10-Q 1 f72606e10-q.txt FORM 10-Q 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 March 31, 2001; 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.
CLASS SHARES OUTSTANDING AS OF APRIL 30, 2001 ----- --------------------------------------- COMMON STOCK 8,753,792 ($.001 PAR VALUE)
2 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2001 and September 30, 2000................................3 Condensed Consolidated Statements of Operations for the three months and the six months ended March 31, 2001 and 2000..................................................................4 Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2001 and 2000......................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
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND SEPTEMBER 30, 2000 (000'S OMITTED) ASSETS
MARCH 31, SEPTEMBER 30, 2001 2000 ----------- ------------- (UNAUDITED) Current assets: Cash and cash equivalents $ 5,506 $ 7,201 Cash held in escrow 764 1,580 Receivables, net 33,934 36,840 Prepaid expenses and other 2,501 2,597 --------- --------- Total current assets 42,705 48,218 Property and equipment, less accumulated depreciation and amortization 15,905 19,651 Intangible assets, less accumulated amortization 19,422 41,672 Other 67 56 --------- --------- Total assets $ 78,099 $ 109,597 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations $ 13,648 $ 1,067 Accounts payable 5,062 5,258 Accrued compensation and benefits 2,078 3,177 Accrued liabilities 6,465 6,329 --------- --------- Total current liabilities 27,253 15,831 Long-term debt and capital lease obligations, net of current portion 2,294 24,130 Minority interest in consolidated entities 1,205 1,774 --------- --------- Total liabilities 30,752 41,735 --------- --------- Stockholders' equity: Common stock 9 9 Additional paid-in capital 62,665 62,664 Common stock to be issued -- 69 Retained earnings (deficit) (11,705) 8,742 --------- --------- 50,969 71,484 Less treasury stock, at cost (3,622) (3,622) --------- --------- Total stockholders' equity 47,347 67,862 --------- --------- Total liabilities and stockholders' equity $ 78,099 $ 109,597 ========= =========
3 4 ' RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) (000'S OMITTED, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, ------------------------ ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Cardiac information services $ 9,668 $ 10,564 $ 19,219 $ 21,005 Diagnostic imaging services 6,494 5,521 12,492 10,853 Heart facilities and other 1,984 2,377 3,683 4,646 -------- -------- -------- -------- Total revenues 18,146 18,462 35,394 36,504 -------- -------- -------- -------- Costs and expenses: Provision for OIG investigation expenses 2,000 -- 2,000 -- Operating costs 8,329 7,752 16,106 15,120 Selling, general and administrative 7,549 7,870 14,704 15,751 Depreciation and amortization 1,650 1,660 3,325 3,288 -------- -------- -------- -------- Total costs and expenses 19,528 17,282 36,135 34,159 -------- -------- -------- -------- Operating income (loss) (1,382) 1,180 (741) 2,345 Interest expense 471 473 1,031 945 Other expense (income) (263) (167) (481) (483) Minority interest 134 272 187 416 -------- -------- -------- -------- Income (loss) from continuing operations before income taxes (benefit) (1,724) 602 (1,478) 1,467 Provision for income taxes (benefit) (671) 235 (576) 572 -------- -------- -------- -------- Income (loss) from continuing operations (1,053) 367 (902) 895 Discontinued operations: Income (loss) from discontinued operations, net of tax (benefit) (51) 513 (192) 885 Loss on disposal of discontinued operations (19,353) -- (19,353) -- -------- -------- -------- -------- Net income (loss) $(20,457) $ 880 $(20,447) $ 1,780 ======== ======== ======== ======== Basic income (loss) per share: Income (loss) from continuing operations $ (.12) $ .04 $ (.10) $ .10 Income (loss) from discontinued operations (2.22) .06 (2.24) .10 -------- -------- -------- -------- Total $ (2.34) $ .10 $ (2.34) $ .20 ======== ======== ======== ======== Diluted income (loss) per share: Income (loss) from continuing operations $ (.12) $ .04 $ (.10) $ .10 Income (loss) from discontinued operations (2.22) .06 (2.24) .10 -------- -------- -------- -------- Total $ (2.34) $ .10 $ (2.34) $ .20 ======== ======== ======== ======== Weighted average shares outstanding: Basic 8,752 8,746 8,751 8,746 ======== ======== ======== ======== Diluted 8,752 8,939 8,751 8,939 ======== ======== ======== ========
4 5 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) (000'S OMITTED)
