<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the Quarterly period ended June 30, 2000; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the transition period from _____________ to ______________.
Commission File Number: 0-27186
RAYTEL MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2787342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2755 CAMPUS DRIVE, SUITE 200, SAN MATEO, CALIFORNIA 94403
(Address of principal executive offices) (Zip code)
(650) 349-0800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS SHARES OUTSTANDING AS OF JULY 28, 2000
----- --------------------------------------
<S> <C>
COMMON STOCK 8,748,888
($.001 PAR VALUE)
</TABLE>
<PAGE> 2
RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 and September 30, 1999...................................... 3
Condensed Consolidated Statements of Operations
for the three months and the nine months ended June 30, 2000 and 1999...... 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 2000 and 1999........................... 5
Notes to Condensed Consolidated Financial Statements. ........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risks................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 16
Item 3. Defaults Upon Senior Securities............................................... 17
Item 6. Exhibits and Reports on Form 8-K............................................ 17
SIGNATURE............................................................................. 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
(000'S OMITTED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
--------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,933 $ 6,110
Cash held in escrow 1,852 --
Receivables, net 29,572 34,858
Prepaid expenses and other 3,074 3,143
--------- ---------
Total current assets 39,431 44,111
Property and equipment, less accumulated
depreciation and amortization 19,830 22,239
Intangible assets, less accumulated
amortization 42,369 51,388
Other 59 45
--------- ---------
Total assets $ 101,689 $ 117,783
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations $ 1,337 $ 2,124
Accounts payable 4,562 3,793
Accrued compensation and benefits 3,237 3,391
Accrued liabilities 2,531 6,204
--------- ---------
Total current liabilities 11,667 15,512
Long-term debt and capital lease obligations,
net of current portion 20,343 27,246
Deferred liabilities 4 129
Minority interest in consolidated entities 2,020 2,867
--------- ---------
Total liabilities 34,034 45,754
--------- ---------
Stockholders' equity:
Common stock 9 9
Additional paid-in capital 62,663 62,053
Common stock to be issued 69 1,045
Retained earnings 8,536 12,544
--------- ---------
71,277 75,651
Less treasury stock, at cost (3,622) (3,622)
--------- ---------
Total stockholders' equity 67,655 72,029
--------- ---------
Total liabilities and stockholders' equity $ 101,689 $ 117,783
========= =========
</TABLE>
3
<PAGE> 4
RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(000'S OMITTED, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Cardiac information services $ 10,144 $ 10,953 $ 31,149 $ 33,694
Diagnostic imaging service 5,990 5,207 16,843 14,977
Heart facilities and other 6,570 6,986 20,793 24,612
-------- -------- -------- --------
Total revenues 22,704 23,146 68,785 73,283
-------- -------- -------- --------
Costs and expenses:
Provision for OIG Expenses 2,000 -- 2,000 --
Operating costs 10,518 9,914 30,825 33,496
Selling, general and administrative 8,964 8,347 26,781 25,951
Depreciation and amortization 2,062 2,023 6,200 5,892
-------- -------- -------- --------
Total costs and expenses 23,544 20,284 65,806 65,339
-------- -------- -------- --------
Operating income (loss) (840) 2,862 2,979 7,944
Interest expense 523 617 1,471 1,750
Other expense (income) (286) (129) (673) (666)
Minority interest 204 337 620 788
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes (1,281) 2,037 1,561 6,072
Provision for income taxes (499) 794 609 2,368
-------- -------- -------- --------
Income (loss) from continuing operations (782) 1,243 952 3,704
Discontinued operations:
Income (loss) from discontinued operations,
net of tax (benefit) (41) 93 5 325
Loss on disposal of discontinued operations,
net of tax (benefit) (4,965) -- (4,965) --
-------- -------- -------- --------
Net income (loss) $ (5,788) $ 1,336 $ (4,008) $ 4,029
======== ======== ======== ========
Basic income (loss) per share:
Income (loss) from continuing operations $ (.09) $ .14 $ .11 $ .42
Income (loss) from discontinued operations (.57) .01 (.57) .04
-------- -------- -------- --------
Total $ (.66) $ .15 $ (.46) $ .46
======== ======== ======== ========
Diluted income (loss) per share:
Income (loss) from continuing operations $ (.09) $ .14 $ .11 $ .41
Income (loss) from discontinued operations (.57) .01 (.57) .03
-------- -------- -------- --------
Total $ (.66) $ .15 $ (.46) $ .44
======== ======== ======== ========
Weighted average shares outstanding:
Basic 8,748 8,724 8,746 8,700
======== ======== ======== ========
Diluted 8,748 9,059 8,746 9,070
======== ======== ======== ========
</TABLE>
4
<PAGE> 5
RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $(4,008) $ 4,029
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,200 6,289
Minority interest 620 788
Pay out of deferred compensation -- (1,245)
Net loss from discontinued operations 4,960 --
Other, net (60) (41)
Changes in operating accounts:
Receivables, net 226 (168)
Prepaid expenses and other (3) 380
Accounts payable 860 (680)
Accrued liabilities and other 1,045 (619)
------- -------
Net cash provided by operating activities 9,840 8,733
------- -------
Cash flows from investing activities:
Capital expenditures (3,402) (7,146)
Other, net 169 (20)
------- -------
Net cash used in investing activities (3,233) (7,166)
------- -------
Cash flows from financing activities:
Income distributions to noncontrolling investors (1,546) (925)
Paydown of line of credit (3,180) (1,430)
Proceeds from (principal repayments of) debt, net (1,150) 2,740
Other, net (56) 182
------- -------
Net cash provided by (used in) financing activities (5,932) 567
------- -------
Net increase in cash and cash equivalents 675 2,134
Cash and cash equivalents at beginning of period 6,110 7,463
------- -------
Cash and cash equivalents at end of period $ 6,785 $ 9,597
======= =======
</TABLE>
5
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED JUNE 30, 2000 AND 1999.
1. PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Information in the accompanying interim condensed consolidated financial
statements and notes to the financial statements of Raytel Medical
Corporation (Raytel or the Company) as of June 30, 2000 and for the three
and nine-month periods ended June 30, 2000 and 1999 is unaudited. The
accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with the instructions to Form 10-Q
and do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three months and
nine months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 2000.
For further information, refer to the consolidated financial statements and
notes included in the Company's Annual Report on Form 10-K for the year
ended September 30, 1999.
2. OFFICE OF THE INSPECTOR GENERAL INVESTIGATION
Raytel is currently the subject of a grand jury investigation concerning
unspecified allegations of impropriety in certain business practices of its
trans-telephonic cardiac pacemaker monitoring business. See "Part II. Item
1. Legal Proceedings". In connection with the investigation, the Company is
reviewing its compliance with Medicare billing and recordkeeping
requirements on a patient-by-patient basis. Pending such confirmation, the
Company is holding Medicare reimbursement checks received since June 23,
2000 in payment of invoices for pacemaker monitoring services and is
establishing an escrow account for funds inadvertently deposited with
respect to such services received since the date of the investigation. The
total amount of such uncashed checks and escrowed funds was approximately
$1,852,000 as of June 30, 2000.
In addition, the Company has incurred, and expects to continue to incur,
substantial legal fees and other expenses in connection with the
investigation and has accrued in the period ended June 30, 2000, a reserve
of $2,000,000 to cover these expenses. At this time, the Company cannot
determine the additional financial impact, if any, of this investigation.
3. DISCONTINUED OPERATIONS
Effective May 2000, the Company's Board of Directors approved management's
plan to dispose of its practice management division, comprised of the
management of Southeast Texas Cardiology Associates II, L.L.P. ("SETCA")
and the management of Comprehensive Cardiology Consultants, a Medical
Group, Inc. ("CCMG"), ("the Practice Management Division"). Effective May
31, 2000 the Company sold substantially all of the assets of Raytel Nuclear
Imaging-Orange, L.P. and the common stock of Raytel Texas Physicians
Services, Inc., which effectively terminated its management of SETCA. As
compensation for this transaction, notes owed by the Company to the
physicians of the practice managed by the Company were terminated in the
aggregate amount of approximately $2,300,000 and the existing rights to
receive 122,068 shares of Raytel's common stock by those physicians were
cancelled. In addition, the Company has discontinued its management of
CCMG. The Company has reported a $4,965,000 loss on the transaction (net of
a $3,367,000 tax benefit) related to the write-off of unamortized
intangible assets created at the inception of the management agreements,
accounts receivable and other assets less the terminated notes and fair
market value of the stock cancelled.
Accordingly, the results of the Practice Management Division have been
accounted for as a discontinued operation and the related operating results
have been reported separately from continuing operations for all periods
presented. The related net assets of the Practice Management Division are
immaterial to the financial statements and are included in the accompanying
balance sheet.
Revenues applicable to the Practice Management Division during the
three-months ended June 30, 2000 and 1999 were $758,000 and $1,435,000,
respectively and during the nine-months ended June 30, 2000 and 1999 were
$3,189,000 and $4,160,000, respectively. Income (loss) from discontinued
operations is net of taxes (benefit) of $(27,000), $60,000, $3,000 and
$208,000 for the three-months ended June 30, 2000 and 1999 and the
nine-months ended June 30, 2000 and 1999, respectively.
