound by the terms hereof.
(c) All purchases of shares hereunder shall be at a price of
Ten Dollars ($10.00) per share.
(d) Each Successor Shareholder shall be a Qualified Medical
Professional, and each Successor Shareholder (other than
the Personal Representative of the Estate of Dr. Rollo)
shall also be a member of the Board of Directors of Raytel
Medical Corporation. Each Successor Shareholder shall be
designated as being eligible to be a shareholder and
director of the Medical Group by the Board of Directors of
Raytel Medical Corporation.
3
<PAGE> 4
3.2 Director Issues.
(a) Dr. Fogarty, or his designee, shall agree that when he
becomes the Successor Shareholder and a party to this
Agreement in accordance with the provisions of paragraph
3.1(d), herein above, that in the event of the death of
Dr. Rollo, he shall fill the vacancy on the Board of
Directors of the Medical Group by electing the Successor
Shareholder, selected pursuant to paragraph 3.1(b), above
to the Board.
(b) In the event that Dr. Fogarty predeceases Dr. Rollo or
becomes disqualified from becoming the Successor
Shareholder in accordance with the terms set forth in this
Agreement, then in such event, Dr. Rollo (if he is still
the sole stockholder) will appoint either one (1) or more
Qualified Medical Professionals to the Board of Directors
of the Medical Group as the replacement for Dr. Fogarty,
hereunder, pursuant to the requirements of paragraph
3.1(d).
(c) Each Successor Shareholder shall exert good faith best
efforts to vote his or her shares hereunder to elect all
Successor Shareholders to the Board of Directors of the
Medical Group; provided, however, no Successor Shareholder
shall be obligated to elect any such person if he or she
believes it is not in the best interest of the Medical
Group. In such event, the Successor Shareholder shall
select a person from among the qualified and licensed
professionals in the medical industry in California who is
reasonably acceptable to the Board of Directors of Raytel
Medical Corporation.
4. PERMANENT DISABILITY AND PERMANENT INCAPACITY.
4.1 Shareholder Issues. In the event of the permanent disability
or permanent incapacity of Dr. Rollo as determined by a recognized medical
authority, then the Shares shall be sold and transferred to the Medical Group in
accordance with Article III of the Bylaws of the Medical Group. In such event,
the Medical Group shall sell newly issued shares to a Successor Shareholder in
the manner set forth in paragraph 3.1 herein.
4.2 Director Issues. Within thirty (30) days from the sale of
shares pursuant to this section 4, a special meeting of the shareholder shall be
called in accordance with Article IV, Section 2 of the Bylaws of the Medical
Group to elect new directors to the Board.
4
<PAGE> 5
5. TERMINATION OF ROLLO AS OFFICER AND RESIGNATION AS DIRECTOR OF
MEDICAL GROUP.
5.1 Shareholder Issues. In the event of:
(a) voluntary resignation by Dr. Rollo as an officer and
director of the Medical Group;
(b) mutual agreement of termination by Dr. Rollo and Raytel
Medical Corporation resulting in his resignation as an
officer of Raytel Medical Corporation;
(c) termination by Raytel Medical Corporation of the
employment agreement between Dr. Rollo and Raytel Medical
Corporation dated March 1, 1998, as the same may be
amended and/or renewed from time to time;
the Corporation shall sell one hundred (100) newly issued shares to Thomas J.
Fogarty, M.D., or his designee, who shall then become the Successor Shareholder
in the manner set forth in paragraph 3.1(b) at a price of Ten Dollars ($10.00)
per share.
5.2 Director Issues. Within thirty (30) days from the sale of
shares pursuant to this section 5, a special meeting of the shareholder shall be
called in accordance with Article IV, Section 2 of the Bylaws of the Medical
Group to elect directors.
6. EVENTS AFFECTING SUCCESSOR SHAREHOLDERS. Anytime there is only one
(1) shareholder in the Medical Group, in the event of death, permanent
disability, permanent incapacity of such Successor Shareholder, the
disqualification of such Shareholder as a Qualified Medical Professional or the
removal of such Successor Shareholder who is a director from the Medical Group's
Board of Directors in accordance with the provisions of the Medical Group's
Bylaws, all shares held by such Successor Shareholder shall be sold and
transferred to the Medical Group in accordance with Article III of the Medical
Group's Bylaws, and the Medical Group shall sell shares to a new Successor
Shareholder in the manner set forth in paragraph 3.1(b). Within thirty (30) days
from the sale of shares to a Successor Shareholder pursuant to this paragraph 6,
a special meeting of the shareholder shall be called in accordance with Article
IV, Section 2 of the Bylaws of the Medical Group to elect directors.
7. TERM AND AMENDMENT TO BYLAWS. This Agreement shall be in full force
and effect for so long as the Management Agreement is in full force and effect.
This Agreement shall terminate upon the earlier termination of the Management
Agreement (whether it be the Initial Term or any Renewal Term as defined
therein). Dr. Rollo and each Successor Shareholder agree that they will not
amend the Bylaws of the Medical Group in a manner adverse to the purposes set
forth and specified in paragraphs 1, 4.1, 5.2 or 6 hereof so long as this
Agreement is in effect.
5
<PAGE> 6
8. COMMUNITY PROPERTY INTEREST. It is intended by this Agreement that
the parties hereto shall subject their entire interest in the shares owned by
them to the terms of this Agreement, irrespective of any community property
interest of any spouse.
9. DELIVERY OF SHARES, STOCK ASSIGNMENTS. Upon the purchase of any
shares hereunder, the Medical Group or the person selling the shares shall
deliver to the Medical Group and/or the purchasing shareholder, as the case may
be, the stock certificate or certificate evidencing the shares purchased,
together with all necessary or appropriate stock assignments separate from
certificate.
10. FURTHER AGREEMENTS.
10.1 Party to Agreement. Any Successor Shareholder shall become a
party to this Agreement and agree to be bound by the term hereof.
10.2 Transfer of Shares. During the term of this Agreement, a
Successor Shareholder shall not sell, transfer, pledge or otherwise
hypothecate his/her shares. The shares will be marked with a restrictive
legend with respect thereto.
10.3 Compliance. Any Successive Shareholder agrees to, and shall
cause all directors of the Medical Group to, take all steps necessary to
ensure that the Medical Group complies with all provisions of the
Professional Corporation Act and remains in good standing as a
Professional Medical Corporation in the State of California.
11. COPY OF AGREEMENT. The Medical Group shall keep a copy of this
Agreement on file in the principal business office of the Medical Group.
12. NOTICE.Any and all notices or other matters required or permitted by
this Agreement to be served on, given to or delivered to a party shall in
writing and shall be deemed duly served, given or delivered when personally
delivered to such party, or in lieu of such personal service, when deposited in
the United States mail, certified, postage prepaid, or by facsimile transmission
followed by mail delivery, addressed to such person as follows:
<TABLE>
<S> <C>
To: "Raytel" To: "Medical Group" or "Dr. Rollo"
Swapan Sen, Senior Vice President F. David Rollo, M.D., President
Raytel California Physician Services, Inc. Raytel Medical Group, Inc.
2755 Campus Drive, Suite 200 2755 Campus Drive, Suite 200
San Mateo, California 94403 San Mateo, California 94403
</TABLE>
6
<PAGE> 7
Any party hereto may change its address for the purpose of receiving
notices, demands and other communications as herein provided by a written notice
given in the manner aforesaid to the other parties hereto.
13. ATTORNEYS' FEES. Should any parties hereto institute any action
or proceeding at law or in equity or in connection with an arbitration, to
enforce any provision of this Agreement, including an action for declaratory
relief, or for damages by reason of an alleged breach of any provision of this
Agreement, or otherwise in connection with this Agreement, or any provision
thereof, the prevailing party shall be entitled to recover from the losing party
or parties reasonable attorneys' fees and costs for services rendered to the
prevailing party in such action or proceeding.
14. MISCELLANEOUS.
14.1 Applicable Law. This Agreement shall, in all respects, be
governed by the laws of the State of California applicable to agreements
executed and to be performed in California.
14.2 Severability. Nothing contained herein shall be construed so
as to require the commission of any act contrary to law, and wherever there is
any conflict between any provisions contained herein and any present or future
statute, law, ordinance or regulation, the latter shall prevail; but the
provision of this Agreement which is affected shall be curtailed and limited
only to the extent necessary to bring it in the requirements of the law.