MARCH 31, ----------------------- 2001 2000 -------- -------- Cash flows from operating activities: Net income (loss) $(20,447) $ 1,780 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,325 3,288 Minority interest 187 416 Loss on disposal of discontinued operations 19,353 -- Other, net 400 1,080 Changes in operating accounts: Receivables, net (547) (1,334) Prepaid expenses and other (294) (344) Accounts payable (196) 609 Accrued liabilities and other (1,803) 816 -------- -------- Net cash provided by (used in) operating activities (22) 6,311 -------- -------- Cash flows from investing activities: Capital expenditures (1,512) (2,373) Proceeds from disposal of discontinued operations 8,876 -- Other, net 9 76 -------- -------- Net cash provided by (used in) investing activities 7,373 (2,297) -------- -------- Cash flows from financing activities: Income distributions to noncontrolling investors (778) (1,121) Paydown of line of credit (7,441) (1,895) Principal repayments of debt, net of proceeds (1,673) (841) Other, net 30 (60) -------- -------- Net cash used in financing activities (9,862) (3,917) -------- -------- Net increase (decrease) in cash and cash equivalents (2,511) 97 Cash and cash equivalents at beginning of period 8,781 6,110 -------- -------- Cash and cash equivalents at end of period $ 6,270 $ 6,207 ======== ========
5 6 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED). 1. PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Information in the accompanying interim condensed consolidated financials statements and notes to the financial statements of Raytel Medical Corporation ("Raytel" or the "Company") as of March 31, 2001 and for the three month and six month periods ended March 31, 2001 and 2000 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 accounting principles generally accepted in the United States. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months and six months ended March 31, 2001 are not necessarily indicative of results that may be expected for the year ending September 30, 2001. 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, 2000. 2. OFFICE OF THE INSPECTOR GENERAL INVESTIGATION Raytel is currently the subject of a grand jury investigation of unspecified allegations concerning certain business practices of its trans-telephonic cardiac pacemaker monitoring business. In connection with the investigation, Raytel has reviewed its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such confirmation, Raytel held Medicare reimbursement checks received since June 23, 2000 in payment of invoices for pacemaker monitoring services and established an escrow account for funds inadvertently deposited with respect to such services received since the date of the investigation. In addition, Raytel suspended billing for such services. Most of the checks have been deposited, most of the cash has been released from escrow, and new billings for services performed has commenced as most of the affected patients' records have been reviewed and found to be in compliance with applicable Medicare requirements. The total amount of such uncashed checks and escrowed funds was approximately $764,000 as of March 31, 2001. 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, 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 a reserve of $4,000,000 to cover the estimated amounts of these expenses. Additional expenses, if any, will adversely affect operating results in future periods, regardless of the eventual outcome of the investigation. As of March 31, 2001, the Company had incurred legal fees and other expenses of approximately $2,895,000 related to the investigation. At this time, the Company cannot determine the additional financial impact of this investigation. The investigation, and the related internal compliance review, 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 as well as the quarters ended September 30, 2000, December 31, 2000 and March 31, 2001. Raytel expects that, while the impact of the investigation on the Company's operations in future periods will be less significant as the investigation proceeds, it may require significant time of certain key employees, and it will continue to adversely affect operating results in future periods. 3. LINE OF CREDIT The Company had 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 was originally scheduled to expire in August 2001 at which time any outstanding balance would be due and payable. 