6
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INCOME PER SHARE
For the three months and nine months ended June 30, 2000 and 1999, basic
and diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(000's omitted, except per share amounts)
BASIC INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations$ (.09) $ .14 $ .11 $ .42
Income (loss) from discontinued operations (.57) .01 (.57) .04
--------- --------- --------- ---------
Total $ (.66) $ .15 $ (.46) $ .46
========= ========= ========= =========
Weighted average shares outstanding 8,748 8,724 8,746 8,700
========= ========= ========= =========
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations $ (.09) $ .14 $ .11 $ .41
Income (loss) from discontinued operations (.57) .01 (.57) .03
--------- --------- --------- ---------
Total $ (.66) $ .15 $ (.46) $ .44
========= ========= ========= =========
Weighted average shares outstanding 8,748 8,724 8,746 8,700
Shares to be issued (a) 144 (a) 148
Options (a) 191 (a) 222
--------- --------- --------- ---------
8,748 9,059 8,746 9,070
========= ========= ========= =========
</TABLE>
(a) Due to the loss for the period shown, dilutives are not
included in the calculation.
Certain options and warrants to purchase shares of common stock were
outstanding during the three months and nine months ended June 30, 2000 and
1999, 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 THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Options and warrants outstanding 1,163,012 484,299 1,041,587 482,856
Range of exercise prices $3.125-$11.875 $4.563-$13.50 $3.125-$13.50 $4.563-$13.50
</TABLE>
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis includes a number of forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed under "Business
Environment and Future Results" and elsewhere in this Item, that could cause
actual results to differ materially from historical results or those
anticipated. In this Item, the words "anticipates," "believes," "expects,"
"intends," "future" and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
OVERVIEW
The Company generates its revenues from cardiac information services
(which includes telephonic monitoring services for cardiac pacemaker patients
("Pacing"), cardiac event detection services ("CEDS") and Holter), diagnostic
imaging services and from heart facilities.
Following the Company's initial public offering in December 1995, the
Company has entered into a series of transactions which expanded its heart
center and physician practice management businesses. As a result, revenue is
also being provided from: Raytel Heart Center at Granada Hills ("RHCGH")
beginning on February 1, 1996; the management of Southeast Texas Cardiology
Associates II, L.L.P. ("SETCA") beginning on September 18, 1996 and ending on
May 31, 2000; the management of Comprehensive Cardiology Consultants, a Medical
Group, Inc. ("CCMG") beginning on November 1, 1996 and ending on May 31, 2000;
and Cardiovascular Ventures, Inc. ("CVI") beginning on August 15, 1997, which
included the multi-specialty physician clinic, Heart and Family Health Institute
("HFHI") and six cardiovascular diagnostic facilities.
Under certain practice management contracts, revenues were recognized
pursuant to long-term arrangements with physician groups under which the Company
provided 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 were
derived from the physician groups' revenues, generally as a purchased service,
except for certain physician compensation and employment benefits, which were
paid by the physician group on a priority basis. Effective May 31, 2000 the
Company discontinued its physician practice management division. For HFHI, the
Company recognizes 100% of all medical revenue as the physicians are employees
of the Company.
On October 9, 1997, the Company announced it had entered into an
agreement with The Baptist Hospital of Southeast Texas ("Baptist") to develop a
Raytel Cardiovascular Center at the hospital. Under the agreement, Raytel was to
manage the cardiovascular center, which did provide the entire continuum of
cardiovascular services, including diagnostic, therapeutic and patient
management programs. Among other duties, Raytel was to be responsible for the
day-to-day operations of the heart center, including administrative support,
information systems management, marketing and public relations activities. The
Company began operations at Baptist during its fourth quarter of fiscal 1998.
Due to a merger between Baptist and the Memorial Hermann Hospital System, a
modified agreement became effective March 1, 1999. Therefore, during the first
five months of fiscal 1999, the Company only recognized revenue to the extent of
expenses. Effective March 1, 1999, the Company is recognizing revenue based on
the modified agreement which calls for the Company to manage portions of the
cardiovascular surgery and cardiology programs at Baptist and to develop and
manage specialty clinics to support the cardiovascular program.
Effective March 27, 1999, the Company entered into a revised agreement
with RHCGH. The new agreement results in significantly lower revenues and
expenses than revenues and expenses recognized under the previous agreements.
However, under the new agreement, the Company expects to generate operating
income. Under the old agreements, operating expenses were in excess of revenues.
In November 1999, the Company filed a demand for arbitration against
CCMG with JAMS/Endispute, Inc. The Company provided management services to CCMG
pursuant to a long-term management services agreement entered into between the
parties in November 1996. The demand for arbitration asserts that Raytel is
entitled to rescission, restitution and/or damages as a result of CCMG's
material breaches of the management services
8
<PAGE> 9
agreement. The Company does not expect that an adverse opinion in the
arbitration will have a material adverse effect on the financial condition of
the Company.
