-----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, H92YxzO+8BAUkLBpSl+enogolkJi/AZysG5Q5mvu/lqnUxMWhKa+26rT8RKx0bcx dh/NU1Zfuc086tkscCAsUg== 0001095811-00-005571.txt : 20010101 0001095811-00-005571.hdr.sgml : 20010101 ACCESSION NUMBER: 0001095811-00-005571 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001229 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: 797830 BUSINESS ADDRESS: STREET 1: 2755 CAMPUS DR STREET 2: STE 200 CITY: SAN MATEO STATE: CA ZIP: 94403 BUSINESS PHONE: 6503490800 MAIL ADDRESS: STREET 1: 2755 CAMPUS DRIVE STREET 2: SUITE 200 CITY: SAN MATEO STATE: CA ZIP: 94403 10-K 1 f68198e10-k.txt FORM 10-K FISCAL YEAR END SEPTEMBER 30, 2000 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, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-27186 RAYTEL MEDICAL CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 94-2787342 (State or other jurisdiction of (I.R.S. Employer incorporation of 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 (Title of Class) 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 voting stock of the Registrant held by non-affiliates of the Registrant, based on the closing price of the Registrant's Common Stock as quoted on the Nasdaq National Market on November 30, 2000, was $4,993,590. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the Registrant's Common Stock outstanding as of November 30, 2000, was 8,751,550. DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED Annual Report to Stockholders for fiscal year ended September 30, 2000 Part II Proxy Statement for the annual meeting to be held on April 25, 2001 Part III
2 PART I This report includes a number of forward-looking statements which reflect Raytel'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, or CVD. We believe, based on our industry experience, that we are the leading provider of remote cardiac monitoring and testing services utilizing transtelephonic monitoring technology in the United States. Raytel also owns and operates seven freestanding cardiovascular diagnostic facilities, two freestanding facilities that provide nuclear cardiology diagnostic services and a multi-specialty medical clinic which focuses on cardiology. In addition, we provide outpatient diagnostic imaging services, through operating and investment interests in eight freestanding imaging centers, and manage 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. In August 1987, we were reincorporated in Delaware under the name Raytel Systems Corporation. In October 1992, we changed our name to Raytel Medical Corporation. Unless the context otherwise requires, "Raytel" as used herein refers to Raytel Medical Corporation, a Delaware corporation, and its consolidated subsidiaries. Raytel'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 CONSIDERATION OF STRATEGIC ALTERNATIVES In September 1999, we announced that are had retained U.S. Bancorp Piper Jaffray as our financial advisor to assist us in considering a range of strategic alternatives for maximizing shareholder value. These alternatives included possible strategic alliances, acquisitions or mergers, the sale of all or some of our businesses, or the continued operation of the businesses as an independent company. In August 2000, we terminated our financial advisory relationship with U.S. Bancorp Piper Jaffray. DISPOSITION OF PRACTICE MANAGEMENT DIVISION In May 2000, in order to settle a dispute and avoid protracted litigation, Raytel's Board of Directors approved management's plan to dispose of one of our divisions which was engaged in the management of the physician practices of Southeast Texas Cardiology Associates, P.A., or "SETCA." In May 2000, we sold substantially all of the assets of a limited partnership and the stock of a subsidiary, which effectively terminated our management of SETCA. As compensation for these assets, promissory notes payable by Raytel to the physicians of the practice managed by Raytel, in the aggregate amount of $2,300,000, were cancelled and rights to receive an aggregate of 122,068 shares of Raytel common stock held by the physicians were terminated. We reported a $4,965,000 loss on the transaction (net of a $3,367,000 tax benefit) related to the write-off of unamortized intangible assets created at the inception of the management agreements, accounts receivable and other assets less the amount of the cancelled promissory notes and the value of the stock rights terminated. The results of the practice management division have been accounted for as a discontinued operation. In addition, Raytel has discontinued its management of the physician practice of Comprehensive Cardiology Consultants, a Medical Group, Inc. 2 3 TERMINATION OF RELATIONSHIP WITH THE BAPTIST HOSPITAL OF SOUTHEAST TEXAS In February 2000, Raytel's relationship with The Baptist Hospital of Southeast Texas, under which Raytel provided management services to the hospital, was terminated. ESTABLISHMENT OF NEW IMAGING CENTER In March 2000, we established a new diagnostic imaging center in Collegeville, Pennsylvania and transferred a portion of the operations of our Morristown, Pennsylvania facility to the new center. ICD MANUFACTURING AND MONITORING AGREEMENT WITH ST. JUDE MEDICAL, INC. In November 1999, Raytel and St. Jude Medical, Inc. announced the launch of the Housecall(TM) transtelephonic monitoring system, the first commercially available system capable of downloading a complete set of diagnostic data from an implantable cardioverter-defibrillator, or ICD, over the telephone. Raytel manufactures the Housecall transmitters and receiving units under an exclusive agreement with St. Jude Medical and monitors St. Jude ICD patients using Housecall. INVESTIGATION BY THE U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Raytel is the subject of a grand jury investigation instituted in June 2000, and conducted under the direction of the United States Attorney for the District of Connecticut and the Office of the Inspector General of the U.S. Department of Health and Human Services. See "Item 3. Legal Proceedings." 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 1999 data, the American Heart Association estimates that approximately 60.8 million people in the United States suffer from one or more forms of CVD. According to the AHA's estimates, CVD claimed approximately 950,000 lives in 1998, representing 40.6% of all deaths. According to the AHA, the risk of developing coronary heart disease after the age of 40 is 49% for men and 32% for women. Due to the aging of the United States population, Raytel believes that the need for medical services to diagnose and treat CVD will continue to increase significantly in the future. BUSINESS STRATEGY Our principal objective is to maintain and extend our leadership position as a provider of cardiac transtelephonic monitoring and testing services. We are pursuing this objective through the following strategies: Expand Raytel's Telemedical Business. We intend to utilize our technology and expertise to address additional transtelephonic applications in the treatment and management of cardiac patients and thereby widen the range of services that it offers. We believe that the focus on new technologies and service opportunities, such as the development of the Housecall system for downloading diagnostic data from an implantable cardioverter-defibrillator over the telephone, will enhance our ability to market its cardiac monitoring and testing services. Develop Affiliations with Providers. We intend to expand our telemedical business 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. Expand Managed Care Relationships. We believe that interaction with managed care organizations will become an increasingly important element in the provision of cardiac care, including care for Medicare patients, and 3 4 that third-party payors will increasingly prefer to contract with providers offering a wide range of cardiovascular services provided on a multi-state or regional basis. We actively market our existing healthcare services to managed care plans and provides value added services. Pursue Strategic Acquisitions. We have built our existing organization largely through a series of acquisitions. We believe that it is often more cost-effective to acquire and reconfigure an existing business than to establish a new business. We believe that our experience in identifying, structuring and completing acquisitions of healthcare service organizations and effectively integrating these organizations will enable us to take advantage of future acquisition opportunities that arise as a result of the trends toward consolidation of healthcare service providers. We intend to explore opportunities to expand our cardiac businesses through additional strategic acquisitions. RAYTEL CARDIAC INFORMATION SERVICES Raytel is the largest provider of cardiac monitoring and testing services in the United States utilizing transtelephonic pacemaker monitoring, or "TTM," cardiac event detection, and Holter monitoring technologies. We believe that our 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 We believe, based on our industry experience, that we are the largest provider of transtelephonic pacemaker monitoring services in the United States, currently serving over 82,000 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 Raytel's three technical operations centers, where the signal is converted and displayed on a computer screen or strip chart recorder. Raytel's pacemaker monitoring services are prescribed by the patient's physician. After receipt of a prescription and enrollment by Raytel, the patient is sent a transmitter and trained to use the device over the telephone by one of our technologists. Unlike most physician-operated monitoring services, our 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. Raytel 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. We are 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 our 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 cardiac rhythm. If problems with the pacemaker system are noted or 4 5 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 Raytel operates the Cardiac Event Detection Service, or "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, 2000, we tested approximately 30,000 patients for potential transient arrhythmic events. Upon enrollment in our CEDS program, we provide 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 our 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, our 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 Raytel on a 30-day program basis for its CEDS service. HOLTER MONITORING SERVICES We believe, based on our industry experience, that we are the largest provider of Holter monitoring services in the United States, currently serving over 51,000 patients annually. Raytel processed approximately 52,000 Holter monitoring tapes during fiscal 2000. 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 In November 1999, Raytel and St. Jude Medical, Inc. announced the launch of the Housecall transtelephonic monitoring system, the first commercially available system capable of downloading a complete set of diagnostic data from an implantable cardioverter-defibrillator, or ICD, over the telephone. 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. The number of times the ICD was activated is also monitored. Previously, patients with ICDs were required to 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 Housecall system will reduce the frequency of physician office visits by extending the transtelephonic monitoring procedures presently used for pacemakers to ICDS. The new system enables trained technicians to interrogate the device's memory and transmit 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. Under an exclusive agreement with St. Jude Medical, Raytel manufactures the Housecall transmitters and receiving units and monitors St. Jude ICD patients using Housecall. TRAINING AND QUALITY ASSURANCE All of our pacemaker monitoring technologists undergo a formal six-week training program that includes basic cardiac physiology, the operation of pacemaker devices, the interaction of pacemaker systems with the heart, and the administration and interpretation of ECG tests. As technologists become more experienced, they are trained 5 6 to monitor increasingly complex pacemaker systems. Technologists administering our CEDS and Holter services undergo training in the interpretation of ECG data to detect symptoms of cardiac arrhythmia. We maintain a rigorous quality assurance program. Board-certified cardiologists direct our technologists who have 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. 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. RAYTEL CARDIOVASCULAR FACILITIES Raytel currently operates seven freestanding cardiac diagnostic cardiovascular facilities, one of which is associated with a multi-specialty medical practice in Florida which we own and manage. Four of our cardiovascular diagnostic facilities are located in Texas and two are located in Louisiana. Raytel also provides consulting services to a hospital relating to its on-site heart center and leases cardiac catheterization equipment and related leasehold improvements to the hospital. CARDIOVASCULAR DIAGNOSTIC FACILITIES Raytel operates seven freestanding cardiovascular diagnostic facilities which perform cardiac catheterization and related services (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 and Florida. At each Cardiovascular Diagnostic Facility, we provide the facilities, equipment, supplies and support personnel necessary for the cardiologist to perform interventional cardiac imaging and peripheral therapeutic procedures. Six of the Cardiovascular Diagnostic Facilities are owned by limited partnerships. Raytel, 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. Raytel owns a majority interest in five of the facilities and owns 100% of the Florida facility. Raytel also owns and operates two nuclear cardiology diagnostic facilities, formerly operated in conjunction with Cardiovascular Diagnostic Facilities. 