6 7 On December 15, 2000, the line of credit agreement was amended to reduce the line of credit to $20,000,000 and to revise certain financial and other covenants and terms. The interest rate was changed to be based on LIBOR plus 275 basis points, or the bank's prime rate plus 50 basis points, at the option of the Company and the due date was extended to October 1, 2001. A new non-financial covenant was added which states that any civil financial settlement in excess of $1,000,000 and/or criminal charges relating to the ongoing OIG investigation would constitute an event of default. The Company is currently in default of certain of its new 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, the banks have the right to terminate the credit facility and demand payment in full of the outstanding balance. See "Part II, Item 3. -- Defaults Upon Senior Securities." On March 16, 2001, the line of credit was further reduced to $14,900,000 in connection with the sale of Heart and Family Health Institute of Port St. Lucie, Inc. ("HFHI"). 4. DISCONTINUED OPERATIONS In March 2001, effective January 1, 2001, the Company completed the sale of its wholly-owned subsidiary, HFHI, to a new company organized by physicians practicing at the clinic. The Company received $8,876,000 in cash (prior to estimated transaction costs of $565,000) in this transaction. The Company has reported a $19,353,000 loss on the transaction related primarily to the write-off of unamortized intangible assets. Due to the uncertainty of the ultimate tax benefit to be realized as a result of the loss, the Company has not provided for any tax benefit that may result from this transaction. As a result, the Company reported the results of HFHI and the loss on disposal 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 HFHI are immaterial to the financial statements and are included in the accompanying balance sheet. Revenues applicable to HFHI during the three months ended March 31, 2001 and 2000 were $0 and $4,988,000, respectively, and during the six months ended March 31, 2001 and 2000 were $3,948,000 and $9,577,000, respectively. Income (loss) from discontinued operations is net of taxes (benefit) of $(33,000), $317,000, $(123,000) and $536,000 for the three months ended March 31, 2001 and 2000 and the six months ended March 31, 2001 and 2000, respectively. 5. INCOME (LOSS) PER SHARE For the three months and the six months ended March 31, 2001 and 2000, basic and diluted earnings per share are calculated as follows:
THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, ----------------------- ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (000's omitted, except per share amounts) BASIC INCOME (LOSS) PER SHARE: Income (loss) from continuing operations $ (.12) $ .04 $ (.10) $ .10 Income (loss) from discontinued operations (2.22) .06 (2.24) .10 -------- -------- -------- -------- Total $ (2.34) $ .10 $ (2.34) $ .20 ======== ======== ======== ======== Weighted average shares outstanding 8,752 8,746 8,751 8,746 ======== ======== ======== ======== DILUTED INCOME (LOSS) PER SHARE: Income (loss) from continuing operations $ (.12) $ .04 $ (.10) $ .10 Income (loss) from discontinued operations (2.22) .06 (2.24) .10 -------- -------- -------- -------- Total $ (2.34) $ .10 $ (2.34) $ .20 ======== ======== ======== ========
7 8 Weighted average shares outstanding 8,752 8,746 8,751 8,746 Shares to be issued (a) 137 (a) 140 Options (a) 56 (a) 53 -------- -------- -------- -------- 8,752 8,939 8,751 8,939 ======== ======== ======== ========
(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 the six months ended March 31, 2001 and 2000, 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 (all warrants expired in December 2000) outstanding and their exercise prices are as follows:
THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, -------------------------------- -------------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Options and warrants outstanding 1,397,909 966,305 1,352,378 980,874 Range of exercise prices $.875-$11.875 $3.563-$13.50 $.875-$11.875 $3.563-$13.50
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 monitoring; diagnostic imaging services; and heart facilities. Following its initial public offering in December 1995, the Company entered into a series of transactions which expanded its heart center and physician practice management businesses. As a result, revenue has also been 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, HFHI and six cardiovascular diagnostic facilities. HFHI was sold effective January 1, 2001. The management of SETCA and CCMG comprised the Company's Practice Management Division. 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 and Louisiana and owned and managed a cardiovascular diagnostic facility and a physician clinic 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 were to be issued. 8 9 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. 