Effective May 31, 2000, the Company's Board of Directors approved
management's plan to dispose of its Practice Management Division. Accordingly,
the Company reported the results of operations of the Practice Management
Division and the loss on disposal as discontinued operations. During the third
quarter of the current year, the Company sold substantially all of the assets of
Raytel Nuclear Imaging-Orange, L.P. and the common stock of Raytel Texas
Physicians Services, Inc. in exchange for promissory notes in the aggregate
amount of $2.3 million and the physicians' agreement to cancel the existing
rights to receive 122,068 of Raytel's common stock. At June 30th, the net assets
of the discontinued operations consist primarily of cash and trade receivables
recorded at estimated net realizable value.
The loss on disposal of $4,965,000 is net of an estimated tax benefit of
approximately $3,367,000.
Raytel is currently the subject of a grand jury investigation concerning
unspecified allegations of impropriety in certain business practices of its
trans-telephonic cardiac pacemaker monitoring business. See "Part II. Item 1.
Legal Proceedings." In connection with the investigation, Raytel is reviewing
its compliance with Medicare billing and record-keeping requirements on a
patient-by-patient basis. Pending such confirmation, Raytel is holding Medicare
reimbursement checks received since June 23, 2000 in payment of invoices for
pacemaker monitoring services and is establishing an escrow account for funds
inadvertently deposited with respect to such services. The total amount of such
uncashed checks and escrowed funds was approximately $1,852,000 as of June 30,
2000. In addition, Raytel has suspended billing for such services. The checks
will be deposited, the cash released from escrow, and additional bills sent,
only after Raytel has conducted an additional review to confirm payment is
appropriate. Since Raytel recognizes revenue when patient services are provided,
neither the escrow arrangement nor the deferred billing has had a direct impact
on Raytel's operating results. If the Company's review discloses any patient
billings that have not been fully compliant with Medicare requirements, then any
resulting billing adjustments or reversals will be charged against operating
results in that current period. In addition, the Company has incurred, and
expects to continue to incur, substantial legal fees and other expenses in
connection with the investigation and has accrued in the period ended June 30,
2000 a reserve of $2,000,000 to cover these expenses. Expenses in excess of the
$2,000,000 reserve, if any, will adversely affect operating results in future
periods, regardless of the eventual outcome of the investigation. Moreover, the
investigation, and the related internal compliance, also have diverted, and are
expected to continue to divert, the efforts and attention of a number of
Raytel's management and administrative personnel. The impact of this diversion
reduced the efficiency of Raytel's pacemaker monitoring operations during the
last week of the quarter ended June 30, 2000 and adversely affected both
revenues and operating expenses for that period. Raytel expects that, while the
impact of the investigation on the Company's operations will be less significant
as the investigation proceeds, it will continue to adversely affect operating
results in future periods.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30,
1999.
Revenues. For the three months ended June 30, 2000, total revenues were
$22,704,000 compared to $23,146,000 for the three months ended June 30, 1999,
representing a decrease of $442,000, or 1.9%.
Cardiac information services revenues were $10,144,000 for the three
months ended June 30, 2000, compared to $10,953,000 for the three months ended
June 30, 1999, a decrease of $809,000, or 7.4%. The decrease in revenues for
cardiac information services was due primarily to lower revenues from CEDS as a
result of lower test volumes. Diagnostic imaging services revenue was $5,990,000
for the three months ended June 30, 2000, compared to $5,207,000 for the three
months ended June 30, 1999, an increase of $783,000, or 15.0%, due primarily to
increases in revenue at certain centers and the imaging network due to an
increase in patient volumes. Heart facilities and other revenues were $6,570,000
for the three months ended June 30, 2000, compared to $6,986,000 for the three
months ended June 30, 1999, a decrease of $416,000, or 6.0%, due primarily to
lower revenue at certain cardiovascular diagnostic facilities, partially offset
by an increase in revenue from HFHI.
9
<PAGE> 10
Operating Expenses. Operating costs and selling, general and
administrative expenses increased by $1,221,000, or 6.7% (excluding the
provision for OIG expenses), from $18,261,000 for the three months ended June
30, 1999 to $19,482,000 for the three months ended June 30, 2000 due primarily
to increases in costs and expenses in diagnostic imaging services and cardiac
information services. Operating costs and selling, general and administrative
expenses as a percentage of total revenues increased by 6.9%, from 78.9% for the
three months ended June 30, 1999 to 85.8% for the three months ended June 30,
2000.
Provision for OIG Expenses. The Company has provided $2,000,000 for
expected expenses associated with the OIG investigation.
Depreciation and Amortization. Depreciation and amortization expense
increased by $39,000, from $2,023,000 for the three months ended June 30, 1999
to $2,062,000 for the three months ended June 30, 2000 and increased as a
percentage of revenues from 8.7% for the three months ended June 30, 1999 to
9.1% for the three months ended June 30, 2000.