14.3 Further Assurances. Each of the parties hereto shall execute
and deliver any and all additional papers, documents, and other assurance, and
shall do any and all acts and things reasonably necessary in connection with the
performance of his or her obligations hereunder to carry out the intent of the
parties hereto.
14.4 Modifications or Amendments. No amendment, change or
modification of this Agreement shall be valid, unless in writing and signed by
all of the parties hereto.
14.5 Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties with respect to its subject matter
and any and all prior agreements, understandings or representations with respect
to its subject matter are hereby terminated and canceled in their entirety and
are of no further force or effect.
14.6 Non-Waiver. No Waiver by any party hereto for a breach of
any provision of this Agreement shall constitute a waiver of any preceding or
succeeding breach of the same or any other provision hereof.
14.7 Counterparts. This Agreement may be executed in one or more
7
<PAGE> 8
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.8 Number and Gender. In this Agreement, the masculine,
feminine or neuter gender, and the singular or plural number, shall each be
deemed to include the other, whenever the context so requires.
14.9 Captions. The Captions appearing at the commencement of the
sections hereof are descriptive only and for convenience in reference. Should
there be any conflict between any such caption and the section at the head of
which it appears, the section and not such caption shall control and govern in
the construction of this Agreement.
14.10 Continued Tenure. The parties hereto acknowledge that
nothing contained in this Agreement shall be deemed as a guarantee of continued
tenure on the Board of Directors of the Medical Group.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
"Medical Group"
<TABLE>
<S> <C>
Raytel Medical Group, Inc. F. David Rollo, M.D.
a California professional corporation
By: /s/ F. David Rollo, M.D. By: /s/ F. David Rollo, M.D.
------------------------- -------------------------
F. David Rollo, M.D. F. David Rollo, M.D.
Its: President
Raytel Medical Corporation Raytel California Physician
Services, Inc.
By: /s/ Swapan Sen By: /s/ Swapan Sen
------------------------- -------------------------
Swapan Sen Swapan Sen
Its: Senior Vice President Its: Senior Vice President
</TABLE>
8
<PAGE> 1
EXHIBIT 13.1
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
- -----------------------------------------------------------------------------------------------------------------
(000's omitted, except per share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Pacing, CEDS and Holter $ 46,171 $ 47,227 $ 43,649 $ 41,384 $ 38,661
Diagnostic imaging service 19,977 17,610 19,970 20,516 19,150
Heart Center, practice management and other 41,481 18,578 8,896 1,562 964
--------------------------------------------------------------
Total revenues 107,629 83,415 72,515 63,462 58,775
Operating costs and selling, general and
administrative expenses 85,633 63,273 56,412 47,353 44,821
Depreciation and amortization 8,282 6,306 5,590 5,806 5,880
Non-recurring tender offer expense -- -- -- 1,050 --
--------------------------------------------------------------
Operating income 13,714 13,836 10,513 9,253 8,074
Interest expense 2,990 785 514 2,118 2,463
Other (income) (511) (3,076) (591) (347) (305)
Minority interest 1,273 485 762 1,161 1,099
--------------------------------------------------------------
Income before income taxes 9,962 15,642 9,828 6,321 4,817
Provision for income taxes 3,869 6,257 3,248 1,960 1,004
Income before extraordinary item 6,093 9,385 6,580 4,361 3,813
Extraordinary item, net of related tax benefit -- 721 449 -- --
--------------------------------------------------------------
Net income $ 6,093 $ 8,664 $ 6,131 $ 4,361 $ 3,813
==============================================================
Net income per share before extraordinary item:
Basic $ .69 $ 1.11 $ .86 $ .84 $ .74
==============================================================
Diluted $ .66 $ 1.04 $ .80 $ .78 $ .69
==============================================================
Net income per share:
Basic $ .69 $ 1.02 $ .80 $ .84 $ .74
==============================================================
Diluted $ .66 $ .96 $ .75 $ .78 $ .69
==============================================================
Weighted average shares outstanding:
Basic 8,879 8,458 7,623 5,210 5,135
==============================================================
Diluted 9,294 9,039 8,194 5,617 5,548
==============================================================
CONSOLIDATED BALANCE SHEET DATA:
Total assets $ 122,186 $ 119,421 $ 68,030 $ 46,768 $ 50,245
Long-term debt and capital lease obligations(1) 36,997 36,354 7,576 14,550 20,518
Total stockholders' equity 66,491 61,899 48,878 21,499 17,160
</TABLE>
(1) Includes current portion of long-term debt and capital lease obligations
plus unamortized debt discount.
PAGE 5
<PAGE> 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 Raytel Medical Corporation's ("Raytel" or the "Company") 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 Section, that could cause actual results to differ materially
from historical results or those anticipated. In this Section, 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: the 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,
which included the multi-specialty physician practice, Heart and Family Health
Institute ("HFHI") and seven cardiovascular diagnostic facilities.
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 $1,318,000 and $3,924,000, for the years
ended September 30, 1997 and 1996, respectively.
On October 18, 1996, the Company, through a subsidiary, entered into a long-term
management service agreement whereby the Company will manage the non-medical
aspects of the CCMG practice. Total consideration for the transaction was cash
of $427,000, promissory notes of $620,000 and 14,376 shares of the Company's
Common Stock to be delivered at future dates, valued at $91,000 (which
represents a discount from the trading price of the stock at the time of the
transaction due primarily to the delay in the delivery of the shares).
In September 1996, the Company received a favorable administrative decision
related to a billing dispute with a New York Medicare carrier whereby it was
entitled to receive approximately $4.0 million. The time period for the
Healthcare Finance Administration ("HCFA") and the Social Security
Administration to file an appeal expired on February 10, 1997. After accounting
for administrative costs and reimbursements due to Medtronic under the terms of
the acquisition of CardioCare and a separate provision against the value of a
non-operating asset, the Company recognized other income of $2,510,000 pretax in
its second fiscal quarter ending March 31, 1997, with a positive after tax
effect of $1,506,000 or $.17 per share (the "Decision").
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
PAGE 6
<PAGE> 3
arrangements, the Company's practice management revenues represent approximately
56% of the revenues of the physician groups for the years ended September 30,
1998 and 1997. For HFHI, the Company recognizes 100% of all medical revenue as
the physicians are employees of the Company.
On August 15, 1997, the Company acquired all of the outstanding capital stock of
CVI, of New Orleans, Louisiana. CVI manages, owns and operates cardiovascular
diagnostic facilities in Texas, Louisiana and Florida and owns and manages a
physician practice in Florida. Total original consideration for the transaction
consisted of cash and transaction costs of approximately $16,980,000, and
500,000 shares of Raytel Common Stock. During fiscal 1998, there were additional
transaction costs of approximately $280,000 and an additional 46,668 shares of
the Company's Common Stock has been or will be issued. The contingent promissory
notes in the aggregate principal amount of $820,000 were cancelled in accordance
with the terms of the agreement.
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 a range 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 and public relations activities. The
Company began operations at Baptist Hospital during the fourth quarter of fiscal
1998.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain data derived
from the Consolidated Statements of Operations as a percentage of total
revenues:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
- ----------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0%
Operating costs and selling, general and
administrative expenses 79.6 75.9 77.8
Depreciation and amortization 7.7 7.6 7.7
-------------------------------
Operating income 12.7 16.5 14.5
Interest expense and other (income) expense 2.3 (2.8) (.1)
Minority interest 1.2 .5 1.1
-------------------------------
Income before income taxes 9.2 18.8 13.5
Provision for income taxes 3.6 7.5 4.5
-------------------------------
Income before extraordinary item 5.6 11.3 9.0
Extraordinary item -- .9 .6
-------------------------------
Net income 5.6% 10.4% 8.4%
-------------------------------
</TABLE>
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30,
1997
The operations of CVI are included in the Company's Consolidated Statements of
Operations since August 15, 1997, the effective date of the Company's
acquisition of CVI. Accordingly, such results are included for fiscal 1998, but
are only included for 45 days of fiscal 1997.
PAGE 7
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues. Pacing, CEDS and Holter revenues decreased by $1,056,000, or 2.2%,
from $47,227,000 in fiscal 1997 to $46,171,000 in fiscal 1998, due primarily to
a combination of competitive pressures and lower reimbursement rates for CEDS.
