-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M8xah79XoUDAd5nsamR5KEYPKE2omrnkew1i5CQhFp/WtUGgsuND+K5MqW4jiqMf kSQ+uW/3A6X3wfQDTjQ8sQ== 0000891618-98-005486.txt : 19981229 0000891618-98-005486.hdr.sgml : 19981229 ACCESSION NUMBER: 0000891618-98-005486 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYTEL MEDICAL CORP CENTRAL INDEX KEY: 0001002017 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 942787342 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27186 FILM NUMBER: 98776125 BUSINESS ADDRESS: STREET 1: 2755 CAMPUS DR STREET 2: STE 200 CITY: SAN MATEO STATE: CA ZIP: 94403 BUSINESS PHONE: 4153490800 MAIL ADDRESS: STREET 1: 2755 CAMPUS DRIVE STREET 2: SUITE 200 CITY: SAN MATEO STATE: CA ZIP: 94403 10-K 1 FORM 10-K FOR PERIOD ENDED SEPTEMBER 30 ,1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998. (FEE REQUIRED) [ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NO. 0-27186 RAYTEL MEDICAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2787342 (STATE OR OTHER JURISDICTION (IRS EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2755 CAMPUS DRIVE, SUITE 200, SAN MATEO, CA 94403 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 349-0800 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's Common Stock held by non-affiliates as of November 30, 1998 was $43,361,405 based on the closing sale price of the Common Stock, as reported on the Nasdaq National Market System on that day. The number of shares of the registrant's Common Stock outstanding on November 30, 1998 was 8,672,281. DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED -------- ------------------ Annual Report to Stockholders for fiscal year ended September 30, 1998........................ Part II Proxy Statement for the Annual Meeting to be held on February 25, 1999............................. Part III
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I. This report includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed in "Item 17. Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Business Environment and Future Financial Results" and elsewhere in this report, that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "intends," "future," "goals" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. ITEM 1. BUSINESS Raytel Medical Corporation is a provider of healthcare services, focusing on the needs of patients with cardiovascular disease ("CVD"). The Company believes, based on its industry experience, that it is the leading provider of remote cardiac monitoring and testing services utilizing transtelephonic monitoring technology in the United States. The Company's goal is to integrate all of its cardiovascular services in order to become a nationwide provider of cardiac health care services. Raytel intends to accomplish this by complementing its existing nationwide cardiac telephonic testing services with a nationwide network of fixed site cardiac diagnostic and therapeutic service facilities including cardiac catheterization laboratories, heart centers and affiliated cardiology and cardiovascular physician groups. Raytel intends to develop its heart centers in affiliation with cardiology physician groups and hospitals delivering high quality patient care. Raytel believes its planned heart centers will address the cost containment pressures currently shaping the healthcare industry. Raytel currently manages two hospital-based heart centers, one of which is in Southern California and the second of which is in Southeast Texas. The Company also owns and operates seven freestanding cardiovascular diagnostic facilities and two hospital-based cardiac catheterization laboratories, and manages three physician practices. In addition, the Company provides outpatient diagnostic imaging services through operating and investment interests in seven freestanding imaging centers, and manages a diagnostic imaging provider network that operates in eight mid-Atlantic states. Raytel was incorporated in California in October 1981 under the name Ratel Labs, Inc. and changed its name to Raytel Medical Imaging, Inc. in 1983 and to Raytel Systems Corporation in 1985. In August 1987, the Company was reincorporated in Delaware under the name Raytel Systems Corporation. Following the organization of its majority-owned subsidiary Raytel Corporation in 1990, the Company changed its name to Raytel Holding Corporation. In October 1992, the Company changed its name to Raytel Medical Corporation. Unless the context otherwise requires, "Raytel" or the "Company" as used herein refers to Raytel Medical Corporation, a Delaware corporation, and its consolidated subsidiaries. The Company's executive offices are located at 2755 Campus Drive, Suite 200, San Mateo, California 94403, and its telephone number is (650) 349-0800. RECENT CORPORATE DEVELOPMENTS During the fiscal year ended September 30, 1998, the Company expanded its CVD healthcare service operations and its physician practice management business through several strategic developments. The Baptist Hospital of Southeast Texas In October 1997, the Company entered into an agreement with The Baptist Hospital of Southeast Texas. Pursuant to this agreement, the Company undertook the management of the existing cardiac catheterization facility located at the hospital and the development of a portion of the hospital as the Raytel Heart Center at Baptist Hospital, which began operations in September 1998. 1 3 Acquisition of C.M. Cardiac Monitoring, Inc. In June 1998, the Company acquired all of the assets of C.M. Cardiac Monitoring, Inc. ("CMI"). CMI provides transtelephonic pacemaker and arrhythmia testing services. Granada Hills Community Hospital In September 1998, the Company entered into a revised management consulting agreement with Granada Hills Community Hospital under which the Company will manage the heart program at the hospital, including the existing cardiac catheterization facility located at the hospital. Development Agreements with St. Jude Medical, Inc. In June 1997, the Company entered into a licensing and joint development agreement with Pacesetter, a wholly owned subsidiary of St. Jude Medical, Inc. ("St. Jude") for the development of a monitoring device for its new pacemaker product. In November 1998, the Company entered into an exclusive agreement with Ventritex, Inc., a wholly owned subsidiary of St. Jude to complete the development of the Housecall(TM) dedicated transtelephonic system for monitoring Ventritex's implantable cardioverter defibrillators ("ICDs") and to monitor all of Ventritex's existing Housecall(TM) ICD patients. OVERVIEW OF CARDIOVASCULAR DISEASE AND ITS TREATMENT Cardiovascular disease is the leading cause of death in the United States and represents the highest percentage of hospital patient days of stay. CVD is a category of illnesses that generally develop progressively, and in many cases asymptomatically, over a number of years. As a result, CVD frequently goes undiagnosed until the patient suffers an acute episode such as a stroke or heart attack. CVD manifests itself in a number of disease states, such as atherosclerosis, electrophysiological defects, valvular dysfunction, congestive heart failure, hypertension and congenital defects. Based upon 1995 data, the American Heart Association (the "AHA") estimates that approximately 58.2 million people in the United States suffer from one or more forms of CVD. According to the 1995 estimates, CVD claimed approximately 960,000 lives in 1995, representing 41.5% of all deaths, and of that total, coronary heart disease (heart attack) caused approximately 481,000 deaths in the United States during 1995 -- the single leading cause of death in the U.S. Due to the aging of the United States population, the Company believes that the need for medical services to diagnose and treat CVD will continue to increase significantly in the future. BUSINESS STRATEGY Raytel's objective is to be a vertically integrated provider of CVD services through a network of therapeutic and diagnostic facilities, complimented by its cardiac transtelephonic monitoring and testing services. The Company is pursuing this objective through the following strategies: Focus on Establishment of Heart Centers. Raytel is establishing heart centers designed to coordinate or provide quality, integrated CVD services on a cost-effective basis. The Company believes that these heart centers will offer substantial benefits over the traditional healthcare delivery system to all of the constituencies involved in CVD care. Patients will benefit from the convenience of dealing with a single entity administering their CVD management needs and providing many services at a single location. Referring physicians will benefit from simplified referral patterns and more consistent patient treatment. Cardiologists and other professionals affiliated with the centers will benefit from local access to a wider range of complementary specialists and diagnostic equipment as well as management, marketing and administrative resources. The Company believes that its heart centers will be able to offer more integrated services at a lower cost than traditional providers, thus addressing the cost containment objectives of managed care plans and other third-party payors. All of these constituencies will benefit from improved accountability. Leverage Expertise and Existing Businesses. Raytel has significant experience in providing diagnostic and monitoring services to CVD patients and in acquiring and operating geographically dispersed healthcare service businesses. The Company believes that the expertise it has acquired through the management and 2 4 operation of these businesses has been and will continue to be a benefit to Raytel as it moves forward with the development of heart centers. Develop Affiliations with Providers. Raytel develops its heart centers on a regional basis, in cooperation with cardiology groups and hospitals with a reputation for the delivery of high quality services among referring primary care physicians and the general population in the communities that they serve. As part of its strategy to create a flexible format for its heart centers, the Company establishes relationships with cardiovascular and thoracic surgeons and other specialists who perform invasive therapeutic procedures not offered at the heart center in order to create consistent referral patterns and assure the seamless delivery of quality service throughout the continuum of cardiac care. Expand Managed Care Relationships. The Company believes that interaction with managed care organizations will become an increasingly important element in the provision of cardiac care, including care for Medicare patients, and that third-party payors will increasingly prefer to contract with providers offering a wide range of cardiovascular services provided on a multistate or regional basis. Raytel actively markets its existing healthcare services to managed care plans and provides value added services, such as specialty clinics including lipid management, chest pain clinics and congestive heart failure clinics, to such organizations. The Company utilizes its experience in working with managed care plans to market the services of its heart centers to such organizations. Expand the Company's Telemedical Business. The Company believes that the establishment of heart centers will enhance its ability to market its cardiac monitoring and testing services. Pursue Strategic Acquisitions. Raytel has built its existing organization largely through a series of acquisitions. The Company believes that it is often more cost-effective to acquire and reconfigure an existing business than to establish a new business. The Company believes that its experience in identifying, structuring and completing acquisitions of healthcare service organizations and effectively integrating these organizations will enable it to take advantage of future acquisition opportunities that arise as a result of the trends toward consolidation of healthcare service providers. Raytel intends to explore opportunities to establish heart centers and expand its other cardiac businesses through additional strategic acquisitions, including the acquisition of the assets of physician practices. RAYTEL CARDIOVASCULAR FACILITIES One of the elements of Raytel's strategy is the development and operation of heart centers that will coordinate or provide integrated CVD services to patients, including management of the patient's diagnostic, therapeutic and follow-up needs. The Company anticipates that each heart center will include one or more of the following capabilities: a cardiac catheterization laboratory, specialized diagnostic equipment, examination and consultation rooms, an operating room, cardiac care units or intensive care units, patient beds and monitoring equipment. Personnel at the heart center will perform diagnostic services, coordinate therapeutic care with affiliated physicians and/or hospitals, conduct post-therapeutic follow-up programs and enroll patients in cardiac monitoring and testing programs. The Company currently operates two catheterization laboratories within licensed acute care hospitals, has completed the construction of a diagnostic catheterization laboratory in Fremont, California, which is awaiting licensing by the California Department of Health Services (See Item 3. Legal Proceedings), and operates eight additional freestanding diagnostic cardiovascular facilities, one of which is associated with a multi-specialty medical practice in Florida. Four of the seven cardiovascular diagnostic facilities are located in Texas, two are located in Louisiana and one is located in Maryland. A cardiovascular diagnostic facility located in Maryland and formerly operated by CVI was closed and ceased operations in March 1998. In September 1998, the Company entered into a revised 10-year management consulting agreement with Granada Hills Community Hospital ("GHCH") in Southern California under which it is managing an on-site heart center. In October 1997, the Company entered into a 10-year agreement with The Baptist Hospital of Southeast Texas in Beaumont, Texas. Pursuant to this agreement, the Company developed and manages a 3 5 fully integrated heart center with a cardiac catheterization laboratory. In addition, Raytel is evaluating opportunities for the development and acquisition of additional heart centers. The Raytel Heart Center Approach The Company plans to organize an integrated delivery system for cardiovascular services in each region in which it develops a heart center. Raytel heart centers will be designed and developed on a region-by-region basis to maximize the available resources and address the specific needs of each community served. The structure of the heart centers will be flexible to permit the Company to proactively respond to the restructuring of the healthcare system as it occurs. The Company prefers to develop its heart centers in conjunction with academic medical centers, established hospitals and cardiology specialists. In certain cases, the Company may coordinate its integrated delivery system by acquiring the assets of cardiology practices and negotiating long-term agreements to provide management services to such practices. The cardiovascular facilities are usually located on hospital premises or in freestanding facilities in close proximity to the hospitals. The cardiovascular facilities will be designed to enable affiliated cardiologists and cardiovascular surgeons to perform a comprehensive range of diagnostic procedures on site. Therapeutic procedures will generally be performed by physicians either at the affiliated hospital or the heart center. Post-therapeutic monitoring and follow-up programs will be offered through the Company's cardiac monitoring services and through on-site programs to be developed by the Company in conjunction with its physician and hospital affiliates. The Company believes that the heart centers and the related integrated delivery systems will be well positioned in their local markets to capture patients enrolled in HMOs and other managed care programs, as well as patient referrals from local primary care physicians and the heart centers' affiliated hospitals. Cardiovascular Diagnostic Facilities The Company operates four hospital-based cardiac catheterization laboratories and eight free-standing cardiovascular diagnostic facilities (the "Cardiovascular Diagnostic Facilities"). Cardiac catheterization utilizes catheters and sophisticated diagnostic instruments to evaluate the functioning of the heart and the coronary arteries. A narrow, flexible tube, or catheter, is inserted through a main artery in the leg or arm and guided into the patient's coronary arteries, where a cardiologist can use the catheter to perform various tests to diagnose the nature and extent of the patient's coronary artery disease. The Cardiovascular Diagnostic Facilities are located in Texas, Louisiana, Florida and California. At each Cardiovascular Diagnostic Facility, the Company provides the facilities, equipment, supplies and support personnel necessary for the cardiologist to perform interventional cardiac imaging and peripheral therapeutic procedures. In three of the Cardiovascular Diagnostic Facilities, the Company also provides nuclear cardiology diagnostic services. Seven of the Cardiovascular Diagnostic Facilities are owned by limited partnerships, and the Company, through a separate wholly-owned subsidiary for each limited partnership, serves as the corporate general partner which acts as the day-to-day manager of each facility. The Company owns a majority interest in six of the facilities and owns 100% of the Florida facility. The limited partnerships have a term of 20 years or more in all but one facility and that one expires on December 31, 2001. Two of the hospital-based Cardiovascular Diagnostic Facilities are located in Texas. Each is operated under contracts with the respective hospitals under which Raytel provides equipment, technical staff and certain management and administrative services. The hospitals provide space for the facility within the hospital, all supplies, and credentialing of physicians. The Company receives a fee from the hospital on a per procedure basis, with a guaranteed minimum monthly payment. One contract expires in January 1999, and the other contract expires in February 2000. In addition to diagnostic catheterization procedures, one of these facilities currently performs pacemaker installations, peripheral vascular angioplasty and peripheral stent installations. There can be no assurance that the Company will be successful in negotiating extensions of the terms of the contracts. Physicians practicing at the Cardiovascular Diagnostic Facilities are not obligated to refer patients to or practice at these facilities and in many cases also practice at nearby hospitals. 4 6 Northern California Heart Center In January 1996, the Company initiated the development of a diagnostic cardiac catheterization facility (the "Northern California Heart Center") in Fremont, California. In November 1996, the Company completed the construction of the facility. In September 1997, the regional office of Licensing and Certification of the California Department of Health Services denied the request for a license to operate the facility. The Company has filed an administrative appeal of the decision by the regional office and the status of the appeal is still pending. In addition, the Company filed a Petition for Writ of Mandate requesting that the Superior Court of California order the Department of Health Services to issue the appropriate license. The Superior Court denied the Company's request for a Writ of Mandate and returned the matter to the administrative appeals office of the Department of Health Services. In December 1997, the Company filed an appeal of the Department's decision denying the application for the appropriate license to operate the facility. In July 1998, the Company and the Department presented the case to an administrative law judge. Final briefs were submitted during November 1998 and a final decision of the administrative law judge is expected in early 1999. (See Item 3. Legal Proceedings) There can be no assurance that the Company will be able to obtain such licensure or any additional licenses that may be required to expand the services offered at the facility. Raytel Heart Center at Granada Hills Community Hospital In September 1998, the Company entered into a revised agreement with GHCH, in the San Fernando Valley north of Los Angeles, pursuant to which Raytel manages an integrated heart center located on the premises of the hospital. Granada Hills Community Hospital is a general acute care hospital. The hospital's heart program includes cardiac catheterization procedures, stress testing, ultrasound and other diagnostic services, cardiovascular and cardiothoracic surgical procedures and cardiac rehabilitation programs. Under the revised agreement, the Company is responsible for supervising and coordinating all day-to-day operations of the heart center, including administrative support and on-site management. The Company is also primarily responsible for marketing and public relations activities and assists the hospital in the negotiation and administration of contracts with managed care organizations and other third-party payors and in its compliance with Medicare coverage and accreditation requirements and governmental licensing and certification matters. All medical services at the facility are the responsibility of the hospital and its medical staff. In December 1997, the Company filed a demand for arbitration pursuant to the terms of the original agreement with GHCH requesting that an independent arbitrator order GHCH to comply with the provisions of the agreement (See Item 3. Legal Proceedings). In connection with the execution of the revised agreement, the Company and the hospital resolved the arbitration claims and counter-claims, and withdrew their respective demands for arbitration. Through an affiliated medical group, the Company and GHCH entered into an exclusive agreement for Raytel to be the exclusive provider of cardiac surgery services at the hospital and to manage the hospital's cardiovascular surgery program. The Company has entered into an agreement with a leading cardiothoracic surgeon to provide the cardiac surgery services at the hospital. The initial term of the agreement coincides with the term of the management consulting agreement with the hospital to manage the heart program. The affiliated medical group is owned by F. David Rollo, M.D., who serves as the Company's Executive Medical Director. The Company, through a subsidiary, provides management services to the medical group. Raytel Heart Center at The Baptist Hospital of Southeast Texas In October 1997, the Company entered into an agreement with The Baptist Hospital of Southeast Texas in Beaumont, Texas. Pursuant to the agreement, Raytel developed certain facilities and manages an integrated heart center located on the premises of the hospital. The Baptist Hospital is a general acute care hospital. The hospital's heart program includes cardiac catheterization procedures, stress testing, ultrasound and other diagnostic services, cardiovascular and cardiothoracic surgical procedures and cardiac rehabilitation programs. The heart center is presently being operated on an interim basis while the parties assess the impact of proposed 5 7 regulations published by the Health Care Financing Administration and a revenue ruling published by the Internal Revenue Service on certain economic and legal provisions contained in the agreement. RAYTEL PHYSICIAN PRACTICE MANAGEMENT The Company expanded its physician practice management business during fiscal 1997 through its acquisitions of certain non-medical assets of cardiology practices in Beaumont, Texas, and Granada Hills, California. Through its acquisition of CVI in August 1997, the Company acquired a 20-physician multi- specialty medical group, which focuses on cardiology, located in Port St. Lucie, Florida. RAYTEL CARDIAC MONITORING AND TESTING SERVICES The Company is the largest provider of cardiac monitoring and testing services in the United States utilizing transtelephonic pacemaker monitoring ("TTM"), cardiac event detection ("CEDS") and Holter monitoring technologies. The Company believes that its TTM-based services are the most cost-effective means of testing the performance of implanted cardiac pacemakers and detecting symptoms of transient arrhythmias. Pacemaker Monitoring The Company believes, based on its industry experience, that it is the largest provider of transtelephonic pacemaker monitoring services in the United States, currently serving over 80,000 patients with implanted pacemaker systems. Pacemaker systems are designed to assist the human heart in maintaining an adequate pumping rate. A pacemaker is an electronic device that is implanted in the patient and is designed to monitor and, if necessary, to stimulate the patient's heartbeat. As it senses the heart's failure to respond to normal physiologic signals, the pacemaker emits electrical pulses directly into the atrium and/or the ventricle of the heart, causing the heart muscle to contract and pump blood through the patient's body. A pacemaker system consists of the generator which includes the device and a battery and the leads from the device to the patient's heart. The purpose of pacemaker monitoring is to enable the patient to maintain a normal lifestyle without the fear of an unexpected system failure. Pacemaker monitoring can detect failures in the pacemaker system as well as changes in the patient's heart rhythms that can cause the system to become ineffective. In TTM-based pacemaker monitoring, the pacemaker system and its interaction with the patient's heart is tested by conducting periodic, prescheduled ECG examinations. The patient is provided with a battery-powered ECG transmitter which detects the heart's impulses from the surface of the skin, converts these impulses into an acoustic signal and transmits the signal over ordinary telephone lines to one of the Company's three technical operations centers, where the signal is converted and displayed on a computer screen or strip chart recorder. The Company's pacemaker monitoring services are prescribed by the patient's physician. After receipt of a prescription and enrollment by the Company, the patient is sent a transmitter and trained to use the device over the telephone by one of the Company's technologists. Unlike most physician-operated monitoring services, the Company's monitoring services are provided 24 hours a day, seven days a week in order to accommodate unscheduled calls from patients experiencing problems. Each patient is tested on a schedule recommended by his or her prescribing physician with such prescription updated annually. The Company generates most of its pacemaker monitoring revenues from reimbursement by Medicare and payors of supplemental Medicare benefits. Patients are typically tested between three and twelve times per year. The Company is reimbursed for pacemaker monitoring services on a per-call basis. Routine pacemaker testing is performed in accordance with a prearranged, computer generated schedule. A trained technologist telephones the patient and requests that the patient initiate transmission of ECG data which is received by recorders in one of the Company's technical operations centers. Once a continuous graph displaying the rhythm of the heart and the pacemaker is generated, this data is interpreted by the technologist to determine the status of the implanted pacemaker and its relationship to the patient's 6 8 cardiac rhythm. If problems with the pacemaker system are noted or a serious abnormality is detected, including an abnormality in the heart's own rhythm (an arrhythmia), the patient's physician is notified immediately by telephone. After each test, the results are promptly reviewed by a supervising technologist and a cardiologist and a written report is mailed to the patient's physician. Cardiac Event Detection Service The Company operates the Cardiac Event Detection Service ("CEDS"), which tests and documents transtelephonically an ambulatory patient's cardiac rhythm