Operating Income (Loss). As a result of the foregoing factors, operating
income decreased by $3,702,000 from income of $2,862,000 for the three months
ended June 30, 1999 to a loss of $840,000 for the three months ended June 30,
2000.
Interest Expense. Interest expense decreased by $94,000, or 15.2%, from
$617,000 for the three months ended June 30, 1999 to $523,000 for the three
months ended June 30, 2000 due primarily to a decrease in the average amount of
debt outstanding.
Other Expense (Income). Other income increased by $157,000 from $129,000
for the three months ended June 30, 1999 to $286,000 for the three months ended
June 30, 2000 due primarily to a series of insignificant items.
Minority Interest. Minority interest decreased by $133,000 or 39.5%,
from $337,000 for the three months ended June 30, 1999 to $204,000 for the three
months ended June 30, 2000 due primarily to decreased income in certain
cardiovascular diagnostic facilities.
Income Taxes (Benefit). The provision for income taxes decreased by
$1,293,000 from $794,000 for the three months ended June 30, 1999 to a benefit
of $499,000 for the three months ended June 30, 2000 as a result of decreased
taxable income.
Income (Loss) From Continuing Operations. As a result of the foregoing
factors, income from continuing operations decreased by $2,025,000 from
$1,243,000 for the three months ended June 30, 1999 to a loss of $782,000 for
the three months ended June 30, 2000.
Discontinued Operations. Income (loss) from discontinued operations, net
of tax was a loss of $41,000 for the three months ended June 30, 2000 versus
income of $93,000 for the three months ended June 30, 1999. The loss on disposal
of the physician practice management business of $4,965,000 is net of estimated
tax benefit of approximately $3,367,000.
Net Income (Loss). As a result of the foregoing factors, the Company
incurred a loss of $5,788,000 for the three months ended June 30, 2000 versus
net income of $1,336,000 for the three months ended June 30, 1999.
Nine Months Ended June 30, 2000 Compared to Nine Months Ended June 30, 1999.
Revenues. For the nine months ended June 30, 2000, total revenues were
$68,785,000 compared to $73,283,000 for the nine months ended June 30, 1999,
representing a decrease of $4,498,000, or 6.1%.
Cardiac information services revenues were $31,149,000 for the nine
months ended June 30, 2000, compared to $33,694, 000 for the nine months ended
June 30, 1999, a decrease of $2,545,000, or 7.6%. The decrease in revenues for
cardiac information services was due primarily to lower revenues from CEDS as a
result of lower test
10
<PAGE> 11
volumes, and, to a lesser extent, lower revenues from Pacing due to a decrease
in test volumes, as well as lower reimbursement rates. Diagnostic imaging
services revenue was $16,843,000 for the nine months ended June 30, 2000,
compared to $14,977,000 for the nine months ended June 30, 1999, an increase of
$1,866,000, or 12.5%, due primarily to increases in revenue at certain centers
and the imaging network due to an increase in patient volumes. Heart facilities
and other revenues were $20,793,000 for the nine months ended June 30, 2000,
compared to $24,612,000 for the nine months ended June 30, 1999, a decrease of
$3,819,000, or 15.5%, due primarily to lower revenue at RHCGH due to the amended
agreement, lower revenue at certain cardiovascular diagnostic facilities,
partially offset by an increase in revenue from HFHI.
Operating Expenses. Operating costs and selling, general and
administrative expenses decreased by $1,841,000, or 3.1% (excluding the
provision for OIG expenses), from $59,447,000 for the nine months ended June 30,
1999 to $57,606,000 for the nine months ended June 30, 2000, due primarily to
lower expenses at RHCGH due to the amended agreement, partially offset by
increases in costs and expenses in diagnostic imaging services, HFHI and cardiac
information services. Operating costs and selling, general and administrative
expenses as a percentage of total revenues increased from 81.1% for the nine
months ended June 30, 1999 to 83.7% for the nine months ended June 30, 2000.
Provision for OIG Expenses. The Company has provided $2,000,000 for
expected expenses associated with the OIG investigation.
Depreciation and Amortization. Depreciation and amortization expense
increased by $308,000, from $5,892,000 for the nine months ended June 30, 1999
to $6,200,000 for the nine months ended June 30, 2000 and increased as a
percentage of revenues from 8.0% for the nine months ended June 30, 1999 to 9.0%
for the nine months ended June 30, 2000.
Operating Income. As a result of the foregoing factors, operating income
decreased by $4,965,000 or 62.5%, from $7,944,000 for the nine months ended June
30, 1999 to $2,979,000 for the nine months ended June 30, 2000.
Interest Expense. Interest expense decreased by $279,000, or 15.9%, from
$1,750,000 for the nine months ended June 30, 1999 to $1,471,000 for the nine
months ended June 30, 2000 due primarily to a decrease in the average amount of
debt outstanding.