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 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. In order to settle a dispute and avoid protracted litigation, initiated by SETCA, effective May 31, 2000, the Company's Board of Directors approved management's plan to sell SETCA. As a result of the discontinuance of the management of CCMG and the sale of SETCA, the Company discontinued 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. in exchange for promissory notes in the aggregate amount of approximately $2,300,000 and the physicians' agreement to cancel existing rights to receive 122,068 shares of Raytel's Common Stock. Accordingly, the Company reported the results of operations of the Practice Management Division and the loss on disposal as discontinued operations. The loss on disposal of $4,965,000, recorded at June 30, 2000, was net of an estimated tax benefit of approximately $3,367,000. Raytel is currently the subject of a grand jury investigation of unspecified allegations concerning certain business practices of its trans-telephonic cardiac pacemaker monitoring business. In connection with the investigation, Raytel has reviewed its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such confirmation, Raytel held Medicare reimbursement checks received since June 23, 2000 in payment of invoices for pacemaker monitoring services and established an escrow account for funds inadvertently deposited with respect to such services received since the date of the investigation. In addition, Raytel suspended billing for such services. Most of the checks have been deposited, most of the cash has been released from escrow, and new billings for services performed has commenced as most of the affected patients' records have been reviewed and found to be in compliance with applicable Medicare requirements. The total amount of such uncashed checks and escrowed funds was approximately $764,000 as of March 31, 2001. 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, 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 a reserve of $4,000,000 to cover the estimated amounts of these expenses. Additional expenses will adversely affect operating results in future periods, regardless of the eventual outcome of the investigation. As of March 31, 2001, the Company had incurred legal fees and other expenses of approximately $2,895,000 related to the investigation. At this time, the Company cannot determine the additional financial impact of this investigation. The investigation, and the related internal compliance review, 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 as well as the quarters ended September 30, 2000, December 31, 2000 and March 31, 2001. Raytel expects that, while the impact of the investigation on the Company's operations in future periods will be less significant as the investigation proceeds, it may require significant time of certain key employees and it will continue to adversely affect operating results in future periods. In March 2001, effective January 1, 2001, the Company completed the sale of its wholly-owned subsidiary, HFHI, to a new company organized by physicians practicing at the clinic, including David Wertheimer, M.D., who had served as President of the subsidiary as well as a former officer of Raytel and a member of Raytel's Board of Directors. Raytel received a cash purchase price of $8,311,000, net of transaction expenses, for all of the Common Stock of the subsidiary. Approximately $1,234,000 of the proceeds were used to pre-pay leases for equipment used at the HFHI facility, $5,100,000 was used to reduce the indebtedness under the Company's bank credit facility and the balance was used for working capital purposes. The Company reported the results of operations of HFHI and the loss on disposal as discontinued operations. Accordingly, prior year operating results have been restated from the operating results previously reported. The loss on disposal of $19,353,000 represents a 9 10 one-time non-cash charge, consisting primarily of the write-off of intangible assets. Due to the uncertainty of the ultimate tax benefit to be realized as a result of the loss, the Company has not provided for any tax benefit that may result from this transaction. RESULTS OF OPERATIONS Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000 Revenues. For the three months ended March 31, 2001, total revenues were $18,146,000 compared to $18,462,000 for the three months ended March 31, 2000, representing a decrease of $316,000, or 1.7%. Cardiac information services revenues were $9,668,000 for the three months March 31, 2001, compared to $10,564,000 for the three months ended March 31, 2000, a decrease of $896,000, or 8.5%. The decrease in revenues for cardiac information services was due primarily to lower revenues from Pacing as a result of lower test volumes and lower average selling prices. Diagnostic imaging services revenue was $6,494,000 for the three months ended March 31, 2001 compared to $5,521,000 for the three months ended