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. RAYTEL HEART CENTER AT GRANADA HILLS COMMUNITY HOSPITAL In March 1999, Raytel and Granada Hills Community Hospital, or GHCH, terminated the management consulting agreement which they had entered into in September 1998, as the result of an advisory opinion from the Regional Office of the Health Care Finance Agency which raised issues regarding the hospital's eligibility to continue to participate in the Medicare program. Effective with the termination of the management consulting agreement, the Company entered into a revised five-year consulting services agreement with GHCH, pursuant to which we provide consulting services to the hospital with regard to the operations of its integrated heart center. GHCH is a general acute care hospital located in the San Fernando Valley area of Los Angeles. 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 consulting services agreement, we provide specified consulting services to GHCH, including quality management and assurance, technology assessment and management, strategic planning and other services. We also lease cardiac catheterization equipment and related leasehold improvements to the hospital. All medical services at the facility are the responsibility of the hospital and its medical staff. 6 7 Through an affiliated medical group, Raytel and GHCH entered into an exclusive agreement for Raytel to act as the exclusive provider of cardiac surgery services at the hospital and to manage the hospital's cardiovascular surgery program. We have 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 consulting agreement with the hospital. The affiliated medical group is owned by David E. Wertheimer, M.D., an officer and director of Raytel. Raytel, through a subsidiary, provides management services to the medical group. RAYTEL PHYSICIAN PRACTICE AND CLINIC MANAGEMENT In March 2000, Raytel disposed of its practice management division which was engaged in the management of the physician practices of SETCA. See "Recent Corporate Developments." Through its acquisition of CVI in August 1997, Raytel acquired a 20-physician multi-specialty medical clinic, which focuses on cardiology, located in Port St. Lucie, Florida. We continue to mange the operations of this clinic. RAYTEL DIAGNOSTIC IMAGING SERVICES Raytel provides outpatient diagnostic imaging services through operating and investment interests in seven freestanding imaging centers (the "Imaging Centers"). Raytel 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 Raytel. 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, or MRI, computed tomography, or CT, nuclear medicine, radiography/fluoroscopy, or 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. Raytel owns four of the Imaging Centers and holds its interests in the other three through investments in limited partnerships (the "Ventures"), to which we provide management services, including data processing, billing and collection, accounting, marketing services and operational supervision. The Ventures have terms that expire between 2008 and 2025. 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. Our experience 7 8 in dealing with a wide variety of managed care organizations and its established, centralized marketing, scheduling, billing and accounting systems provide us with the capability to establish and operate networks of independent diagnostic imaging centers. In addition, Raytel's purchasing power allows us 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 150 organizations administering healthcare programs covering more than 700,000 individual participants. SALES AND MARKETING Our marketing activities are directed at managed care organizations, cardiologists and referring physicians. We maintain a central managed care sales group that negotiates and manages contracts with managed care organizations. Our marketing organization also supervises the marketing of our 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 INFORMATION SERVICES We market our 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 or part-time employees of Raytel. Our sales organization is supported by our customer service and telemarketing personnel. We work closely with all major pacemaker manufacturers and have agreements with certain manufacturers for the distribution of Raytel's services through the direct sales forces of the manufacturers. Our sales force works closely with the approximately 10,000 physicians currently prescribing Raytel's pacemaker monitoring services. Raytel 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, we offer 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. RAYTEL DIAGNOSTIC IMAGING SERVICES We market the services of the Imaging Centers we manage through a team approach tailored to the needs of each Imaging Center. Our 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, Raytel provides marketing materials, including newsletters and brochures and holds routine educational sessions for physicians. Raytel also assists the Imaging Center in addressing needs of managed care organizations by negotiating contracts with these organizations and working closely with insurance plan administrators, HMO personnel, workers' compensation coordinators and hospital administrators. 8 9 RAYTEL CARDIOVASCULAR DIAGNOSTIC FACILITIES We market the services of our 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. Raytel'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 our cardiac monitoring and testing sales force to cross-sell our transtelephonic pacemaker monitoring, Holter monitoring and cardiac event detection services. We negotiate contacts with managed care organizations centrally from our Connecticut facility. This central sales group also assists the center manager in addressing the needs of such organizations. BILLING AND COLLECTION Our cardiac monitoring and testing operations generate a high volume of relatively low-cost services delivered to patients living throughout the United States. Raytel 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 for its pacemaker monitoring services to at least two payors for each procedure. In the year ended September 30, 2000, we generated more than 780,000 bills to Medicare and other third-party payors related to these businesses. Accordingly, our success in these businesses is substantially dependent upon the efficiency of our billing and collection systems. All of the billing and collection functions for Raytel's cardiac testing operations are centralized at our facilities in Connecticut. We have specialized data management systems that we use to obtain and record primary and secondary insurance data at the time of patient enrollment and to maintain and update that information. Our billing and collection staff is specially trained in third-party coverage and reimbursement procedures. We communicate continuously with carriers administering Medicare and have established procedures that allow us to submit most primary Medicare claims electronically, on a batch-billing basis. In addition, we maintain 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 our personnel to continually monitor open accounts. Due to the complexity of the billing and collection process, Raytel, like many other healthcare service providers, experiences normal payment cycles that are considerably longer than those customary in many other industries. We typically experience 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 our experience, we believe that our specialized data processing system used in billing for our pacemaker monitoring services and our 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. In 1998, we converted our billing processing for CEDS and Holter monitoring services to a system based on commercially available software. This system has not performed to our expectations, and we are considering converting this segment of our billing operations back to our internally-developed system. Raytel also bills and collects for the Imaging Centers, the Cardiovascular Diagnostic Facilities, the other facilities that it manages. THIRD-PARTY REIMBURSEMENT Raytel 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 Raytel in the future, or that the future reimbursement for any service offered by Raytel will be sufficient to cover the costs and overhead allocated to such service, either of which could have a material adverse effect on our operating results. We cannot predict with any 9 10 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 our business. 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 Raytel's operating results. In addition, Raytel 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 Raytel, 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 our business. GOVERNMENT REGULATION The healthcare industry is highly regulated, and there can be no assurance that the regulatory environment in which Raytel 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, or the BBA, into law. Two of the areas affected most profoundly by this law were (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. 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, or 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 Health and Human Services published final regulations implementing a number of changes proposed in June 1997. One of the changes replaced the independent physiological laboratory, or IPL, with the creation of the independent diagnostic testing facility, or 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. Our pacemaker testing and cardiac monitoring services currently operate as an IPL. The original implementation date was postponed until March 1999, and we are 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. Raytel believes that healthcare legislation, regulations and interpretations will continue to change and, as a result, routinely monitors developments in healthcare law. We expect to modify our agreements and operations from time to time as the business and regulatory environment changes. While we believe we will be able to structure our agreements and operations in accordance with applicable law, the lack of definitive interpretations of many statutory and regulatory provisions means that there can be no assurance that Raytel'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 Raytel'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. 10 11 Raytel's existing cardiac monitoring and testing services derive a substantial portion of their revenue from the Medicare program. Raytel's, diagnostic imaging services and Cardiovascular Diagnostic Facilities also derive a substantial portion of their revenue from payments made under the Medicare program, and we anticipate 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. We expect 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 facilities. These working capital deficiencies will have to be funded by Raytel through working capital advances to the facilities using funds provided by operating or financing activities. THE STARK LAW AND MEDICARE FRAUD AND ABUSE LAWS Raytel 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, often referred to as 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, or 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 OIG. 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 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." 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 11 12 of an exception under such laws, could prohibit physicians with ownership interests in the Company from referring any patients to such facilities. We are also subject to the illegal remuneration provisions of the federal Social Security Act and similar state laws, often referred to as "Fraud and Abuse Laws," which 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 Raytel 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. We have attempted to structure our 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 our 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 Raytel's operations or otherwise have a material adverse effect on our business, financial condition or operating results. CERTIFICATES OF NEED AND OTHER LICENSING REQUIREMENTS Certain states in which we operate 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 of need, or "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 Raytel 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 Raytel 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. Raytel 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 we operate 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 we have structured our 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 our practices or that other laws or regulations will not be enacted in the 12 13 future that could have a material adverse effect on our business. If a corporate practice of medicine law is interpreted in a manner that is inconsistent with our practices, we 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 Raytel to successfully restructure, any such relationship could result in fines or a loss of revenue that could have a material adverse effect on our business, financial condition or operating results. MEDICAL MALPRACTICE INSURANCE In general, Raytel does not, itself, engage in the practice of medicine and requires physicians performing medical services at its facilities to maintain medical malpractice insurance. In connection with the operation of its clinic at Port St. Lucie, Florida, a wholly-owned subsidiary of Raytel employs approximately 20 physicians, who perform 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 supervision of the physicians. With the exception of the physician employees of the Florida clinic, Raytel's employees do not practice medicine. However, certain of its employees are involved in the delivery of healthcare services to the public under the supervision of physicians. To protect Raytel from medical malpractice claims, including claims associated with its employees' activities, Raytel, or the Ventures for which Raytel serves as general partner, maintain professional liability and general liability insurance on a "claims made" basis in amounts deemed appropriate by management based upon the nature and risks of Raytel'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 we believe our insurance policies are adequate in amount and coverage for its current operations, there can be no assurance that the coverage maintained by Raytel is sufficient to cover all future claims. In addition, there can be no assurance that we will be able to obtain such insurance on commercially reasonable terms in the future. COMPETITION The healthcare service businesses in which Raytel 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. We expect competition to increase as a result of this consolidation and ongoing cost containment pressures among other factors. In executing its business strategy, we compete 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. Raytel'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. We believe that we compete favorably with most of our smaller competitors based on our 24-hour a day, seven-day a week service, specialized technical staff and sophisticated billing and collection system. Certain of our competitors, including local physicians and hospitals, may have certain competitive advantages over Raytel based upon their direct relationships with referring physicians. 