Other Expense (Income). Other income increased by $7,000 from $666,000
for the nine months ended June 30, 1999 to $673,000 for the nine months ended
June 30, 2000 due primarily to a series of insignificant items.
Minority Interest. Minority interest decreased by $168,000, or 21.3%,
from $788,000 for the nine months ended June 30, 1999 to $620,000 for the nine
months ended June 30, 2000 due primarily to decreased income in certain
cardiovascular diagnostic facilities.
Income Taxes. The provision for income taxes decreased by $1,759,000, or
74.3%, from $2,368,000 for the nine months ended June 30, 1999 to $609,000 for
the nine months ended June 30, 2000 as a result of decreased taxable income.
Income (Loss) From Continuing Operations. As a result of the foregoing
factors, income from continuing operations decreased by $2,752,000, or 74.3%,
from $3,704,000 for the nine months ended June 30, 1999 to $952,000 for the nine
months ended June 30, 2000.
Discontinued Operations. Income (loss) from discontinued operations, net
of tax was $5,000 for the nine months ended June 30, 2000 versus income of
$325,000 for the nine months ended June 30, 1999. The loss on disposal of the
physician practice management business of $4,965,000 is net of estimated tax
benefit of approximately $3,367,000.
Net Income (Loss). As a result of the foregoing factors, the Company
incurred a loss of $4,008,000 for the nine months ended June 30, 2000 versus net
income of $4,029,000 for the nine months ended June 30, 1999.
11
<PAGE> 12
SEGMENT INFORMATION
The Company's reportable segments are strategic business units that
offer different services. The Company has three reportable segments: Cardiac
Information Services ("Information"), Diagnostic Imaging Services ("Imaging")
and Heart Facilities and Other ("Facilities"). The Information segment provides
remote cardiac monitoring and testing services utilizing telephonic and Internet
communication technology. The Imaging segment operates a network of imaging
centers throughout the United States. The Facilities segment provides
diagnostic, therapeutic and patient management services primarily associated
with cardiovascular disease.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (see Note 2 of the Company's
1999 Annual Report) except that the Company does not allocate all interest
expense, taxes or corporate overhead to the individual segments. The Company
evaluates performance based on profit or loss from operations before income
taxes and unallocated amounts. The totals per the schedules below will not and
should not agree to the consolidated totals. The difference is due to corporate
overhead and other unallocated amounts which are reflected in the reconciliation
to consolidated earnings before income taxes (in thousands):
<TABLE>
<CAPTION>
INFORMATION IMAGING FACILITIES TOTAL
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
For the three months ended June 30, 2000:
Net revenue $ 10,144 $ 5,990 $ 6,570 $ 22,704
Total operating expenses 10,959 4,366 5,097 20,422
--------- --------- --------- ---------
Segment contribution (815) 1,624 1,473 2,282
Depreciation and amortization 767 422 788 1,977
Interest expense -- 67 60 127
Minority interest/other expense (income) (178) (47) 190 (35)
--------- --------- --------- ---------
Segment profit/(loss) $ (1,404) $ 1,182 $ 435 $ 213
========= ========= ========= =========
Segment assets $ 38,953 $ 15,026 $ 42,644 $ 96,623
========= ========= ========= =========
Capital expenditures $ 591 $ 139 $ 231 $ 961
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
INFORMATION IMAGING FACILITIES TOTAL
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
For the three months ended June 30, 1999:
Net revenue $ 10,953 $ 5,207 $ 6,986 $ 23,146
Total operating expenses 8,555 3,780 5,120 17,455
--------- --------- --------- ---------
Segment contribution 2,398 1,427 1,866 5,691
Depreciation and amortization 740 499 701 1,940
Interest expense -- 62 84 146
Minority interest/other expense (income) (84) (2) 318 232
--------- --------- --------- ---------
Segment profit $ 1,742 $ 868 $ 763 $ 3,373
========= ========= ========= =========
Segment assets $ 40,641 $ 17,667 $ 49,177 $ 107,485
========= ========= ========= =========
Capital expenditures $ 806 $ 60 $ 64 $ 930
========= ========= ========= =========
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
INFORMATION IMAGING FACILITIES TOTAL
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
For the nine months ended June 30, 2000:
Net revenue $ 31,149 $ 16,843 $ 20,793 $ 68,785
Total operating expenses 28,551 12,476 15,461 56,488
-------- -------- --------
Segment contribution 2,598 4,367 5,332 12,297
Depreciation and amortization 2,269 1,255 2,423 5,947
Interest expense -- 208 182 390
Minority interest/other expense (income) (193) (127) 357 37
-------- -------- -------- --------
Segment profit $ 522 $ 3,031 $ 2,370 $ 5,923
======== ======== ======== ========
Segment assets $ 38,953 $ 15,026 $ 42,644 $ 96,623
======== ======== ======== ========
Capital expenditures $ 2,290 $ 694 $ 297 $ 3,281
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INFORMATION IMAGING FACILITIES TOTAL
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
For the nine months ended June 30, 1999:
Net revenue $ 33,694 $ 14,977 $ 24,612 $ 73,283
Total operating expenses 25,661 11,041 19,855 56,557
-------- -------- --------
Segment contribution 8,033 3,936 4,757 16,726
Depreciation and amortization 2,152 1,410 2,172 5,734
Interest expense -- 77 276 353
Minority interest/other expense (income) (249) (73) 512 190