Diagnostic imaging service revenues increased by $2,367,000, or 13.4%, from
$17,610,000 in fiscal 1997 to $19,977,000 in fiscal 1998 due primarily to
increases in revenues at certain centers due to an increase in volume, partially
offset by decreased revenues due to the termination of two Ventures in fiscal
1997. Heart Center, practice management and other revenues increased by
$22,903,000, or 123.3%, from $18,578,000 in fiscal 1997 to $41,481,000 in fiscal
1998 due primarily to the inclusion of revenues from CVI.
As a result of the foregoing factors, total revenues increased by $24,214,000,
or 29.0%, from $83,415,000 in fiscal 1997 to $107,629,000 in fiscal 1998.
Operating Expenses. Operating costs and selling, general and administrative
expenses increased by 22,360,000, or 35.3%, from $63,273,000 in fiscal 1997 to
$85,633,000 in fiscal 1998, due primarily to the inclusion of costs and expenses
from CVI. Operating costs and selling, general and administrative expenses as a
percentage of total revenues increased from 75.9% in fiscal 1997 to 79.6% in
fiscal 1998 due primarily to the inclusion of revenues and costs and expenses
from CVI. At RHCGH operating expenses were slightly in excess of revenues for
both fiscal years.
Depreciation and Amortization. Depreciation and amortization expense increased
by $1,976,000, or 31.3%, from $6,306,000 in fiscal 1997 to $8,282,000 in fiscal
1998, due primarily to the inclusion of CVI, but remained relatively unchanged
as a percentage of revenues.
Operating Income. As a result of the foregoing factors, operating income
decreased by $122,000, or 0.9%, from $13,836,000 in fiscal 1997 to $13,714,000
in fiscal 1998.
Interest Expense. Interest expense increased by $2,205,000, or 280.9%, from
$785,000 in fiscal 1997 to $2,990,000 in fiscal 1998 due primarily to an
increase in debt due to the CVI acquisition.
Other Expense (Income). Other income decreased by $2,565,000 or 83.4% from
$3,076,000 in fiscal 1997 to $511,000 in fiscal 1998 due primarily to
non-recurring income resulting from the Decision.
Minority Interest. Minority interest increased by $788,000, or 162.5%, from
$485,000 in fiscal 1997 to $1,273,000 in fiscal 1998 due primarily to the
inclusion of CVI.
Income Taxes. The provision for income taxes decreased by $2,388,000, or 38.2%,
from $6,257,000 in fiscal 1997 to $3,869,000 in fiscal 1998 as a result of
decreased taxable income.
Extraordinary Item. An extraordinary charge of $721,000, net of the related tax
benefit, for the cost of restructuring certain indebtedness acquired with the
CVI purchase was recorded during the year ended September 30, 1997.
Net Income. As a result of the foregoing factors, net income decreased by
$2,571,000, or 29.7%, from $8,664,000 in fiscal 1997 to $6,093,000 in fiscal
1998.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996
The operations of RHCGH are included in the Company's Consolidated Statements of
Operations since February 1, 1996, the effective date of the agreement.
Accordingly, RHCGH's operations are included for all twelve months in fiscal
1997, but are only included for eight months in fiscal 1996. The operations of
CDS are included in the Company's Consolidated Statements of Operations since
June 11, 1996, the effective date of the Company's acquisition of CDS.
Accordingly, the operations of CDS are included for all twelve months in fiscal
1997, but are only included for approximately four months of fiscal 1996. The
results of operations from the management service agreement with SETCA are
included in the Company's
PAGE 8
<PAGE> 5
Consolidated Statements of Operations since September 18, 1996, the effective
date of the agreement. Accordingly, such results are included for all twelve
months in fiscal 1997, but are only included for twelve days of fiscal 1996. The
results of operations from the management service agreement with CCMG are
included in the Company's Consolidated Statements of Operations since November
1, 1996, the effective date of its agreement. Accordingly, such results are
included for eleven months in fiscal 1997, but are not included in fiscal 1996.
The operations of CVI are included in the Company's Consolidated Statements of
Operations since August 15, 1997, the effective date of the Company's
acquisition of CVI.
Revenues. Pacing, CEDS and Holter revenues increased by $3,578,000, or 8.2%,
from $43,649,000 in fiscal 1996 to $47,227,000 in fiscal 1997, due primarily to
the inclusion of revenues from CDS. Diagnostic imaging service revenues
decreased by $2,360,000 or 11.8%, from $19,970,000 in fiscal 1996 to $17,610,000
in fiscal 1997, due primarily to the termination of one diagnostic imaging joint
venture on December 31, 1996 and another on June 30, 1997. Heart Center,
practice management and other revenues increased by $9,682,000 or 108.8% from
$8,896,000 in fiscal 1996 to $18,578,000 in fiscal 1997 due primarily to the
inclusion of revenues from the physician practice management agreements and from
CVI and RHCGH.
As a result of the foregoing factors, total revenues increased by $10,900,000,
or 15.0%, from $72,515,000, in fiscal 1996 to $83,415,000 in fiscal 1997.
Operating Expenses. Operating costs and selling, general and administrative
expenses increased by $6,861,000, or 12.2%, from $56,412,000 in fiscal 1996 to
$63,273,000 in fiscal 1997 due primarily to the inclusion of costs and expenses
from CVI, RHCGH, CDS and the management of the physician practices. These
increases were partially offset by decreases in costs and expenses at operating
facilities, other than CDS, which provide Pacing, CEDS and Holter services due
to cost containment measures. Operating costs and selling, general and
administrative expenses as a percentage of total revenues declined slightly at
RHCGH, where operating expenses were slightly in excess of revenues for the
years ended September 30, 1997 and 1996.
Depreciation and Amortization. Depreciation and amortization expense increased
by $716,000, or 12.8%, from $5,590,000 in fiscal 1996 to $6,306,000 in fiscal
1997 but declined as a percentage of revenues from 7.7% in fiscal 1996 to 7.6%
in fiscal 1997.
Operating Income. As a result of the foregoing factors, operating income
increased by $3,323,000, or 31.6%, from $10,513,000 in fiscal 1996 to
$13,836,000 in fiscal 1997.
Interest Expense. Interest expense increased by $271,000, or 52.7%, from
$514,000 in fiscal 1996 to $785,000 in fiscal 1997, due primarily to an increase
in debt due to the CVI acquisition and an increase in the principal amount
outstanding under equipment loans and capital leases due to the CVI acquisition.
Other Expense (Income). Other income increased by $2,485,000 from $591,000 for
fiscal 1996 to $3,076,000 for fiscal 1997 due primarily to the Decision.
Income Taxes. The provision for income taxes increased by $3,009,000, or 92.6%,
from $3,248,000 in fiscal 1996 to $6,257,000 in fiscal 1997 as a result of
increased taxable income and a higher effective tax rate in the current period.
Extraordinary Item. An extraordinary charge of $721,000, net of the related tax
benefit, for the cost of restructuring certain indebtedness acquired with the
CVI purchase was recorded during the year ended September 30, 1997. An
extraordinary non-cash charge of $449,000, net of the related tax benefit, for
the write-off of unamortized debt discount and capitalized debt issuance
expense, was recorded during the year ended September 30, 1996.
Net Income. As a result of the foregoing factors, net income increased by
$2,533,000, or 41.3%, from $6,131,000 in fiscal 1996 to $8,664,000 in fiscal
1997.
PAGE 9
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 growth of the Company's Pacing
operations during that period has been negatively impacted by Medicare
reimbursement rate reductions. 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 1996, fiscal 1997 and the first quarter
of fiscal 1998. The Company's Pacing operations have been favorably impacted
since January 1, 1998 due to an increase in Medicare reimbursement rates
effective on that date. However, effective January 1, 1999 the Company expects a
slight decrease in these reimbursement rates. 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. Governmental agencies promulgate regulations which mandate changes in
the method of delivering services which could have a material adverse effect on
the Company's business.
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 increased 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.
PAGE 10
<PAGE> 7
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, legislative or 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 acquired 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 CVI in August 1997 for cash in the
amount of $16,980,000 plus $280,000 paid during fiscal 1998. At September 30,
1998, the Company had working capital of $31,168,000, compared to $24,391,000 at
September 30, 1997. At September 30, 1998, the Company had cash and temporary
cash investments of $7,463,000. At September 30, 1998, $28,225,000 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 1999.
PAGE 11
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. Many existing computer
programs use only two digits instead of four to identify a year in the date
field. The Company has completed a thorough review of its material computer
applications. We have begun installation of a new billing and collection system
as well as a new accounting system. These new systems are Year 2000 compliant.