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 Raytel 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 our markets are hospital and physician affiliated facilities, some of which may have greater financial and other resources than Raytel, more experience and greater name recognition than the local managers and physicians associated with our Imaging Centers and Cardiovascular Diagnostic Facilities, 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 Raytel) are in the business of establishing facilities 13 14 similar to the facilities in which we have or may obtain interests and providing management services to such facilities. EMPLOYEES As of November 30, 2000, Raytel employed approximately 736 full time equivalent employees. None of our employees are covered by collective bargaining contracts. ITEM 2. PROPERTIES The principal operations of Raytel 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 45,000 square feet, is occupied under a lease expiring in July 2004. 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 10,000 square feet, is occupied under a lease expiring in June 2002. 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 25,400 square feet, is occupied under a lease expiring in December 2002. In addition, through seven of its consolidated Imaging Centers, Raytel 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, Raytel acquired Cardiovascular Diagnostic Facilities in Texas, Louisiana, Maryland and Florida. The Ventures that operate the Cardiovascular Diagnostic Facilities lease a total of approximately 84,000 square feet in these facilities. We generally consider our properties to be in good condition and suitable for its anticipated needs. ITEM 3. LEGAL PROCEEDINGS Raytel Cardiac Services, Inc., or "RCS," a wholly-owned subsidiary of Raytel, is currently the subject of a grand jury investigation being conducted under the direction of the United States Attorney for the District of Connecticut and the Office of the Inspector General of the U.S. Department of Human Services. On June 23, 2000, the OIG and other federal agents executed a search warrant for information concerning unspecified allegations of impropriety in RCS' business practices related to Medicare-covered services. Subsequently, subpoenas have been served on RCS for the production of additional documents, and several RCS employees and contractors have been subpoenaed to provide testimony before the grand jury. Neither Raytel nor RCS has been informed of any specific charges or allegations against RCS or its employees. However, based on the actions of the U.S. Attorney and the OIG to date, Raytel believes that the investigation is focused on certain business practices of RCS' cardiac pacemaker monitoring business. RCS is continuing to perform pacemaker monitoring services for its patients and intends to maintain the quality of its service and patient care during the course of the investigation. To date, the investigation has not involved Raytel's other healthcare related services, such as RCS' cardiac event detection services, or Raytel's diagnostic imaging services or other cardiac related businesses. Raytel is cooperating with the investigation and is currently engaged in the identification and production of documents in response to the subpoenas. In connection with the investigation, Raytel is confirming its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such confirmation, Raytel held Medicare reimbursement checks received subsequent to June 23, 2000 in payment of invoices for pacemaker monitoring services and established an escrow account for funds inadvertently deposited with respect to such services. In addition, Raytel suspended billing for such services. The checks are being deposited, the cash released from escrow, and additional bills sent, only after the affected patient's records have been reviewed and found to be in compliance with applicable Medicare requirements. The total amount of such uncashed checks and escrowed funds was approximately $1,588,000 as of September 30, 2000. Subsequent to September 30, 2000, substantially all such amounts have been released. Raytel has internal procedures in place designed to assure compliance by Raytel and its subsidiaries with applicable laws and governmental regulations, including Medicare reimbursement laws. However, because of the 14 15 preliminary stage of the investigation and the limited information currently available to Raytel, we cannot predict the outcome of the investigation with any certainty. The investigation is complex and document-intensive and is likely to extend over a protracted period of time. RCS has incurred, and expects to continue to incur, substantial legal fees and other expenses in connection with the investigation and has accrued a reserve of $2,000,000 to cover the estimated amount of these expenses. Expenses in excess of the $2,000,000 reserve, if any, will adversely affect operating results in future periods, regardless of the eventual outcome of the investigation. The investigation, and the related internal review, also has diverted, and is expected to continue to divert, the efforts and attention of a number of RCS' management and administrative personnel. As a result, the investigation, regardless of its eventual outcome, has been, and will likely continue to be, costly and time-consuming. Should the outcome of the investigation ultimately result in RCS being charged with and convicted of violations of federal criminal statutes, RCS could be required to pay substantial fines and its right to participate in federal health care programs, including Medicare, could be revoked. Conviction under certain statutes could result in mandatory exclusion from participation in federal health care programs. In addition, such criminal charges would constitute a default under Raytel's bank credit agreement. It is also possible that federal authorities could assert civil claims against RCS under the Federal False Claim Act, which allows the government to recover treble damages plus penalties of $5,000 to $10,000 per claim. We cannot currently determine the likelihood of any such claims or the eventual outcome. A significant fine, the revocation of RCS' Medicare participation or civil liability under the False Claims Act would significantly harm Raytel's business. Raytel and its subsidiaries are parties to other litigation and claims arising out of its ongoing business operations. We believe that none of these matters, either individually or in the aggregate, are likely to have a material adverse effect on our 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. 15 16 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 Raytel's 2000 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 Raytel's 2000 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 Raytel's 2000 Annual Report to Stockholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Raytel does not hold any marketable equity securities, foreign currencies, or derivative financial instruments in its investment portfolio. As of September 30, 2000, Raytel did not hold any investments that are subject to interest rate risk, except for approximately $1,753,000 in investment grade commercial paper with maturities of less than 150 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, Raytel has the ability to hold its fixed income investments until maturity. Therefore, Raytel would not expect to recognize an adverse impact in income or cash flows if there were an increase or decrease in interest rates. Raytel 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 29 of our 2000 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 16 17 PART III Certain information required by Part III is omitted from this report in that Raytel 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." 17 18 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, 2000, 1999 and 1998 Consolidated Balance Sheets as of September 30, 2000 and 1999 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended September 30, 2000, 1999 and 1998 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, 2000 The Company filed one report on Form 8-K during the quarter ended September 30, 2000. The report was filed on July 25, 2000 and reported under Item 5 a transaction that effectively terminated the management services agreement between the Company and Southeast Texas Cardiology Associates. 18 19 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. Dated: December 29, 2000 RAYTEL MEDICAL CORPORATION By: /s/ Richard F. Bader -------------------------------------- Richard F. Bader Chairman of the Board of Directors 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 of Directors and Chief December 29, 2000 - ------------------------------------ Executive Officer (Principal Executive Officer) (Richard F. Bader) /s/ John F. Lawler, Jr. Vice President, Chief Financial Officer and December 29, 2000 - ------------------------------------ Corporate Controller (Principal Financial and (John F. Lawler, Jr.) Accounting Officer) Senior Vice President and Director December 29, 2000 - ------------------------------------ (David E. Wertheimer, M.D.) /s/ Thomas J. Fogarty, M.D. Director December 29, 2000 - ------------------------------------ (Thomas J. Fogarty, M.D.) /s/ Mary M. Lampe Director December 29, 2000 - ------------------------------------ (Mary M. Lampe) Director December 29, 2000 - ------------------------------------ (Gene I. Miller) /s/ Allan Zinberg Director December 29, 2000 - ------------------------------------ (Allan Zinberg)
19 20 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 10, 2000 (except with respect to the matter discussed in Note 6 of the consolidated financial statements, as to which the date is December 15, 2000). Our audits were made for the purpose of forming an opinion on the basic consolidated 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 consolidated financial statements. The information reflected on the schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements 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. ARTHUR ANDERSEN LLP /s/ ARTHUR ANDERSEN LLP Hartford, Connecticut November 10, 2000 21 SCHEDULE II RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998 VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Beginning Cost and Balance at of Year Expenses Deductions End of Year ------- -------- ---------- ----------- Description September 30, 2000 $5,664,000 $6,012,000 $(4,986,000) $6,690,000 Allowance for doubtful accounts September 30, 1999 $7,093,000 $6,467,000 $(7,896,000) $5,664,000 Allowance for doubtful accounts September 30, 1998 $6,189,000 $5,767,000 $(4,863,000) $7,093,000 Allowance for doubtful accounts
22 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE 3.1(1) Restated Certificate of Incorporation of the Registrant. 3.2(2) 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. *10.7(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. 10.22(4) Lease Agreement dated March 6, 1992 between the Registrant and Peninsula Office Park, as amended. 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. 10.28(4) Joint Venture Agreement dated March 3, 1998 between Medical Imaging Partners, L.P. and California Medical Imaging Services, Inc., as amended, and related agreements. 10.30(4) MRI Diagnostic Partners I, L.P. 1986 Limited Partnership Agreement dated December 31, 1986, and related agreement and MRI Building Partners, L.P. 1986 Agreement of Limited Partnership dated December 31, 1986. +10.38(5) 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. +10.40(6) 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. *10.41(7) Employee Stock Purchase Plan dated May 8, 1996 10.42(7) 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.