-------- -------- -------- --------
Segment profit $ 6,130 $ 2,522 $ 1,797 $ 10,449
======== ======== ======== ========
Segment assets $ 40,641 $ 17,667 $ 49,177 $107,485
======== ======== ======== ========
Capital expenditures $ 2,234 $ 2,863 $ 1,920 $ 7,017
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Segment profit $ 213 $ 3,373 $ 5,923 $ 10,449
Unallocated amounts:
Corporate general and administrative 1,060 806 3,118 2,890
Corporate depreciation and amortization 85 83 253 158
Corporate interest expense 396 471 1,081 1,397
Corporate other expense (income) (47) (24) (90) (68)
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes ($ 1,281) $ 2,037 $ 1,561 $ 6,072
======== ======== ======== ========
</TABLE>
13
<PAGE> 14
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, 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. Revenue from the Company's Pacing
operations during certain periods of the last three fiscal years has been
negatively impacted by Medicare reimbursement rate reductions. Reimbursement
rate reductions applicable to the Company's Pacing procedures became effective
on January 1, 1997. These reductions had a negative effect on the Company's
operating results for the last three quarters of fiscal 1997 and for the first
quarter of fiscal 1998. The Company's Pacing operations have been favorably
impacted for the period January 1, 1998 to December 31, 1998 due to an increase
in Medicare reimbursement rates effective on January 1, 1998. However, a slight
decrease in these rates became effective on January 1, 1999, thereby having a
negative effect on pacing revenue for calendar 1999. There was a slight increase
in Medicare reimbursement rates effective January 1, 2000. 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.
An element of the Company's strategy is to expand, in part, through
acquisitions and investments in complementary healthcare businesses. The
implementation of this strategy may place significant strain on the Company's
administrative, operational and financial resources and increase demands on its
systems and controls. There can be no assurances that businesses acquired by the
Company, either recently or in the future, will be integrated successfully and
profitably into the Company's operations, that suitable acquisitions or
investment opportunities will be identified, or that any such transactions can
be consummated.
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.
14
<PAGE> 15
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 and
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
June 30, 2000 the Company had working capital of $27,764,000, compared to
$28,599,000 at September 30, 1999. At June 30, 2000, the Company had cash and
temporary cash investments of $6,785,000. At June 30, 2000, $15,867,000 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 2001 at which time any outstanding balance
will be due and payable. The Company is currently in default of one of its
financial covenants in connection with its line of credit. The Company has
requested a waiver from the banks. If the banks do not grant the waiver, then
the banks have the right to demand payment in full of the outstanding balance.
See "Part II, Item 3.-Defaults Upon Senior Securities".
The Company's long-term capital requirements will depend on numerous
factors, including the rate at which the Company develops new products and
services and acquires 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 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risk from interest rate fluctuations
because it uses variable rate debt to finance working capital requirements. The
Company does not believe that there is any material market risk exposure with
respect to other financial instruments that would require further disclosure
under this item.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Raytel is currently the subject of a grand jury investigation being
conducted under the direction of the United States Attorney for the District of
Connecticut and the Office of the Inspector General of the U.S. Department of
Health and Human Services. On June 23, 2000, the OIG and other federal agents
executed a search warrant for information concerning unspecified allegations of
impropriety in the Company's business practices related to Medicare-covered
services. Subsequently, subpoenas have been served on Raytel for the production
of additional documents, and several Raytel employees and contractors have been
subpoenaed to provide testimony before the grand jury.
Raytel has not been informed of any specific charges or allegations
against the Company or its employees. However, based on the actions of the U.S.
Attorney and the OIG to date, Raytel believes that the investigation is
currently limited to certain business practices of its cardiac pacemaker
monitoring business, conducted by its wholly-owned subsidiary, Raytel Cardiac
Services, Inc. The Company is continuing to perform pacemaker monitoring
services for its patients and intends to maintain the quality of its service and
patient care during the course of the investigation. To date, the investigation
has not involved Raytel's other healthcare-related services, such as its cardiac
event detection, diagnostic imaging or other cardiac related businesses.
Raytel is cooperating with the investigation and is currently engaged in
the identification and production of documents in response to the subpoenas. In
connection with the investigation, Raytel is confirming its compliance with
Medicare billing and record-keeping requirements on a patient-by-patient basis.