The Company had planned on replacing them regardless of the Year 2000 issue.
There are other systems at certain cardiovascular diagnostic facilities recently
acquired by the Company which may not be Year 2000 compliant, however, the
Company anticipates that all such systems will be replaced by its new systems
before the Year 2000. There can be no assurances that any systems at companies
purchased by or affiliated with the Company in the future will be Year 2000
compliant or, if not, will be converted on a timely basis. At the present time,
the Company does not anticipate that the cost for it to become Year 2000
compliant will have a material impact on the Company's financial statements.
The Company has initiated a program to determine whether the computer
applications of its significant vendors will be upgraded in a timely manner. The
Company has also initiated a program to determine whether embedded applications
which control medical and other equipment will be affected. The Company has not
yet completed these reviews. The Company has begun discussions with its payors
to determine the status of their systems. The nature of the Company's business
is such that any failure to these types of applications may have a material
adverse effect on its business.
Because of the many uncertainties associated with Year 2000 compliance issues,
and because the Company's assessment is necessarily based on information from
third-party vendors, payors and suppliers, there can be no assurance that the
Company's assessment is correct or as to the materiality or effect of any
failure of such assessment to be correct. At the present time, the Company has
not developed a contingency plan relative to Year 2000 compliance.
PAGE 12
<PAGE> 9
PERCENTAGE OF CONSOLIDATED REVENUES
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Pacing, CEDS and Holter 43% 57% 60%
Diagnostic imaging service 19% 21% 28%
Heart Center, practice management and other 38% 22% 12%
------------------------
Total 100% 100% 100%
========================
</TABLE>
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1998
- ------------------------------------------------------------------------------------------------
(000's omitted, except per share amounts) December 31, March 31, June 30, September 30,
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $25,864 $27,151 $28,131 $26,483
===============================================
Income before income taxes $ 2,210 $ 2,657 $ 2,609 $ 2,486
Provision for income taxes 884 1,063 1,043 879
-----------------------------------------------
Net income $ 1,326 $ 1,594 $ 1,566 $ 1,607
===============================================
Net income per share(1):
Basic $ .15 $ .18 $ .18 $ .18
===============================================
Diluted $ .14 $ .17 $ .17 $ .18
===============================================
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1997
- ---------------------------------------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $20,652 $20,436 $19,758 $22,569
==============================================
Income before income taxes and extraordinary item $ 3,101 $ 5,817 $ 3,276 $ 3,448
Provision for income taxes 1,240 2,327 1,311 1,379
----------------------------------------------
Income before extraordinary item 1,861 3,490 1,965 2,069
Extraordinary item, net of related tax benefit -- -- -- 721
----------------------------------------------
Net income $ 1,861 $ 3,490 $ 1,965 $ 1,348
==============================================
Net income per share before extraordinary item(1):
Basic $ .22 $ .41 $ .23 $ .24
==============================================
Diluted $ .21 $ .39 $ .22 $ .22
==============================================
Net income per share(1):
Basic $ .22 $ .41 $ .23 $ .16
==============================================
Diluted $ .21 $ .39 $ .22 $ .14
==============================================
</TABLE>
(1) Quarterly per share earnings do not necessarily equal the total per share
earnings reported for the year as a result of the dilutive effect of common
stock equivalents on the calculation of per share earnings.
PAGE 13
<PAGE> 10
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
September 30,
- ---------------------------------------------------------------------------------------------------------
(000's omitted) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,463 $ 7,873
Receivables, net 35,504 30,345
Prepaid expenses and other 3,996 3,970
-------------------------------
Total current assets 46,963 42,188
Property and equipment, less accumulated depreciation
and amortization 19,681 19,712
Intangible assets, less accumulated amortization 55,497 57,486
Other assets 45 35
-------------------------------
Total assets $ 122,186 $119,421
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 1,962 $ 1,893
Accounts payable 4,649 5,110
Accrued compensation and benefits 2,920 3,397
Accrued other liabilities 6,264 7,397
-------------------------------
Total current liabilities 15,795 17,797
Long-term debt and capital lease obligations, net of current portion 35,035 34,461
Deferred liabilities 1,405 1,163
Minority interest in consolidated entities 3,460 4,101
-------------------------------
Total liabilities 55,695 57,522
-------------------------------
Commitments and contingencies (Notes 9 and 13)
Stockholders' equity:
Common stock 9 9
Additional paid-in capital 61,790 61,261
Common stock to be issued 1,124 943
Retained earnings 7,190 1,097
-------------------------------
70,113 63,310
Less treasury stock, at cost (3,622) (1,411)
-------------------------------
Total stockholders' equity 66,491 61,899
-------------------------------
Total liabilities and stockholders' equity $ 122,186 $119,421
===============================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
PAGE 14
<PAGE> 11
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
September 30,
- ----------------------------------------------------------------------------------------------------
(000's omitted, except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Pacing, CEDS and Holter $ 46,171 $ 47,227 $43,649
Diagnostic imaging service 19,977 17,610 19,970
Heart Center, practice management and other 41,481 18,578 8,896
-------------------------------------------
Total revenues 107,629 83,415 72,515
===========================================
Costs and expenses:
Operating costs 50,143 33,536 27,582
Selling, general and administrative 35,490 29,737 28,830
Depreciation and amortization 8,282 6,306 5,590
-------------------------------------------
Total costs and expenses 93,915 69,579 62,002
===========================================
Operating income 13,714 13,836 10,513
Interest expense 2,990 785 514
Other expense (income) (511) (3,076) (591)
Minority interest 1,273 485 762
-------------------------------------------
Income before income taxes and extraordinary item 9,962 15,642 9,828
Provision for income taxes 3,869 6,257 3,248
-------------------------------------------
Income before extraordinary item 6,093 9,385 6,580
Extraordinary item, net of related tax benefit -- 721 449
-------------------------------------------
Net income $ 6,093 $ 8,664 $ 6,131
===========================================
Net income per share before extraordinary item:
Basic $ .69 $ 1.11 $ .86
===========================================
Diluted $ .66 $ 1.04 $ .80
===========================================
Net income per share:
Basic $ .69 $ 1.02 $ .80
===========================================
Diluted $ .66 $ .96 $ .75
===========================================
Weighted average shares:
Basic 8,879 8,458 7,623
===========================================
Diluted 9,294 9,039 8,194
===========================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
PAGE 15
<PAGE> 12
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Common Retained Total
-------------------------------------- Paid-in Stock to Earnings Treasury Stockholders'
(000's omitted, except shares) Shares Amount Shares Amount Capital be Issued (Deficit) Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 3,741,152 $ 7 1,039,683 $2 $ 31,410 $ -- $(9,920) $ -- $ 21,499
Net income -- -- -- - -- -- 6,131 -- 6,131
Conversion of preferred
stock to common stock (3,741,152) (7) 3,741,152 3 4 -- -- -- --
Issuance of common stock in
payment of preferred dividends -- -- 472,250 - 3,778 -- (3,778) -- --
Retirement of fractional shares -- -- (230) - -- -- -- -- --
Payment of warrants -- -- -- - (501) -- -- -- (501)
Sale of common stock in
initial public offering -- -- 2,875,000 3 20,397 -- -- -- 20,400
Value of 122,068 shares
to be issued -- -- -- - -- 852 -- -- 852
Warrants exercised -- -- 15,760 - 63 -- -- -- 63
Options exercised -- -- 189,309 - 434 -- -- -- 434
------------------------------------------------------------------------------------------------
Balance at September 30, 1996 -- -- 8,332,924 8 55,585 852 (7,567) -- 48,878
Net income -- -- -- - -- -- 8,664 -- 8,664
Warrants exercised -- -- 10,505 - 42 -- -- -- 42
Options exercised -- -- 191,494 - 369 -- -- -- 369
Repurchase of shares -- -- (134,434) - -- -- -- (1,411) (1,411)
Employee stock purchase -- -- 5,908 - 63 -- -- -- 63
Value of 14,376 shares
to be issued -- -- -- - -- 91 -- -- 91
Issuance of common stock
for purchase of a company -- -- 500,000 1 5,202 -- -- -- 5,203
------------------------------------------------------------------------------------------------
Balance at September 30, 1997 -- -- 8,906,397 9 61,261 943 1,097 (1,411) 61,899
Net income -- -- -- - -- -- 6,093 -- 6,093
Warrants exercised -- -- 31,359 - 125 -- -- -- 125
Options exercised -- -- 11,001 - 55 -- -- -- 55