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EXHIBIT NUMBER EXHIBIT TITLE 10.43(7) Promissory Note in the amount of $15,000,000 between the Registrant and Bank of Boston Connecticut dated September 2, 1996. 10.44(7) Promissory Note in the amount of $10,000,000 between the Registrant and Banque Paribas dated September 2, 1996 10.45(8) 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(8) 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(8) Promissory Note in the amount of $27,000,000 between the Registrant and Bank of Boston Connecticut dated September 26, 1997. 10.48(8) Promissory Note in the amount of $18,000,000 between the Registrant and Banque Paribas dated September 26, 1997. 10.50(8) Noncompetition Agreement, dated as of August 15, 1997, by and between David E. Wertheimer and Raytel Medical Corporation *10.51(8) 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(9) Employment Agreement dated as of March 1, 1998, by and between Swapan Sen and Raytel Medical Corporation. *10.53(9) Employment Agreement dated as of March 1, 1998, by and between F. David Rollo, M.D., Ph.D., and Raytel Medical Corporation. *10.54(9) Employment Agreement dated as of March 1, 1998, by and between Michael O. Kokesh and Raytel Medical Corporation. 10.55(10) 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(10) 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(10) Succession Agreement, dated February 3, 1997, by and among F. David Rollo, M.D., Raytel Medical Group, Inc., P.C., Raytel Medical Corporation and Raytel California Physician Services, Inc. 10.58(11) Fourth 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. 10.59(11) Commercial Office Lease dated July 19, 1999 between Registrant and USGC Joint Venture. *10.60(11) Key Management Retention Agreement dated as of September 1, 1999, by and between Swapan Sen and Raytel Medical Corporation.
21 24
EXHIBIT NUMBER EXHIBIT TITLE *10.61(11) Key Management Retention Agreement dated as of September 1, 1999, by and between David E. Wertheimer, M.D. and Raytel Medical Corporation. *10.62(11) Key Management Retention Agreement dated as of September 1, 1999, by and between John F. Lawler, Jr. and Raytel Medical Corporation. *10.63(12) Employment Agreement dated as of August 4, 1999, by and between Allan Zinberg and Raytel Medical Corporation *10.64(12) Consulting Agreement dated as of January 1, 2000 by and between Allan Zinberg and Raytel Medical Corporation 10.65(13) Stock Purchase Agreement dated as of May 31, 2000 between and among RTPS Acquisition Company, LLC, Raytel Medical Corporation, Raytel Texas Physician Services, Inc. 10.66(14) Master Termination Agreement entered into as of May 31, 2000 and effective as of November 10, 1999 between and among Southeast Texas Cardiology Associates, P.A., Southeast Texas Cardiology Associates II, P.A., Southeast Texas Cardiology Associates II, LLP, Rodolfo P. Sotolongo, M.D., Wayne S. Margolis, M.D., and Michael L. Smith, M.D., Raytel Southeast Management, L.P., Raytel Texas Physician Services, Inc., Raytel Management Holdings, Inc. and Raytel Medical Corporation. 13.1 2000 Annual Report to Stockholders, portions of which are 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 exhibit to the Registrant's Form 10-Q Report for the quarter ended December 31, 1995. (2) Incorporated by reference to Exhibit 4 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 2.1 to the Registrant's Form 8-K Report filed on October 3, 1996 (the "October 1996 Form 8-K"). (6) Incorporated by reference to Exhibit 2.3 to the October 1996 Form 8-K. (7) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-K Report 22 25 for the year ended September 30, 1996. (8) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-K Report for the year ended September 30, 1997. (9) Incorporated by reference to Exhibit 2.1 to the March 1998 Form 10-Q. (10) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-K Report for the year ended September 30, 1998. (11) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-K Report for the year ended September 30, 1999. (12) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-Q Report for the quarter ended December 31, 1999. (13) Incorporated by reference to Exhibit 10.59 to the Registrant's Form 10-Q Report for the quarter ended June 30, 2000 (the "June 2000 10-Q"). (14) Incorporated by reference to Exhibit 10.60 to the June 2000 10-Q. 23 EX-13.1 2 f68198ex13-1.txt EXHIBIT 13.1 1 EXHIBIT 13.1 People & Technology Raytel Medical Corporation 2000 Annual Report 2 COMPANY PROFILE Raytel Medical Corporation is a company dedicated to providing diagnostic quality information to physicians who prescribe its services throughout the United States. There are three companies under the Raytel umbrella that provide that information: RAYTEL INFORMATION SERVICES Raytel Cardiac Services, Inc. is the leading provider of services and the dissemination of diagnostic information on pacemaker performance and arrhythmia monitoring to referring physicians in the country. These services include remotely monitoring patients for arrhythmias for a 30-day period and remotely testing pacemakers implanted in patients utilizing data transmission over the telephone. The company also processes 24-hour Holter monitoring tapes utilizing computer technology to localize suspected arrhythmias. The results from these tests are transmitted to the referring physician either by fax, mail, or in some cases posted on a secure Web site for immediate viewing by the physician. RAYTEL DIAGNOSTIC IMAGING SERVICES Raytel Imaging Holdings, Inc. provides quality diagnostic imaging through its diagnostic imaging centers located in clusters in the Atlantic states and California. Raytel's imaging operations include MRI, CT and other radiological exams provided in convenient facilities using state-of-the-art equipment. The Company's imaging operations also include a network with over 600 multi-modality diagnostic imaging facilities located throughout the East Coast. The network provides services to over 700,000 beneficiaries participating in occupational injury management programs and group health plans. RAYTEL HEART CENTERS Raytel supplies diagnostic data on vessels of the heart through its stand-alone cath labs as well as its stand-alone nuclear imaging facilities in the Texas and Louisiana areas. These centers do invasive diagnostic procedures performed by board-certified cardiologists in an outpatient setting. These procedures save the cardiologists valuable time and allow the patient to have the procedure done on an outpatient basis without an overnight stay in the hospital. TOTAL REVENUES (000'S OMITTED) 1996 .................. $ 72,395 1997 .................. $ 78,881 1998 .................. $102,864 1999 .................. $ 95,872 2000 .................. $ 89,950
OPERATING INCOME (000'S OMITTED) 1996 .................. $10,491 1997 .................. $12,287 1998 .................. $12,753 1999 .................. $10,409 2000 .................. $ 3,543
NET INCOME FROM CONTINUING OPERATIONS (000'S OMITTED) 1996 .................. $6,567 1997 .................. $8,678 1998 .................. $5,692 1999 .................. $4,948 2000 .................. $1,158
STOCKHOLDER'S EQUITY (000'S OMITTED) 1996 .................. $48,878 1997 .................. $61,899 1998 .................. $66,491 1999 .................. $72,029 2000 .................. $67,862
www.raytel.com 3 Letter to Our Shareholders In Fiscal Year 2000, Raytel achieved its goal of redirecting its focus to its key businesses, allowing the Company to concentrate on its core areas of expertise. This redirection created two operating companies, RAYTEL CARDIAC SERVICES, INC. and RAYTEL IMAGING HOLDINGS, INC. The Company's primary focus is now on the services provided through each of these companies -- transtelephonic monitoring of cardiac patients and outpatient diagnostic imaging, including cardiovascular cath labs. With the renewed focus on these key businesses, Raytel is positioned for growth in profits. Raytel has organized around company presidents for its individual businesses. At the end of the first quarter, Allan Zinberg, President, Raytel Medical Corporation, retired. In the second quarter, Swapan Sen was promoted to President of the diagnostic imaging division, Raytel Imaging Holdings, Inc., and Jason Sholder was hired and named President of the cardiac division, Raytel Cardiac Services, Inc. During the first quarter, continued problems with the new Cardiac Event Detection (CEDs) automated testing system resulted in abnormally long delays in answering telephone calls from patients and physicians. This culminated in a loss of business, which peaked in December 1999. The decline in profits at Raytel Cardiac Services occurred as a result of decreased revenues primarily from these problems in CEDs, and to a lesser extent, Pacemaker Follow-up. I am pleased to say the CEDs' patient volume has improved considerably from the 30% loss in business experienced during the first and second quarters; however, it has not yet returned to the volume realized in January, 1999. The OIG investigation into the Pacemaker monitoring operations, which was initiated on June 23, 2000, has also partially contributed to the Company's decline in profits. From the end of June, the time taken up by the Company lawyers, the anxiety caused by the questioning of our employees, including technician supervisors by government lawyers, has had its effects on the emotions of Raytel employees, including the CT supervisors of Pacemaker operations. As a result, the operational efficiency as measured by the number of pacemaker tests taken during the year, compared to the tests that could have been taken, has materially declined since the onset of the investigation despite the backlog of business. The decrease in efficiency resulted in costs that were higher than the corresponding revenue. On a more positive note, the Federal Register reported this month that there will be a 4% increase in reimbursement for pacemaker follow-up starting January 1, 2001. This will provide a boost to both earnings and revenue during the second quarter of the year. As of the date that I write this to you, Raytel is still speculating regarding the exact cause of the OIG investigation. Neither the company nor any individuals have been charged with any wrongdoing as a result of any findings of the investigation. Although there is no official word on the scope of the investigation, we have been given strong indications that the investigation was at least in part triggered by an audit of the CT Medicare carrier over the length of time the technicians are required to collect an ECG strip. The Company has discovered that there are no consistent applications of the rules with regard to this requirement across the country. The attorneys representing the government seem to be acutely aware of the problems this investigation is causing our Cardiac division and they are attempting to work with our lawyers to find an acceptable solution that will allow the Company to get back to its business. Jason Sholder joined the Company as President of Raytel Cardiac Services, Inc. in May 2000. He has contributed significantly during his tenure; however, the OIG investigation, which began just five weeks after his appointment, has had a significant impact on the speed of implementation of some of the plans and changes he wanted to implement, including the reduction of expenses. He has already replaced antiquated mechanical recorders associated with the pacemaker testing stations with new custom designed electronics. This assures more accurate, reliable tests by our technicians. Jason anticipates introducing a new, more reliable Raytel developed computer testing system in the first quarter of Fiscal 2001. Under the leadership of Swapan Sen, President, Raytel Imaging Holdings, Inc., The imaging division has once again maintained a solid performance for the year. Revenue increased by $2,509,000 or 12.5%, compared to last