March 31, 2000, an increase of $973,000, or 17.6%, 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 $1,984,000 for the three months ended March 31, 2001, compared to $2,377,000 for the three months ended March 31, 2000, a decrease of $393,000, or 16.5%, due primarily to lower revenue at certain cardiovascular diagnostic facilities. Provision for OIG Investigation Expenses. The Company has provided an additional $2,000,000 for expected expenses associated with the OIG investigation. Operating Expenses. Operating costs and selling, general and administrative expenses increased by $256,000, or 1.6% (excluding the provision for OIG investigation expenses), from $15,622,000 for the three months ended March 31, 2000 to $15,878,000 for the three months ended March 31, 2001, due primarily to increases in costs and expenses at diagnostic imaging services, partially offset by decreased costs at cardiac information services and at heart facilities and other. Operating costs and selling, general and administrative expenses as a percentage of total revenues increased by 2.9%, from 84.6% for the three months ended March 31, 2000 to 87.5% for the three months ended March 31, 2001 primarily due to lower revenue. Depreciation and Amortization. Depreciation and amortization expense decreased by $10,000, from $1,660,000 for the three months ended March 31, 2000 to $1,650,000 for the three months ended March 31, 2001 and increased as a percentage of revenues from 9.0% for the three months ended March 31, 2000 to 9.1% for the three months ended March 31, 2001 primarily as a result of lower revenues. Operating Income (Loss). As a result of the foregoing factors, operating income decreased by $2,562,000 from $1,180,000 for the three months ended March 31, 2000 to an operating loss of $1,382,000 for the three months ended March 31, 2001. Interest Expense. Interest expense decreased by $2,000, or 0.4%, from $473,000 for the three months ended March 31, 2000 to $471,000 for the three months ended March 31, 2001. Other Expense (Income). Other income increased by $96,000 from $167,000 for the three months ended March 31, 2000 to $263,000 for the three months ended March 31, 2001. Minority Interest. Minority interest decreased by $138,000, or 50.7%, from $272,000 for the three months ended March 31, 2000 to $134,000 for the three months ended March 31, 2001 due primarily to decreased income in certain cardiovascular diagnostic facilities. Income Taxes (Benefit). The provision for income taxes (benefit) decreased by $906,000 from $235,000 for the three months ended March 31, 2000 to a tax benefit of $671,000 for the three months ended March 31, 2001 as a result of decreased taxable income. Income (Loss) From Continuing Operations. Income (loss) from continuing operations decreased by $1,420,000 from $367,000 for the three months ended March 31, 2000 to a loss from continuing operations of $1,053,000 for the three months ended March 31, 2001. 10 11 Discontinued Operations. Income from discontinued operations, net of tax was $513,000 for the three months ended March 31, 2000 compared to a loss from discontinued operations of $51,000 for the three months ended March 31, 2001. The loss on disposal of the HFHI business was approximately $19,353,000. Due to the uncertainty of the ultimate tax benefit to be realized as a result of the loss, the Company has not provided for any tax benefit that may result from this transaction. Net Income (Loss). As a result of the foregoing factors, net income decreased by $21,337,000 from net income of $880,000 for the three months ended March 31, 2000 to a net loss of $20,457,000 for the three months ended March 31, 2001. Six Months Ended March 31, 2001 Compared to Six Months Ended March 31, 2000. Revenues. For the six months ended March 31, 2001, total revenues were $35,394,000 compared to $36,504,000 for the six months ended March 31, 2000, representing a decrease of $1,110,000, or 3.0%. Cardiac information services revenues were $19,219,000 for the six months ended March 31, 2001, compared to $21,005,000 for the six months ended March 31, 2000, a decrease of $1,786,000, or 8.5%. The decrease in revenues for cardiac information services was due primarily to lower revenues from Pacing as a result of lower test volumes and lower average selling prices. Diagnostic imaging services revenue was $12,492,000 for the six months ended March 31, 2001, compared to $10,853,000 for the six months ended March 31, 2000, an increase of $1,639,000, or 15.1%, 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 $3,683,000 for the six months ended March 31, 2001, compared to $4,646,000 for the six months ended March 31, 2000, a decrease of $963,000, or 20.7%, due primarily to lower revenue at