irregularities while the patient is experiencing symptoms. CEDS testing aids in the diagnosis of transient cardiac arrhythmias, including atrial and ventricular abnormalities, such as tachycardia, which causes the heart to beat at an abnormally rapid and potentially life threatening rate. During its fiscal year ended September 30, 1998, Raytel tested over 37,000 patients for potential transient arrhythmic events. The Company believes, based on its industry experience, that it is the largest provider of these services in the United States. Upon enrollment in its CEDS program, the Company provides the patient with a cardiac event recorder for a testing period lasting up to 30 days. Upon experiencing symptoms, the patient activates the event recorder to capture one or more ECGs which the patient will later transmit to one of the Company's two CEDS technical operations centers for analysis. Skilled technologists, under the supervision of cardiac care nurses and cardiologists, make preliminary evaluations of these transmissions for cardiac irregularities. Unlike similar services offered by individuals or small clinics, the Company's centers are staffed 24 hours a day, seven days a week to respond to a patient's needs on a timely basis. Emergency medical response is initiated for CEDS patients when necessary. Regardless of the number of calls placed, payors reimburse the Company on a 30-day program basis for its CEDS service. Holter Monitoring Services The Company believes, based on its industry experience, that it is the largest provider of Holter monitoring services in the United States, currently serving over 51,000 patients annually. The Company processed approximately 70,000 Holter monitoring tapes during fiscal 1998. Holter monitoring tests and documents an ambulatory patient's cardiac rhythm irregularities while the patient is fitted with a recording device, with leads attached to the patient's chest, typically for a single 24-hour period. Should Holter monitoring or other testing procedures fail to detect an arrhythmia event in a symptomatic patient, the patient's physician often will refer the patient to an event detection service such as CEDS. Implantable Cardioverter Defibrillators Pursuant to an exclusive agreement signed in November 1998 with St. Jude Medical, the Company will complete the development of the Housecall(TM) dedicated transtelephonic system for monitoring Ventritex implantable cardioverter defibrillators ("ICDs"). These ICDs are designed and manufactured by St. Jude Medical's California-based Cardiac Rhythm Management Division. ICDs are pacemaker-like devices that can sense ventricular tachyarrhythmias (life-threatening fast heart rates) and automatically deliver an electrical shock to restore a normal rhythm. Currently, patients with ICDs must return to the physician's office on a routine basis in order to have the ICD's battery tested and for an examination of the ICD system integrity. The number of times the ICD was activated is also monitored. The Housecall(TM) system will reduce the frequency of physician office visits by extending the transtelephonic monitoring procedures presently used for pacemakers to ICDs. The new system will enable trained technicians to interrogate the device's memory and transmit both stored data as well as real-time clinical and technical information on the patient's cardiac activity and ICD status. The test results are interpreted by trained technicians and a comprehensive report is communicated to the patient's physician for clinical evaluation. Training and Quality Assurance All of the Company's pacemaker monitoring technologists undergo a formal six-week training program that includes basic cardiac physiology, the operation of pacemaker devices, the interaction of pacemaker 7 9 systems with the heart, and the administration and interpretation of ECG tests. As technologists become more experienced, they are trained to monitor increasingly complex pacemaker systems. Technologists administering the Company's CEDS and Holter services undergo training in the interpretation of ECG data to detect symptoms of cardiac arrhythmia. The Company maintains a rigorous quality assurance program. Board-certified cardiologists direct the Company's technologists with special training in the fields of cardiac pacing and electrophysiology. Each pacemaker-monitoring test is separately reviewed by a supervising technologist and a cardiologist. CEDS transmissions and Holter test results are evaluated by technologists under the supervision of cardiac care nurses and cardiologists. In order to comply with certain requirements of new federal regulations regarding independent diagnostic testing facilities (See Government Regulation), the State of Connecticut has approved Raytel's training program for college credit toward a bachelor of science degree within the Connecticut state university system. DIAGNOSTIC IMAGING SERVICES The Company provides outpatient diagnostic imaging services through operating and investment interests in seven freestanding imaging centers (the "Imaging Centers"). The Company also operates the Raytel Imaging Network, a specialized preferred provider network currently consisting of 475 independent imaging centers located from Virginia to New York, including five centers owned and managed by the Company. Diagnostic imaging technology consists of a number of medical diagnostic modalities, many of which integrate computer hardware and software. These modalities include magnetic resonance imaging (MRI), computed tomography ("CT"), nuclear medicine, radiography/fluoroscopy ("R/F"), ultrasound, general x-ray and mammography. These imaging modalities are generally non-invasive (with the exception of the injection of contrast material in certain techniques and the occasional use of sedating agents) and subject the patient either to sound waves (ultrasound), X-rays (CT, R/F and X-ray mammography) or radio waves and magnetic fields (MRI) to gather data that aid in medical diagnosis. These diagnostic technologies enable physicians to view certain internal body anatomy and pathology and in many instances provide early diagnostic capability and aid in effective treatment planning without the need for more costly exploratory surgery. The principal diagnostic imaging modality in use at the Imaging Centers is MRI. MRI is used to provide high resolution images of the soft tissue of the body. In the field of cardiology, MRI is used for the assessment of congenital and anatomical cardiac defects. Other MRI techniques, such as MR angiography, are also used in the assessment of peripheral vascular and other cardiovascular diseases. The Imaging Centers also provide a wide range of imaging services for the diagnosis of neurological disorders of the head, neck and spine, as well as imaging of the musculoskeletal system and a variety of internal organs, including the liver and prostate, and the female pelvis. Raytel Imaging Centers The Imaging Centers are located in four states. All of the Imaging Centers offer MRI services, and four offer other imaging modalities. The Company owns four of the Imaging Centers and holds its interests in the other three through investments in limited partnerships (the "Ventures"), to which the Company provides management services, including data processing, billing and collection, accounting, marketing services and operational supervision. The Ventures have terms that expire between 1999 and 2026. Raytel Imaging Network The trends toward cost containment and managed care have resulted in changes in the patterns of patient referrals to diagnostic imaging facilities, adversely affecting the profitability of independent imaging centers and encouraging the formation of networks of independent centers. Many independent operators of diagnostic imaging facilities lack the management and marketing expertise and systems, as well as the experience in dealing with large managed care organizations, that are necessary to effectively establish and operate such networks. The Company's experience in dealing with a wide variety of managed care organizations and its established, centralized marketing, scheduling, billing and accounting systems provide the Company with the 8 10 capability to establish and operate networks of independent diagnostic imaging centers. In addition, the Company's purchasing power allows it to provide participating centers with supplies, such as contrast agents, film and other medical and technical supplies, and with equipment maintenance and other services at considerable cost savings. The Raytel Imaging Network (the "Network") is a dedicated network of diagnostic imaging facilities established to provide services to patients participating in healthcare benefit programs offered by municipal and state employers, corporations that self-insure, third-party insurance carriers, union health and welfare plans and managed care providers. Independent imaging centers enter into fixed fee contractual relationships with the Network to provide imaging services to patients referred by payors which have contracted with the Network for services at a negotiated fee. The Network handles scheduling for patients whose healthcare benefit programs participate in the Network and guarantees these participating entities a fixed fee for all radiology procedures performed in Network centers. The Network also offers centralized billing services for those procedures, promptly reports the results of the studies to the patient's referring physician and the outcomes of the studies to the administrators responsible for the management of the patient's healthcare program. The Network is a preferred provider organization with participating imaging centers in the states of New Jersey, Pennsylvania, Delaware, Maryland, New York and Virginia. The Network currently provides diagnostic imaging services under referral arrangements with approximately 90 organizations administering healthcare programs covering more than 600,000 individual participants. SALES AND MARKETING The Company's marketing activities are directed at managed care organizations, cardiologists and referring physicians. The Company maintains a central managed care sales group that negotiates and manages contracts with managed care organizations. The Company's marketing organization also supervises the marketing of its TTM-based services to physicians nationwide and supports the efforts of local centers to market their services to referring physicians in the communities they serve. Raytel Cardiac Monitoring and Testing Services The Company markets its cardiac monitoring and testing services nationwide by using regional sales managers coordinating the activities of approximately 400 sales representatives who are employees of the pacemaker equipment manufacturers. The sales organization is supported by the Company's customer service and telemarketing personnel. Raytel works closely with all major pacemaker manufacturers and has agreements with certain manufacturers for the distribution of the Company's services through the direct sales forces of the manufacturers. The Company's sales force works closely with the approximately 12,000 physicians currently prescribing the Company's pacemaker monitoring services. The Company differentiates its cardiac monitoring and testing services from most of its competitors by providing its services 24 hours a day, seven days a week. In addition, the Company offers technologists who specialize in monitoring specific pacemaker models (the more complex the unit, the more expertise a technologist is required to have), extensive quality control procedures, computerized reports for complex pacemakers, detailed reporting procedures for abnormal findings and an extensive database on pacemaker performance. Diagnostic Imaging Services The Company markets services of the Imaging Centers it manages through a team approach tailored to the needs of each Imaging Center. The Company's central sales organization coordinates the Imaging Center's marketing activities with the Imaging Center's radiologists. The principal selling effort is directed toward the local base of referring physicians. In support of the selling effort, the Company provides marketing materials, including newsletters and brochures and holds routine educational sessions for physicians. The Company also assists the Imaging Center in addressing needs of managed care organizations by negotiating 9 11 contracts with these organizations and working closely with insurance plan administrators, HMO personnel, workers' compensation coordinators and hospital administrators. Raytel Heart Centers and Cardiovascular Diagnostic Facilities The Company markets the services of its Cardiovascular Diagnostic Facilities using the basic approach employed with the Imaging Centers. Each facility undertakes marketing activities specifically structured for its local or regional market. The manager of each facility initiates and maintains contact with local referring physicians. The Company's central sales organization supports the local selling effort with marketing materials and assistance in the development of clinical outreach programs designed to make the capabilities of the center available to underserved segments of the community. The center manager coordinates local physician contacts with the Company's cardiac monitoring and testing sales force to cross-sell the Company's transtelephonic pacemaker monitoring, Holter monitoring and cardiac event detection services. The Company's central sales group negotiates contacts with managed care organizations. This group also assists the center manager in addressing the needs of such organizations. Raytel Physician Practice Management Services The Company markets services of the physician practices it manages through a team approach tailored to the needs of each physician practice, in the same fashion used to market the services of the Imaging Centers and its heart centers and Cardiovascular Diagnostic Facilities. BILLING AND COLLECTION The Company's cardiac monitoring and testing operations generate a high volume of relatively low-cost services delivered to patients living throughout the United States. The Company derives substantially all of its transtelephonic pacemaker monitoring, cardiac event detection services, and Holter monitoring revenues from Medicare and other third-party payors and, in most cases, renders bills to at least two payors for each procedure. In the year ended September 30, 1998 the Company generated more than one million bills to Medicare and other third-party payors related to these businesses. Accordingly, the Company's success in these businesses is substantially dependent upon the efficiency of its billing and collection systems. All of the billing and collection functions for the Company's cardiac testing operations are centralized at the Company's facilities in Connecticut. The Company has specialized data management systems that it uses to obtain and record primary and secondary insurance data at the time of patient enrollment and to maintain and update that information. The Company's billing and collection staff is specially trained in third-party coverage and reimbursement procedures. The Company communicates continuously with carriers administering Medicare and has established procedures that allow it to submit most primary Medicare claims electronically, on a batch-billing basis. In addition, the Company maintains a database on the billing procedures and requirements of more than 1,500 insurance carriers, which enables it to efficiently process claims to primary, secondary and tertiary private insurers. Computerized billing and collection reports allow the Company's personnel to continually monitor open accounts. Due to the complexity of the billing and collection process, the Company, like many other healthcare service providers, experiences normal payment cycles that are considerably longer than those customary in many other industries. The Company typically experiences billing cycles of 60 to 240 days from the billing date, depending on the type and number of third-party payors, although billing cycles can be even longer in certain situations. Based upon its experience, the Company believes that its specialized data processing system and its extensive background in processing high volume, third-party claims serve to minimize collection cycles and the incidence of rejected claims due to incomplete or inaccurate information. The Company bills and collects for the Imaging Centers, physician practices, heart centers and other cardiac facilities that it manages. 10 12 THIRD-PARTY REIMBURSEMENT The Company derives substantially all of its revenues from Medicare, HMOs and commercial insurers and other third-party payors. Both government and private payment sources have instituted cost containment measures designed to limit payments made to healthcare providers, by reducing reimbursement rates, limiting services covered, increasing utilization review of services, negotiating prospective or discounted contract pricing, adopting capitation strategies and seeking competitive bids. There can be no assurance that such measures will not adversely affect the amounts or types of services that may be reimbursable to the Company in the future, or that the future reimbursement for any service offered by the Company will be sufficient to cover the costs and overhead allocated to such service by the Company, either of which could have a material adverse effect on the Company's operating results. The Company cannot predict with any certainty whether or when additional changes in Medicare, Medicaid or other third-party reimbursement rates or policies will be implemented. However, such future changes could have a material adverse effect on the Company's business, financial condition or operating results. Reimbursement rates vary depending on the type of third-party payors. Changes in the composition of third-party payors from higher reimbursement rate payors to lower reimbursement rate payors could have an adverse effect on the Company's operating results. In addition, the Company anticipates that it may increasingly offer its services to third party payors on a capitated or other risk-sharing basis. To the extent that patients or enrollees covered by a risk-sharing contract require more frequent or extensive services than is anticipated by the Company, the revenue derived from such contract may be insufficient to cover the costs of the services provided. Insufficient revenue under capitated or other risk-sharing contracts could have a material adverse effect on the Company's business, financial condition or operating results. GOVERNMENT REGULATION The healthcare industry is highly regulated, and there can be no assurance that the regulatory environment in which the Company operates will not change significantly and adversely in the future. In general, the scrutiny of methods and levels of payment of healthcare providers and companies is increasing. On August 5, 1997, President Clinton signed the Balanced Budget Act of 1997 ("BBA") into law. Two of the areas affected most profoundly by this law are (1) fraud and abuse, and (2) the effort of the federal government to use its purchasing power to expand health care options for Medicare beneficiaries while using pressure from increased competition to control costs. The fraud and abuse provisions build on many of the provisions that were enacted by the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). In addition to the specific changes, the fraud and abuse provisions of the BBA signify an apparent shift to the Office of the Inspector General of the Department of Health and Human Services (the "OIG") of not only enforcement power, but policy-making authority as well. In addition, the BBA broadened the authority for the HCFA to enter into contracts for providing managed care to Medicare beneficiaries by expanding the type of managed care options available to Medicare beneficiaries. On October 31, 1997, the Secretary of the Department of Health and Human Services ("HHS") published final regulations implementing a number of changes proposed in June 1997. One of the changes replaced the independent physiological laboratory ("IPL") with the creation of the independent diagnostic testing facility (the "IDTF"). An IDTF is a diagnostic facility, distinct from a physician's office or hospital, which does not directly use test results to treat patients. The facility exists to perform diagnostic testing procedures. The Company's cardiac monitoring and testing services currently operate as an IPL. The original implementation date was postponed until March 1999, and the Company is in the process of replacing all of its designations as an IPL with the new designation as an IDTF, as required by the new regulations. The Company believes that healthcare legislation, regulations and interpretations will continue to change and, as a result, routinely monitors developments in healthcare law. The Company expects to modify its agreements and operations from time to time as the business and regulatory environment changes. While the Company believes it will be able to structure all of its agreements and operations in accordance with applicable law, the lack of definitive interpretations of many statutory and regulatory provisions means that there can be 11 13 no assurance that the Company's arrangements are in compliance with such provisions or will not be successfully challenged. Government Reimbursement Programs The federal government maintains the Medicare health insurance program for the aged. Individual states have programs for medical assistance to the indigent known generally as Medicaid, which are partially financed by the federal government. Federal Medicaid funds are currently conditioned on state compliance with federal requirements. A significant portion of the Company's revenues is received under Medicare and other government programs. Both the Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, interpretations of policy, intermediary determinations, and government funding restrictions, all of which may materially increase or decrease the rate of program payments to healthcare facilities and other healthcare suppliers and practitioners. The Company's existing cardiac monitoring and testing services derive a substantial portion of its revenue from the Medicare program. The Company's heart centers, diagnostic imaging, and Cardiovascular Diagnostic Facilities also derive a substantial portion of their revenue from payments made under the Medicare program, and the Company anticipates that future facilities and services will also derive significant revenues from these sources. In order to participate in this program, a newly-developed facility must be certified after officials administering the Medicare program in the state where the facility is located, or their designees, have conducted a survey of the facility, a process that cannot commence until the facility opens and begins providing services to patients. Once a facility is certified, it will be reimbursed by Medicare for services performed from the date on which a satisfactory survey is conducted in connection with the certification of the facility or such later date as an acceptable plan is submitted to correct any deficiencies noted in the survey. The Company expects that delays in the certification process may occur and may increase with the funding limitations being imposed on certifying authorities. Combined with the billing and collection cycle for Medicare reimbursement that all healthcare facilities experience, these delays could result in a three to six month working capital deficiency during the start-up phase for newly developed cardiac centers. These working capital deficiencies will have to be funded by the Company through working capital advances to the facilities using funds provided by operating or financing activities. The Stark Law and Medicare Fraud and Abuse Laws The Company is subject to a variety of laws and regulations governing the referral of patients to facilities with whom the referring physician has a financial relationship. Subject to certain exceptions, physicians who have a financial relationship with an entity providing healthcare services are prohibited by federal law (the "Stark Law") from referring or admitting patients to that entity for the provision of certain designated services reimbursable under Medicare or Medicaid, as well as certain other federally assisted state healthcare programs. The entity providing healthcare services is also prohibited from presenting, or causing to be presented, a claim or bill for the designated services furnished pursuant to a prohibited referral. Possible sanctions for violations of the Stark Law include civil monetary penalties, exclusion from the Medicare and Medicaid programs and forfeiture of amounts collected in violation of such prohibition. The Stark Law prohibits a physician who owns stock of a company from referring patients to the medical facilities in which such company has an ownership interest unless such Company's stockholders' equity exceeds $75.0 million. On January 9, 1998, the Health Care Financing Administration ("HCFA") published proposed rules implementing the Stark Law. The regulations have been published in proposed form and HCFA has solicited comments on the proposed regulations. The proposed regulations do not have the force of law, but they do provide information regarding the views of enforcement agencies, such as the Office of Inspector General. The Stark Law was originally enacted in December 1989, and prohibited a physician (or an immediate family member of a physician), with a financial relationship with a clinical laboratory from making a referral to the clinical laboratory for the furnishing of clinical laboratory services for which payment otherwise would 12 14 be made by the Medicare program. In 1993, the Stark Law was amended to expand the referral prohibition to apply to certain "designated health services." The 1993 amendments are commonly referred to as "Stark II." Two years later, in 1995, HCFA issued regulations, but these applied only to the original 1989 Stark Law. The recently promulgated regulations apply to the Stark II Law. Generally, the Stark Law prohibits physicians from referring Medicare patients to facilities for "designated health services" if the physician (or immediate family member of the physician) has a financial arrangement with the entity, unless the arrangement fits within an exception. The definition of designated health services specifically includes radiology services, including MRI, CT, ultrasound and nuclear medicine. However, the regulations specifically exclude "invasive" radiology, which includes cardiac catheterization, PTCA and similar imaging modalities used to guide a needle, probe or catheter accurately. Thus, the Stark Law does not prohibit physician ownership of an entity or facility which provides "invasive" radiology, such as cardiac catheterization services provided at the Cardiovascular Diagnostic Facilities. In addition to the limitations of the Stark Law, a number of states have laws which apply to referrals made for services reimbursed by all payors, and not simply Medicare or Medicaid. Some of these laws may extend to the services furnished by medical facilities in which the Company has an ownership interest and, absent the availability of an exception under such laws, could prohibit physicians with ownership interests in the Company from referring any patients to such facilities. The Company is also subject to the illegal remuneration provisions of the federal Social Security Act and similar state laws ("Fraud and Abuse Laws") which collectively impose civil and criminal sanctions on persons who solicit, offer, receive or pay any remuneration, directly or indirectly, for referring a patient for treatment that is paid for in whole or in part by Medicare, Medicaid or similar state or private programs. The courts and the OIG have stated that the Fraud and Abuse Laws are violated where even one purpose, as opposed to a primary or sole purpose, of the arrangement is to induce referrals. Violations of the Fraud and Abuse Laws are punishable by criminal or civil