Repurchase of shares -- -- (322,600) - -- -- -- (2,211) (2,211)
Employee stock purchase -- -- 6,361 - 44 -- -- -- 44
Value of 46,668 shares
to be issued -- -- -- - -- 486 -- -- 486
Value of 30,981 shares issued -- -- 30,981 - 305 (305) -- -- --
------------------------------------------------------------------------------------------------
Balance at September 30, 1998 -- $-- 8,663,499 $9 $ 61,790 $ 1,124 $ 7,190 $(3,622) $ 66,491
================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
PAGE 16
<PAGE> 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------------------------
(000's omitted) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,093 $ 8,664 $ 6,131
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,282 6,306 5,590
Minority interest 1,273 485 762
Other, net 211 (735) 245
Changes in operating accounts:
Receivables, net (5,813) (3,137) 850
Prepaid expenses and other (25) (987) (105)
Accounts payable (429) 1,494 651
Accrued compensation, benefits and
other liabilities (1,286) 435 574
-------------------------------------
Net cash provided by operating activities 8,306 12,525 14,698
-------------------------------------
Cash flows from investing activities:
Capital expenditures (5,092) (3,828) (3,022)
Purchases of net assets and physician practice -- (427) (18,264)
Purchase of a company -- (16,980) --
Additional costs of company previously purchased (280) -- --
Cash acquired in purchase of a company -- 1,384 --
Other, net (396) 487 350
-------------------------------------
Net cash used in investing activities (5,768) (19,364) (20,936)
-------------------------------------
Cash flows from financing activities:
Net proceeds from borrowings 2,264 23,599 2,376
Net proceeds from initial public offering -- -- 20,400
Repurchase of warrants -- -- (2,101)
Income distributions to noncontrolling investors (1,560) (862) (738)
Repurchase of company stock (2,211) (1,411) --
Principal repayments of debt (1,665) (12,822) (13,442)
Other, net 224 471 497
-------------------------------------
Net cash provided by (used in) financing activities (2,948) 8,975 6,992
-------------------------------------
Net increase (decrease) in cash and cash equivalents (410) 2,136 754
Cash and cash equivalents at beginning of period 7,873 5,737 4,983
-------------------------------------
Cash and cash equivalents at end of period $ 7,463 $ 7,873 $ 5,737
=====================================
Supplemental disclosure of cash flow information:
Interest paid $ 2,925 $ 822 $ 454
=====================================
Income taxes paid $ 3,710 $ 6,687 $ 3,309
=====================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
PAGE 17
<PAGE> 14
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND DESCRIPTION OF THE COMPANY
Since 1990, Raytel Medical Corporation ("Raytel" or the "Company") or its
predecessor companies, have been in the medical service business. The Company
provides a range of services, focusing on the needs of patients with
cardiovascular disease and is the leading provider in the United States of
remote cardiac monitoring and testing services utilizing transtelephonic
technology. Also, the Company is developing integrated heart centers that are
located within existing hospitals and acquiring cardiology-related physician
practices, assets and facilities. Since 1990, the Company has acquired and/or
entered into agreements with various medical service providers. The significant
transactions occurring during the past three fiscal years are described below:
(a) An agreement, with Granada Hills Community Hospital, became effective
February 1, 1996 and provided for the creation of the Company's first
integrated heart center, the Raytel Heart Center at Granada Hills ("RHCGH").
The Company is responsible for the day-to-day operations of RHCGH, including
administrative support and other non-medical aspects of the program. On
September 29, 1998, the Company announced that it had reached a new
agreement with the hospital which includes revised financial terms.
(b) Effective June 11, 1996, the Company acquired certain assets and assumed
certain liabilities of Cardio Data Services, Inc. ("CDS"). CDS provides
clinical transtelephonic pacemaker monitoring, cardiac event detection and
Holter monitoring services. The purchase price of the transaction was
$14,254,000 and of such amount $13,985,000 was allocated to the acquisition
of intangible assets, the majority of which is being amortized over 25
years.
(c) On September 18, 1996, the Company acquired all of the non-medical
assets of Southeast Texas Cardiology Associates, P.A. ("SETCA") and entered
into a long-term management service agreement whereby the Company will
manage the non-medical aspects of the practice. The Company has assumed
responsibility for providing office space as well as billing and collection
activities and other management services.
Total consideration for the transaction was cash and transaction costs
of $4,010,000, promissory notes of $2,289,000 and 122,068 shares of the
Company's Common Stock to be delivered at future dates, valued at $852,000.
The shares of Common Stock were valued at a discount from the then current
trading price of a share after considering all relevant factors, including,
but not limited to, normal discounts for marketability due to the time delay
in delivery of the shares. The recorded amounts for the aggregate number of
shares of Common Stock to be delivered were discounted 40% from comparable
cash sales of Common Stock. The scheduled issuance of the shares of Common
Stock that the Company is committed to deliver are 48,828 in 1999, 36,620 in
2000 and 36,620 in 2001.
(d) On October 18, 1996, the Company entered into a long-term management
service agreement whereby the Company will manage the non-medical aspects of
Comprehensive Cardiology Consultants, a Medical Group, Inc. ("CCMG"), a
physician practice.
Total consideration for the transaction was cash of $427,000, promissory
notes of $620,000 and 14,376 shares of the Company's Common Stock to be
delivered at future dates, valued, as described above, at $91,000.
(e) On August 15, 1997, the Company acquired all of the outstanding capital
stock of Cardiovascular Ventures, Inc. ("CVI"). CVI manages, owns and
operates several cardiovascular diagnostic facilities in Texas, Louisiana
and Florida and owns and manages a physician practice in Florida.
Total original consideration for the transaction was cash and
transaction costs of approximately $16,980,000, 500,000 shares of the
Company's Common Stock and contingent promissory notes in the aggregate
principal amount of $820,000. During fiscal 1998 there were additional
transaction costs of approximately $280,000 and an additional 46,668 shares
of
PAGE 18
<PAGE> 15
the Company's Common Stock has been or will be issued. Also, the $820,000 of
contingent promissory notes were cancelled in accordance with the terms of
the agreement.
Unaudited pro forma consolidated financial information for the years ended
September 30, 1997 and 1996, as though the acquisitions of CVI and CDS had
occurred at the beginning of fiscal 1996, is as shown in the table below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
September 30,
- ---------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Revenues $104,345 $94,720
Net income $ 9,446 $ 4,940
Net income per share:
Basic $ 1.05 $ .61
Diluted $ .99 $ .57
Weighted average shares outstanding:
Basic 8,958 8,123
Diluted 9,539 8,694
</TABLE>
The Company's acquisitions have been accounted for as purchases in accordance
with generally accepted accounting principles. Accordingly, acquired assets and
assumed liabilities were recorded at their estimated fair values at the
acquisition date. In certain acquisitions, there was an excess of the purchase
price over the fair value of the net tangible assets acquired which was
allocated to identifiable intangible assets and goodwill (See Note 5).
In December 1995, the Company completed the initial public offering of its
Common Stock (the "Offering") which yielded net proceeds, after underwriting
discounts and expenses, of $20,400,000. The Company used approximately
$6,000,000 of the proceeds of the Offering to pay the remaining balance of a
term loan from two banks, approximately $2,101,000 to repurchase certain
outstanding redeemable warrants and $5,000,000 to repay substantially all of a
subordinated note. The remaining proceeds were used for working capital, general
corporate purposes and a portion of the purchase price for CDS.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries.
At September 30, 1998, the Company owned four imaging centers and held interests
in three others through investments in various joint ventures and limited
partnerships (the "Ventures"). All Ventures are consolidated for financial
reporting purposes, as the Company owns more than 50% of those Ventures and/or
controls their assets and operations.
Two Ventures that operated four consolidated imaging centers terminated during
fiscal 1997. Revenues contributed by these Ventures were $1,318,000 and
$3,924,000 for the years ended September 30, 1997 and 1996, respectively.
At September 30, 1998, the Company held interests in seven cardiovascular
diagnostic facilities, through investments in various limited partnerships (the
"Partnerships") and wholly-owned two others. All Partnerships are consolidated
for financial reporting purposes, as the Company owns more than 50% of those
Partnerships and/or controls their assets and operations.
Minority interests in consolidated entities represent the investment of
third-parties in certain consolidated Ventures and Partnerships.