Pending such confirmation, Raytel is holding Medicare reimbursement checks
received since June 23, 2000 in payment of invoices for pacemaker monitoring
services and is establishing an escrow account for funds inadvertently deposited
with respect to such services. The total amount of such uncashed checks and
escrowed funds was approximately $1,852,000 as of June 30, 2000. In addition,
Raytel has suspended billing for such services. The checks will be deposited,
the cash released from escrow, and additional bills sent, only after the
affected patients' records have been reviewed and found to be in compliance with
applicable Medicare requirements. See "Part I, Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Raytel has internal procedures in place designed to assure compliance
with applicable laws and governmental regulations, including Medicare
reimbursement laws. However, because of the preliminary stage of the
investigation and the limited information currently available to Raytel, Raytel
cannot predict the outcome of the investigation with any certainty. The
investigation is complex and document-intensive and is likely to extend over a
protracted period of time. The Company has incurred, and expects to continue to
incur, substantial legal fees and other expenses in connection with the
investigation and in the period ended June 30, 2000 accrued a reserve of
$2,000,000 to cover the estimated amount of these expenses. Expenses in excess
of the $2,000,000 reserve, if any, will adversely affect operating results in
future periods, regardless of the eventual outcome of the investigation. The
investigation, and the related internal review, also has diverted, and is
expected to continue to divert, the efforts and attention of a number of
Raytel's management and administrative personnel. As a result, the
investigation, regardless of its eventual outcome, has been, and will likely
continue to be, costly and time-consuming. See "Part I, Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Should the outcome of the investigation ultimately result in the Company being
charged with and convicted of violations of federal criminal statutes, the
Company could be required to pay substantial fines and its right to participate
in federal health care programs, including Medicare, could be revoked.
Conviction under certain statutes could result in mandatory exclusion from
participation in federal health care programs. A significant fine or the
revocation of its Medicare participation would significantly harm Raytel's
business.
16
<PAGE> 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is currently in default of one of its financial covenants in
connection with its $45,000,000 revolving line of credit with two banks. The
Company has requested a waiver from the banks. The amount outstanding under the
credit line as of June 30, 2000 is $15,867,000. If the banks do not grant the
waiver, then the banks have the right to demand payment in full of the
outstanding balance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
The following exhibits are filed as a part of this Report:
<TABLE>
<CAPTION>
Exhibit
Number Title
------- -----
<S> <C>
10.59 Stock Purchase Agreement dated as of May 31,
2000 between and among RTPS Acquisition
Company, LLC, Raytel Medical Corporation,
Raytel Texas Physician Services, Inc.
The above listed agreement contains a list
identifying all omitted exhibits and
attachments. The Company agrees to furnish
supplementally a copy of any omitted exhibits
or attachment to the Securities and Exchange
Commission upon request.
10.60 Master Termination Agreement entered into as
of May 31, 2000 and effective as of November
10, 1999 between and among Southeast Texas
Cardiology Associates, P.A., Southeast Texas
Cardiology Associates II, P.A., Southeast
Texas Cardiology Associates II, LLP, Rodolfo
P. Sotolongo, M.D., Wayne S. Margolis, M.D.,
and Michael L. Smith, M.D., Raytel Southeast
Management, L.P., Raytel Texas Physician
Services, Inc., Raytel Management Holdings,
Inc. and Raytel Medical Corporation.
27.1 Financial data schedule
</TABLE>
b. REPORTS ON FORM 8-K:
The Company filed no other reports on Form 8-K during the quarter
ended June 30, 2000.
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAYTEL MEDICAL CORPORATION
Dated: August 11, 2000 By: /s/ John F. Lawler, Jr.
-----------------------
John F. Lawler, Jr.
Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Title
------- -----
<S> <C>
10.59 Stock Purchase Agreement dated as of May 31,
2000 between and among RTPS Acquisition
Company, LLC, Raytel Medical Corporation,
Raytel Texas Physician Services, Inc.
The above listed agreement contains a list
identifying all omitted exhibits and
attachments. The Company agrees to furnish
supplementally a copy of any omitted exhibits
or attachment to the Securities and Exchange
Commission upon request.
10.60 Master Termination Agreement entered into as
of May 31, 2000 and effective as of November
10, 1999 between and among Southeast Texas
Cardiology Associates, P.A., Southeast Texas
Cardiology Associates II, P.A., Southeast
Texas Cardiology Associates II, LLP, Rodolfo
P. Sotolongo, M.D., Wayne S. Margolis, M.D.,
and Michael L. Smith, M.D., Raytel Southeast
Management, L.P., Raytel Texas Physician
Services, Inc., Raytel Management Holdings,
Inc. and Raytel Medical Corporation.
27.1 Financial data schedule
</TABLE>