penalties, which may include exclusion or suspension of the provider from future participation in the Medicare, Medicaid and similar state and federal programs, as well as substantial fines. The federal government has published exemptions, or "safe harbors," for business transactions that will be deemed not to violate the federal Fraud and Abuse Laws. Although satisfaction of the requirements of these safe harbors provides protection from criminal prosecution or penalties under the federal anti-kickback legislation, failure to meet the safe harbors does not necessarily mean a transaction violates the statutory prohibitions. Due to the breadth of the statutory provisions of the Fraud and Abuse Laws and the absence of definitive regulations or court decisions addressing the type of arrangements by which the Company and its affiliated entities conduct and will conduct their business, from time to time certain of their practices may be subject to challenge under these laws. In October 1995, Congress passed a bill that would extend the prohibitions of the Fraud and Abuse Laws to all third-party payors, governmental and private. In the HIPAA and BBA, Congress expanded the government fraud and abuse controls in a number of ways and added a provision for obtaining advisory opinions from the OIG regarding physician self-referral compliance with the Stark Law. The Company has attempted to structure its business relations to comply with the Stark Legislation, the Fraud and Abuse Laws and all other applicable healthcare laws and regulations. However, there can be no assurance that such laws will be interpreted in a manner consistent with the Company's practices. In addition, state legislatures and other governmental entities are considering additional measures restricting or regulating referrals, and there can be no assurance that new laws or regulations will not be enacted which will require restructuring of the Company's operations or otherwise have a material adverse effect on the Company's business, financial condition or operating results. Certificates of Need and Other Licensing Requirements Certain states in which the Company operates or may operate in the future prohibit the establishment, expansion or modification of certain healthcare facilities and the services provided at such facilities, including heart centers, catheterization laboratories and diagnostic imaging centers, without first obtaining a certificate 13 15 of need ("CON") or comparable license from the appropriate state regulatory agency. In addition to any CON or comparable licensing requirements that may apply, heart centers, catheterization laboratories and diagnostic imaging centers developed or operated by the Company may also be required to comply with other licensing requirements, which vary from state to state. Obtaining CON approval or comparable licensing is typically an expensive and lengthy process and may involve adversarial proceedings initiated by competing facilities or taxpayer groups. The existence of these laws or future legislation changing these laws may make it more difficult or prohibitive for the Company to develop heart centers, catheterization laboratories or other diagnostic facilities, maintain existing facilities or expand the services provided at such facilities or its other diagnostic imaging facilities. Under current California regulations, the performance of cardiac catheterization procedures is generally restricted to licensed general acute care hospitals. In 1996, the Company applied for a license for its freestanding cardiac catheterization laboratory in Fremont, California under a pilot program. Although this pilot program was repealed in 1993, the Company believes that it meets all of the requirements for the granting of a license, because the entity holding the permit for such a facility was in active status as of December 31, 1993. In September 1997, the regional office of the California Department of Health Services notified the Company by letter dated September 8, 1997 that its application for the license was denied. In December 1997, the Company filed an appeal of the Department's decision and filed a Petition for Writ of Mandate requesting that the Superior Court of California order the Department of Health Services to issue the appropriate license. The Superior Court denied the Company's request for a Writ of Mandate and returned the matter to the administrative appeals office of the Department of Health Services. In July 1998, the Company and the Department presented the case to an administrative law judge. Final briefs were submitted in November 1998 and a final decision of the administrative law judge is expected in early 1999. There can be no assurance that the court will enter the order requested by the Company or that the Company will be successful in its appeal of the decision denying the application. If the Company cannot obtain such license, it is uncertain under current California regulations whether the Company could otherwise separately obtain a license to operate a free standing catheterization laboratory. The Company from time to time is required to upgrade or modify its facilities in order to maintain its licenses. In many states, a facility, such as a free-standing heart center, must be completed before a license will be issued allowing the facility to operate, and even once the facility is built there can be no assurances that a license or certification for operations will be issued by the appropriate government agency. Restrictions on Corporate Practice of Medicine The laws of certain states in which the Company operates or may operate in the future prohibit non-physician entities from practicing medicine, exercising control over physicians or engaging in certain practices such as fee-splitting with physicians. Although the Company has structured its affiliations with physician groups so that the physicians maintain exclusive authority regarding the delivery of medical care, there can be no assurance that these laws will be interpreted in a manner consistent with the Company's practices or that other laws or regulations will not be enacted in the future that could have a material adverse effect on the Company's business. If a corporate practice of medicine law is interpreted in a manner that is inconsistent with the Company's practices, the Company would be required to restructure or terminate its relationship with the applicable physician group to bring its activities into compliance with such law. The termination of, or failure of the Company to successfully restructure, any such relationship could result in fines or a loss of revenue that could have a material adverse effect on the Company's business, financial condition or operating results. MEDICAL MALPRACTICE INSURANCE In general, the Company does not, itself, engage in the practice of medicine and requires physicians performing medical services at its facilities to maintain medical malpractice insurance. In the case of HIPSL, a wholly owned subsidiary, the Company employs approximately 20 physicians, who are performing medical services as members of a multi-specialty medical group. The other licensed professionals in this practice, such as registered nurses, nurse practitioners and technicians, perform their professional duties under the direct 14 16 supervision of the physicians. With the exception of the physician employees of HIPSL, the Company's employees do not practice medicine. However, certain of its employees are or will be involved in the delivery of healthcare services to the public under the supervision of physicians. To protect the Company from medical malpractice claims, including claims associated with its employees' activities, the Company, or the Ventures for which the Company serves as general partner, maintains professional liability and general liability insurance on a "claims made" basis in amounts deemed appropriate by management based upon the nature and risks of the Company's business. Such policies provide malpractice coverage in the amount of $1 million per occurrence with an aggregate limit of $3 million. Insurance coverage under such policies is contingent upon a policy being in effect when a claim is made, regardless of when the events which caused the claim occurred. The cost and availability of such coverage has varied widely in recent years. While the Company believes its insurance policies are adequate in amount and coverage for its current operations, there can be no assurance that the coverage maintained by the Company is sufficient to cover all future claims. In addition, there can be no assurance that the Company will be able to obtain such insurance on commercially reasonable terms in the future. COMPETITION The healthcare service businesses in which the Company is currently engaged are highly competitive. The restructuring of the healthcare system is leading to rapid consolidation of the existing highly fragmented healthcare delivery system into larger and more organized groups and networks of healthcare providers. The Company expects competition to increase as a result of this consolidation and ongoing cost containment pressures among other factors. In executing its business strategy, the Company competes with management services organizations, for-profit and nonprofit hospitals, HMOs and other competitors that are seeking to form strategic alliances with physicians or provide management services to physicians or to diagnostic and therapeutic facilities owned by such physicians. In operating its heart centers, the Company encounters competition from physician groups, general acute care hospitals and freestanding and hospital-based cardiac care facilities located in the same markets. The Company's cardiac monitoring and testing programs compete with a number of smaller, regional commercial entities as well as hospitals, clinics and physicians who generally provide these services as an adjunct to their primary practice. Principal competitive factors are the availability and quality of service. The Company believes that it competes favorably with most of its smaller competitors based on its 24-hour a day, seven-day a week service, specialized technical staff and sophisticated billing and collection system. Certain of its competitors, including local physicians and hospitals, may have certain competitive advantages over the Company based upon their direct relationships with patients. Cardiac catheterization and other cardiac diagnostic and therapeutic procedures, as well as diagnostic imaging procedures, are performed in hospitals, private physicians' offices, clinics operated by group practices of physicians and independent catheterization facilities. Although the Company and its affiliates operate in locations throughout the United States, competition focuses on physician referrals at the local market level. Principal competitors in each of the Company's markets are hospital and physician affiliated facilities, some of which may have greater financial and other resources than the Company, more experience and greater name recognition than the local managers and physicians associated with the Company's Imaging Centers, Cardiovascular Diagnostic Facilities and Catheterization Laboratories, or better ties to the local medical community. Successful competition for referrals is a result of many factors, including quality and timeliness of test results, type and quality of equipment, facility location, convenience of scheduling and, increasingly, relationships with managed care programs. Other independent companies (including some which have substantially greater financial and operating resources than the Company) are in the business of establishing facilities similar to the facilities in which the Company has or may obtain interests and providing management services to such facilities. EMPLOYEES As of November 30, 1998, the Company employed approximately 849 full time equivalent employees. None of the Company's employees are covered by collective bargaining contracts. 15 17 ITEM 2. PROPERTIES The principal operations of the Company and its subsidiaries are conducted at facilities located in Windsor, Connecticut; New York, New York; Haddonfield, New Jersey; San Mateo, California; and Port St. Lucie, Florida. The Windsor facility, consisting of approximately 33,000 square feet, is occupied under a lease expiring in July 1999. In August 1997, the Windsor facility was expanded by the addition of approximately 8,500 square feet in an adjoining building that is occupied under a lease expiring in November 2002. The New York facility, consisting of approximately 23,300 square feet, is occupied under a lease expiring in September 2001. The Haddonfield facility, consisting of approximately 11,000 square feet, is occupied under a lease expiring in June 1999. The San Mateo facility, consisting of approximately 2,400 square feet, is occupied under a lease expiring in May 2003. The Port St. Lucie facility, consisting of approximately 28,680 square feet, is occupied under a lease expiring in December 2002. In addition, through seven of its consolidated Imaging Centers, the Company leases a total of approximately 31,000 square feet in facilities located in New York, New Jersey, California and Pennsylvania. Through its acquisition of CVI in August 1997, the Company acquired eight Cardiovascular Diagnostic Facilities in Texas, Louisiana, Maryland and Florida. The joint ventures that operate the Cardiovascular Diagnostic Facilities lease a total of approximately 89,000 square feet in these facilities. The Company generally considers its properties to be in good condition and suitable for the Company's anticipated needs. ITEM 3. LEGAL PROCEEDINGS In September 1997, the California Department of Health Services denied the Company's application for a license to operate a freestanding diagnostic catheterization facility in Fremont, California. The Company filed an administrative appeal requesting that the Department of Health Services reconsider the denial of the application by the regional office of Licensing and Certification. In addition, in November 1997, the Company filed a Petition for Writ of Mandate requesting that the Superior Court of the State of California for the County of Sacramento order the Department of Health Services to issue the appropriate license, or in the alternative, to find that the Department of Health Services lacks jurisdiction to regulate the operation of the diagnostic catheterization facility. The Court denied the Company's Petition for a Writ of Mandate and remanded the case the administrative law office of the Department of Health Services. In July 1998, the Company and the Department presented their case to an administrative law judge. Final briefs were filed in November 1998 and the judge is expected to enter her decision in early 1999. In December 1997, the Company filed a demand for binding arbitration pursuant to the terms of its 10-year agreement with GHCH requesting that an independent arbitrator order GHCH to comply with the provisions of the agreement. In response, the hospital filed its own claim for arbitration. In connection with the execution of a revised management services agreement in September 1998, the parties resolved their dispute and withdrew their respective demands for arbitration. Raytel and its subsidiaries are parties to other litigation and claims arising out of its ongoing business operations. The Company believes that none of these matters, either individually or in the aggregate, are likely to have a material adverse effect on the Company's business, financial condition or operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 16 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to information set forth under the heading "Stock Data Nasdaq Symbol: RTEL" on page 30 of the Company's 1998 Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference to the information set forth under the heading "Five Year Financial Summary" on page 5 of the Company's 1998 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference to information set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 6 to 12 of the Company's 1998 Annual Report to Stockholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not hold any marketable equity securities, foreign currencies, or derivative financial instruments in its investment portfolio. At the end of the fiscal year 1998, the Company did not hold any investments that are subject to interest rate risk, except for approximately $1,610,000 in investment grade commercial paper with maturities of less than 60 days. These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. However, because commercial paper has such short maturities, the Company has the ability to hold its fixed income investments until maturity. Therefore, the Company would not expect to recognize an adverse impact in income or cash flows if there were an increase or decrease in interest rates. The Company has not issued any debt securities other than promissory notes with fixed interest rates in connection with certain acquisitions, and therefore does not have any interest rate risk with respect to this type of financing activity. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to the financial statements and supplementary data on pages 13 to 28 of the Company's 1998 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 17 19 PART III Certain information required by Part III is omitted from this report in that the Company intends to file its definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this report, and certain information therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to information set forth in the Proxy Statement under the heading "Proposal No. 1 -- Election of Directors -- Executive Officers and Directors." The information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to information set forth in the Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to information set forth in the Proxy Statement under the heading "Executive Compensation and Other Matters." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to information set forth in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to information set forth in the Proxy Statement under the heading "Certain Transactions." 18 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS: Report of Independent Public Accountants Consolidated Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996 Consolidated Balance Sheets as of September 30, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Supplementary Data: Quarterly Financial Data (unaudited) 2. FINANCIAL STATEMENT SCHEDULES: Report of Independent Public Accountants Schedule II -- Valuation and Qualifying Accounts 3. EXHIBITS: The exhibits which are filed with this Form 10-K, or incorporated herein by reference, are set forth in the Exhibit Index, which immediately precedes the exhibits to this Report. (b)REPORTS ON FORM 8-K DURING THE QUARTER ENDED SEPTEMBER 30, 1998 The Company filed no report on Form 8-K during the quarter ended September 30, 1998. 19 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAYTEL MEDICAL CORPORATION Dated: December 28, 1998 By: /s/ RICHARD F. BADER ------------------------------------ Richard F. Bader Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD F. BADER Chairman of the Board and December 28, 1998 - ----------------------------------------------------- Chief Executive Officer (Richard F. Bader) (Principal Executive Officer) /s/ ALLAN ZINBERG President, Chief Operating December 28, 1998 - ----------------------------------------------------- Officer and Director (Allan Zinberg) /s/ E. PAYSON SMITH, JR. Senior Vice President and December 28, 1998 - ----------------------------------------------------- Chief Financial Officer (E. Payson Smith, Jr.) (Principal Financial and Accounting Officer) /s/ DAVID E. WERTHEIMER Senior Vice President, December 28, 1998 - ----------------------------------------------------- Development, and Director (David E. Wertheimer) /s/ JOSEPH T. SEBASTIANELLI Director December 28, 1998 - ----------------------------------------------------- (Joseph T. Sebastianelli) Director December 28, 1998 - ----------------------------------------------------- (Gene I. Miller) /s/ THOMAS J. FOGARTY Director December 28, 1998 - ----------------------------------------------------- (Thomas J. Fogarty)
20 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Board of Directors and Stockholders of Raytel Medical Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Raytel Medical Corporation and Subsidiaries included in this Form 10-K, and have issued our report thereon dated November 12, 1998. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements. The information reflected on the schedule has been subjected to the auditing procedures applied in the audits of the basic financial data, and in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP -------------------------------------- Arthur Andersen LLP Hartford, Connecticut November 12, 1998 21 23 SCHEDULE II RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30,1998, 1997 AND 1996
BALANCE AT CHARGED TO BEGINNING COST AND BALANCE AT OF YEAR EXPENSES OTHER(1) DEDUCTIONS END OF YEAR ---------- ---------- ---------- ----------- ----------- DESCRIPTION September 30, 1998 Allowance for doubtful accounts............... $6,189,000 $5,767,000 $(4,863,000) $7,093,000 September 30, 1997 Allowance for doubtful accounts............... $5,855,000 $5,387,000 $1,946,000 $(6,999,000) $6,189,000 September 30, 1996 Allowance for doubtful Accounts............... $7,709,000 $5,352,000 $(7,206,000) $5,855,000
- --------------- (1) The majority represents a reserve acquired in connection with the purchase of CVI on August 15, 1997. 22 24 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 2.1(1) Stock Purchase Agreement, dated as of August 11, 1997, by and among Raytel Medical Corporation, Cardiovascular Ventures, Inc. ("CVI") and the stockholders of CVI, together with the form of the Escrow Agreement attached thereto as Exhibit B and the form of the Contingent Promissory Note attached thereto as Exhibit M. 3.1(2) Restated Certificate of Incorporation of the Registrant. 3.2(3) Bylaws of the Registrant, as amended. 4.1(3) Rights Agreement dated as of August 14, 1998 between the Registrant and BankBoston N.A., as Rights Agent *10.1(4) 1983 Incentive Stock Option Plan, as amended. *10.2(4) 1990 Stock Option Plan, as amended. *10.3(4) 1995 Outside Directors Stock Option Plan. *10.5(4) Executive Deferred Compensation Plan. *10.7(4) Form of Indemnity Agreement for officers and directors. *10.8(4) Employment Agreement dated September 28, 1995 between the Registrant and Richard F. Bader. *10.9(4) Employment Agreement dated September 28, 1995 between the Registrant and Allan Zinberg. *10.10(4) Employment Agreement dated September 28, 1995 between the Registrant and E. Payson Smith, Jr. 10.22(4) Lease Agreement dated March 6, 1992 between the Registrant and Peninsula Office Park, as amended. 10.23(4) Lease dated August 27, 1993 between the Registrant and USGC Joint Venture. 10.24(4) Agreement of Lease dated July 22, 1983 between the Registrant and C.E. Towers Co., as amended, with Lease Assignment and Assumption Agreement dated February 26, 1993 between the Registrant and Medtronic, Inc. and Consent of C.E. Towers Co. dated February 12, 1993. 10.25(4) Letter of Intent dated May 31, 1995 between the Registrant and Stanford Health Services and related letter dated June 12, 1995 from Bruce A. Reitz, M.D. +10.26(4) American Diagnostics and Management, Inc. Diagnostic Catheterization Services Agreement dated September 2, 1992 between American Diagnostics And Management, Inc. ("ADAM") and Southmore Medical Center, as assumed from ADAM by Registrant. +10.27(4) American Diagnostics And Management, Inc. Diagnostic Catheterization Services Agreement dated June 10, 1993 between ADAM and Southmore Medical Center, as assumed from ADAM by Registrant. 10.28(4) Joint Venture Agreement dated March 3, 1988 between Medical Imaging Partners, L.P. and California Medical Imaging Services, Inc., as amended, and related agreements. 10.29(4) Joint Venture Agreement dated November 25, 1987 between Medical Imaging Partners, L.P. and Mastercare Diagnostic Limited Partners, as amended, and related agreements. 10.30(4) MRI Diagnostic Partners I, L.P. 1986 Limited Partnership Agreement dated December 31, 1986, and related agreements and MRI Building Partners, L.P. 1986 Agreement of Limited Partnership dated December 31, 1986. +10.34(5) Cardiac Catheterization Facility and Administrative Services Agreement dated January 10, 1996 between the Company and Stanford Health Services. +10.35(6) Letter Agreement dated January 9, 1996 between the Company and International Philanthropic Hospital Foundation, doing business as Granada Hills Community Hospital.
25
EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- +10.36(7) Cardiac Catheterization Facility and Administrative Services Agreement dated January 10, 1996 between the Company and Stanford Health Services. +10.38(9) Master Transaction Agreement, dated as of August 21, 1996, but effective as of September 18, 1996, between and among Raytel Medical Corporation, Raytel Texas Physician Services, Inc., Raytel Southeast Management, L.P., Southeast Texas Cardiology Associates, P.A., Southeast Texas Cardiology Associates II, P.A., Rodolfo P. Sotolongo, M.D., Wayne S. Margolis, M.D., Michael L. Smith, M.D., and Miguel Castellanos, M.D. Reference is made to Exhibit 2.1. +10.39(10) Agreement for the Purchase and Sale of Assets, dated as of August 21, 1996, but effective as of September 18, 1996, between and among Raytel Medical Corporation, Raytel Texas Physician Services, Inc., Raytel Southeast Management, L.P., Southeast Texas Cardiology Associates, P.A., Southeast Texas Cardiology Associates II, P.A., Rodolfo P. Sotolongo, M.D., Wayne S. Margolis, M.D., and Michael L. Smith, M.D. Reference is made to Exhibit 2.2. +10.40(11) Management Services Agreement, dated and effective as of September 18, 1996, between Cardiology Management Partnership, a Texas general partnership, and Southeast Texas Cardiology Associates II, P.A., as assigned to Raytel Southeast Management, L.P. Reference is made to Exhibit 2.3. *10.41(12) Employee Stock Purchase Plan dated May 8, 1996 10.42(12) Amended and Restated Credit Agreement and form of Promissory Note dated August 14, 1996 among the Registrant, Bank of Boston Connecticut and Banque Paribas, and Bank of Boston Connecticut, as agent. 10.43(12) Promissory Note in the amount of $15,000,000 between the Registrant and Bank of Boston Connecticut dated September 2, 1996. 10.44(12) Promissory Note in the amount of $10,000,000 between the Registrant and Banque Paribas dated September 2, 1996. 10.45(13) First Amendment to Amended and Restated Credit Agreement dated June 4, 1997 among the Registrant, Bank of Boston Connecticut and Banque Paribas, and Bank of Boston Connecticut, as agent. 10.46(13) Second Amendment to Amended and Restated Credit Agreement, dated September 26, 1997 among the Registrant, Bank of Boston Connecticut and Banque Paribas, and Bank of Boston Connecticut, as agent. 10.47(13) Promissory Note in the amount of $27,000,000 between the Registrant and Bank of Boston Connecticut dated September 26, 1997. 10.48(13) Promissory Note in the amount of $18,000,000 between the Registrant and Banque Paribas dated September 26, 1997. 10.49(14) Stock Purchase Agreement, dated as of August 11, 1997, by and among Raytel Medical Corporation, Cardiovascular Ventures, Inc. and the stockholders of CVI, together with the form of the Escrow Agreement attached thereto as Exhibit B and the form of the Contingent Promissory Note attached thereto as Exhibit M. 10.50(13) Noncompetition Agreement, dated as of August 15, 1997, by and between David E. Wertheimer and Raytel Medical Corporation *10.51(13) Employment Agreement, dated as of January 1, 1996, by and between David E. Wertheimer, M.D., and Heart Institute of Port St. Lucie, Inc., an indirect wholly-owned subsidiary of Registrant as a result of the CVI acquisition. *10.52(15) Employment Agreement dated as of March 1, 1998, by and between Swapan Sen and Raytel Medical Corporation.