All significant intercompany accounts and transactions are eliminated in
consolidation.
PAGE 19
<PAGE> 16
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Revenue Recognition. Net patient and service revenues are recognized at
established rates when the services are provided. Contractual allowances are
calculated for services provided at less than the established rates as approved
by Medicare or other third-party payors and are recorded as deductions from
revenue. Diagnostic imaging service revenues principally represent net fees of
the consolidated Ventures for services provided to patients net of physician
fees and certain expenses.
In certain practice management contracts, revenues are recognized pursuant to
long-term arrangements with physician groups pursuant to 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 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% of the revenues of the physician
groups for the years ended September 30, 1998 and 1997. For the physician
practice acquired with the CVI acquisition, the Company recognizes 100% of all
medical revenue as the physicians are employees of the Company.
Other revenues include other revenue and equity earnings of unconsolidated
entities.
(c) Cash Equivalents. For purposes of reporting cash flows, the Company
considers temporary investments with original maturities of three months or less
to be cash equivalents. The temporary investments are stated at cost, which
approximates market.
(d) Property and Equipment. Property and equipment are stated at cost.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets which range from three to ten years. Capital leases are
recorded at the present value of the future minimum lease payments. Capital
leases are amortized over the terms of the related lease on a straight-line
basis.
(e) Management Service Agreements. Management service agreements are each
recorded as an intangible asset consisting of the costs of purchasing the rights
to manage the medical group. The agreements contain an initial noncancelable
40-year term. Under these long-term agreements, the medical groups have agreed
to provide medical services on an exclusive basis only through facilities
managed by the Company. The agreements are noncancelable except for performance
defaults. In the event a medical group breaches the agreement, or if the Company
terminates with cause, the medical group is required to purchase all related
assets, including the unamortized portion of any management service agreement
and any other intangible assets, at the then net book value. Management service
agreements are being amortized over twenty years.
(f) Intangible Assets. Intangible assets principally consist of the excess of
cost over the fair value of the net tangible assets acquired. Such intangible
assets represent physician referrals and patient lists, joint
venture/partnership interests, non-compete covenants, capitalized debt issuance
expense and goodwill.
Amortization of capitalized debt issuance expense and goodwill is provided on a
straight-line basis. Amortization of physician referrals and patient lists and
joint venture/partnership interests is provided based upon the ratio of expected
annual revenues to expected total revenues to be generated over the estimated
life of the asset. The amortization periods of the intangibles range from two to
twenty-five years, with physician referrals and patient lists being amortized
over fifteen years and goodwill being amortized over ten to twenty-five years.
PAGE 20
<PAGE> 17
(g) Income Taxes. The Company and its subsidiaries file consolidated federal and
state income tax returns. The Company accounts for income taxes in accordance
with the Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes.
(h) Extraordinary Item. An extraordinary noncash charge of $449,000 ($670,000
less $221,000 of related tax benefit) for the write-off of unamortized debt
discount and the write-off of capitalized debt issuance expense was recorded
during the year ended September 30, 1996. This charge resulted from the early
repayment of indebtedness and the repurchase of certain redeemable warrants from
the net proceeds of the Offering.
An extraordinary charge of $721,000 ($1,202,000 less $481,000 of related tax
benefit), for the cost of restructuring certain indebtedness acquired with the
CVI purchase was recorded during the year ended September 30, 1997.
(i) Use of Estimates.The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the related disclosures. Actual results could differ from those
estimates.
(j) New Accounting Standards. Recently, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information and SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. All statements are effective
for fiscal 1999 and relate only to additional disclosures. Therefore, the
adoption of these accounting standards will have no effect on the Company's
results of operations or financial position. Also SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities was issued in June 1998 (effective
for fiscal 2000). It will have no effect on the Company's results.
(k) Fair Value of Financial Instruments. The carrying amounts of all financial
instruments approximate fair value.
(l) Long-Lived Assets. The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
NOTE 3. RECEIVABLES
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
- -----------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Patient and service receivables $ 41,239 $ 34,114
Less allowance for doubtful accounts (7,093) (6,189)
-----------------------
34,146 27,925
Other receivables 1,358 2,420
-----------------------
Total $ 35,504 $ 30,345
=======================
</TABLE>
PAGE 21
<PAGE> 18
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
- ----------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Equipment, furniture and fixtures $ 31,263 $ 28,495
Leasehold improvements 8,928 7,768
------------------------
40,191 36,263
Less accumulated depreciation (20,510) (16,551)
------------------------
$ 19,681 $ 19,712
========================
</TABLE>
Depreciation expense was $4,820,000, $3,712,000 and $3,667,000 for the years
ended September 30, 1998, 1997 and 1996, respectively.
NOTE 5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 48,752 $ 47,986
Physician referrals and patient lists 10,940 10,715
Management service agreements 7,984 7,984
Other 6,245 5,803
-------- --------
73,921 72,488
Less accumulated amortization (18,424) (15,002)
------------------------
$ 55,497 $ 57,486
========================
</TABLE>
Amortization expense related to intangible assets totaled $3,462,000, $2,594,000
and $1,923,000 for the years ended September 30, 1998, 1997 and 1996,
respectively.
NOTE 6. NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES
Notes payable, long-term debt and capital leases consist of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
- ------------------------------------------------------
1998 1997
- ------------------------------------------------------
<S> <C> <C>
Promissory notes(a) $ 2,609 $ 2,609
Line of credit(b) 28,225 25,975
Other(c) 6,163 7,770
------------------------
36,997 36,354
Less current maturities (1,962) (1,893)
------------------------
$ 35,035 $ 34,461
========================
</TABLE>
(a) In connection with the SETCA and CCMG transactions, the Company issued
promissory notes bearing interest at rates ranging from 10% to 12% per
annum. Interest is payable quarterly.
(b) In August 1996, the Company entered into a line of credit for $25,000,000.
This agreement was amended in September 1997 to expand the line of credit to
$45,000,000 and was further amended on July 24, 1998 adjusting certain
covenants. Under terms of the agreement
PAGE 22
<PAGE> 19
with two banks, this credit facility can be used to fund acquisitions and
for working capital purposes. The Company can draw amounts under the line of
credit until August 1, 1999, at which date amounts outstanding will convert
into a term loan which will amortize on a semi-annual basis for the five
years thereafter.
The Company's access to the line of credit is subject to the maintenance of
certain financial covenants related to the Company's level of indebtedness
and cash flow. The interest rate is based upon LIBOR plus 150 basis points
or the bank's prime rate at the option of the Company. At September 30,
1998, the approximate weighted average interest rate was 7.24%. The line is
collateralized by substantially all of the assets of the Company and its
subsidiaries.
(c) Other debt includes a balance due in connection with the RHCGH transaction
and nonrecourse notes and capital lease obligations with varying maturities
at interest rates ranging from 8.29% to 12.75% per annum. The majority of
these notes and leases are collateralized by the equipment purchased.
Notes payable, long-term debt and capital lease obligations maturing within each
of the five years subsequent to September 30, 1998 are as follows: 1999 --
$1,962,000; 2000 -- $6,943,000; 2001 -- $7,743,000; 2002 -- $7,778,000 and 2003
- -- $6,386,000.
NOTE 7. PREFERRED STOCK AND COMMON STOCK
Effective upon the closing of the Offering in December 1995, all outstanding
Preferred Stock was converted into Common Stock. Upon the completion of the
Offering, 2,000,000 shares of undesignated Preferred Stock were authorized for
issuance. The Company's Board of Directors has the authority to issue such
Preferred Stock in one or more series and to establish its terms which may be
greater than the rights of the Common Stock. As of September 30, 1998, no such
shares had been issued.
The previously outstanding shares of Preferred Stock were entitled to receive
dividends. Upon the completion of the Offering, all accumulated dividends on the
Preferred Stock were paid with Common Stock in amounts determined by dividing
the total accumulated dividends by the Offering price.
In August 1998, the Board of Directors adopted a Stockholder Rights Plan (the
"Rights Plan"). Under the Rights Plan, each outstanding share of Raytel Common
Stock held of record at the close of business on September 2, 1998, will receive
one right to purchase one one-hundredth of a share of a new series of Preferred
Stock for $30.00 per right when someone acquires 15 percent or more of Raytel's
Common Stock or announces a tender offer which could result in such person
owning 15 percent or more of the Common Stock. The rights expire on August 13,
2008.