year, resulting in increased operating income. The division's imaging network, Raytel Imaging Network, increased its revenues by approximately 28.3% compared to the previous year. This increase is attributed to the increased number of contracts from self insured companies. The Network also contributed to increased operating income, posting an 88.1% increase over last year. The introduction of new advanced equipment has kept our centers technologically competitive. Even centers that experienced a substantial amount of competition, such as Raytel's Bronx, NY center, are showing improvement. Fiscal 2000 saw the opening of two new Raytel 2 RAYTEL MEDICAL CORPORATION www.raytel.com 4 imaging facilities. Raytel Medical Imaging - Collegeville opened January, 2000, in Collegeville, PA. Raytel is experiencing significant growth from this new center that was designed to complement our existing center in Norristown, PA. Collegeville is performing in accordance with plan and has improved the market penetration of Raytel in the Norristown area. With the opening of our new Collegeville facility, additional space was allocated for the relocation of Raytel's imaging network. A second satellite facility was opened in Laurel Springs, NJ, to complement our existing multi-modality facility in Turnersville, NJ. We anticipate continued growth in the imaging division through Fiscal 2001. Raytel plans to expand the diagnostic imaging business over the next 12 months with the addition of new services to existing centers and acquisitions of new centers within our two areas of influence, the Mid-Atlantic states and California. To assure we continue to provide the most advanced technology at our imaging facilities, we are investigating new advanced modalities which we anticipate adding to our existing centers. The Raytel cath labs showed growth in many of the centers. Due to government regulation changes last year, it became necessary to separate the nuclear imaging business from the cath lab business. As a result, two Raytel nuclear imaging facilities were created, Raytel Nuclear Imaging - Fort Worth and Raytel Nuclear Imaging - West Houston, both of which are doing well. One cath lab is being disbanded because it does not make economic sense to have the lab without nuclear imaging. Raytel is upgrading the cath equipment at another center and anticipates substantial improvements in profitability as a result of this new equipment. During the third quarter Raytel divested the management company that managed Southeast Texas Cardiology Associates II, L. L. P. (SETCA), a cardiology practice with some ancillary services in Southeast Texas, to the SETCA practice. This transaction occurred as a result of the advice of Piper Jaffrey, who we had hired to advise Raytel on the best way to enhance stockholder value. As a result of the completion of this transaction Raytel retired 122,068 shares of stock and eliminated a $2.3 million note that was being carried on the Raytel Balance Sheet due and payable next year. This resulted in a one-time non-cash charge for discontinued operations of $4,965,000 net of an estimated tax benefit of approximately $3,367,000. Our physician practice management operations in Port St. Lucie increased its revenue to $17,629,000 from $15,951,000 last year, although the practice did post a slight loss for two of the summer months which is the slowest time at Port St. Lucie. For the year, the practice posted an increase of 10.5% in revenues and an increase of 7.7% in operating income. This past year has been one of redirection and refocusing for Raytel. Despite some setbacks we experienced, we look forward to a return to greater profitability. However, we do not anticipate material improvements in revenues for this fiscal year, due to the restructuring of the Company. We welcome you to follow our progress as we move forward by visiting our web site at www.raytel.com. Sincerely, /s/ RICHARD E. BADER Richard E. Bader Chairman of the Board and Chief Executive Officer www.raytel.com RAYTEL MEDICAL CORPORATION 3 5 FINANCIAL TABLE OF CONTENTS Five Year Financial Summary ................................................ 5 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................... 6 Consolidated Balance Sheets ................................................ 13 Consolidated Statements of Operations ...................................... 14 Consolidated Statements of Changes in Stockholders' Equity ................. 15 Consolidated Statements of Cash Flows ...................................... 16 Notes to Consolidated Financial Statements ................................. 17 Report of Independent Public Accountants ................................... 29 Corporate Information ...................................................... 30 Corporate Directory ......................................... Inside Back Cover
4 RAYTEL MEDICAL CORPORATION www.raytel.com 6 FIVE YEAR FINANCIAL SUMMARY
Fiscal Year Ended September 30, - -------------------------------------------------------------------------------------------------------------------------------- (000's omitted, except per share data) 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA Revenues: Cardiac information services $ 40,782 $ 44,731 $ 46,171 $ 47,227 $ 43,649 Diagnostic imaging services 22,652 20,143 19,977 17,610 19,970 Heart facilities and other 26,516 30,998 36,716 14,044 8,776 ------------------------------------------------------------------------ Total revenues 89,950 95,872 102,864 78,881 72,395 Provision for OIG investigation expenses 2,000 -- -- -- -- Operating costs and selling, general and administrative expenses 76,119 77,520 82,344 60,793 56,314 Depreciation and amortization 8,288 7,943 7,767 5,801 5,590 ------------------------------------------------------------------------ Operating income 3,543 10,409 12,753 12,287 10,491 Interest expense 1,968 2,312 2,683 415 512 Other expense (income), net (788) (1,011) (509) (3,076) (591) Minority interest 602 1,000 1,273 485 762 ------------------------------------------------------------------------ Income from continuing operations before income taxes and extraordinary item 1,761 8,108 9,306 14,463 9,808 Provision for income taxes 603 3,160 3,614 5,785 3,241 ------------------------------------------------------------------------ Income from continuing operations before extraordinary item 1,158 4,948 5,692 8,678 6,567 Discontinued operations: Income from discontinued operations, net of tax 5 406 401 707 13 Loss on disposal of discontinued operations, net of tax benefit (4,965) -- -- -- -- Extraordinary item, net of tax benefit -- -- -- (721) (449) ------------------------------------------------------------------------ Net income (loss) $ (3,802) $ 5,354 $ 6,093 $ 8,664 $ 6,131 ======================================================================== Basic income (loss) per share: Income from continuing operations $ .13 $ .56 $ .64 $ 1.03 $ .86 Income (loss) from discontinued operations (.57) .05 .05 .08 -- Loss from extraordinary item -- -- -- (.09) (.06) ======================================================================== Total $ (.44) $ .61 $ .69 $ 1.02 $ .80 ======================================================================== Diluted income (loss) per share: Income from continuing operations $ .13 $ .54 $ .61 $ .96 $ 80 Income (loss) from discontinued operations (.57) .05 .05 .08 -- Loss from extraordinary item -- -- -- (.08) (.05) ======================================================================== Total $ (.44) $ .59 $ .66 $ .96 $ .75 ======================================================================== Weighted average shares outstanding: Basic 8,747 8,711 8,879 8,458 7,623 ======================================================================== Diluted 8,747 9,040 9,294 9,039 8,194 ======================================================================== CONSOLIDATED BALANCE SHEET DATA Total assets $ 109,597 $ 117,783 $ 122,186 $ 119,421 $ 68,030 Long-term debt and capital lease obligations(1) 25,197 29,370 36,997 36,354 7,576 Total stockholders' equity 67,862 72,029 66,491 61,899 48,878
(1) Includes current portion of long-term debt and capital lease obligations. www.raytel.com RAYTEL MEDICAL CORPORATION 5 7 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 discussion, that could cause actual results to differ materially from historical results or those anticipated. In this discussion, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. OVERVIEW The Company generates its revenues from cardiac information services (which include telephonic monitoring services for cardiac pacemaker patients ("Pacing"), cardiac event detection services ("CEDS") and Holter monitoring), diagnostic imaging services and from heart facilities. Following the Company's initial public offering in December 1995, the Company entered into a series of transactions which expanded its heart center and physician practice management businesses. As a result, revenue has also been provided from: the Raytel Heart Center at Granada Hills ("RHCGH") beginning on February 1, 1996; the management of Southeast Texas Cardiology Associates II, L.L.P. ("SETCA") beginning on September 18, 1996; 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 clinic, Heart and Family Health Institute ("HFHI") and six cardiovascular diagnostic facilities. The management of SETCA and CCMG comprised the Company's Practice Management Division. Under certain practice management contracts, revenues were recognized pursuant to long-term arrangements with physician groups under which the Company provided the physician group with a full range of services, including, but not limited to, office space, specialized clinical and procedural facilities, medical equipment, data processing and medical record keeping, billing and collection procedures and services, non-physician licensed personnel, such as nurses and technicians, as well as office staff and administrative personnel. In the case of SETCA and CCMG, the Company's practice management revenues were derived from the physician groups' revenues, generally as a purchased service, except for certain physician compensation and employment benefits, which were paid by the physician group on a priority basis. 