26
EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- *10.53(16) Employment Agreement dated as of March 1, 1998, by and between F. David Rollo, M.D., Ph.D., and Raytel Medical Corporation. *10.54(17) Employment Agreement dated as of March 1, 1998, by and between Michael O. Kokesh and Raytel Medical Corporation. 10.55 Third Amendment to Amended and Restated Credit Agreement, dated July 24, 1998 among the Registrant, Bank of Boston Connecticut and Banque Paribas, and BankBoston, as agent. 10.56 Succession Agreement, dated July 1, 1998, by and among David E. Wertheimer, M.D., Advanced Magnetic Resonance Imaging, P.C., Raytel Medical Corporation and Raytel Imaging Holdings, Inc. as General Partner for Forest Hills Imaging Venture. 10.57 Succession Agreement, dated February 3, 1998, by and among F. David Rollo, M.D., Raytel Medical Group, Inc., P.C., Raytel Medical Corporation and Raytel California Physician Services, Inc. 13.1 Portions of Annual Report to Stockholders incorporated by reference in this Report on Form 10-K. 21.1 List of subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP. 27 Financial Data Schedule
- --------------- * Constitutes a management contract or compensatory plan required to be filed pursuant to Item 14(c) of Form 10-K. + Confidential treatment has been granted as to a portion of this Exhibit. (1) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-Q Report for the quarter ended December 31, 1995 (the "December 1995 Form 10-Q"). (2) Incorporated by reference to Exhibit 7 to the Registrant's Form 8-K Report filed on October 23, 1998 (the "October 1998 Form 8-K"). (3) Incorporated by reference to Exhibit 1 to the October 1998 Form 8-K. (4) Incorporated by reference to the identically numbered exhibit to the Registrant's Registration Statement on Form S-1, No. 33-97860, which became effective on November 30, 1995 (the "1995 Registration Statement"). (5) Incorporated by reference to Exhibit 10.1 to the December 1995 Form 10-Q. (6) Incorporated by reference to Exhibit 10.2 to the December 1995 Form 10-Q. (7) Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q Report for the quarter ended June 30, 1996 (the "June 1996 Form 10-Q"). (8) Incorporated by reference to Exhibit 10.2 to the June 1996 Form 10-Q. (9) Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K Report filed on October 3, 1996 (the "October 1996 Form 8-K"). (10) Incorporated by reference to Exhibit 2.2 to the October 1996 Form 8-K. (11) Incorporated by reference to Exhibit 2.3 to the October 1996 Form 8-K. (12) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-K Report for the year ended September 30, 1996. (13) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-K Report for the year ended September 30, 1997. 27 (14) Incorporated by reference to Exhibit 2.1 to the August 1997 Form 8-K. (15) Incorporated by reference to Exhibit 2.1 to the March 1998 Form 10-Q. (16) Incorporated by reference to Exhibit 2.1 to the March 1998 Form 10-Q. (17) Incorporated by reference to Exhibit 2.1 to the March 1998 Form 10-Q. EX-10.55 2 THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT 1 THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT This THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "AMENDMENT") dated as of July 24, 1998, is by and among Raytel Medical Corporation (the "BORROWER"), BankBoston, N.A., formerly known as Bank of Boston Connecticut ("BANKBOSTON") and Banque Paribas (collectively, the "BANKS") and BankBoston, as agent for the Banks (in such capacity, the "AGENT"). W I T N E S S E T H: WHEREAS, the Borrower, the Banks and the Agent entered into a certain Amended and Restated Credit Agreement dated as of August 14, 1996, as amended by the First Amendment to Amended and Restated Credit Agreement dated as of June 4, 1997 and by the Second Amendment to Amended and Restated Credit Agreement dated as of September 26, 1997 (as amended from time to time, the "CREDIT AGREEMENT"); and WHEREAS, the Borrower has requested that the Credit Agreement be amended in certain respects; and WHEREAS, the Agent and the Banks have agreed to amend the Credit Agreement on the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS. Capitalized terms used herein without definition that are defined in the Credit Agreement shall have the same meanings herein as therein. SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats on and as of the date hereof the representations and warranties made by it in the Credit Agreement, provided that all references therein to the Credit Agreement shall refer to the Credit Agreement as amended hereby. SECTION 3. RATIFICATION, ETC. Except as expressly amended hereby, the Credit Agreement and all documents, instruments and agreements related thereto are hereby ratified and confirmed in all respects and shall continue in full force and effect. This Amendment and the Credit Agreement shall hereafter be read and construed together as a single document, and all references in the Credit Agreement or any related agreement or instrument to the Credit Agreement shall hereafter refer to the Credit Agreement as amended by this Amendment. 2 -2- SECTION 4. AMENDMENTS TO CREDIT AGREEMENT. SECTION 4.1. AMENDMENT TO SECTION 10.3. Section 10.3 of the Credit Agreement is hereby amended in its entirety to read as follows: "SECTION 10.3 CONSOLIDATED TOTAL FUNDED DEBT TO EBITDA. The Borrower will not permit the ratio of Consolidated Total Funded Debt of the Borrower and its Subsidiaries to Earnings Before Interest and Taxes, Depreciation and Amortization of the Borrower and its Subsidiaries for any period consisting of four (4) consecutive fiscal quarters of the Borrower ending after the Effective Date to exceed 2.5:1.0." SECTION 4.2. AMENDMENTS TO SCHEDULE 2. (a) The definition of "Consolidated Total Funded Debt" appearing in Schedule 2 of the Credit Agreement is hereby amended in its entirety to read as follows: "Consolidated Total Funded Debt. As to any Person and whether recourse is secured by or is otherwise available against all or only a portion of the assets of such Person and whether or not contingent, but without duplication: (i) every obligation of such Person for money borrowed, (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses, (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (including securities repurchase agreements but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith), (v) every obligation of such Person under any Capitalized Lease, (vi) every obligation of such Person under any lease (a "synthetic lease") treated as an operating lease under generally 3 -3- accepted accounting principles and as a loan or financing for U.S. income tax purposes, (vii) all sales by such Person of (A) accounts or general intangibles for money due or to become due, (B) chattel paper, instruments or documents creating or evidencing a right to payment of money or (C) other receivables (collectively "receivables"), whether pursuant to a purchase facility or otherwise, other than in connection with the disposition of the business operations of such Person relating thereto or a disposition of defaulted receivables for collection and not as a financing arrangement, and together with any obligation of such Person to pay any discount, interest, fees, indemnities, penalties, recourse, expenses or other amounts in connection therewith, (viii) every obligation of such Person (an "equity related purchase obligation") to purchase, redeem, retire or otherwise acquire for value any shares of capital stock of any class issued by such Person, any warrants, options or other rights to acquire any such shares, or any rights measured by the value of such shares, warrants, options or other rights, (ix) every obligation of such Person under any forward contract, futures contract, swap, option or other financing agreement or arrangement (including, without limitation, caps, floors, collars and similar agreements), the value of which is dependent upon interest rates, currency exchange rates, commodities or other indices (a "derivative contract"), (x) every obligation in respect of Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent that such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except (1) to the extent that the terms of such Indebtedness provide that such Person is not liable therefor and such terms are enforceable under applicable law and (2) any obligation arising in connection with the Joint Ventures, (xi) every obligation, contingent or otherwise, of such Person guaranteeing, or having the economic effect of guarantying or otherwise acting as surety for, any obligation of a type described in any of clauses (i) through (x) (the "primary obligation") of another Person (the "primary obligor"), in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person (A) to purchase or pay (or advance or supply funds for the 4 -4- purchase of) any security for the payment of such primary obligation, (B) to purchase property, securities or services for the purpose of assuring the payment of such primary obligation, or (C) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such primary obligation. The "amount" or "principal amount" of any Indebtedness at any time of determination represented by (u) any Indebtedness, issued at a price that is less than the principal amount at maturity thereof, shall be the amount of the liability in respect thereof determined in accordance with generally accepted accounting principles, (v) any Capitalized Lease shall be the principal component of the aggregate of the rentals obligation under such Capitalized Lease payable over the term thereof that is not subject to termination by the lessee, (w) any sale of receivables shall be the amount of unrecovered capital or principal investment of the purchaser (other than the Borrower or any of its wholly-owned Subsidiaries) thereof, excluding amounts representative of yield or interest earned on such investment, (x) any synthetic lease shall be the stipulated loss value, termination value or other equivalent amount, (y) any derivative contract shall be the maximum amount of any termination or loss payment required to be paid by such Person if such derivative contract were, at the time of determination, to be terminated by reason of any event of default or early termination event thereunder, whether or not such event of default or early termination event has in fact occurred and (z) any equity related purchase obligation shall be the maximum fixed redemption or purchase price thereof inclusive of any accrued and unpaid dividends to be comprised in such redemption or purchase price." (b) The following new definition of "Earnings Before Interest and Taxes, Depreciation and Amortization" is hereby added to Schedule 2 of the Credit Agreement in alphabetical order to read as follows: "Earnings Before Interest and Taxes, Depreciation and Amortization. For any period, an amount equal to the sum of (a) the consolidated earnings (or loss) from the operations of any Person for such period, after all expenses and other proper charges but before payment or provision for any income taxes or interest expense for such period, plus (b) depreciation, amortization and other non-cash charges for such period, all determined in accordance with generally accepted accounting principles." SECTION 5. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment is subject to the prior satisfaction, on or before the date hereof, of the following conditions precedent (the date of such satisfaction herein referred to as the "AMENDMENT EFFECTIVE DATE"): 5 -5- (a) Representations and Warranties. The representations and warranties contained in paragraph 7 of the Credit Agreement shall have been correct at and as of the date made. Such representations and warranties shall also be correct at and as of the date thereof, except to the extent that such representations and warranties expressly related to a specific date or were based on facts which have changes in the ordinary course of business, which changes, either singly or in the aggregate, are not materially adverse. (b) No Event of Default. There shall exist no Event of Default or condition which, with either or both the giving of notice of the lapse of time, would result in an Event of Default upon the execution and delivery of this Amendment. (c) Corporate Action. The Banks and the Agent shall have received evidence reasonably satisfactory to the Bank and the Agent that all requisite corporate action necessary for the valid execution, delivery and performance by the Borrower and Subsidiaries of this Amendment and all other instruments and documents delivered by the Borrower and Subsidiaries in connection herewith. (d) Delivery of Amendment. The parties hereto shall have executed and delivered this Amendment in form and substance satisfactory to the Banks and the Agent. SECTION 6. EFFECTIVE DATE This Amendment shall become effective among the parties hereto as of the Amendment Effective Date. Until the Amendment Effective Date, the terms of the Credit Agreement prior to its amendment hereby shall remain in full force and effect. SECTION 7. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts taken together shall be deemed to constitute one and the same instrument. 6 -6- IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers, as of the day and year first above written. RAYTEL MEDICAL CORPORATION By: /s/ E. Payson Smith, Jr. -------------------------- Its: Chief Financial Officer BANQUE PARIBAS, now known as Paribas By: /s/ Clare Bailhe -------------------------- Its: Director BANKBOSTON, N.A., individually and as Agent By: /s/ Christopher Phelan -------------------------- Its: Vice President Each of the undersigned Subsidiaries acknowledges and accepts the foregoing and ratifies and confirms in all respects such Subsidiary's obligations under the Guarantees: RAYTEL CARDIAC SERVICES, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer 7 -7- RAYTEL MEDICAL IMAGING, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer MEDICAL IMAGING PARTNERS L.P. By: RAYTEL MEDICAL IMAGING, INC., Its General Partner By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer RAYTEL IMAGING HOLDINGS, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer RAYTEL CARDIOVASCULAR LABS, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer RAYTEL IMAGING NETWORK, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer RAYTEL IMAGING WEST INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer RAYTEL IMAGING EAST INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer 8 -8- RAYTEL IMAGING MID-ATLANTIC INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer RAYTEL GRANADA HILLS INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer CARDIOVASCULAR VENTURES, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer RAYTEL MANAGEMENT HOLDINGS, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer RAYTEL CALIFORNIA PHYSICIAN SERVICES, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer 9 -9- RAYTEL TEXAS PHYSICIAN SERVICES, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer CARDIOVASCULAR VENTURES OF TEXAS, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer CARDIOVASCULAR VENTURES OF WEST HOUSTON, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer CARDIOVASCULAR VENTURES OF CENTRAL SAN ANTONIO, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer CARDIOVASCULAR VENTURES OF TOWSON, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer 10 -10- CARDIOVASCULAR CENTERS OF PORT ST. LUCIE, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer CARDIOVASCULAR VENTURES OF ALEXANDRIA, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer CARDIOVASCULAR VENTURES OF EAST NEW ORLEANS, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer FORT WORTH CARDIAC LABORATORY, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer PHYSICIAN PARTNERS OF PORT ST. LUCIE, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer 11 -11- HEART INSTITUTE OF PORT ST. LUCIE, INC. By: /s/ E. Payson Smith, Jr. --------------------------- E. Payson Smith, Jr. Its Chief Financial Officer EX-10.56 3 SUCCESSION AGREEMENT, DATED JULY 1, 1998 1 SUCCESSION AGREEMENT This Succession Agreement (the "Agreement") is made and entered into this 1st day of July, 1998 by and among David E. Wertheimer, M.D. ("Dr. Wertheimer"), and the Advanced Magnetic Resonance Imaging, PC, a New York professional corporation (the "Medical Group"). RECITALS This Agreement is made with reference to the following facts: A. The Medical Group is a professional medical corporation (a "Professional Medical Corporation") within the meaning of the New York Professional Corporation Act (the "Professional Corporation Act"). B. The Medical Group has authorized stock consisting of 1,000 shares. The Medical Group currently has one hundred (100 shares issued and outstanding. C. The legal and beneficial owners of all of the issued and outstanding shares of the Medical Group (the "Shares") is David E. Wertheimer, M.D. (100 Shares). D. The only member of the Board of Directors of the Medical Group is David E. Wertheimer, M.D. (hereinafter referred to as the "Director"). E. The parties hereto desire to promote their mutual interests by imposing certain restrictions on the sale, transfer or other disposition of the shares of the Medical Group and provide for certain disposition of the shares in the event of the death, permanent disability, permanent incapacity or the termination of employment of Dr. Wertheimer, thus insuring the continued successful operation of the business of the Medical Group through continuous harmonious management and share ownership. Further, the parties hereto desire to set forth certain of their understandings with reference to other matters pertaining to the Medical Group. F. The Medical Group is entering into that certain management agreement (the "Management Agreement") dated as of the date hereof, between the Medical Group and Forest Hills Imaging Venture, a New York joint venture (hereinafter the "Joint Venture" or "Raytel"). The parties hereto acknowledge that, but for the execution of this Agreement, neither the Joint Venture nor Raytel would enter into the Management Agreement. G. Each of the parties has agreed to be bound by the covenants and agreements set forth herein, all of which are for the mutual benefit of the parties hereto, collectively and individually. -1- 2 NOW THEREFORE, the parties hereto hereby agree as follows: AGREEMENT 1. GENERAL PURPOSE: CONSTRUCTIONS. The purpose of this Agreement is to provide, in the event of the death or permanent disability or permanent incapacity of Dr. Wertheimer, or the termination (for any reason whatsoever) of Dr. Wertheimer, as an employee of Raytel Medical Corporation (collectively, "Succession Events") for (i) the orderly transfer of ownership of the stock of the Medical Group and (ii) the directors of the Medical Group. In connection therewith, it is the intent of the parties hereto that: (a) The Medical Group maintain its continuous existence as a Professional Medical Corporation. (b) In the event of a Succession Event, the Medical Group shall have at least one (1) shareholder. (c) The Medical Group shall continue to honor the Management Agreement. 2. EVENTS PRIOR TO SUCCESSION EVENTS. 2.1 Dr. Wertheimer agrees to maintain at all times throughout the Medical Group's existence a Board of Directors of one (1) member who is a person licensed to practice medicine in New York and such licensed persons shall be designated as a licensed physician in accordance with the New York Professional Corporation Act. In addition, each member of the Board of Directors must not be a "disqualified person" as defined in the Professional Corporation Act as being legally disqualified (temporary or permanently) or not licensed to render professional services in the medical industry. A licensed person who is legally qualified is hereinafter referred to as a "Qualified Medical Professional". Dr. Wertheimer (or any other shareholder who becomes a party hereto (a "Successor Shareholder"), will vote only for directors who are Qualified Medical Professionals. 2.2 Dr. Wertheimer agrees that he will vote the Shares to elect at least one (1) member to the Board of Directors, who will be a Qualified Medical Professional. Initially, Dr. Wertheimer has voted his Shares to elect himself to the Board of Directors of the Medical Group. If another person is elected to succeed any him, such successor shall be a Qualified Medical professional and qualified to serve on the Board of Directors. 2.3 During the term of this Agreement, Dr. Wertheimer shall not sell, transfer, pledge or otherwise hypothecate the Shares. The Shares will be marked with a restrictive legend with respect thereto. -2- 3 2.4 Dr. Wertheimer agrees to, and shall cause all directors of the Medical Group to, take all steps necessary to ensure that the Medical Group complies with all provisions of the Professional Corporation Act and remains in good standing as a Professional Corporation in the State of New York. 3. EVENT OF DEATH. 3.1 Shareholder Issues. If Dr. Wertheimer is the remaining sole shareholder of the Medical Group, then in the event of death of the last survivor, if legal counsel for the Medical Group determines that ownership of the Shares by the representative or successor-in-interest to the survivor is not permitted or legal under the Professional Corporation Act, then such Shares shall be sold and transferred to the Medical Group in accordance with Article III of the Bylaws of the Medical Group. In such event, the Medical Group shall, in order to have one (1) shareholder, do one of the following: (a) The Medical Group shall sell one hundred (100) newly issued shares to Thomas J. Fogarty, M.D., or his designee, who shall be designated the "Successor Shareholder" hereunder, and shall agree to purchase such shares; provided that such sale shall be consummated only if Dr. Fogarty or his designee is a Qualified Medical Professional on the Board of Directors of Raytel Medical Corporation; or (b) If Dr. Fogarty or his designee is not a member of the Board of Directors of Raytel Medical Corporation , then the Medical Group shall sell one hundred (100) newly issued shares to a Qualified Medical Professional who is a member of the Board of Directors of Raytel Medical Corporation. The Successor Shareholder shall be selected in the manner set forth in sub-paragraph (d) herein. Such Successor Shareholder shall become a party to this Agreement and agree to be bound by the terms hereof. (c) All purchases of shares hereunder shall be at a price of Ten Dollars ($10.00) per share. (d) Each Successor Shareholder shall be a Qualified Medical Professional, and each Successor Shareholder (other than the Personal Representative of the Estate of Dr. Wertheimer) shall also be a member of the Board of Directors of Raytel Medical Corporation. Each Successor Shareholder shall be designated as being eligible to be a shareholder and director of the Medical Group by the Board of Directors of Raytel Medical Corporation. -3- 4 3.2 Director Issues. (a) Dr. Fogarty, or his designee, shall agree that when he becomes the Successor Shareholder and a party to this Agreement in accordance with the provisions of paragraph 3.1(d), herein above, that in the event of the death of Dr. Wertheimer, he shall fill the vacancy on the Board of Directors of the Medical Group by electing the Successor Shareholder, selected pursuant to paragraph 3.1(b), above to the Board. (b) In the event that Dr. Fogarty predeceases Dr. Wertheimer or becomes disqualified from becoming the Successor Shareholder in accordance with the terms set forth in this Agreement, then in such event, Dr. Wertheimer (if he is still the sole stockholder) will appoint either one (1) or more Qualified Medical Professionals to the Board of Directors of the Medical Group as the replacement for Dr. Fogarty, hereunder, pursuant to the requirements of paragraph 3.1(d). (c) Each Successor Shareholder shall exert good faith best efforts to vote his or her shares hereunder to elect all Successor Shareholders to the Board of Directors of the Medical Group; provided, however, no Successor Shareholder shall be obligated to elect any such person if he or she believes it is not in the best interest of the Medical Group. In such event, the Successor Shareholder shall select a person from among the qualified and licensed professionals in the medical industry in New York who is reasonably acceptable to the Board of Directors of Raytel Medical Corporation. 4. PERMANENT DISABILITY AND PERMANENT INCAPACITY. 4.1 Shareholder Issues. In the event of the permanent disability or permanent incapacity of Dr. Wertheimer as determined by a recognized medical authority, then the Shares shall be sold and transferred to the Medical Group in accordance with Article III of the Bylaws of the Medical Group. In such event, the Medical Group shall sell newly issued shares to a Successor Shareholder in the manner set forth in paragraph 3.1 herein. 