certain cardiovascular diagnostic facilities and the termination of the agreement with Baptist. Provision for OIG Investigation Expenses. The Company has provided an additional $2,000,000 for expected expenses associated with the OIG investigation. Operating Expenses. Operating costs and selling, general and administrative expenses decreased by $61,000, or 0.2% (excluding the provision for OIG investigation expenses), from $30,871,000 for the six months ended March 31, 2000 to $30,810,000 for the six months ended March 31, 2001, due primarily to lower expenses at heart facilities and other and cardiac information services, partially offset by increases in costs and expenses in diagnostic imaging services. Operating costs and selling, general and administrative expenses as a percentage of total revenues increased from 84.6% for the six months ended March 31, 2000 to 87.0% for the six months ended March 31, 2001, primarily as a result of lower revenues. Depreciation and Amortization. Depreciation and amortization expense increased by $37,000, from $3,288,000 for the six months ended March 31, 2000 to $3,325,000 for the six months ended March 31, 2001, and increased as a percentage of revenues from 9.0% for the six months ended March 31, 2000 to 9.4% for the six months ended March 31, 2001. Operating Income (Loss). As a result of the foregoing factors, operating income decreased by $3,086,000, or 131.6%, from $2,345,000 for the six months ended March 31, 2000 to an operating loss of $741,000 for the six months ended March 31, 2001. Interest Expense. Interest expense increased by $86,000, or 9.1%, from $945,000 for the six months ended March 31, 2000 to $1,031,000 for the six months ended March 31, 2001 due primarily to an increase in the average interest rate. Other Expense (Income). Other income decreased by $2,000 from $483,000 for the six months ended March 31, 2000 to $481,000 for the six months ended March 31, 2001. Minority Interest. Minority interest decreased by $229,000, or 55.0%, from $416,000 for the six months ended March 31, 2000 to $187,000 for the six months ended March 31, 2001 due primarily to decreased incomes in certain cardiovascular diagnostic facilities. 11 12 Income Taxes (Benefit). The provision for income taxes (benefit) decreased by $1,148,000, or 200.7%, from $572,000 for the six months ended March 31, 2000 to a tax benefit of $576,000 for the six months ended March 31, 2001 as a result of decreased taxable income. Income (Loss) From Continuing Operations. Income (loss) from continuing operations decreased by $1,797,000 from income of $895,000 for the six months ended March 31, 2000 to a loss from continuing operations of $902,000 for the six months ended March 31, 2001. Discontinued Operations. Income from discontinued operations, net of tax, was $885,000 for the six months ended March 31, 2000 compared to a loss from discontinued operations of $192,000 for the six months ended March 31, 2001. The loss on disposal of the HFHI business was approximately $19,353,000. Due to the uncertainty of the ultimate tax benefit to be realized as a result of the loss, the Company has not provided for any tax benefit that may result from this transaction. Net Income (Loss). As a result of the foregoing factors, net income (loss) decreased by $22,227,000 from net income of $1,780,000 for the six months ended March 31, 2000 to a net loss of $20,447,000 for the six months ended March 31, 2001. 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 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2000) 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 from continuing operations before income taxes (in thousands):
INFORMATION IMAGING FACILITIES TOTAL ----------- ------- ---------- -------- For the three months ended March 31, 2001: Net revenue $ 9,668 $ 6,494 $ 1,984 $ 18,146 Total operating expenses 10,647 4,855 1,349 16,851 -------- -------- -------- -------- Segment contribution (979) 1,639 635 1,295 Depreciation and amortization 865 405 279 1,549 Interest expense -- 67 31 98 Minority interest/other expense (income) (5) (40) 41 (4) -------- -------- -------- -------- Segment profit (loss) $ (1,839)(a) $ 1,207 $ 284 $ (348) ======== ======== ======== ======== Segment assets $ 42,362 $ 14,989 $ 12,213 $ 69,564 ======== ======== ======== ======== Capital expenditures $ 556 $ 56 $ -- $ 612 ======== ======== ======== ========
---------- (a) Includes a $2,000,000 provision for OIG investigation expenses. 12 13