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 clinic in Florida. Total original consideration for the transaction consisted of cash and transaction cost 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 ("Baptist") to develop a Raytel Cardiovascular Center at the hospital. Under the agreement, Raytel was to manage the cardiovascular center, which provided the entire continuum of cardiovascular services, including diagnostic, therapeutic and patient management programs. Among other duties, Raytel was to be responsible for the day-to-day operations of the heart center, including administrative support, information systems management, marketing and public relations activities. The Company began operations at Baptist during its fourth quarter of fiscal 1998. Due to the merger between Baptist and the Memorial Hermann Hospital System, a modified agreement became effective March 1, 1999. Therefore, 6 RAYTEL MEDICAL CORPORATION www.raytel.com 8 during the first five months of fiscal 1999, the Company only recognized revenue to the extent of expenses. Effective March 1, 1999, the Company recognized revenue based on the modified agreement which called for the Company to manage portions of the cardiovascular surgery and cardiology programs at Baptist and to develop and manage specialty clinics to support the cardiovascular program. Effective March 27, 1999, the Company entered into a revised agreement with RHCGH. The new agreement results in significantly lower revenues and expenses than revenues and expenses recognized under the previous agreements. In November 1999, the Company filed a demand for arbitration against CCMG with JAMS/Endispute, Inc. The Company provided management services to CCMG pursuant to a long-term management services agreement entered into between the parties in November 1996. The demand for arbitration asserts that Raytel is entitled to rescission, restitution and/or damages as a result of CCMG's material breaches of the management services agreement. The Company does not expect that an adverse opinion in the arbitration will have a material adverse effect on the financial condition of the Company. In order to settle a dispute and avoid protracted litigation, initiated by SETCA, effective May 31, 2000, the Company's Board of Directors approved management's plan to sell SETCA. As a result of the discontinuance of the management of CCMG and the sale of SETCA, the Company discontinued the Practice Management Division. Effective May 31, 2000, the Company sold substantially all of the assets of Raytel Nuclear Imaging-Orange, L.P. and the common stock of Raytel Texas Physicians Services, Inc. in exchange for promissory notes in the aggregate amount of approximately $2,300,000 and the physicians' agreement to cancel existing rights to receive 122,068 shares of Raytel's common stock. Accordingly, the Company reported the results of operations of the Practice Management Division and the loss on disposal as discontinued operations. The loss on disposal of $4,965,000 is net of an estimated tax benefit of approximately $3,367,000. Raytel is currently the subject of a grand jury investigation of unspecified allegations concerning certain business practices. In connection with the investigation, Raytel has reviewed its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such confirmation, Raytel held Medicare reimbursement checks received since June 23, 2000 in payment of invoices for pacemaker monitoring services and established an escrow account for funds inadvertently deposited with respect to such services received since the date of the investigation. In addition, Raytel suspended billing for such services. Most of the checks are deposited, most of the cash is released from escrow, and new billings for services performed has commenced. The total amount of such uncashed checks and escrowed funds was approximately $1,580,000 as of September 30, 2000. Since Raytel recognizes revenue when patient services are provided, neither the escrow arrangement nor the deferred billing has had a direct impact on Raytel's operating results. If the Company's review discloses any patient billings that have not been fully compliant with Medicare requirements, any resulting billing adjustments or reversals will be charged against operating results in that current period. In addition, the Company has incurred, and expects to continue to incur, substantial legal fees and other expenses in connection with the investigation and has accrued a reserve of $2,000,000 to cover the estimated amounts of these expenses. As of September 30, 2000, the Company had received legal bills and other charges of approximately $896,000 related to the investigation. Expenses in excess of the $2,000,000 reserve, if any, will adversely affect operating results in future periods, regardless of the eventual outcome of the investigation. At this time, the Company cannot determine the additional financial impact, if any, of this investigation. Moreover, the investigation, and the related internal compliance review, also have diverted, and are expected to continue to divert, the efforts and attention of a number of Raytel's management and administrative personnel. The impact of this diversion reduced the efficiency of Raytel's pacemaker monitoring operations during the last week of the quarter ended June 30, 2000 and adversely affected both revenues and operating expenses for that period as well as the quarter ended September 30, 2000. Raytel expects that, www.raytel.com RAYTEL MEDICAL CORPORATION 7 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS while the impact of the investigation on the Company's operations will be less significant as the investigation proceeds, it will continue to adversely affect operating results in future periods. RESULTS OF OPERATIONS 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, - ----------------------------------------------------------------------------------------------------- 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Total revenues 100.0% 100.0% 100.0% Operating costs and selling, general and administrative expenses 86.8 80.9 80.1 Depreciation and amortization 9.2 8.3 7.6 ------------------------------- Operating income 4.0 10.8 12.3 Interest expense and other expense (income) 1.3 1.4 2.1 Minority interest .7 1.0 1.2 ------------------------------- Income from continuing operations before income taxes 2.0 8.4 9.0 Provision for income taxes .7 3.3 3.5 ------------------------------- Income from continuing operations 1.3 5.1 5.5 Discontinued operations (5.5) .4 .4 ------------------------------- Net income (loss) (4.2)% 5.5% 5.9% ===============================
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1999 REVENUES. For the fiscal year ended September 30, 2000, total revenues were $89,950,000 compared to $95,872,000 for fiscal 1999, representing a decrease of $5,922,000, or 6.2%. Cardiac information services revenues were $40,782,000 in fiscal year 2000, compared to $44,731,000 in fiscal year 1999, a decrease of $3,949,000 ,or 8.8%. The decrease in revenues for cardiac information services was due primarily to lower revenues from Pacing and CEDS as a result of lower test volumes. Diagnostic imaging services revenue was $22,652,000 in fiscal 2000, compared to $20,143,000 in fiscal 1999, an increase of $2,509,000, or 12.5%, due primarily to increases in revenue at certain centers and the imaging network due to an increase in patient volumes. Heart facilities and other revenues were $26,516,000 in fiscal 2000, compared to $30,998,000 in fiscal 1999, a decrease of $4,482,000, or 14.5%, due primarily to lower revenue at RHCGH due to the amended agreement and, to a lesser extent, lower revenue at certain cardiovascular diagnostic facilities, partially offset by an increase in revenue from HFHI. OPERATING EXPENSES. Operating costs and selling, general and administrative expenses decreased by $1,401,000, or 1.8% (excluding the provision for OIG investigation expenses), from $77,520,000 in fiscal 1999 to $76,119,000 in fiscal 2000 due primarily to lower expenses at RHCGH due to the amended agreement, partially offset by increases in costs and expenses in diagnostic imaging services, HFHI and cardiac information services. Operating costs and selling, general and administrative expenses (excluding the OIG provision) as a percentage of total revenues increased from 80.9% in fiscal 1999 to 84.6% in fiscal 2000. PROVISION FOR OIG INVESTIGATION EXPENSES. The Company has provided $2,000,000 for expected expenses associated with the OIG investigation. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by $345,000, or 4.3%, from $7,943,000 in fiscal 1999 to $8,288,000 in fiscal 2000 and increased as a percentage of revenues from 8.3% in fiscal 1999 to 9.2% in fiscal 2000. 8 RAYTEL MEDICAL CORPORATION www.raytel.com 10 OPERATING INCOME. As a result of the foregoing factors, operating income decreased by $6,866,000, or 66.0%, from $10,409,000 in fiscal 1999 to $3,543,000 in fiscal 2000. INTEREST EXPENSE. Interest expense decreased by $344,000, or 14.9%, from $2,312,000 in fiscal 1999 to $1,968,000 in fiscal 2000 due primarily to a decrease in the average amount of debt outstanding. OTHER EXPENSE (INCOME). Other income decreased by $223,000 from $1,011,000 for fiscal 1999 to $788,000 for fiscal 2000 due primarily to a series of insignificant items. MINORITY INTEREST. Minority interest decreased by $398,000 from $1,000,000 in fiscal 1999 to $602,000 in fiscal 2000 due primarily to decreased income in certain cardiovascular diagnostic facilities. INCOME TAXES. The provision for income taxes decreased by $2,557,000, or 80.9%, from $3,160,000 in fiscal 1999 to $603,000 in fiscal 2000 as a result of decreased taxable income. INCOME (LOSS) FROM CONTINUING OPERATIONS. As a result of the foregoing factors, income from continuing operations decreased by $3,790,000, or 76.6%, from $4,948,000 in fiscal 1999 to $1,158,000 in fiscal 2000. DISCONTINUED OPERATIONS. Income from operations of a discontinued segment decreased by $401,000 from $406,000 in fiscal 1999 to $5,000 in fiscal 2000, net of tax. The loss on disposal of the physician practice management business of $4,965,000 is net of an estimated tax benefit of $3,367,000. NET INCOME (LOSS). As a result of the foregoing factors, the Company incurred a net loss of $3,802,000 in fiscal 2000 versus net income of $5,354,000 in fiscal 1999. FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1998 REVENUES. For the fiscal year ended September 30, 1999, total revenues were $95,872,000 compared to $102,864,000 for fiscal 1998, representing a decrease of $6,992,000, or 6.8%. Cardiac information services revenues were $44,731,000 in fiscal 1999 compared to $46,171,000 in fiscal 1998, a decrease of $1,440,000, or 3.1%. The decrease in revenues for cardiac information services was due primarily to slight decreases in Pacing and CEDs revenue. Diagnostic imaging services revenue was $20,143,000 in fiscal 1999, compared to $19,977,000 in fiscal 1998, an increase of $166,000, or .8%. Heart facilities and other revenues were $30,998,000 in fiscal 1999, compared to $36,716,000 in fiscal 1998, a decrease of $5,718,000, or 15.6%, due primarily to lower revenues at RHCGH due to the amended agreement. OPERATING EXPENSES. Operating costs and selling, general and administrative expenses decreased by $4,824,000, or 5.9%, from $82,344,000 in fiscal 1998 to $77,520,000 in fiscal 1999 due primarily to lower expenses at RHCGH due to the amended agreement, partially offset by increases in costs and expenses in diagnostic imaging services and, to a lesser degree, by increases in cardiac information services. Operating costs and selling, general and administrative expenses as a percentage of total revenues increased slightly from 80.1% in fiscal 1998 to 80.9% in fiscal 1999. At RHCGH, operating expenses were slightly in excess of revenues for both fiscal 1999 and 1998. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by $176,000, or 2.3%, from $7,767,000 in fiscal 1998 to $7,943,000 in fiscal 1999 and increased as a percentage of revenues from 7.6% in fiscal 1998 to 8.3% in fiscal 1999. OPERATING INCOME. As a result of the foregoing factors, operating income decreased by $2,344,000, or 18.4%, from $12,753,000 in fiscal 1998 to $10,409,000 in fiscal 1999. www.raytel.com RAYTEL MEDICAL CORPORATION 9 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST EXPENSE. Interest expense decreased by $371,000, or 13.8%, from $2,683,000 in fiscal 1998 to $2,312,000 in fiscal 1999 due primarily to lower interest rates and to a decrease in the average debt outstanding. OTHER EXPENSE (INCOME). Other income increased by $502,000 from $509,000 for fiscal 1998 to $1,011,000 for fiscal 1999 due primarily to a series of insignificant items. MINORITY INTEREST. Minority interest decreased by $273,000 from $1,273,000 in fiscal 1998 to $1,000,000 in fiscal 1999 due primarily to decreased income in a certain cardiovascular diagnostic facility. INCOME TAXES. The provision for income taxes decreased by $454,000, or 12.6%, from $3,614,000 in fiscal 1998 to $3,160,000 in fiscal 1999 as a result of decreased taxable income. INCOME FROM CONTINUING OPERATIONS. As a result of the foregoing factors, net income decreased by $744,000, or 13.1%, from $5,692,000 in fiscal 1998 to $4,948,000 in fiscal 1999. DISCONTINUED OPERATIONS. Income from operations of a discontinued segment increased $5,000 from $401,000 in fiscal 1998 to $406,000 in fiscal 1999, net of tax. NET INCOME. As a result of the foregoing factors, net income decreased by $739,000, or 12.1%, from $6,093,000 in fiscal 1998 to $5,354,000 in fiscal 1999. BUSINESS ENVIRONMENT AND FUTURE RESULTS The Company's future operating