4.2 Director Issues. Within thirty (30) days from the sale of shares pursuant to this section 4, a special meeting of the shareholder shall be called in accordance with Article IV, Section 2 of the Bylaws of the Medical Group to elect new directors to the Board. -4- 5 5. TERMINATION OF DR. WERTHEIMER AS AN OFFICER AND RESIGNATION AS DIRECTOR OF MEDICAL GROUP. 5.1 Shareholder Issues. In the event of: (a) voluntary resignation by Dr. Wertheimer as an officer and director of the Medical Group; (b) mutual agreement of termination by Dr. Wertheimer and Raytel Medical Corporation resulting in his resignation as an officer of Raytel Medical Corporation; (c) termination by Heart Institute of Port St. Lucie, Inc. of the employment agreement between Dr. Wertheimer and Heart Institute of Port St. Lucie, Inc., dated January 1, 1996, as the same may be amended and/or renewed from time to time; the Corporation shall sell one hundred (100) newly issued shares to Thomas J. Fogarty, M.D., or his designee, who shall then become the Successor Shareholder in the manner set forth in paragraph 3.1(b) at a price of Ten Dollars ($10.00) per share. 5.2 Director Issues. Within thirty (30) days from the sale of shares pursuant to this section 5, a special meeting of the shareholder shall be called in accordance with Article IV, Section 2 of the Bylaws of the Medical Group to elect directors. 6. EVENTS AFFECTING SUCCESSOR SHAREHOLDERS. Anytime there is only one (1) shareholder in the Medical Group, in the event of death, permanent disability, permanent incapacity of such Successor Shareholder, the disqualification of such Shareholder as a Qualified Medical Professional or the removal of such Successor Shareholder who is a director from the Medical Group's Board of Directors in accordance with the provisions of the Medical Group's Bylaws, all shares held by such Successor Shareholder shall be sold and transferred to the Medical Group in accordance with Article III of the Medical Group's Bylaws, and the Medical Group shall sell shares to a new Successor Shareholder in the manner set forth in paragraph 3.1(b). Within thirty (30) days from the sale of shares to a Successor Shareholder pursuant to this paragraph 6, a special meeting of the shareholder shall be called in accordance with Article IV, Section 2 of the Bylaws of the Medical Group to elect directors. 7. TERM AND AMENDMENT TO BYLAWS. This Agreement shall be in full force and effect for so long as the Management Agreement is in full force and effect. This Agreement shall terminate upon the earlier termination of the Management Agreement (whether it be the Initial Term or any Renewal Term as defined therein). Dr. Wertheimer and each Successor Shareholder agree that they will not amend the Bylaws of the Medical Group in -5- 6 a manner adverse to the purposes set forth and specified in paragraphs 1, 4.1, 5.2 or 6 hereof so long as this Agreement is in effect. 8. COMMUNITY PROPERTY INTEREST. It is intended by this Agreement that the parties hereto shall subject their entire interest in the shares owned by them to the terms of this Agreement, irrespective of any community property interest of any spouse. 9. DELIVERY OF SHARES, STOCK ASSIGNMENTS. Upon the purchase of any shares hereunder, the Medical Group or the person selling the shares shall deliver to the Medical Group and/or the purchasing shareholder, as the case may be, the stock certificate or certificate evidencing the shares purchased, together with all necessary or appropriate stock assignments separate from certificate. 10. FURTHER AGREEMENTS. 10.1 Party to Agreement. Any Successor Shareholder shall become a party to this Agreement and agree to be bound by the term hereof. 10.2 Transfer of Shares. During the term of this Agreement, a Successor Shareholder shall not sell, transfer, pledge or otherwise hypothecate his/her shares. The shares will be marked with a restrictive legend with respect thereto. 10.3 Compliance. Any Successive Shareholder agrees to, and shall cause all directors of the Medical Group to, take all steps necessary to ensure that the Medical Group complies with all provisions of the Professional Corporation Act and remains in good standing as a Professional Medical Corporation in the State of New York. 11. COPY OF AGREEMENT. The Medical Group shall keep a copy of this Agreement on file in the principal business office of the Medical Group. 12. NOTICE.Any and all notices or other matters required or permitted by this Agreement to be served on, given to or delivered to a party shall in writing and shall be deemed duly served, given or delivered when personally delivered to such party, or in lieu of such personal service, when deposited in the United States mail, certified, postage prepaid, or by facsimile transmission followed by mail delivery, addressed to such person as follows: To:"Raytel" or Forest Hills Imaging Venture" To: "Medical Group" or "Dr. Wertheimer" Swapan Sen, Senior Vice President David E. Wertheimer, M.D., President Forest Hills Imaging Venture Advanced Magnetic Resonance Imaging, PC 7 Waterside Crossing 2755 Campus Drive, Suite 200 Windsor, CT 06095 San Mateo, CA 94403
-6- 7 Any party hereto may change its address for the purpose of receiving notices, demands and other communications as herein provided by a written notice given in the manner aforesaid to the other parties hereto. 13. ATTORNEYS' FEES. Should any parties hereto institute any action or proceeding at law or in equity or in connection with an arbitration, to enforce any provision of this Agreement, including an action for declaratory relief, or for damages by reason of an alleged breach of any provision of this Agreement, or otherwise in connection with this Agreement, or any provision thereof, the prevailing party shall be entitled to recover from the losing party or parties reasonable attorneys' fees and costs for services rendered to the prevailing party in such action or proceeding. 14. MISCELLANEOUS. 14.1 Applicable Law. This Agreement shall, in all respects, be governed by the laws of the State of New York applicable to agreements executed and to be performed in New York. 14.2 Severability. Nothing contained herein shall be construed so as to require the commission of any act contrary to law, and wherever there is any conflict between any provisions contained herein and any present or future statute, law, ordinance or regulation, the latter shall prevail; but the provision of this Agreement which is affected shall be curtailed and limited only to the extent necessary to bring it in the requirements of the law. 14.3 Further Assurances. Each of the parties hereto shall execute and deliver any and all additional papers, documents, and other assurance, and shall do any and all acts and things reasonably necessary in connection with the performance of his or her obligations hereunder to carry out the intent of the parties hereto. 14.4 Modifications or Amendments. No amendment, change or modification of this Agreement shall be valid, unless in writing and signed by all of the parties hereto. 14.5 Entire Agreement. This Agreement constitutes the entire understanding and agreement of the parties with respect to its subject matter and any and all prior agreements, understandings or representations with respect to its subject matter are hereby terminated and canceled in their entirety and are of no further force or effect. 14.6 Non-Waiver. No Waiver by any party hereto for a breach of any provision of this Agreement shall constitute a waiver of any preceding or succeeding breach of the same or any other provision hereof. -7- 8 14.7 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14.8 Number and Gender. In this Agreement, the masculine, feminine or neuter gender, and the singular or plural number, shall each be deemed to include the other, whenever the context so requires. 14.9 Captions. The Captions appearing at the commencement of the sections hereof are descriptive only and for convenience in reference. Should there be any conflict between any such caption and the section at the head of which it appears, the section and not such caption shall control and govern in the construction of this Agreement. 14.10 Continued Tenure. The parties hereto acknowledge that nothing contained in this Agreement shall be deemed as a guarantee of continued tenure on the Board of Directors of the Medical Group. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. "Medical Group" Advanced Magnetic Resonance Imaging, PC David E. Wertheimer, M.D. a New York professional corporation By: /s/ David E. Wertheimer, M.D. By: /s/ David E. Wertheimer, M.D. ----------------------------- ----------------------------- David E. Wertheimer, M.D. David E. Wertheimer, M.D. Its: President Raytel Medical Corporation Forest Hills Imaging Venture a New York joint venture By: /s/ Swapan Sen By: /s/ Swapan Sen ----------------------------- ----------------------------- Swapan Sen Swapan Sen, Senior Vice President on behalf of Raytel Imaging Holdings, Inc. Its: Senior Vice President Its: General Partner
-8- EX-10.57 4 SUCCESSION AGREEMENT, DATED FEBRUARY 3, 1998 1 SUCCESSION AGREEMENT This Succession Agreement (the "Agreement") is made and entered into this 3rd day of February, 1998 by and among F. David Rollo, M.D. ("Dr. Rollo"), and the Raytel Medical Group, Ltd., a California professional corporation (the "Medical Group"). RECITALS This Agreement is made with reference to the following facts: A. The Medical Group is a professional medical corporation (a "Professional Medical Corporation") within the meaning of the California Moscone-Knox Professional Corporation Act (the "Professional Corporation Act"). B. The Medical Group has authorized stock consisting of 1,000 shares. The Medical Group currently has one hundred (100 shares issued and outstanding. C. The legal and beneficial owners of all of the issued and outstanding shares of the Medical Group (the "Shares") is F. David Rollo, M.D. (100 Shares). D. The only member of the Board of Directors of the Medical Group is F. David Rollo, M.D. (hereinafter referred to as the "Director"). E. The parties hereto desire to promote their mutual interests by imposing certain restrictions on the sale, transfer or other disposition of the shares of the Medical Group and provide for certain disposition of the shares in the event of the death, permanent disability, permanent incapacity or the termination of employment of Dr. Rollo, thus insuring the continued successful operation of the business of the Medical Group through continuous harmonious management and share ownership. Further, the parties hereto desire to set forth certain of their understandings with reference to other matters pertaining to the Medical Group. F. The Medical Group is entering into that certain management agreement (the "Management Agreement") dated as of the date hereof, between the Medical Group and Raytel California Physician Services, Inc., a Delaware corporation ("Raytel"). The parties hereto acknowledge that, but for the execution of this Agreement, Raytel would not enter into the Management Agreement. G. Each of the parties has agreed to be bound by the covenants and agreements set forth herein, all of which are for the mutual benefit of the parties hereto, collectively and individually. NOW THEREFORE, the parties hereto hereby agree as follows: 1 2 AGREEMENT 1. GENERAL PURPOSE: CONSTRUCTIONS. The purpose of this Agreement is to provide, in the event of the death or permanent disability or permanent incapacity of Dr. Rollo, or the termination (for any reason whatsoever) of Dr. Rollo, as an employee of Raytel Medical Corporation (collectively, "Succession Events") for (i) the orderly transfer of ownership of the stock of the Medical Group and (ii) the directors of the Medical Group. In connection therewith, it is the intent of the parties hereto that: (a) The Medical Group maintain its continuous existence as a Professional Medical Corporation. (b) In the event of a Succession Event, the Medical Group shall have at least one (1) shareholder. (c) The Medical Group shall continue to honor the Management Agreement. 2. EVENTS PRIOR TO SUCCESSION EVENTS. 2.1 Dr. Rollo agrees to maintain at all times throughout the Medical Group's existence a Board of Directors of one (1) member who is a person licensed to practice medicine in California and such licensed persons shall be designated as a licensed physician in accordance with the California Professional Corporation Act. In addition, each member of the Board of Directors must not be a "disqualified person" as defined in the Professional Corporation Act as being legally disqualified (temporary or permanently) or not licensed to render professional services in the medical industry. A licensed person who is legally qualified is hereinafter referred to as a "Qualified Medical Professional". Dr. Rollo (or any other shareholder who becomes a party hereto (a "Successor Shareholder"), will vote only for directors who are Qualified Medical Professionals. 2.2 Dr. Rollo agrees that he will vote the Shares to elect at least one (1) member to the Board of Directors, who will be a Qualified Medical Professional. Initially, Dr. Rollo has voted his Shares to elect himself to the Board of Directors of the Medical Group. If another person is elected to succeed any him, such successor shall be a Qualified Medical professional and qualified to serve on the Board of Directors. 2.3 During the term of this Agreement, Dr. Rollo shall not sell, transfer, pledge or otherwise hypothecate the Shares. The Shares will be marked with a restrictive legend with respect thereto. 2 3 2.4 Dr. Rollo agrees to, and shall cause all directors of the Medical Group to, take all steps necessary to ensure that the Medical Group complies with all provisions of the Professional Corporation Act and remains in good standing as a Professional Corporation in the State of California. 3. EVENT OF DEATH. 3.1 Shareholder Issues. If Dr. Rollo is the remaining sole shareholder of the Medical Group, then in the event of death of the last survivor, if legal counsel for the Medical Group determines that ownership of the Shares by the representative or successor-in-interest to the survivor is not permitted or legal under the Professional Corporation Act, then such Shares shall be sold and transferred to the Medical Group in accordance with Article III of the Bylaws of the Medical Group. In such event, the Medical Group shall, in order to have one (1) shareholder, do one of the following: (a) The Medical Group shall sell one hundred (100) newly issued shares to Thomas J. Fogarty, M.D., or his designee, who shall be designated the "Successor Shareholder" hereunder, and shall agree to purchase such shares; provided that such sale shall be consummated only if Dr. Fogarty or his designee is a Qualified Medical Professional on the Board of Directors of Raytel Medical Corporation; or (b) If Dr. Fogarty or his designee is not a member of the Board of Directors of Raytel Medical Corporation , then the Medical Group shall sell one hundred (100) newly issued shares to a Qualified Medical Professional who is a member of the Board of Directors of Raytel Medical Corporation. The Successor Shareholder shall be selected in the manner set forth in sub-paragraph (d) herein. Such Successor Shareholder shall become a party to this Agreement and agree to be bound by the terms hereof. (c) All purchases of shares hereunder shall be at a price of Ten Dollars ($10.00) per share. (d) Each Successor Shareholder shall be a Qualified Medical Professional, and each Successor Shareholder (other than the Personal Representative of the Estate of Dr. Rollo) shall also be a member of the Board of Directors of Raytel Medical Corporation. Each Successor Shareholder shall be designated as being eligible to be a shareholder and director of the Medical Group by the Board of Directors of Raytel Medical Corporation. 3 4 3.2 Director Issues. (a) Dr. Fogarty, or his designee, shall agree that when he becomes the Successor Shareholder and a party to this Agreement in accordance with the provisions of paragraph 3.1(d), herein above, that in the event of the death of Dr. Rollo, he shall fill the vacancy on the Board of Directors of the Medical Group by electing the Successor Shareholder, selected pursuant to paragraph 3.1(b), above to the Board. (b) In the event that Dr. Fogarty predeceases Dr. Rollo or becomes disqualified from becoming the Successor Shareholder in accordance with the terms set forth in this Agreement, then in such event, Dr. Rollo (if he is still the sole stockholder) will appoint either one (1) or more Qualified Medical Professionals to the Board of Directors of the Medical Group as the replacement for Dr. Fogarty, hereunder, pursuant to the requirements of paragraph 3.1(d). (c) Each Successor Shareholder shall exert good faith best efforts to vote his or her shares hereunder to elect all Successor Shareholders to the Board of Directors of the Medical Group; provided, however, no Successor Shareholder shall be obligated to elect any such person if he or she believes it is not in the best interest of the Medical Group. In such event, the Successor Shareholder shall select a person from among the qualified and licensed professionals in the medical industry in California who is reasonably acceptable to the Board of Directors of Raytel Medical Corporation. 4. PERMANENT DISABILITY AND PERMANENT INCAPACITY. 4.1 Shareholder Issues. In the event of the permanent disability or permanent incapacity of Dr. Rollo as determined by a recognized medical authority, then the Shares shall be sold and transferred to the Medical Group in accordance with Article III of the Bylaws of the Medical Group. In such event, the Medical Group shall sell newly issued shares to a Successor Shareholder in the manner set forth in paragraph 3.1 herein. 4.2 Director Issues. Within thirty (30) days from the sale of shares pursuant to this section 4, a special meeting of the shareholder shall be called in accordance with Article IV, Section 2 of the Bylaws of the Medical Group to elect new directors to the Board. 4 5 5. TERMINATION OF ROLLO AS OFFICER AND RESIGNATION AS DIRECTOR OF MEDICAL GROUP. 5.1 Shareholder Issues. In the event of: (a) voluntary resignation by Dr. Rollo as an officer and director of the Medical Group; (b) mutual agreement of termination by Dr. Rollo and Raytel Medical Corporation resulting in his resignation as an officer of Raytel Medical Corporation; (c) termination by Raytel Medical Corporation of the employment agreement between Dr. Rollo and Raytel Medical Corporation dated March 1, 1998, as the same may be amended and/or renewed from time to time; the Corporation shall sell one hundred (100) newly issued shares to Thomas J. Fogarty, M.D., or his designee, who shall then become the Successor Shareholder in the manner set forth in paragraph 3.1(b) at a price of Ten Dollars ($10.00) per share. 5.2 Director Issues. Within thirty (30) days from the sale of shares pursuant to this section 5, a special meeting of the shareholder shall be called in accordance with Article IV, Section 2 of the Bylaws of the Medical Group to elect directors. 6. EVENTS AFFECTING SUCCESSOR SHAREHOLDERS. Anytime there is only one (1) shareholder in the Medical Group, in the event of death, permanent disability, permanent incapacity of such Successor Shareholder, the disqualification of such Shareholder as a Qualified Medical Professional or the removal of such Successor Shareholder who is a director from the Medical Group's Board of Directors in accordance with the provisions of the Medical Group's Bylaws, all shares held by such Successor Shareholder shall be sold and transferred to the Medical Group in accordance with Article III of the Medical Group's Bylaws, and the Medical Group shall sell shares to a new Successor Shareholder in the manner set forth in paragraph 3.1(b). Within thirty (30) days from the sale of shares to a Successor Shareholder pursuant to this paragraph 6, a special meeting of the shareholder shall be called in accordance with Article IV, Section 2 of the Bylaws of the Medical Group to elect directors. 7. TERM AND AMENDMENT TO BYLAWS. This Agreement shall be in full force and effect for so long as the Management Agreement is in full force and effect. This Agreement shall terminate upon the earlier termination of the Management Agreement (whether it be the Initial Term or any Renewal Term as defined therein). Dr. Rollo and each Successor Shareholder agree that they will not amend the Bylaws of the Medical Group in a manner adverse to the purposes set forth and specified in paragraphs 1, 4.1, 5.2 or 6 hereof so long as this Agreement is in effect. 5 6 8. COMMUNITY PROPERTY INTEREST. It is intended by this Agreement that the parties hereto shall subject their entire interest in the shares owned by them to the terms of this Agreement, irrespective of any community property interest of any spouse. 9. DELIVERY OF SHARES, STOCK ASSIGNMENTS. Upon the purchase of any shares hereunder, the Medical Group or the person selling the shares shall deliver to the Medical Group and/or the purchasing shareholder, as the case may be, the stock certificate or certificate evidencing the shares purchased, together with all necessary or appropriate stock assignments separate from certificate. 10. FURTHER AGREEMENTS. 10.1 Party to Agreement. Any Successor Shareholder shall become a party to this Agreement and agree to be bound by the term hereof. 10.2 Transfer of Shares. During the term of this Agreement, a Successor Shareholder shall not sell, transfer, pledge or otherwise hypothecate his/her shares. The shares will be marked with a restrictive legend with respect thereto. 10.3 Compliance. Any Successive Shareholder agrees to, and shall cause all directors of the Medical Group to, take all steps necessary to ensure that the Medical Group complies with all provisions of the Professional Corporation Act and remains in good standing as a Professional Medical Corporation in the State of California. 11. COPY OF AGREEMENT. The Medical Group shall keep a copy of this Agreement on file in the principal business office of the Medical Group. 12. NOTICE.Any and all notices or other matters required or permitted by this Agreement to be served on, given to or delivered to a party shall in writing and shall be deemed duly served, given or delivered when personally delivered to such party, or in lieu of such personal service, when deposited in the United States mail, certified, postage prepaid, or by facsimile transmission followed by mail delivery, addressed to such person as follows: To: "Raytel" To: "Medical Group" or "Dr. Rollo" Swapan Sen, Senior Vice President F. David Rollo, M.D., President Raytel California Physician Services, Inc. Raytel Medical Group, Inc. 2755 Campus Drive, Suite 200 2755 Campus Drive, Suite 200 San Mateo, California 94403 San Mateo, California 94403
6 7 Any party hereto may change its address for the purpose of receiving notices, demands and other communications as herein provided by a written notice given in the manner aforesaid to the other parties hereto. 13. ATTORNEYS' FEES. Should any parties hereto institute any action or proceeding at law or in equity or in connection with an arbitration, to enforce any provision of this Agreement, including an action for declaratory relief, or for damages by reason of an alleged breach of any provision of this Agreement, or otherwise in connection with this Agreement, or any provision thereof, the prevailing party shall be entitled to recover from the losing party or parties reasonable attorneys' fees and costs for services rendered to the prevailing party in such action or proceeding. 14. MISCELLANEOUS. 14.1 Applicable Law. This Agreement shall, in all respects, be governed by the laws of the State of California applicable to agreements executed and to be performed in California. 14.2 Severability. Nothing contained herein shall be construed so as to require the commission of any act contrary to law, and wherever there is any conflict between any provisions contained herein and any present or future statute, law, ordinance or regulation, the latter shall prevail; but the provision of this Agreement which is affected shall be curtailed and limited only to the extent necessary to bring it in the requirements of the law. 14.3 Further Assurances. Each of the parties hereto shall execute and deliver any and all additional papers, documents, and other assurance, and shall do any and all acts and things reasonably necessary in connection with the performance of his or her obligations hereunder to carry out the intent of the parties hereto. 14.4 Modifications or Amendments. No amendment, change or modification of this Agreement shall be valid, unless in writing and signed by all of the parties hereto. 14.5 Entire Agreement. This Agreement constitutes the entire understanding and agreement of the parties with respect to its subject matter and any and all prior agreements, understandings or representations with respect to its subject matter are hereby terminated and canceled in their entirety and are of no further force or effect. 14.6 Non-Waiver. No Waiver by any party hereto for a breach of any provision of this Agreement shall constitute a waiver of any preceding or succeeding breach of the same or any other provision hereof. 14.7 Counterparts. This Agreement may be executed in one or more 7 8 counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14.8 Number and Gender. In this Agreement, the masculine, feminine or neuter gender, and the singular or plural number, shall each be deemed to include the other, whenever the context so requires. 14.9 Captions. The Captions appearing at the commencement of the sections hereof are descriptive only and for convenience in reference. Should there be any conflict between any such caption and the section at the head of which it appears, the section and not such caption shall control and govern in the construction of this Agreement. 14.10 Continued Tenure. The parties hereto acknowledge that nothing contained in this Agreement shall be deemed as a guarantee of continued tenure on the Board of Directors of the Medical Group. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. "Medical Group" Raytel Medical Group, Inc. F. David Rollo, M.D. a California professional corporation By: /s/ F. David Rollo, M.D. By: /s/ F. David Rollo, M.D. ------------------------- ------------------------- F. David Rollo, M.D. F. David Rollo, M.D. Its: President Raytel Medical Corporation Raytel California Physician Services, Inc. By: /s/ Swapan Sen By: /s/ Swapan Sen ------------------------- ------------------------- Swapan Sen Swapan Sen Its: Senior Vice President Its: Senior Vice President