There are 20,000,000 shares of Common Stock, $.001 par value, authorized.
NOTE 8. STOCK OPTIONS AND WARRANTS
Warrants
In connection with previous credit facilities, warrants were issued to the banks
to purchase 5% of the fully diluted Common Stock of certain subsidiaries under
certain circumstances. Such warrants were valued at $750,000 and $850,000,
respectively, and were being amortized over the life of the term loan. The
warrants were repurchased using proceeds of the Offering.
Upon completion of the Offering, in accordance with the terms of a 1993
acquisition, the Company issued the seller warrants to purchase 231,200 shares
of Common Stock at an exercise price of $8.40 per share. At September 30, 1998,
all such warrants are outstanding. The warrants will expire five years from the
effective date of the Offering.
PAGE 23
<PAGE> 20
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLANS
The Company has options outstanding under the 1983 Incentive Stock Option Plan
as Amended (the "1983 Option Plan") and the 1990 Stock Option Plan (the "1990
Option Plan"). Generally, the 1983 Option Plan and the 1990 Option Plan
(together the "Plans") have similar terms. Terms for the option grants under the
Plans, including exercise price, are set by the Board of Directors. The exercise
price for incentive stock options must be at not less than the fair market value
of the underlying stock at the date of grant. The exercise price for
nonqualified options must be at not less than 85% of fair market value. Options
granted under the Plans have a term of five to ten years from the date of grant.
Vesting occurs ratably over a period ranging from two to four years beginning
with the effective date of grant.
Effective upon the closing of the Offering, and the conversion of Preferred
Stock into Common Stock in December 1995, all options outstanding to purchase
Preferred Stock were converted into options to purchase Common Stock.
The Company's Outside Directors Stock Option Plan (the "Directors Plan") was
approved by the stockholders in fiscal 1995. The Directors Plan provides for the
grant of 6,000 nonstatutory stock options to nonemployee directors of the
Company on the date on which the optionee first becomes a director of the
Company. Thereafter, the annual grant could be a maximum of 6,000 shares, as
defined. Total vesting occurs, based on a formula, no sooner than three years
nor longer than five years. The exercise price per share of all options granted
under the Directors Plan shall be equal to the fair market value of a share of
the Company's Common Stock on the date of grant.
In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), was issued. SFAS 123 requires the measurement of the fair value of stock
options or warrants to be included in the statements of operations or disclosed
in the notes to financial statements. The Company has determined that it will
retain its existing method of accounting for stock options and has elected the
pro forma footnote disclosure included in the tables below. Accordingly, SFAS
123 has no effect on the Company's consolidated financial position or results of
operations.
The Company has computed the pro forma disclosures required under SFAS 123 for
options granted in 1998, 1997 and 1996 using the Black-Scholes option pricing
model prescribed by SFAS 123. The weighted average assumptions used are as
follows:
<TABLE>
<CAPTION>
September 30,
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.58% - 5.86% 5.74% - 6.68% 5.60% - 6.60%
Expected dividend yield None None None
Expected lives 3 years 3 years 3 years
Expected volatility 62.9% 61.6% 61.6%
</TABLE>
PAGE 24
<PAGE> 21
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates of awards under these plans consistent with
the method of SFAS 123, the Company's net income and net income per common share
would have decreased to the pro forma amounts indicated below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
September 30,
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $6,093 $8,664 $6,131
Pro forma 5,086 8,338 5,532
Net income per common share -- basic:
As reported .69 1.02 .80
Pro forma .57 .99 .73
Net income per common share -- diluted:
As reported .66 .96 .75
Pro forma .55 .92 .68
</TABLE>
Because SFAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
A summary of the status of the Company's three stock option plans at September
30, 1998, 1997 and 1996 and changes during the years then ended is presented in
the tables below:
<TABLE>
<CAPTION>
September 30,
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,026,712 $7.24 1,122,050 $ 7.34 705,183 $ 2.48
Granted 165,750 6.21 653,150 9.17 626,275 10.91
Exercised (11,001) 5.04 (191,494) 1.93 (189,309) 2.30
Expired (136,552) 8.99 (556,994) 11.38 (20,099) 5.76
--------- --------- ---------
Outstanding, end of year 1,044,909 6.87 1,026,712 7.24 1,122,050 7.34
========= ========= =========
Exercisable, end of year 584,779 6.17 435,813 4.61 538,713 3.33
========= ========= =========
Weighted average fair value 3.73 5.26 6.52
of options granted
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------- -----------------------
Weighted
Average Weighted Number Weighted
Remaining Average Exercisable Average
Options Outstanding Summary Outstanding Life Exercise As of Exercise
Range of Exercise Prices @ 9/30/98 (in years) Price 9/30/98 Price
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.42 - $ 5.63 357,347 $6.03 $3.69 262,847 $3.02
5.88 - 8.00 66,000 9.62 6.88 500 8.00
8.50 - 13.50 621,562 8.46 8.70 321,432 8.76
--------- -------
1.42 - 13.50 1,044,909 7.70 6.87 584,779 6.17
========= =======
</TABLE>
At September 30, 1998, there were 470,415 shares available for future option
grants.
PAGE 25
<PAGE> 22
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. LEASE COMMITMENTS
The Company leases its facilities and office space under various noncancelable
agreements which expire at various dates through 2008. The Company also leases
various equipment under noncancelable leases. All of the above are treated as
operating leases.
At September 30, 1998, the future minimum rental payments for each fiscal year
thereafter under all noncancelable operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ending
- --------------------------------------------------------
<S> <C>
1999 $3,308
2000 2,608
2001 2,488
2002 1,340
2003 1,222
Thereafter 3,343
</TABLE>
NOTE 10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
- -------------------------------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $2,782 $4,233 $1,751
State 1,087 2,024 1,497
------------------------------------
Total $3,869 $6,257 $3,248
====================================
</TABLE>
At September 30, 1998 and 1997, the Company had $1,780,000 and $2,019,000,
respectively, of deferred tax assets. The Company has recorded a 100% valuation
allowance against these amounts.
The tax effect of the primary temporary differences giving rise to the Company's
deferred tax assets and liabilities at September 30, 1998 and 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
Current Asset Long-Term Asset
(Liability) (Liability)
- ---------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Depreciation and amortization $ 779 $ 63 $ 1,133 $ 3,203
Reserves for accounts receivable
and unbilled costs and fees 941 44 -- --
Net operating loss (105) -- -- --
Other, net (459) -- (509) (1,291)
--------------------------------------------------
1,156 107 624 1,912
Valuation allowance $(1,156) (107) (624) (1,912)
------- ----- ------- ------
Total deferred income taxes $ -- $ -- $ -- $ --
==================================================
</TABLE>
PAGE 26
<PAGE> 23
Reconciliation of the federal statutory rate to the Company's effective tax rate
is as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at the
statutory rate $ 3,387 34.0% $ 5,318 34.0% $ 3,342 34.0%
State income taxes, net of
federal benefit 1,087 10.9 1,336 8.5 988 10.0
Other (481) (4.8) (397) (2.5) -- --
Federal tax benefit of the
utilization of net operating
loss and credit carryforwards (124) (1.2) -- -- (1,082) (11.0)
--------------------------------------------------------------
Total $ 3,869 38.9% $ 6,257 40.0% $ 3,248 33.0%
==============================================================
</TABLE>
At September 30, 1998, the Company had $4,436,000 of federal net operating loss
carryforwards acquired in the CVI transaction. Such carryforwards have certain
limitations on use.
NOTE 11. EMPLOYEE BENEFIT PLANS
The Raytel Medical Corporation Pension Plan (the "Pension Plan") is a defined
contribution benefit plan which covers substantially all employees.
Contributions to the Pension Plan are based upon a percentage of an employee's
covered compensation, as defined. Total expense under the Pension Plan amounted
to $596,000, $547,000 and $503,000 for the years ended September 30, 1998, 1997
and 1996, respectively.
The Company maintains a tax-qualified Retirement Savings Plan (the "401(k)
Plan") which covers substantially all employees. Eligible employees may make
salary deferral (before tax) contributions up to a specified maximum. The
Company makes a matching contribution of 25% of the amount deferred. Total
expense under the 401(k) Plan amounted to $191,000, $178,000 and $133,000 for
the years ended September 30, 1998, 1997 and 1996, respectively.
Executive officers and key employees of the Company are eligible to participate
in an executive deferred compensation plan at the discretion of the Board of
Directors. Participants may defer a portion of their compensation, as defined.