results may be affected by various trends in the healthcare industry as well as by a variety of other factors, some of which are beyond the Company's control. The healthcare industry is undergoing significant change as third-party payors attempt to control the cost, utilization and delivery of healthcare services. Substantially all of the Company's revenues are derived from Medicare, HMOs, commercial insurers and other third-party payors. Both government and private payment sources have instituted cost containment measures designed to limit payments made to healthcare providers by reducing reimbursement rates, limiting services covered, increasing utilization review of services, negotiating prospective or discounted contract pricing, adopting capitation strategies and seeking competitive bids. Revenue from the Company's Pacing operations during certain periods of the last three fiscal years has been negatively impacted by Medicare reimbursement rate reductions. Reimbursement rate reductions applicable to the Company's Pacing procedures became effective on January 1, 1997. These reductions had a negative effect on the Company's operating results for the last three quarters of fiscal 1997 and for the first quarter of fiscal 1998. The Company's Pacing operations have been favorably impacted for the period January 1, 1998 to December 31, 1998 due to an increase in Medicare reimbursement rates effective on January 1, 1998. However, a slight decrease in these rates became effective on January 1, 1999, thereby having a negative effect on Pacing revenue for calendar year 1999. There was a slight increase in Medicare reimbursement rates effective January 1, 2000. The Company cannot predict with any certainty whether or when additional reductions or changes in Medicare or other third-party reimbursement rates or policies will be implemented. There can be no assurance that future changes, if any, will not adversely affect the amounts or types of services that may be reimbursed to the Company, or that future reimbursement of any service offered by the Company will be sufficient to cover the costs and overhead allocated to such service. From time to time, Congress considers legislation to reduce Medicare and Medicaid expenditures. Future legislation of this type could have a material adverse effect on the Company's business, financial condition and operating results. Governmental agencies promulgate regulations which mandate changes in the method of delivering services which could have a material adverse effect on the Company's business. 10 RAYTEL MEDICAL CORPORATION www.raytel.com 12 An element of the Company's strategy is to expand, in part, through acquisitions and investments in complementary healthcare businesses. The implementation of this strategy may place significant strain on the Company's administrative, operational and financial resources and increase demands on its systems and controls. There can be no assurances that businesses acquired by the Company, either recently or in the future, will be integrated successfully and profitably into the Company's operations, that suitable acquisitions or investment opportunities will be identified, or that any such transactions can be consummated. Providers of healthcare services are subject to numerous federal, state and local laws and regulations that govern various aspects of their business. There can be no assurance that the Company will be able to obtain regulatory approvals that may be required to expand its services or that new laws or regulations will not be enacted or adopted that will have a material adverse effect on the Company's business, financial condition or operating results. The healthcare businesses in which the Company is engaged are highly competitive. The Company expects competition to increase as a result of ongoing consolidations and cost-containment pressures, among other factors. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in the Company's operating results, shortfalls in such operating results from levels forecasted by securities analysts and other events or factors. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations that have particularly affected the market prices of companies in the healthcare service industries and that have often been unrelated to the operating performance of the affected companies. Announcements of changes in reimbursement policies of third-party payors, legislative or regulatory developments, economic news and other external factors may have a significant impact on the market price of healthcare stocks. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, the Company had working capital of $32,387,000, compared to $28,599,000 at September 30, 1999. At September 30, 2000, the Company had cash and temporary cash investments of $8,781,000. At September 30, 2000, $20,258,000 was outstanding under the Company's $45,000,000 line of credit. The Company batch-bills Medicare insurance carriers for most cardiac testing services performed during the first few months of each calendar year. This practice results in a temporary build-up of accounts receivable during the Company's second and third fiscal quarters and the collection of these receivables primarily during the subsequent fourth fiscal quarter. The Company has a revolving line of credit with two banks in the amount of $45,000,000 to fund working capital needs, future acquisitions, equipment purchases and other business needs. Amounts outstanding under the line of credit bear interest based on a defined formula and are subject to certain covenants. The line of credit expires in August 2001 at which time any outstanding balance will be due and payable. The Company is currently in default of one of its financial covenants in connection with its line of credit. The Company has requested a waiver from the banks. If the banks do not grant the waiver, the banks have the right to terminate the credit facility and demand payment in full of the outstanding balance. On December 15, 2000, the line of credit agreement was amended to lower the line of credit to $20,000,000 and to revise certain financial and other covenants and terms. The interest rate was changed to be based on LIBOR plus 275 basis points, or the bank's prime rate plus 50 basis points, at the option of the Company and the due date was extended to October 1, 2001. A new non-financial covenant was added which states any civil financial settlement in excess of $1,000,000 and/or criminal charges relating to the ongoing OIG investigation will be an event of default. In addition, the banks granted a waiver for the event of default existing at September 30, 2000. www.raytel.com RAYTEL MEDICAL CORPORATION 11 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's long-term capital requirements will depend on numerous factors, including the rate at which the Company develops new products and services and acquires other businesses, if any. The Company believes that its cash and cash equivalent balances, together with amounts available from bank borrowings and cash generated by its operating activities, will be adequate to meet the Company's anticipated needs for working capital and capital expenditures through fiscal 2001. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to market risk from interest rate fluctuations because it uses variable rate debt to finance working capital requirements. The Company does not believe that there is any material market risk exposure with respect to other financial instruments that would require further disclosure under this item. PERCENTAGE OF CONSOLIDATED REVENUES
Fiscal Year Ended September 30, ------------------------------------- 2000 1999 1998 ---- ---- ---- Cardiac information services 45% 47% 45% Diagnostic imaging services 25% 21% 19% Heart facilities and other 30% 32% 36% ----------------------------------- Total 100% 100% 100% ===================================
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
FISCAL YEAR ENDED SEPTEMBER 30, 2000 - ---------------------------------------------------------------------------------------------------------------- (000's omitted, except per share amounts) DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, - ---------------------------------------------------------------------------------------------------------------- Net revenues $22,631 $23,450 $ 22,704 $ 21,165 =============================================================== Income (loss) before income taxes $ 1,427 $ 1,415 $ (1,281) $ 200 Provision for income taxes 556 552 (499) (6) --------------------------------------------------------------- Income (loss) from continuing operations 871 863 (782) 206 Income (loss) from discontinued operations 29 17 (5,006) -- --------------------------------------------------------------- Net income (loss) $ 900 $ 880 $ (5,788) $ 206 =============================================================== Net income (loss) per share(1): Basic $ .10 $ .10 $ (.66) $ .02 =============================================================== Diluted $ .10 $ .10 $ (.66) $ .02 ===============================================================
Fiscal Year Ended September 30, 1999 - ------------------------------------------------------------------------------------------------------ December 31, March 31, June 30, September 30, - ------------------------------------------------------------------------------------------------------ Net revenues $24,501 $25,636 $23,146 $22,589 ============================================================ Income before income taxes $ 2,049 $ 1,986 $ 2,037 $ 2,036 Provision for income taxes 799 775 794 792 ------------------------------------------------------------ Income from continuing operations 1,250 1,211 1,243 1,244 Income from discontinued operations 100 132 93 81 ============================================================ Net income $ 1,350 $ 1,343 $ 1,336 $ 1,325 ============================================================ Net income per share(1): Basic $ .16 $ .15 $ .15 $ .15 ============================================================ Diluted $ .15 $ .15 $ .15 $ .15 ============================================================
(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. 12 RAYTEL MEDICAL CORPORATION www.raytel.com 14 CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2000 AND 1999
September 30, - ---------------------------------------------------------------------------------------------------------- (000's omitted) 2000 1999 - ---------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 7,201 $ 6,110 Cash held in escrow 1,580 -- Receivables, net 36,840 34,858 Prepaid expenses and other 2,597 3,143 ----------------------------- Total current assets 48,218 44,111 Property and equipment, less accumulated depreciation and amortization 19,651 22,239 Intangible assets, less accumulated amortization 41,672 51,388 Other assets 56 45 ----------------------------- Total assets $ 109,597 $ 117,783 ============================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations $ 1,067 $ 2,124 Accounts payable 5,258 3,793 Accrued compensation and benefits 3,177 3,391 Accrued other liabilities 6,329 6,204 ----------------------------- Total current liabilities 15,831 15,512 Long-term debt and capital lease obligations, net of current portion 24,130 27,246 Deferred liabilities -- 129 Minority interest in consolidated entities 1,774 2,867 ----------------------------- Total liabilities 41,735 45,754 ----------------------------- Commitments and contingencies (Notes 9, 11 and 13) Stockholders' equity: Common stock 9 9 Additional paid-in capital 62,664 62,053 Common stock to be issued 69 1,045 Retained earnings 8,742 12,544 ----------------------------- 71,484 75,651 Less treasury stock, at cost (3,622) (3,622) ----------------------------- Total stockholders' equity 67,862 72,029 ----------------------------- Total liabilities and stockholders' equity $ 109,597 $ 117,783 =============================