8 EX-13.1 5 PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 FIVE YEAR FINANCIAL SUMMARY
Fiscal Year Ended September 30, - ----------------------------------------------------------------------------------------------------------------- (000's omitted, except per share data) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Pacing, CEDS and Holter $ 46,171 $ 47,227 $ 43,649 $ 41,384 $ 38,661 Diagnostic imaging service 19,977 17,610 19,970 20,516 19,150 Heart Center, practice management and other 41,481 18,578 8,896 1,562 964 -------------------------------------------------------------- Total revenues 107,629 83,415 72,515 63,462 58,775 Operating costs and selling, general and administrative expenses 85,633 63,273 56,412 47,353 44,821 Depreciation and amortization 8,282 6,306 5,590 5,806 5,880 Non-recurring tender offer expense -- -- -- 1,050 -- -------------------------------------------------------------- Operating income 13,714 13,836 10,513 9,253 8,074 Interest expense 2,990 785 514 2,118 2,463 Other (income) (511) (3,076) (591) (347) (305) Minority interest 1,273 485 762 1,161 1,099 -------------------------------------------------------------- Income before income taxes 9,962 15,642 9,828 6,321 4,817 Provision for income taxes 3,869 6,257 3,248 1,960 1,004 Income before extraordinary item 6,093 9,385 6,580 4,361 3,813 Extraordinary item, net of related tax benefit -- 721 449 -- -- -------------------------------------------------------------- Net income $ 6,093 $ 8,664 $ 6,131 $ 4,361 $ 3,813 ============================================================== Net income per share before extraordinary item: Basic $ .69 $ 1.11 $ .86 $ .84 $ .74 ============================================================== Diluted $ .66 $ 1.04 $ .80 $ .78 $ .69 ============================================================== Net income per share: Basic $ .69 $ 1.02 $ .80 $ .84 $ .74 ============================================================== Diluted $ .66 $ .96 $ .75 $ .78 $ .69 ============================================================== Weighted average shares outstanding: Basic 8,879 8,458 7,623 5,210 5,135 ============================================================== Diluted 9,294 9,039 8,194 5,617 5,548 ============================================================== CONSOLIDATED BALANCE SHEET DATA: Total assets $ 122,186 $ 119,421 $ 68,030 $ 46,768 $ 50,245 Long-term debt and capital lease obligations(1) 36,997 36,354 7,576 14,550 20,518 Total stockholders' equity 66,491 61,899 48,878 21,499 17,160
(1) Includes current portion of long-term debt and capital lease obligations plus unamortized debt discount. PAGE 5 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis includes a number of forward-looking statements which reflect Raytel Medical Corporation's ("Raytel" or the "Company") current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed under "Business Environment and Future Results" and elsewhere in this Section, that could cause actual results to differ materially from historical results or those anticipated. In this Section, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. OVERVIEW The Company generates the majority of its revenues from the provision of transtelephonic monitoring services for cardiac pacemaker patients ("Pacing"), cardiac event detection services ("CEDS") and Holter, diagnostic imaging services and cardiac catheterization procedures. Following the Company's initial public offering in December 1995, the Company has entered into a series of transactions which have expanded its heart center and physician practice management businesses. As a result, revenue is also being provided from: the Raytel Heart Center at Granada Hills ("RHCGH") beginning on February 1, 1996; the management of Southeast Texas Cardiology Associates II P.A. ("SETCA") beginning on September 18, 1996; the management of Comprehensive Cardiology Consultants, a Medical Group, Inc. ("CCMG") beginning on November 1, 1996; and Cardiovascular Ventures, Inc. ("CVI") beginning on August 15, 1997, which included the multi-specialty physician practice, Heart and Family Health Institute ("HFHI") and seven cardiovascular diagnostic facilities. The Company's investments in two ventures ("Ventures") that operated four of the consolidated diagnostic imaging centers terminated during fiscal 1997. Revenues contributed by these ventures were $1,318,000 and $3,924,000, for the years ended September 30, 1997 and 1996, respectively. On October 18, 1996, the Company, through a subsidiary, entered into a long-term management service agreement whereby the Company will manage the non-medical aspects of the CCMG practice. Total consideration for the transaction was cash of $427,000, promissory notes of $620,000 and 14,376 shares of the Company's Common Stock to be delivered at future dates, valued at $91,000 (which represents a discount from the trading price of the stock at the time of the transaction due primarily to the delay in the delivery of the shares). In September 1996, the Company received a favorable administrative decision related to a billing dispute with a New York Medicare carrier whereby it was entitled to receive approximately $4.0 million. The time period for the Healthcare Finance Administration ("HCFA") and the Social Security Administration to file an appeal expired on February 10, 1997. After accounting for administrative costs and reimbursements due to Medtronic under the terms of the acquisition of CardioCare and a separate provision against the value of a non-operating asset, the Company recognized other income of $2,510,000 pretax in its second fiscal quarter ending March 31, 1997, with a positive after tax effect of $1,506,000 or $.17 per share (the "Decision"). Under certain practice management contracts, revenues are recognized pursuant to long-term arrangements with physician groups under which the Company provides the physician group with a full range of services, including, but not limited to, office space, specialized clinical and procedural facilities, medical equipment, data processing and medical record keeping, billing and collection procedures and services, non-physician licensed personnel, such as nurses and technicians, as well as office staff and administrative personnel. In the case of SETCA and CCMG, the Company's practice management revenues are derived from the physician groups' revenues, generally as a purchased service, except for certain physician compensation and employment benefits, which are paid by the physician group on a priority basis. Under the above management services PAGE 6 3 arrangements, the Company's practice management revenues represent approximately 56% of the revenues of the physician groups for the years ended September 30, 1998 and 1997. For HFHI, the Company recognizes 100% of all medical revenue as the physicians are employees of the Company. On August 15, 1997, the Company acquired all of the outstanding capital stock of CVI, of New Orleans, Louisiana. CVI manages, owns and operates cardiovascular diagnostic facilities in Texas, Louisiana and Florida and owns and manages a physician practice in Florida. Total original consideration for the transaction consisted of cash and transaction costs of approximately $16,980,000, and 500,000 shares of Raytel Common Stock. During fiscal 1998, there were additional transaction costs of approximately $280,000 and an additional 46,668 shares of the Company's Common Stock has been or will be issued. The contingent promissory notes in the aggregate principal amount of $820,000 were cancelled in accordance with the terms of the agreement. On October 9, 1997, the Company announced it had entered into an agreement with The Baptist Hospital of Southeast Texas to develop a Raytel Heart Center at the hospital. Under the agreement, Raytel will manage the heart center, which will provide a range of cardiovascular services, including diagnostic, therapeutic and patient wellness programs. Among other duties, Raytel will be responsible for the day-to-day operations of the heart center, including administrative support, information systems management and public relations activities. The Company began operations at Baptist Hospital during the fourth quarter of fiscal 1998. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain data derived from the Consolidated Statements of Operations as a percentage of total revenues:
Fiscal Year Ended September 30, - ---------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------- Total revenues 100.0% 100.0% 100.0% Operating costs and selling, general and administrative expenses 79.6 75.9 77.8 Depreciation and amortization 7.7 7.6 7.7 ------------------------------- Operating income 12.7 16.5 14.5 Interest expense and other (income) expense 2.3 (2.8) (.1) Minority interest 1.2 .5 1.1 ------------------------------- Income before income taxes 9.2 18.8 13.5 Provision for income taxes 3.6 7.5 4.5 ------------------------------- Income before extraordinary item 5.6 11.3 9.0 Extraordinary item -- .9 .6 ------------------------------- Net income 5.6% 10.4% 8.4% -------------------------------
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30, 1997 The operations of CVI are included in the Company's Consolidated Statements of Operations since August 15, 1997, the effective date of the Company's acquisition of CVI. Accordingly, such results are included for fiscal 1998, but are only included for 45 days of fiscal 1997. PAGE 7 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenues. Pacing, CEDS and Holter revenues decreased by $1,056,000, or 2.2%, from $47,227,000 in fiscal 1997 to $46,171,000 in fiscal 1998, due primarily to a combination of competitive pressures and lower reimbursement rates for CEDS. Diagnostic imaging service revenues increased by $2,367,000, or 13.4%, from $17,610,000 in fiscal 1997 to $19,977,000 in fiscal 1998 due primarily to increases in revenues at certain centers due to an increase in volume, partially offset by decreased revenues due to the termination of two Ventures in fiscal 1997. Heart Center, practice management and other revenues increased by $22,903,000, or 123.3%, from $18,578,000 in fiscal 1997 to $41,481,000 in fiscal 1998 due primarily to the inclusion of revenues from CVI. As a result of the foregoing factors, total revenues increased by $24,214,000, or 29.0%, from $83,415,000 in fiscal 1997 to $107,629,000 in fiscal 1998. Operating Expenses. Operating costs and selling, general and administrative expenses increased by 22,360,000, or 35.3%, from $63,273,000 in fiscal 1997 to $85,633,000 in fiscal 1998, due primarily to the inclusion of costs and expenses from CVI. Operating costs and selling, general and administrative expenses as a percentage of total revenues increased from 75.9% in fiscal 1997 to 79.6% in fiscal 1998 due primarily to the inclusion of revenues and costs and expenses from CVI. At RHCGH operating expenses were slightly in excess of revenues for both fiscal years. Depreciation and Amortization. Depreciation and amortization expense increased by $1,976,000, or 31.3%, from $6,306,000 in fiscal 1997 to $8,282,000 in fiscal 1998, due primarily to the inclusion of CVI, but remained relatively unchanged as a percentage of revenues. Operating Income. As a result of the foregoing factors, operating income decreased by $122,000, or 0.9%, from $13,836,000 in fiscal 1997 to $13,714,000 in fiscal 1998. Interest Expense. Interest expense increased by $2,205,000, or 280.9%, from $785,000 in fiscal 1997 to $2,990,000 in fiscal 1998 due primarily to an increase in debt due to the CVI acquisition. Other Expense (Income). Other income decreased by $2,565,000 or 83.4% from $3,076,000 in fiscal 1997 to $511,000 in fiscal 1998 due primarily to non-recurring income resulting from the Decision. Minority Interest. Minority interest increased by $788,000, or 162.5%, from $485,000 in fiscal 1997 to $1,273,000 in fiscal 1998 due primarily to the inclusion of CVI. Income Taxes. The provision for income taxes decreased by $2,388,000, or 38.2%, from $6,257,000 in fiscal 1997 to $3,869,000 in fiscal 1998 as a result of decreased taxable income. Extraordinary Item. An extraordinary charge of $721,000, net of the related tax benefit, for the cost of restructuring certain indebtedness acquired with the CVI purchase was recorded during the year ended September 30, 1997. Net Income. As a result of the foregoing factors, net income decreased by $2,571,000, or 29.7%, from $8,664,000 in fiscal 1997 to $6,093,000 in fiscal 1998. Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30, 1996 The operations of RHCGH are included in the Company's Consolidated Statements of Operations since February 1, 1996, the effective date of the agreement. Accordingly, RHCGH's operations are included for all twelve months in fiscal 1997, but are only included for eight months in fiscal 1996. The operations of CDS are included in the Company's Consolidated Statements of Operations since June 11, 1996, the effective date of the Company's acquisition of CDS. Accordingly, the operations of CDS are included for all twelve months in fiscal 1997, but are only included for approximately four months of fiscal 1996. The results of operations from the management service agreement with SETCA are included in the Company's PAGE 8 5 Consolidated Statements of Operations since September 18, 1996, the effective date of the agreement. Accordingly, such results are included for all twelve months in fiscal 1997, but are only included for twelve days of fiscal 1996. The results of operations from the management service agreement with CCMG are included in the Company's Consolidated Statements of Operations since November 1, 1996, the effective date of its agreement. Accordingly, such results are included for eleven months in fiscal 1997, but are not included in fiscal 1996. The operations of CVI are included in the Company's Consolidated Statements of Operations since August 15, 1997, the effective date of the Company's acquisition of CVI. Revenues. Pacing, CEDS and Holter revenues increased by $3,578,000, or 8.2%, from $43,649,000 in fiscal 1996 to $47,227,000 in fiscal 1997, due primarily to the inclusion of revenues from CDS. Diagnostic imaging service revenues decreased by $2,360,000 or 11.8%, from $19,970,000 in fiscal 1996 to $17,610,000 in fiscal 1997, due primarily to the termination of one diagnostic imaging joint venture on December 31, 1996 and another on June 30, 1997. Heart Center, practice management and other revenues increased by $9,682,000 or 108.8% from $8,896,000 in fiscal 1996 to $18,578,000 in fiscal 1997 due primarily to the inclusion of revenues from the physician practice management agreements and from CVI and RHCGH. As a result of the foregoing factors, total revenues increased by $10,900,000, or 15.0%, from $72,515,000, in fiscal 1996 to $83,415,000 in fiscal 1997. Operating Expenses. Operating costs and selling, general and administrative expenses increased by $6,861,000, or 12.2%, from $56,412,000 in fiscal 1996 to $63,273,000 in fiscal 1997 due primarily to the inclusion of costs and expenses from CVI, RHCGH, CDS and the management of the physician practices. These increases were partially offset by decreases in costs and expenses at operating facilities, other than CDS, which provide Pacing, CEDS and Holter services due to cost containment measures. Operating costs and selling, general and administrative expenses as a percentage of total revenues declined slightly at RHCGH, where operating expenses were slightly in excess of revenues for the years ended September 30, 1997 and 1996. Depreciation and Amortization. Depreciation and amortization expense increased by $716,000, or 12.8%, from $5,590,000 in fiscal 1996 to $6,306,000 in fiscal 1997 but declined as a percentage of revenues from 7.7% in fiscal 1996 to 7.6% in fiscal 1997. Operating Income. As a result of the foregoing factors, operating income increased by $3,323,000, or 31.6%, from $10,513,000 in fiscal 1996 to $13,836,000 in fiscal 1997. Interest Expense. Interest expense increased by $271,000, or 52.7%, from $514,000 in fiscal 1996 to $785,000 in fiscal 1997, due primarily to an increase in debt due to the CVI acquisition and an increase in the principal amount outstanding under equipment loans and capital leases due to the CVI acquisition. Other Expense (Income). Other income increased by $2,485,000 from $591,000 for fiscal 1996 to $3,076,000 for fiscal 1997 due primarily to the Decision. Income Taxes. The provision for income taxes increased by $3,009,000, or 92.6%, from $3,248,000 in fiscal 1996 to $6,257,000 in fiscal 1997 as a result of increased taxable income and a higher effective tax rate in the current period. Extraordinary Item. An extraordinary charge of $721,000, net of the related tax benefit, for the cost of restructuring certain indebtedness acquired with the CVI purchase was recorded during the year ended September 30, 1997. An extraordinary non-cash charge of $449,000, net of the related tax benefit, for the write-off of unamortized debt discount and capitalized debt issuance expense, was recorded during the year ended September 30, 1996. Net Income. As a result of the foregoing factors, net income increased by $2,533,000, or 41.3%, from $6,131,000 in fiscal 1996 to $8,664,000 in fiscal 1997. PAGE 9 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS ENVIRONMENT AND FUTURE RESULTS The Company's future operating results may be affected by various trends in the healthcare industry as well as by a variety of other factors, some of which are beyond the Company's control. The healthcare industry is undergoing significant change as third-party payors attempt to control the cost, utilization and delivery of healthcare services. Substantially all of the Company's revenues are derived from Medicare, HMOs, and commercial insurers and other third-party payors. Both government and private payment sources have instituted cost containment measures designed to limit payments made to healthcare providers by reducing reimbursement rates, limiting services covered, increasing utilization review of services, negotiating prospective or discounted contract pricing, adopting capitation strategies and seeking competitive bids. Although the Company's total revenues have increased in each of the last three fiscal years, revenue growth of the Company's Pacing operations during that period has been negatively impacted by Medicare reimbursement rate reductions. Additional reimbursement rate reductions applicable to the Company's Pacing procedures became effective on January 1, 1996 and January 1, 1997. These reductions had a negative effect on the Company's operating results for fiscal 1996, fiscal 1997 and the first quarter of fiscal 1998. The Company's Pacing operations have been favorably impacted since January 1, 1998 due to an increase in Medicare reimbursement rates effective on that date. However, effective January 1, 1999 the Company expects a slight decrease in these reimbursement rates. The Company cannot predict with any certainty whether or when additional reductions or changes in Medicare or other third-party reimbursement rates or policies will be implemented. There can be no assurance that future changes, if any, will not adversely affect the amounts or types of services that may be reimbursed to the Company, or that future reimbursement of any service offered by the Company will be sufficient to cover the costs and overhead allocated to such service. From time to time, Congress considers legislation to reduce Medicare and Medicaid expenditures. Future legislation of this type could have a material adverse effect on the Company's business, financial condition and operating results. Governmental agencies promulgate regulations which mandate changes in the method of delivering services which could have a material adverse effect on the Company's business. A key element of the Company's long-range strategy is the development and operation of integrated heart centers and the acquisition of healthcare providers specializing in cardiology related services and the assets of physician practices and other businesses related to its current operations. The success of the Company's existing and future heart centers and physician practices will depend upon several factors, including the Company's ability to: obtain and operate in compliance with appropriate licenses; control costs and realize operating efficiencies; educate patients, referring physicians and third-party payors about the benefits of such heart centers; and provide cost-effective services that meet or exceed existing standards of care. An element of the Company's strategy is to expand, in part, through acquisitions and investments in complementary healthcare businesses. The implementation of this strategy may place significant strain on the Company's administrative, operational and financial resources and increased demands on its systems and controls. There can be no assurances that businesses acquired by the Company, either recently or in the future, will be integrated successfully and profitably into the Company's operations, that suitable acquisitions or investment opportunities will be identified, or that any such transactions can be consummated. PAGE 10 7 Providers of healthcare services are subject to numerous federal, state and local laws and regulations that govern various aspects of their business. There can be no assurance that the Company will be able to obtain regulatory approvals that may be required to expand its services or that new laws or regulations will not be enacted or adopted that will have a material adverse effect on the Company's business, financial condition or operating results. The healthcare businesses in which the Company is engaged are highly competitive. The Company expects competition to increase as a result of ongoing consolidations and cost-containment pressures, among other factors. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in the Company's operating results, shortfalls in such operating results from levels forecasted by securities analysts and other events or factors. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations that have particularly affected the market prices of companies in the healthcare service industries and that have often been unrelated to the operating performance of the affected companies. Announcements of changes in reimbursement policies of third-party payors, legislative or regulatory developments, economic news and other external factors may have a significant impact on the market price of healthcare stocks. LIQUIDITY AND CAPITAL RESOURCES The Company acquired CDS in June 1996 for cash in the amount of $14,254,000, SETCA in September 1996 for cash in the amount of $4,010,000, CCMG in November 1996 for cash in the amount of $427,000 and CVI in August 1997 for cash in the amount of $16,980,000 plus $280,000 paid during fiscal 1998. At September 30, 1998, the Company had working capital of $31,168,000, compared to $24,391,000 at September 30, 1997. At September 30, 1998, the Company had cash and temporary cash investments of $7,463,000. At September 30, 1998, $28,225,000 was outstanding under the Company's line of credit. The Company batch-bills Medicare insurance carriers for most cardiac testing services performed during the first few months of each calendar year. This practice results in a temporary build-up of accounts receivable during the Company's second and third fiscal quarters and the collection of these receivables primarily during the subsequent fourth fiscal quarter. The Company has a revolving line of credit with two banks in the amount of $45,000,000 to fund working capital needs, future acquisitions, equipment purchases and other business needs. Amounts outstanding under the line of credit bear interest based on a defined formula and are subject to certain covenants. The line of credit expires in August 1999 at which time any outstanding balance will be converted to a five-year term loan. The Company's long-term capital requirements will depend on numerous factors, including the rate at which the Company develops and opens new heart centers or acquires existing heart centers, physician practices or other businesses, if any. The Company believes that its cash and cash equivalent balances, together with amounts available from bank borrowings and cash generated by its operating activities, will be adequate to meet the Company's anticipated needs for working capital and capital expenditures through fiscal 1999. PAGE 11 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the programming code in existing computer systems as the Year 2000 approaches. Many existing computer programs use only two digits instead of four to identify a year in the date field. The Company has completed a thorough review of its material computer applications. We have begun installation of a new billing and collection system as well as a new accounting system. These new systems are Year 2000 compliant. The Company had planned on replacing them regardless of the Year 2000 issue. There are other systems at certain cardiovascular diagnostic facilities recently acquired by the Company which may not be Year 2000 compliant, however, the Company anticipates that all such systems will be replaced by its new systems before the Year 2000. There can be no assurances that any systems at companies purchased by or affiliated with the Company in the future will be Year 2000 compliant or, if not, will be converted on a timely basis. At the present time, the Company does not anticipate that the cost for it to become Year 2000 compliant will have a material impact on the Company's financial statements. The Company has initiated a program to determine whether the computer applications of its significant vendors will be upgraded in a timely manner. The Company has also initiated a program to determine whether embedded applications which control medical and other equipment will be affected. The Company has not yet completed these reviews. The Company has begun discussions with its payors to determine the status of their systems. The nature of the Company's business is such that any failure to these types of applications may have a material adverse effect on its business. Because of the many uncertainties associated with Year 2000 compliance issues, and because the Company's assessment is necessarily based on information from third-party vendors, payors and suppliers, there can be no assurance that the Company's assessment is correct or as to the materiality or effect of any failure of such assessment to be correct. At the present time, the Company has not developed a contingency plan relative to Year 2000 compliance. PAGE 12 9 PERCENTAGE OF CONSOLIDATED REVENUES