NOTE 12. PRINCIPAL CUSTOMERS
All services performed by the Company are performed in the United States. No one
customer accounted for more than 10% of the Company's total net patient and
service revenues. However, certain sources of payment for the services, such as
Medicare, HMOs, commercial insurers and other third party payors, do or could
account for more than 10% of payments received.
NOTE 13. CONTINGENCIES
The Company is from time to time a party to various unrelated claims and
disputes associated with various aspects of its ongoing business operations. In
management's opinion, none of these claims or disputes are expected, either
individually or in the aggregate, to have a material adverse effect on the
Company's financial position or results of operations.
NOTE 14. NET INCOME PER SHARE
All previously outstanding preferred shares and accumulated preferred dividends
were converted to Common Stock for all periods presented for purposes of the
income per share calculation. Also, those shares under commitments to be issued
at specified future dates are considered as outstanding for per share
calculations.
PAGE 27
<PAGE> 24
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has adopted the provisions of SFAS No. 128, Earnings Per Share for
all periods presented. The adoption of this accounting standard did not have a
material impact on its results of operations.
For the years ended September 30, 1998, 1997 and 1996, basic and diluted
earnings per share are calculated as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
For the Year Ended September 30,
- --------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings per Share:
Net income $6,093 $8,664 $6,131
==============================
Weighted average shares outstanding 8,879 8,458 7,623
==============================
Per share $ .69 $ 1.02 $ .80
==============================
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended September 30,
- -------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Diluted Earnings per Share:
Net income $6,093 $8,664 $6,131
==============================
Weighted average shares outstanding 8,879 8,458 7,623
Shares to be issued 137 135 4
Options 250 350 476
Warrants 28 96 91
------------------------------
9,294 9,039 8,194
==============================
Per share $ .66 $ .96 $ .75
==============================
</TABLE>
Certain options and warrants to purchase shares of common stock were outstanding
during the years ended September 30, 1998, 1997 and 1996, but were not included
in the computation of diluted earnings per share because their exercise prices
were greater than the average market price of the common shares for the period.
The options and warrants outstanding and their exercise prices are as follows:
<TABLE>
<CAPTION>
For the Year Ended September 30,
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Options and warrants outstanding 525,722 307,542 --
Range of exercise prices $5.63 - $13.50 $10.00 - $13.88 --
</TABLE>
NOTE 15. DEFERRED LITIGATION AWARD
In September 1996, the Company received a favorable administrative decision
related to a billing dispute with a New York Medicare carrier whereby it was
entitled to approximately $4.0 million. The time period for the Healthcare
Finance Administration ("HCFA") and the Social Security Administration to file
an appeal expired on February 10, 1997. After accounting for administrative
costs and reimbursements due to Medtronic as a result of the terms of the
acquisition of CardioCare and a separate provision against the value of a
non-operating asset, the Company recognized other income of $2,510,000 pretax in
its second fiscal quarter ending March 31, 1997, with a positive after tax
effect of $1,506,000 or $.17 per share (the "Decision").
PAGE 28
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Raytel Medical Corporation:
We have audited the accompanying consolidated balance sheets of Raytel Medical
Corporation and Subsidiaries as of September 30, 1998 and 1997 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Raytel
Medical Corporation and Subsidiaries as of September 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 1998 in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
ARTHUR ANDERSEN LLP
Hartford, Connecticut
November 12, 1998
<PAGE> 1
RAYTEL MEDICAL CORPORATION
Federal EIN: 94-2787342
For the year ended September 30, 1998
<TABLE>
<CAPTION>
NAME & ADDRESS FEDERAL EIN TAX PD
- -------------- ----------- ------
<S> <C>
Raytel Cardiac Services, Inc. 06-1287427 9/98
7 Waterside Crossing
Windsor, CT 06095
Raytel Cardiovascular Labs, Inc. 94-3210502 9/98
7 Waterside Crossing
Windsor, CT 06095
Raytel Imaging Holdings, Inc. 06-1406441 9/98
7 Waterside Crossing
Windsor, CT 06095
Raytel Imaging Network, Inc. 94-3210501 9/98
7 Waterside Crossing
Windsor, CT 06095
Raytel Medical Imaging, Inc. 06-1332098 9/98
7 Waterside Crossing
Windsor, CT 06095
Raytel Management Holdings, Inc. 94-3251759 9/98
2755 Campus Drive, Suite 200
San Mateo, CA 94403
Raytel Texas Physician Services, Inc. 94-3249951 9/98
2755 Campus Drive, Suite 200
San Mateo, CA 94403
Raytel Granada Hills, Inc. 94-3221261 9/98
2755 Campus Drive, Suite 200
San Mateo, CA 94403
Raytel California Physician Services, Inc. 94-3253644 9/98
2755 Campus Drive, Suite 200
San Mateo, CA 94403
</TABLE>
1
<PAGE> 2
<TABLE>
<CAPTION>
NAME & ADDRESS FEDERAL EIN TAX PD
- -------------- ----------- ------
<S> <C>
Raytel Texas Heart Center Management
Company, Inc. 94-3286082 9/98
2755 Campus Drive, Suite 200
San Mateo, CA 94403
CardioCare 11-3145721 9/98
7 Waterside Crossing
Windsor, CT 06095
Cardiovascular Ventures Inc. 65-0294084 9/98
7 Waterside Crossing
Windsor, CT 06095
Cardiovascular Ventures of Alexandria, Inc. 72-1325012 9/98
7 Waterside Crossing
Windsor, CT 06095
Cardiovascular Ventures of
Central San Antonio, Inc. 75-0381834 9/98
7 Waterside Crossing
Windsor, CT 06095
Cardiovascular Ventures of
East New Orleans, Inc. 72-1333975 9/98
7 Waterside Crossing
Windsor, CT 06095
Cardiovascular Ventures of Texas, Inc. 65-0340398 9/98
7 Waterside Crossing
Windsor, CT 06095
Cardiovascular Ventures of Towson, Inc. 72-1250526 9/98
7 Waterside Crossing
Windsor, CT 06095
Cardiovascular Ventures
of West Houston, Inc. 72-1284493 9/98
7 Waterside Crossing
Windsor, CT 06095
Fort Worth Cardiac Laboratory, Inc. 75-2341421 9/98
7 Waterside Crossing
Windsor, CT 06095
Cardiovascular Ventures of Texas II, Inc. 74-2657210 9/98
7 Waterside Crossing
Windsor, CT 06095
Cardiovascular Centers of
Port St. Lucie, Inc. 72-1235790 9/98
7 Waterside Crossing
Windsor, CT 06095
Cardiovascular Ventures of Cleveland, Inc. 72-1333978 9/98
7 Waterside Crossing
Windsor, CT 06095
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
NAME & ADDRESS FEDERAL EIN TAX PD
- -------------- ----------- ------
<S> <C>
Heart Institute of Port St. Lucie 59-2420810 9/98
7 Waterside Crossing
Windsor, CT 06095
Physician Partners of Port St. Lucie 65-0627710 9/98
7 Waterside Crossing
Windsor, CT 06095
Raytel Heart Center of Harrisburg, LLC 94-3303355 9/98
2755 Campus Drive, Suite 200
San Mateo, CA 94403
</TABLE>
3
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated November 12, 1998. It should be
noted that we have not audited any financial statements of the company
subsequent to September 30, 1998, or performed any audit procedures subsequent
to the date of our report.
/s/ Arthur Andersen LLP
-----------------------------
Hartford, Connecticut
December 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RAYTEL
MEDICAL CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 7,463
<SECURITIES> 0
<RECEIVABLES> 35,504<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,963
<PP&E> 40,191
<DEPRECIATION> 20,510
<TOTAL-ASSETS> 122,186
<CURRENT-LIABILITIES> 15,795
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 66,482
<TOTAL-LIABILITY-AND-EQUITY> 122,186
<SALES> 0
<TOTAL-REVENUES> 107,629
<CGS> 0
<TOTAL-COSTS> 93,915
<OTHER-EXPENSES> 762
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 2,990
<INCOME-PRETAX> 9,962
<INCOME-TAX> 3,869
<INCOME-CONTINUING> 6,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,093
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.66
<FN>
<F1>(RECEIVABLES) Represents net receivables
<F2>(LOSS PROVISION) Included in (TOTAL COSTS)
</FN>
</TABLE>