INFORMATION IMAGING FACILITIES TOTAL ----------- ------- ---------- -------- For the three months ended March 31, 2000: Net revenue $ 10,564 $ 5,521 $ 2,377 $ 18,462 Total operating expenses 8,876 4,198 1,496 14,570 -------- -------- -------- -------- Segment contribution 1,688 1,323 881 3,892 Depreciation and amortization 766 415 393 1,574 Interest expense -- 69 63 132 Minority interest/other expense (income) (3) (54) 182 125 -------- -------- -------- -------- Segment profit $ 925 $ 893 $ 243 $ 2,061 ======== ======== ======== ======== Segment assets $ 40,092 $ 15,036 $ 35,734 $ 90,862 ======== ======== ======== ======== Capital expenditures $ 1,043 $ 290 $ 13 $ 1,346 ======== ======== ======== ========
INFORMATION IMAGING FACILITIES TOTAL ----------- ------- ---------- -------- For the six months ended March 31, 2001: Net revenue $ 19,219 $ 12,492 $ 3,683 $ 35,394 Total operating expenses 19,060 9,254 2,588 30,902 -------- -------- -------- -------- Segment contribution 159 3,238 1,095 4,492 Depreciation and amortization 1,714 833 576 3,123 Interest expense -- 128 62 190 Minority interest/other expense (income) 1 (39) 21 (17) -------- -------- -------- -------- Segment profit (loss) $ (1,556)(a) $ 2,316 $ 436 $ 1,196 ======== ======== ======== ======== Segment assets $ 42,362 $ 14,989 $ 12,213 $ 69,564 ======== ======== ======== ======== Capital expenditures $ 1,299 $ 101 $ 80 $ 1,480 ======== ======== ======== ========
-------------- (a) Includes a $2,000,000 provision for OIG investigation expenses.
INFORMATION IMAGING FACILITIES TOTAL ----------- ------- ---------- -------- For the six months ended March 31, 2000: Net revenue $ 21,005 $ 10,853 $ 4,646 $ 36,504 Total operating expenses 17,592 8,110 3,111 28,813 -------- -------- -------- -------- Segment contribution 3,413 2,743 1,535 7,691 Depreciation and amortization 1,502 833 785 3,120 Interest expense -- 141 119 260 Minority interest/other expense (income) (15) (80) 71 (24) -------- -------- -------- -------- Segment profit $ 1,926 $ 1,849 $ 560 $ 4,335 ======== ======== ======== ======== Segment assets $ 40,092 $ 15,036 $ 35,734 $ 90,862 ======== ======== ======== ======== Capital expenditures $ 1,698 $ 555 $ 30 $ 2,283 ======== ======== ======== ========
13 14
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, ----------------------- ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Segment profit (loss) $ (348) $ 2,061 $ 1,196 $ 4,335 Unallocated amounts: Corporate general and administrative 1,027 1,052 1,908 2,058 Corporate depreciation and amortization 101 86 202 168 Corporate interest expense 373 341 841 685 Corporate other expense (income) (125) (20) (277) (43) -------- -------- -------- -------- Income (loss) from continuing operations before income taxes $ (1,724) $ 602 $ (1,478) $ 1,467 ======== ======== ======== ========
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. The Company's Pacing revenue has 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 and again effective January 1, 2001. 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. 14 15 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 At March 31, 2001 the Company had working capital of $28,269,000 (excluding $12,817,000, the outstanding amount under the Company's line of credit), compared to $32,387,000 at September 30, 2000. At March 31, 2001, the Company had cash and temporary cash investments of $6,270,000. 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, with the collection of these receivables occurring primarily during the subsequent fourth fiscal quarter. The Company had 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 was originally scheduled to expire in August 2001 at which time any outstanding balance would be due and payable. On December 15, 2000, the line of credit agreement was amended to reduce the line of credit to $20,000,000 and to revise certain financial and other covenants and terms. The interest rate was changed to be based on LIBOR plus 275 basis points, or the bank's prime rate plus 50 basis points, at the option of the Company, and the date for repayment was extended to October 1, 2001. A new non-financial covenant was added which states any civil financial settlement in excess of $1,000,000 and/or criminal charges relating to the ongoing OIG investigation would constitute an event of default. On March 16, 2001, the line of credit was further reduced to $14,900,000 in connection with the sale of the Company's subsidiary HFHI. The Company is currently in default of certain of its new 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, 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 2001. 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. 