Fiscal Year Ended September 30, - ----------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------- Pacing, CEDS and Holter 43% 57% 60% Diagnostic imaging service 19% 21% 28% Heart Center, practice management and other 38% 22% 12% ------------------------ Total 100% 100% 100% ========================
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
Fiscal Year Ended September 30, 1998 - ------------------------------------------------------------------------------------------------ (000's omitted, except per share amounts) December 31, March 31, June 30, September 30, - ------------------------------------------------------------------------------------------------ Net revenues $25,864 $27,151 $28,131 $26,483 =============================================== Income before income taxes $ 2,210 $ 2,657 $ 2,609 $ 2,486 Provision for income taxes 884 1,063 1,043 879 ----------------------------------------------- Net income $ 1,326 $ 1,594 $ 1,566 $ 1,607 =============================================== Net income per share(1): Basic $ .15 $ .18 $ .18 $ .18 =============================================== Diluted $ .14 $ .17 $ .17 $ .18 ===============================================
Fiscal Year Ended September 30, 1997 - --------------------------------------------------------------------------------------------------------- December 31, March 31, June 30, September 30, - --------------------------------------------------------------------------------------------------------- Net revenues $20,652 $20,436 $19,758 $22,569 ============================================== Income before income taxes and extraordinary item $ 3,101 $ 5,817 $ 3,276 $ 3,448 Provision for income taxes 1,240 2,327 1,311 1,379 ---------------------------------------------- Income before extraordinary item 1,861 3,490 1,965 2,069 Extraordinary item, net of related tax benefit -- -- -- 721 ---------------------------------------------- Net income $ 1,861 $ 3,490 $ 1,965 $ 1,348 ============================================== Net income per share before extraordinary item(1): Basic $ .22 $ .41 $ .23 $ .24 ============================================== Diluted $ .21 $ .39 $ .22 $ .22 ============================================== Net income per share(1): Basic $ .22 $ .41 $ .23 $ .16 ============================================== Diluted $ .21 $ .39 $ .22 $ .14 ==============================================
(1) Quarterly per share earnings do not necessarily equal the total per share earnings reported for the year as a result of the dilutive effect of common stock equivalents on the calculation of per share earnings. PAGE 13 10 CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1998 AND 1997
September 30, - --------------------------------------------------------------------------------------------------------- (000's omitted) 1998 1997 - --------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 7,463 $ 7,873 Receivables, net 35,504 30,345 Prepaid expenses and other 3,996 3,970 ------------------------------- Total current assets 46,963 42,188 Property and equipment, less accumulated depreciation and amortization 19,681 19,712 Intangible assets, less accumulated amortization 55,497 57,486 Other assets 45 35 ------------------------------- Total assets $ 122,186 $119,421 =============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations $ 1,962 $ 1,893 Accounts payable 4,649 5,110 Accrued compensation and benefits 2,920 3,397 Accrued other liabilities 6,264 7,397 ------------------------------- Total current liabilities 15,795 17,797 Long-term debt and capital lease obligations, net of current portion 35,035 34,461 Deferred liabilities 1,405 1,163 Minority interest in consolidated entities 3,460 4,101 ------------------------------- Total liabilities 55,695 57,522 ------------------------------- Commitments and contingencies (Notes 9 and 13) Stockholders' equity: Common stock 9 9 Additional paid-in capital 61,790 61,261 Common stock to be issued 1,124 943 Retained earnings 7,190 1,097 ------------------------------- 70,113 63,310 Less treasury stock, at cost (3,622) (1,411) ------------------------------- Total stockholders' equity 66,491 61,899 ------------------------------- Total liabilities and stockholders' equity $ 122,186 $119,421 ===============================
The accompanying notes are an integral part of these consolidated statements. PAGE 14 11 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
September 30, - ---------------------------------------------------------------------------------------------------- (000's omitted, except per share amounts) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Revenues: Pacing, CEDS and Holter $ 46,171 $ 47,227 $43,649 Diagnostic imaging service 19,977 17,610 19,970 Heart Center, practice management and other 41,481 18,578 8,896 ------------------------------------------- Total revenues 107,629 83,415 72,515 =========================================== Costs and expenses: Operating costs 50,143 33,536 27,582 Selling, general and administrative 35,490 29,737 28,830 Depreciation and amortization 8,282 6,306 5,590 ------------------------------------------- Total costs and expenses 93,915 69,579 62,002 =========================================== Operating income 13,714 13,836 10,513 Interest expense 2,990 785 514 Other expense (income) (511) (3,076) (591) Minority interest 1,273 485 762 ------------------------------------------- Income before income taxes and extraordinary item 9,962 15,642 9,828 Provision for income taxes 3,869 6,257 3,248 ------------------------------------------- Income before extraordinary item 6,093 9,385 6,580 Extraordinary item, net of related tax benefit -- 721 449 ------------------------------------------- Net income $ 6,093 $ 8,664 $ 6,131 =========================================== Net income per share before extraordinary item: Basic $ .69 $ 1.11 $ .86 =========================================== Diluted $ .66 $ 1.04 $ .80 =========================================== Net income per share: Basic $ .69 $ 1.02 $ .80 =========================================== Diluted $ .66 $ .96 $ .75 =========================================== Weighted average shares: Basic 8,879 8,458 7,623 =========================================== Diluted 9,294 9,039 8,194 ===========================================
The accompanying notes are an integral part of these consolidated statements. PAGE 15 12 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
Preferred Stock Common Stock Additional Common Retained Total -------------------------------------- Paid-in Stock to Earnings Treasury Stockholders' (000's omitted, except shares) Shares Amount Shares Amount Capital be Issued (Deficit) Stock Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1995 3,741,152 $ 7 1,039,683 $2 $ 31,410 $ -- $(9,920) $ -- $ 21,499 Net income -- -- -- - -- -- 6,131 -- 6,131 Conversion of preferred stock to common stock (3,741,152) (7) 3,741,152 3 4 -- -- -- -- Issuance of common stock in payment of preferred dividends -- -- 472,250 - 3,778 -- (3,778) -- -- Retirement of fractional shares -- -- (230) - -- -- -- -- -- Payment of warrants -- -- -- - (501) -- -- -- (501) Sale of common stock in initial public offering -- -- 2,875,000 3 20,397 -- -- -- 20,400 Value of 122,068 shares to be issued -- -- -- - -- 852 -- -- 852 Warrants exercised -- -- 15,760 - 63 -- -- -- 63 Options exercised -- -- 189,309 - 434 -- -- -- 434 ------------------------------------------------------------------------------------------------ Balance at September 30, 1996 -- -- 8,332,924 8 55,585 852 (7,567) -- 48,878 Net income -- -- -- - -- -- 8,664 -- 8,664 Warrants exercised -- -- 10,505 - 42 -- -- -- 42 Options exercised -- -- 191,494 - 369 -- -- -- 369 Repurchase of shares -- -- (134,434) - -- -- -- (1,411) (1,411) Employee stock purchase -- -- 5,908 - 63 -- -- -- 63 Value of 14,376 shares to be issued -- -- -- - -- 91 -- -- 91 Issuance of common stock for purchase of a company -- -- 500,000 1 5,202 -- -- -- 5,203 ------------------------------------------------------------------------------------------------ Balance at September 30, 1997 -- -- 8,906,397 9 61,261 943 1,097 (1,411) 61,899 Net income -- -- -- - -- -- 6,093 -- 6,093 Warrants exercised -- -- 31,359 - 125 -- -- -- 125 Options exercised -- -- 11,001 - 55 -- -- -- 55 Repurchase of shares -- -- (322,600) - -- -- -- (2,211) (2,211) Employee stock purchase -- -- 6,361 - 44 -- -- -- 44 Value of 46,668 shares to be issued -- -- -- - -- 486 -- -- 486 Value of 30,981 shares issued -- -- 30,981 - 305 (305) -- -- -- ------------------------------------------------------------------------------------------------ Balance at September 30, 1998 -- $-- 8,663,499 $9 $ 61,790 $ 1,124 $ 7,190 $(3,622) $ 66,491 ================================================================================================
The accompanying notes are an integral part of these consolidated statements. PAGE 16 13 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
September 30, - -------------------------------------------------------------------------------------------------- (000's omitted) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 6,093 $ 8,664 $ 6,131 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,282 6,306 5,590 Minority interest 1,273 485 762 Other, net 211 (735) 245 Changes in operating accounts: Receivables, net (5,813) (3,137) 850 Prepaid expenses and other (25) (987) (105) Accounts payable (429) 1,494 651 Accrued compensation, benefits and other liabilities (1,286) 435 574 ------------------------------------- Net cash provided by operating activities 8,306 12,525 14,698 ------------------------------------- Cash flows from investing activities: Capital expenditures (5,092) (3,828) (3,022) Purchases of net assets and physician practice -- (427) (18,264) Purchase of a company -- (16,980) -- Additional costs of company previously purchased (280) -- -- Cash acquired in purchase of a company -- 1,384 -- Other, net (396) 487 350 ------------------------------------- Net cash used in investing activities (5,768) (19,364) (20,936) ------------------------------------- Cash flows from financing activities: Net proceeds from borrowings 2,264 23,599 2,376 Net proceeds from initial public offering -- -- 20,400 Repurchase of warrants -- -- (2,101) Income distributions to noncontrolling investors (1,560) (862) (738) Repurchase of company stock (2,211) (1,411) -- Principal repayments of debt (1,665) (12,822) (13,442) Other, net 224 471 497 ------------------------------------- Net cash provided by (used in) financing activities (2,948) 8,975 6,992 ------------------------------------- Net increase (decrease) in cash and cash equivalents (410) 2,136 754 Cash and cash equivalents at beginning of period 7,873 5,737 4,983 ------------------------------------- Cash and cash equivalents at end of period $ 7,463 $ 7,873 $ 5,737 ===================================== Supplemental disclosure of cash flow information: Interest paid $ 2,925 $ 822 $ 454 ===================================== Income taxes paid $ 3,710 $ 6,687 $ 3,309 =====================================
The accompanying notes are an integral part of these consolidated statements. PAGE 17 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND DESCRIPTION OF THE COMPANY Since 1990, Raytel Medical Corporation ("Raytel" or the "Company") or its predecessor companies, have been in the medical service business. The Company provides a range of services, focusing on the needs of patients with cardiovascular disease and is the leading provider in the United States of remote cardiac monitoring and testing services utilizing transtelephonic technology. Also, the Company is developing integrated heart centers that are located within existing hospitals and acquiring cardiology-related physician practices, assets and facilities. Since 1990, the Company has acquired and/or entered into agreements with various medical service providers. The significant transactions occurring during the past three fiscal years are described below: (a) An agreement, with Granada Hills Community Hospital, became effective February 1, 1996 and provided for the creation of the Company's first integrated heart center, the Raytel Heart Center at Granada Hills ("RHCGH"). The Company is responsible for the day-to-day operations of RHCGH, including administrative support and other non-medical aspects of the program. On September 29, 1998, the Company announced that it had reached a new agreement with the hospital which includes revised financial terms. (b) Effective June 11, 1996, the Company acquired certain assets and assumed certain liabilities of Cardio Data Services, Inc. ("CDS"). CDS provides clinical transtelephonic pacemaker monitoring, cardiac event detection and Holter monitoring services. The purchase price of the transaction was $14,254,000 and of such amount $13,985,000 was allocated to the acquisition of intangible assets, the majority of which is being amortized over 25 years. (c) On September 18, 1996, the Company acquired all of the non-medical assets of Southeast Texas Cardiology Associates, P.A. ("SETCA") and entered into a long-term management service agreement whereby the Company will manage the non-medical aspects of the practice. The Company has assumed responsibility for providing office space as well as billing and collection activities and other management services. Total consideration for the transaction was cash and transaction costs of $4,010,000, promissory notes of $2,289,000 and 122,068 shares of the Company's Common Stock to be delivered at future dates, valued at $852,000. The shares of Common Stock were valued at a discount from the then current trading price of a share after considering all relevant factors, including, but not limited to, normal discounts for marketability due to the time delay in delivery of the shares. The recorded amounts for the aggregate number of shares of Common Stock to be delivered were discounted 40% from comparable cash sales of Common Stock. The scheduled issuance of the shares of Common Stock that the Company is committed to deliver are 48,828 in 1999, 36,620 in 2000 and 36,620 in 2001. (d) On October 18, 1996, the Company entered into a long-term management service agreement whereby the Company will manage the non-medical aspects of Comprehensive Cardiology Consultants, a Medical Group, Inc. ("CCMG"), a physician practice. Total consideration for the transaction was cash of $427,000, promissory notes of $620,000 and 14,376 shares of the Company's Common Stock to be delivered at future dates, valued, as described above, at $91,000. (e) On August 15, 1997, the Company acquired all of the outstanding capital stock of Cardiovascular Ventures, Inc. ("CVI"). CVI manages, owns and operates several cardiovascular diagnostic facilities in Texas, Louisiana and Florida and owns and manages a physician practice in Florida. Total original consideration for the transaction was cash and transaction costs of approximately $16,980,000, 500,000 shares of the Company's Common Stock and contingent promissory notes in the aggregate principal amount of $820,000. During fiscal 1998 there were additional transaction costs of approximately $280,000 and an additional 46,668 shares of PAGE 18 15 the Company's Common Stock has been or will be issued. Also, the $820,000 of contingent promissory notes were cancelled in accordance with the terms of the agreement. Unaudited pro forma consolidated financial information for the years ended September 30, 1997 and 1996, as though the acquisitions of CVI and CDS had occurred at the beginning of fiscal 1996, is as shown in the table below (in thousands, except per share amounts):
September 30, - --------------------------------------------------------------- 1997 1996 - --------------------------------------------------------------- Revenues $104,345 $94,720 Net income $ 9,446 $ 4,940 Net income per share: Basic $ 1.05 $ .61 Diluted $ .99 $ .57 Weighted average shares outstanding: Basic 8,958 8,123 Diluted 9,539 8,694
The Company's acquisitions have been accounted for as purchases in accordance with generally accepted accounting principles. Accordingly, acquired assets and assumed liabilities were recorded at their estimated fair values at the acquisition date. In certain acquisitions, there was an excess of the purchase price over the fair value of the net tangible assets acquired which was allocated to identifiable intangible assets and goodwill (See Note 5). In December 1995, the Company completed the initial public offering of its Common Stock (the "Offering") which yielded net proceeds, after underwriting discounts and expenses, of $20,400,000. The Company used approximately $6,000,000 of the proceeds of the Offering to pay the remaining balance of a term loan from two banks, approximately $2,101,000 to repurchase certain outstanding redeemable warrants and $5,000,000 to repay substantially all of a subordinated note. The remaining proceeds were used for working capital, general corporate purposes and a portion of the purchase price for CDS. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. At September 30, 1998, the Company owned four imaging centers and held interests in three others through investments in various joint ventures and limited partnerships (the "Ventures"). All Ventures are consolidated for financial reporting purposes, as the Company owns more than 50% of those Ventures and/or controls their assets and operations. Two Ventures that operated four consolidated imaging centers terminated during fiscal 1997. Revenues contributed by these Ventures were $1,318,000 and $3,924,000 for the years ended September 30, 1997 and 1996, respectively. At September 30, 1998, the Company held interests in seven cardiovascular diagnostic facilities, through investments in various limited partnerships (the "Partnerships") and wholly-owned two others. All Partnerships are consolidated for financial reporting purposes, as the Company owns more than 50% of those Partnerships and/or controls their assets and operations. Minority interests in consolidated entities represent the investment of third-parties in certain consolidated Ventures and Partnerships. All significant intercompany accounts and transactions are eliminated in consolidation. PAGE 19 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (b) Revenue Recognition. Net patient and service revenues are recognized at established rates when the services are provided. Contractual allowances are calculated for services provided at less than the established rates as approved by Medicare or other third-party payors and are recorded as deductions from revenue. Diagnostic imaging service revenues principally represent net fees of the consolidated Ventures for services provided to patients net of physician fees and certain expenses. In certain practice management contracts, revenues are recognized pursuant to long-term arrangements with physician groups pursuant to which the Company provides the physician group with a full range of services, including, but not limited to, office space, specialized clinical and procedural facilities, medical equipment, data processing and medical record keeping, billing and collection procedures and services, non-physician licensed personnel, such as nurses and technicians, as well as office staff and administrative personnel. In the case of SETCA and CCMG, the Company's practice management revenues are derived from the physician groups' revenues, generally as a purchased service, except for physician compensation and employment benefits, which are paid by the physician group on a priority basis. Under the above management services arrangements, the Company's practice management revenues represent approximately 56% of the revenues of the physician groups for the years ended September 30, 1998 and 1997. For the physician practice acquired with the CVI acquisition, the Company recognizes 100% of all medical revenue as the physicians are employees of the Company. Other revenues include other revenue and equity earnings of unconsolidated entities. (c) Cash Equivalents. For purposes of reporting cash flows, the Company considers temporary investments with original maturities of three months or less to be cash equivalents. The temporary investments are stated at cost, which approximates market. (d) Property and Equipment. Property and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets which range from three to ten years. Capital leases are recorded at the present value of the future minimum lease payments. Capital leases are amortized over the terms of the related lease on a straight-line basis. (e) Management Service Agreements. Management service agreements are each recorded as an intangible asset consisting of the costs of purchasing the rights to manage the medical group. The agreements contain an initial noncancelable 40-year term. Under these long-term agreements, the medical groups have agreed to provide medical services on an exclusive basis only through facilities managed by the Company. The agreements are noncancelable except for performance defaults. In the event a medical group breaches the agreement, or if the Company terminates with cause, the medical group is required to purchase all related assets, including the unamortized portion of any management service agreement and any other intangible assets, at the then net book value. Management service agreements are being amortized over twenty years. (f) Intangible Assets. Intangible assets principally consist of the excess of cost over the fair value of the net tangible assets acquired. Such intangible assets represent physician referrals and patient lists, joint venture/partnership interests, non-compete covenants, capitalized debt issuance expense and goodwill. Amortization of capitalized debt issuance expense and goodwill is provided on a straight-line basis. Amortization of physician referrals and patient lists and joint venture/partnership interests is provided based upon the ratio of expected annual revenues to expected total revenues to be generated over the estimated life of the asset. The amortization periods of the intangibles range from two to twenty-five years, with physician referrals and patient lists being amortized over fifteen years and goodwill being amortized over ten to twenty-five years. PAGE 20 17 (g) Income Taxes. The Company and its subsidiaries file consolidated federal and state income tax returns. The Company accounts for income taxes in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. (h) Extraordinary Item. An extraordinary noncash charge of $449,000 ($670,000 less $221,000 of related tax benefit) for the write-off of unamortized debt discount and the write-off of capitalized debt issuance expense was recorded during the year ended September 30, 1996. This charge resulted from the early repayment of indebtedness and the repurchase of certain redeemable warrants from the net proceeds of the Offering. An extraordinary charge of $721,000 ($1,202,000 less $481,000 of related tax benefit), for the cost of restructuring certain indebtedness acquired with the CVI purchase was recorded during the year ended September 30, 1997. (i) Use of Estimates.The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the related disclosures. Actual results could differ from those estimates. (j) New Accounting Standards. Recently, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information and SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. All statements are effective for fiscal 1999 and relate only to additional disclosures. Therefore, the adoption of these accounting standards will have no effect on the Company's results of operations or financial position. Also SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities was issued in June 1998 (effective for fiscal 2000). It will have no effect on the Company's results. (k) Fair Value of Financial Instruments. The carrying amounts of all financial instruments approximate fair value. (l) Long-Lived Assets. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. NOTE 3. RECEIVABLES Receivables consist of the following (in thousands):
September 30, - ----------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------- Patient and service receivables $ 41,239 $ 34,114 Less allowance for doubtful accounts (7,093) (6,189) ----------------------- 34,146 27,925 Other receivables 1,358 2,420 ----------------------- Total $ 35,504 $ 30,345 =======================
PAGE 21 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
September 30, - ---------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------- Equipment, furniture and fixtures $ 31,263 $ 28,495 Leasehold improvements 8,928 7,768 ------------------------ 40,191 36,263 Less accumulated depreciation (20,510) (16,551) ------------------------ $ 19,681 $ 19,712 ========================
Depreciation expense was $4,820,000, $3,712,000 and $3,667,000 for the years ended September 30, 1998, 1997 and 1996, respectively. NOTE 5. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands):
September 30, - -------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------- Goodwill $ 48,752 $ 47,986 Physician referrals and patient lists 10,940 10,715 Management service agreements 7,984 7,984 Other 6,245 5,803 -------- -------- 73,921 72,488 Less accumulated amortization (18,424) (15,002) ------------------------ $ 55,497 $ 57,486 ========================
Amortization expense related to intangible assets totaled $3,462,000, $2,594,000 and $1,923,000 for the years ended September 30, 1998, 1997 and 1996, respectively. NOTE 6. NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES Notes payable, long-term debt and capital leases consist of the following (in thousands):
September 30, - ------------------------------------------------------ 1998 1997 - ------------------------------------------------------ Promissory notes(a) $ 2,609 $ 2,609 Line of credit(b) 28,225 25,975 Other(c) 6,163 7,770 ------------------------ 36,997 36,354 Less current maturities (1,962) (1,893) ------------------------ $ 35,035 $ 34,461 ========================
(a) In connection with the SETCA and CCMG transactions, the Company issued promissory notes bearing interest at rates ranging from 10% to 12% per annum. Interest is payable quarterly. (b) In August 1996, the Company entered into a line of credit for $25,000,000. This agreement was amended in September 1997 to expand the line of credit to $45,000,000 and was further amended on July 24, 1998 adjusting certain covenants. Under terms of the agreement PAGE 22 19 with two banks, this credit facility can be used to fund acquisitions and for working capital purposes. The Company can draw amounts under the line of credit until August 1, 1999, at which date amounts outstanding will convert into a term loan which will amortize on a semi-annual basis for the five years thereafter. The Company's access to the line of credit is subject to the maintenance of certain financial covenants related to the Company's level of indebtedness and cash flow. The interest rate is based upon LIBOR plus 150 basis points or the bank's prime rate at the option of the Company. At September 30, 1998, the approximate weighted average interest rate was 7.24%. The line is collateralized by substantially all of the assets of the Company and its subsidiaries. (c) Other debt includes a balance due in connection with the RHCGH transaction and nonrecourse notes and capital lease obligations with varying maturities at interest rates ranging from 8.29% to 12.75% per annum. The majority of these notes and leases are collateralized by the equipment purchased. Notes payable, long-term debt and capital lease obligations maturing within each of the five years subsequent to September 30, 1998 are as follows: 1999 -- $1,962,000; 2000 -- $6,943,000; 2001 -- $7,743,000; 2002 -- $7,778,000 and 2003 - -- $6,386,000. NOTE 7. PREFERRED STOCK AND COMMON STOCK Effective upon the closing of the Offering in December 1995, all outstanding Preferred Stock was converted into Common Stock. Upon the completion of the Offering, 2,000,000 shares of undesignated Preferred Stock were authorized for issuance. The Company's Board of Directors has the authority to issue such Preferred Stock in one or more series and to establish its terms which may be greater than the rights of the Common Stock. As of September 30, 1998, no such shares had been issued. The previously outstanding shares of Preferred Stock were entitled to receive dividends. Upon the completion of the Offering, all accumulated dividends on the Preferred Stock were paid with Common Stock in amounts determined by dividing the total accumulated dividends by the Offering price. In August 1998, the Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan"). Under the Rights Plan, each outstanding share of Raytel Common Stock held of record at the close of business on September 2, 1998, will receive one right to purchase one one-hundredth of a share of a new series of Preferred Stock for $30.00 per right when someone acquires 15 percent or more of Raytel's Common Stock or announces a tender offer which could result in such person owning 15 percent or more of the Common Stock. The rights expire on August 13, 2008. There are 20,000,000 shares of Common Stock, $.001 par value, authorized. NOTE 8. STOCK OPTIONS AND WARRANTS Warrants In connection with previous credit facilities, warrants were issued to the banks to purchase 5% of the fully diluted Common Stock of certain subsidiaries under certain circumstances. Such warrants were valued at $750,000 and $850,000, respectively, and were being amortized over the life of the term loan. The warrants were repurchased using proceeds of the Offering. Upon completion of the Offering, in accordance with the terms of a 1993 acquisition, the Company issued the seller warrants to purchase 231,200 shares of Common Stock at an exercise price of $8.40 per share. At September 30, 1998, all such warrants are outstanding. The warrants will expire five years from the effective date of the Offering. PAGE 23 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCK OPTION PLANS The Company has options outstanding under the 1983 Incentive Stock Option Plan as Amended (the "1983 Option Plan") and the 1990 Stock Option Plan (the "1990 Option Plan"). Generally, the 1983 Option Plan and the 1990 Option Plan (together the "Plans") have similar terms. Terms for the option grants under the Plans, including exercise price, are set by the Board of Directors. The exercise price for incentive stock options must be at not less than the fair market value of the underlying stock at the date of grant. The exercise price for nonqualified options must be at not less than 85% of fair market value. Options granted under the Plans have a term of five to ten years from the date of grant. Vesting occurs ratably over a period ranging from two to four years beginning with the effective date of grant. Effective upon the closing of the Offering, and the conversion of Preferred Stock into Common Stock in December 1995, all options outstanding to purchase Preferred Stock were converted into options to purchase Common Stock. The Company's Outside Directors Stock Option Plan (the "Directors Plan") was approved by the stockholders in fiscal 1995. The Directors Plan provides for the grant of 6,000 nonstatutory stock options to nonemployee directors of the Company on the date on which the optionee first becomes a director of the Company. Thereafter, the annual grant could be a maximum of 6,000 shares, as defined. Total vesting occurs, based on a formula, no sooner than three years nor longer than five years. The exercise price per share of all options granted under the Directors Plan shall be equal to the fair market value of a share of the Company's Common Stock on the date of grant. In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), was issued. SFAS 123 requires the measurement of the fair value of stock options or warrants to be included in the statements of operations or disclosed in the notes to financial statements. The Company has determined that it will retain its existing method of accounting for stock options and has elected the pro forma footnote disclosure included in the tables below. Accordingly, SFAS 123 has no effect on the Company's consolidated financial position or results of operations. The Company has computed the pro forma disclosures required under SFAS 123 for options granted in 1998, 1997 and 1996 using the Black-Scholes option pricing model prescribed by SFAS 123. The weighted average assumptions used are as follows:
September 30, - ---------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------- Risk free interest rate 5.58% - 5.86% 5.74% - 6.68% 5.60% - 6.60% Expected dividend yield None None None Expected lives 3 years 3 years 3 years Expected volatility 62.9% 61.6% 61.6%
PAGE 24 21 Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates of awards under these plans consistent with the method of SFAS 123, the Company's net income and net income per common share would have decreased to the pro forma amounts indicated below (in thousands, except per share amounts):
September 30, - ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Net income: As reported $6,093 $8,664 $6,131 Pro forma 5,086 8,338 5,532 Net income per common share -- basic: As reported .69 1.02 .80 Pro forma .57 .99 .73 Net income per common share -- diluted: As reported .66 .96 .75 Pro forma .55 .92 .68
Because SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. A summary of the status of the Company's three stock option plans at September 30, 1998, 1997 and 1996 and changes during the years then ended is presented in the tables below:
September 30, - ------------------------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------- -------------------- --------------------- Outstanding, beginning of year 1,026,712 $7.24 1,122,050 $ 7.34 705,183 $ 2.48 Granted 165,750 6.21 653,150 9.17 626,275 10.91 Exercised (11,001) 5.04 (191,494) 1.93 (189,309) 2.30 Expired (136,552) 8.99 (556,994) 11.38 (20,099) 5.76 --------- --------- --------- Outstanding, end of year 1,044,909 6.87 1,026,712 7.24 1,122,050 7.34 ========= ========= ========= Exercisable, end of year 584,779 6.17 435,813 4.61 538,713 3.33 ========= ========= ========= Weighted average fair value 3.73 5.26 6.52 of options granted
Options Outstanding Options Exercisable ---------------------- ----------------------- Weighted Average Weighted Number Weighted Remaining Average Exercisable Average Options Outstanding Summary Outstanding Life Exercise As of Exercise Range of Exercise Prices @ 9/30/98 (in years) Price 9/30/98 Price --------------------------------------------------------------------------------------------------- $1.42 - $ 5.63 357,347 $6.03 $3.69 262,847 $3.02 5.88 - 8.00 66,000 9.62 6.88 500 8.00 8.50 - 13.50 621,562 8.46 8.70 321,432 8.76 --------- ------- 1.42 - 13.50 1,044,909 7.70 6.87 584,779 6.17 ========= =======
At September 30, 1998, there were 470,415 shares available for future option grants. PAGE 25 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. LEASE COMMITMENTS The Company leases its facilities and office space under various noncancelable agreements which expire at various dates through 2008. The Company also leases various equipment under noncancelable leases. All of the above are treated as operating leases. At September 30, 1998, the future minimum rental payments for each fiscal year thereafter under all noncancelable operating leases are as follows (in thousands):
Fiscal Year Ending - -------------------------------------------------------- 1999 $3,308 2000 2,608 2001 2,488 2002 1,340 2003 1,222 Thereafter 3,343
NOTE 10. INCOME TAXES The provision for income taxes consists of the following (in thousands):
September 30, - ------------------------------------------------------------- 1998 1997 1996 ------ ------ ------ Current: Federal $2,782 $4,233 $1,751 State 1,087 2,024 1,497 ------------------------------------ Total $3,869 $6,257 $3,248 ====================================
At September 30, 1998 and 1997, the Company had $1,780,000 and $2,019,000, respectively, of deferred tax assets. The Company has recorded a 100% valuation allowance against these amounts. The tax effect of the primary temporary differences giving rise to the Company's deferred tax assets and liabilities at September 30, 1998 and 1997, are as follows (in thousands):
Current Asset Long-Term Asset (Liability) (Liability) - --------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------- Depreciation and amortization $ 779 $ 63 $ 1,133 $ 3,203 Reserves for accounts receivable and unbilled costs and fees 941 44 -- -- Net operating loss (105) -- -- -- Other, net (459) -- (509) (1,291) -------------------------------------------------- 1,156 107 624 1,912 Valuation allowance $(1,156) (107) (624) (1,912) ------- ----- ------- ------ Total deferred income taxes $ -- $ -- $ -- $ -- ==================================================
PAGE 26 23 Reconciliation of the federal statutory rate to the Company's effective tax rate is as follows (in thousands):
September 30, - ---------------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Amount Rate Amount Rate Amount Rate - ---------------------------------------------------------------------------------------------------- Federal income tax at the statutory rate $ 3,387 34.0% $ 5,318 34.0% $ 3,342 34.0% State income taxes, net of federal benefit 1,087 10.9 1,336 8.5 988 10.0 Other (481) (4.8) (397) (2.5) -- -- Federal tax benefit of the utilization of net operating loss and credit carryforwards (124) (1.2) -- -- (1,082) (11.0) -------------------------------------------------------------- Total $ 3,869 38.9% $ 6,257 40.0% $ 3,248 33.0% ==============================================================
At September 30, 1998, the Company had $4,436,000 of federal net operating loss carryforwards acquired in the CVI transaction. Such carryforwards have certain limitations on use. NOTE 11. EMPLOYEE BENEFIT PLANS The Raytel Medical Corporation Pension Plan (the "Pension Plan") is a defined contribution benefit plan which covers substantially all employees. Contributions to the Pension Plan are based upon a percentage of an employee's covered compensation, as defined. Total expense under the Pension Plan amounted to $596,000, $547,000 and $503,000 for the years ended September 30, 1998, 1997 and 1996, respectively. The Company maintains a tax-qualified Retirement Savings Plan (the "401(k) Plan") which covers substantially all employees. Eligible employees may make salary deferral (before tax) contributions up to a specified maximum. The Company makes a matching contribution of 25% of the amount deferred. Total expense under the 401(k) Plan amounted to $191,000, $178,000 and $133,000 for the years ended September 30, 1998, 1997 and 1996, respectively. Executive officers and key employees of the Company are eligible to participate in an executive deferred compensation plan at the discretion of the Board of Directors. Participants may defer a portion of their compensation, as defined. NOTE 12. PRINCIPAL CUSTOMERS All services performed by the Company are performed in the United States. No one customer accounted for more than 10% of the Company's total net patient and service revenues. However, certain sources of payment for the services, such as Medicare, HMOs, commercial insurers and other third party payors, do or could account for more than 10% of payments received. NOTE 13. CONTINGENCIES The Company is from time to time a party to various unrelated claims and disputes associated with various aspects of its ongoing business operations. In management's opinion, none of these claims or disputes are expected, either individually or in the aggregate, to have a material adverse effect on the Company's financial position or results of operations. NOTE 14. NET INCOME PER SHARE All previously outstanding preferred shares and accumulated preferred dividends were converted to Common Stock for all periods presented for purposes of the income per share calculation. Also, those shares under commitments to be issued at specified future dates are considered as outstanding for per share calculations. PAGE 27 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has adopted the provisions of SFAS No. 128, Earnings Per Share for all periods presented. The adoption of this accounting standard did not have a material impact on its results of operations. For the years ended September 30, 1998, 1997 and 1996, basic and diluted earnings per share are calculated as follows (in thousands, except per share amounts):
For the Year Ended September 30, - -------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------- Basic Earnings per Share: Net income $6,093 $8,664 $6,131 ============================== Weighted average shares outstanding 8,879 8,458 7,623 ============================== Per share $ .69 $ 1.02 $ .80 ==============================
For the Year Ended September 30, - ------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------- Diluted Earnings per Share: Net income $6,093 $8,664 $6,131 ============================== Weighted average shares outstanding 8,879 8,458 7,623 Shares to be issued 137 135 4 Options 250 350 476 Warrants 28 96 91 ------------------------------ 9,294 9,039 8,194 ============================== Per share $ .66 $ .96 $ .75 ==============================
Certain options and warrants to purchase shares of common stock were outstanding during the years ended September 30, 1998, 1997 and 1996, but were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the period. The options and warrants outstanding and their exercise prices are as follows:
For the Year Ended September 30, - ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Options and warrants outstanding 525,722 307,542 -- Range of exercise prices $5.63 - $13.50 $10.00 - $13.88 --
NOTE 15. DEFERRED LITIGATION AWARD In September 1996, the Company received a favorable administrative decision related to a billing dispute with a New York Medicare carrier whereby it was entitled to approximately $4.0 million. The time period for the Healthcare Finance Administration ("HCFA") and the Social Security Administration to file an appeal expired on February 10, 1997. After accounting for administrative costs and reimbursements due to Medtronic as a result of the terms of the acquisition of CardioCare and a separate provision against the value of a non-operating asset, the Company recognized other income of $2,510,000 pretax in its second fiscal quarter ending March 31, 1997, with a positive after tax effect of $1,506,000 or $.17 per share (the "Decision"). PAGE 28 25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Raytel Medical Corporation: We have audited the accompanying consolidated balance sheets of Raytel Medical Corporation and Subsidiaries as of September 30, 1998 and 1997 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended September 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Raytel Medical Corporation and Subsidiaries as of September 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1998 in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP - ----------------------- ARTHUR ANDERSEN LLP Hartford, Connecticut November 12, 1998 EX-21.1 6 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 RAYTEL MEDICAL CORPORATION Federal EIN: 94-2787342 For the year ended September 30, 1998
NAME & ADDRESS FEDERAL EIN TAX PD - -------------- ----------- ------ Raytel Cardiac Services, Inc. 06-1287427 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Cardiovascular Labs, Inc. 94-3210502 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Imaging Holdings, Inc. 06-1406441 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Imaging Network, Inc. 94-3210501 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Medical Imaging, Inc. 06-1332098 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Management Holdings, Inc. 94-3251759 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Raytel Texas Physician Services, Inc. 94-3249951 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Raytel Granada Hills, Inc. 94-3221261 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Raytel California Physician Services, Inc. 94-3253644 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403
1 2
NAME & ADDRESS FEDERAL EIN TAX PD - -------------- ----------- ------ Raytel Texas Heart Center Management Company, Inc. 94-3286082 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403 CardioCare 11-3145721 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Ventures Inc. 65-0294084 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Ventures of Alexandria, Inc. 72-1325012 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Ventures of Central San Antonio, Inc. 75-0381834 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Ventures of East New Orleans, Inc. 72-1333975 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Ventures of Texas, Inc. 65-0340398 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Ventures of Towson, Inc. 72-1250526 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Ventures of West Houston, Inc. 72-1284493 9/98 7 Waterside Crossing Windsor, CT 06095 Fort Worth Cardiac Laboratory, Inc. 75-2341421 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Ventures of Texas II, Inc. 74-2657210 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Centers of Port St. Lucie, Inc. 72-1235790 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Ventures of Cleveland, Inc. 72-1333978 9/98 7 Waterside Crossing Windsor, CT 06095
2 3
NAME & ADDRESS FEDERAL EIN TAX PD - -------------- ----------- ------ Heart Institute of Port St. Lucie 59-2420810 9/98 7 Waterside Crossing Windsor, CT 06095 Physician Partners of Port St. Lucie 65-0627710 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Heart Center of Harrisburg, LLC 94-3303355 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403
3 EX-23.1 7 CONSENT OF ARTHUR ANDERSEN LLP 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated November 12, 1998. It should be noted that we have not audited any financial statements of the company subsequent to September 30, 1998, or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP ----------------------------- Hartford, Connecticut December 21, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 7,463 0 35,504 0 0 46,963 40,191 20,510 122,186 15,795 0 0 0 9 66,482 122,186 0 107,629 0 93,915 762 0 2,990 9,962 3,869 6,093 0 0 0 6,093 0.69 0.66 (RECEIVABLES) Represents net receivables (LOSS PROVISION) Included in (TOTAL COSTS)
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