15 16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Raytel Cardiac Services, Inc., or "RCS," a wholly-owned subsidiary of 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 Human Services (the "OIG"). On June 23, 2000, the OIG and other federal agents executed a search warrant for information concerning unspecified allegations of impropriety in RCS' business practices related to Medicare-covered services. Subsequently, subpoenas have been served on RCS for the production of additional documents, and several RCS employees and contractors have been subpoenaed to provide documents and testimony before the grand jury. Raytel believes that the investigation is focused on certain business practices of RCS' cardiac pacemaker monitoring business. RCS 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 RCS' cardiac event detection services, or Raytel's diagnostic imaging services 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 held Medicare reimbursement checks received subsequent to June 23, 2000 in payment of invoices for pacemaker monitoring services and established an escrow account for funds inadvertently deposited with respect to such services. In addition, Raytel suspended billing for such services. The checks are being 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. The total amount of such uncashed checks and escrowed funds was approximately $764,000 as of March 31, 2001. Raytel has internal procedures in place designed to assure compliance by Raytel and its subsidiaries 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. RCS has incurred, and expects to continue to incur, substantial legal fees and other expenses in connection with the investigation and has accrued a reserve of $4,000,000 to cover the estimated amount of these expenses. Expenses in excess to the 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 RCS' 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. Should the outcome of the investigation ultimately result in RCS being charged with and convicted of violations of federal criminal statutes, RCS 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. In addition, such criminal charges would constitute a default under Raytel's bank credit agreement. It is also possible that federal authorities could assert civil claims against RCS under the Federal False Claim Act, which allows the government to recover treble damages plus penalties of $5,000 to $10,000 per claim. Raytel is currently engaged in discussions with representatives of the government regarding a possible resolution of the matter. However, we cannot currently determine the likelihood of such a resolution. A significant fine, the revocation of RCS' Medicare participation or civil liability under the False Claims Act would significantly harm Raytel's business. 16 17 Raytel and its subsidiaries are parties to other litigation and claims arising out of its ongoing business operations. Raytel believes that none of these matters, either individually or in the aggregate, are likely to have a material adverse effect on its business, financial condition or operating results. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company is currently in default of certain of its financial covenants in connection with its $14,900,000 revolving line of credit with two banks. These covenants require the Company to maintain certain financial ratios. The Company has requested a waiver from the banks. If the banks do not grant the waiver, the banks have the right to terminate the credit facility and demand payment in full of the outstanding balance. The amount outstanding under the credit line as of March 31, 2001 was $12,817,000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS: The following exhibit is filed as a part of this Report:
Exhibit Number Title ------- ----- 10.68 Stock Purchase Agreement dated as of March 9, 2001 and effective as of January 1, 2001, among Heart Institute Acquisition Corporation, Raytel Medical Corporation, Cardiovascular Ventures, Inc., and The Heart Institute of Port St. Lucie, Inc.
b. REPORTS ON FORM 8-K: On March 9, 2001, the Company filed a report on Form 8-K announcing that the Company had completed the sale of its wholly-owned subsidiary, The Heart Institute of Port St. Lucie, Inc., to a new company organized by physicians practicing at the clinic, including David Wertheimer, M.D., who had served as President of the subsidiary as well as an officer of the Company and a member of the Company's Board of Directors. 17 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: May 14, 2001 By: /s/ John F. Lawler, Jr. ------------------------------------ John F. Lawler, Jr. Vice President and Chief Financial Officer (duly authorized officer and principal financial officer) 18 19 EXHIBIT INDEX
Exhibit Number Title ------- ----- 10.68 Stock Purchase Agreement dated as of March 9, 2001 and effective as of January 1, 2001, among Heart Institute Acquisition Corporation, Raytel Medical Corporation, Cardiovascular Ventures, Inc., and The Heart Institute of Port St. Lucie, Inc.