The accompanying notes are an integral part of these consolidated financial statements. www.raytel.com RAYTEL MEDICAL CORPORATION 13 15 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
September 30, - ------------------------------------------------------------------------------------------------------------------------- (000's omitted, except per share amounts) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Revenues: Cardiac information services $ 40,782 $ 44,731 $ 46,171 Diagnostic imaging services 22,652 20,143 19,977 Heart facilities and other 26,516 30,998 36,716 ---------------------------------------------- Total revenues 89,950 95,872 102,864 ---------------------------------------------- Costs and expenses: Provision for OIG investigation expenses 2,000 -- -- Operating costs 41,203 43,042 48,481 Selling, general and administrative 34,916 34,478 33,863 Depreciation and amortization 8,288 7,943 7,767 ---------------------------------------------- Total costs and expenses 86,407 85,463 90,111 ---------------------------------------------- Operating income 3,543 10,409 12,753 Interest expense 1,968 2,312 2,683 Other expense (income), net (788) (1,011) (509) Minority interest 602 1,000 1,273 ---------------------------------------------- Income from continuing operations before income taxes 1,761 8,108 9,306 Provision for income taxes 603 3,160 3,614 ---------------------------------------------- Income from continuing operations 1,158 4,948 5,692 Discontinued operations: Income from discontinued operations, net of tax 5 406 401 Loss on disposal of discontinued operations, net of tax benefit (4,965) -- -- ---------------------------------------------- Net income (loss) $ (3,802) $ 5,354 $ 6,093 ============================================== Basic income per share: Income from continuing operations $ .13 $ .56 $ .64 Income (loss) from discontinued operations (.57) .05 .05 ---------------------------------------------- Total $ (.44) $ .61 $ .69 ============================================== Diluted income (loss) per share: Income from continuing operations $ .13 $ .54 $ .61 Income (loss) from discontinued operations (.57) .05 .05 ---------------------------------------------- Total $ (.44) $ .59 $ .66 ============================================== Weighted average shares outstanding: Basic 8,747 8,711 8,879 ---------------------------------------------- Diluted 8,747 9,040 9,294 ==============================================
The accompanying notes are an integral part of these consolidated financial statements. 14 RAYTEL MEDICAL CORPORATION www.raytel.com 16 \ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
Common Stock Additional Common Total -------------------- Paid-in Stock to Retained Treasury Stockholders' (000's omitted, except shares) Shares Amount Capital be Issued Earnings Stock Equity - ----------------------------------------------------------------------------------------------------------------------------------- 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 Net income -- -- -- -- 5,354 -- 5,354 Options exercised 59,206 -- 120 -- -- -- 120 Stock compensation grant 7,348 -- 37 -- -- -- 37 Employee stock purchase 6,973 -- 27 -- -- -- 27 Value of 8,104 shares issued 8,104 -- 79 (79) -- -- -- ----------------------------------------------------------------------------------------- Balance at September 30, 1999 8,745,130 9 62,053 1,045 12,544 (3,622) 72,029 Net loss -- -- -- -- (3,802) -- (3,802) Employee stock purchase 5,299 -- 11 -- -- -- 11 Cancellation of 137,360 shares to be issued -- -- 600 (976) -- -- (376) ----------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 2000 8,750,429 $9 $62,664 $ 69 $ 8,742 $(3,622) $ 67,862 =========================================================================================
The accompanying notes are an integral part of these consolidated financial statements. www.raytel.com RAYTEL MEDICAL CORPORATION 15 17 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
September 30, - --------------------------------------------------------------------------------------------------- (000's omitted) 2000 1999 1998 - --------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $(3,802) $ 5,354 $ 6,093 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 8,288 8,475 8,282 Minority interest 602 1,000 1,273 Payout of deferred compensation -- (1,245) -- Net loss on disposal of discontinued division 4,965 -- -- Other, net 126 78 211 Changes in operating accounts: Receivables, net (7,042) 646 (5,813) Prepaid expenses and other 474 853 (25) Accounts payable 1,556 (856) (429) Accrued liabilities 4,783 411 (1,286) ------------------------------------ Net cash provided by operating activities 9,950 14,716 8,306 ------------------------------------ Cash flows from investing activities: Capital expenditures (5,297) (7,773) (5,092) Additional costs of company previously purchased -- -- (280) Other, net 661 (36) (396) ------------------------------------ Net cash used in investing activities (4,636) (7,809) (5,768) ------------------------------------ Cash flows from financing activities: Proceeds from (paydown of) line of credit 1,211 (9,178) 2,264 Income distributions to noncontrolling investors (1,774) (1,594) (1,560) Repurchase of company stock -- -- (2,211) Proceeds from (principal repayments of) debt, net (2,020) 2,325 (1,665) Other, net (60) 187 224 ------------------------------------ Net cash used in financing activities (2,643) (8,260) (2,948) ------------------------------------ Net increase (decrease) in cash and cash equivalents 2,671 (1,353) (410) Cash and cash equivalents at beginning of year 6,110 7,463 7,873 ------------------------------------ Cash and cash equivalents at end of year $ 8,781 $ 6,110 $ 7,463 ==================================== Supplemental disclosure of cash flow information: Interest paid $ 2,036 $ 2,680 $ 2,925 ==================================== Income taxes paid, net of refunds received $ 1,073 $ 2,309 $ 3,710 ====================================
The accompanying notes are an integral part of these consolidated financial statements. 16 RAYTEL MEDICAL CORPORATION www.raytel.com 18 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, testing and information services utilizing telephonic and Internet communication technology. Also, the Company has developed integrated heart centers that are located within existing hospitals and acquired 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 five 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 was 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 included revised financial terms. Then, effective March 27, 1999, the Company entered into a revised agreement with RHCGH. The revised agreement results in significantly lower revenues and expenses than revenues and expenses recognized under the previous agreements. (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 of which $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 managed the non-medical aspects of the practice. The Company 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 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 was committed to deliver was 85,448 in 2000 and 36,620 in 2001 (See (g) on following page). (d) On October 18, 1996, the Company entered into a long-term management service agreement whereby the Company managed 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. In November 1999, the Company filed a demand for arbitration against CCMG with JAMS/Endispute, Inc. The demand for arbitration asserts that Raytel is entitled to rescission, restitution and/or damages as a result of CCMG's material breaches of the management services agreement. The Company does not expect that an adverse opinion in the arbitration will have a material adverse effect on the financial condition of the Company. www.raytel.com RAYTEL MEDICAL CORPORATION 17 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 clinic in Florida ("HFHI"). 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 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. (f) On October 9, 1997, the Company announced it had entered into an agreement with The Baptist Hospital of Southeast Texas ("Baptist") to develop a Raytel Cardiovascular Center at the hospital. Under the agreement, Raytel was to manage the cardiovascular center, which provided the entire continuum of cardiovascular services, including diagnostic, therapeutic and patient management programs. Among other duties, Raytel was to be responsible for the day-to-day operations of the heart center, including administrative support, information systems management, marketing and public relations activities. The Company began operations at Baptist during its fourth quarter of fiscal 1998. Due to a merger between Baptist and the Memorial Hermann Hospital System, a modified agreement became effective March 1, 1999. Therefore, during the first five months of fiscal 1999, the Company only recognized revenue to the extent of expenses. Effective March 1, 1999, the Company recognized revenue based on the modified agreement which called for the Company to manage portions of the cardiovascular surgery and cardiology programs at Baptist and to develop and manage specialty clinics to support the cardiovascular program. (g) In order to settle a dispute and avoid protracted litigation, initiated by SETCA, effective May 31, 2000, the Company's Board of Directors approved management's plan to sell SETCA. As a result of the discontinuance of the management of CCMG and the sale of SETCA, the Company discontinued that division (the "Practice Management Division"). Effective May 31, 2000, the Company sold substantially all of the assets of Raytel Nuclear Imaging-Orange, L.P. and the common stock of Raytel Texas Physicians Services, Inc., which effectively terminated its management of SETCA. As compensation for these assets and stock, promissory notes payable by the Company to the physicians of the practice in the aggregate amount of approximately $2,300,000 and rights to receive an aggregate of 122,068 shares of Raytel's common stock held by those physicians were terminated. Accordingly, the Company reported the results of operations of the Practice Management Division and the loss on disposal as discontinued operations. The Company has reported a $4,965,000 loss on the disposal (net of an estimated $3,367,000 tax benefit) related to the write-off of unamortized intangible assets created at the inception of the management agreements, accounts receivable and other assets less the amount of the cancelled notes and the fair market value of the stock rights terminated. Accordingly, the results of the Practice Management Division have been accounted for as a discontinued operation and the related operating results have been reported separately from continuing operations for all periods presented. Thus, prior year operating results have been restated from the operating results previously reported. The assets and liabilities of the Practice Management Division are immaterial to the financial statements and are included in the accompanying prior year balance sheet. Revenues applicable to the Practice Management Division for the years ended September 30, 2000, 1999 and 1998 were $2,432,000, $5,522,000 and $4,765,000, respectively. Income from discontinued operations for the years ended September 30, 2000, 1999 and 1998 is net of taxes of $3,000, $259,000 and $255,000, respectively. 18 RAYTEL MEDICAL CORPORATION www.raytel.com 20 (h) 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). 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, 2000, the Company owned six imaging centers and held interests in two 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 each of the Ventures and/or controls their assets and operations. At September 30, 2000, the Company held interests in six cardiovascular diagnostic facilities (two of which are currently inactive), through investments in various limited partnerships (the "Partnerships") and wholly-owned three others. All Partnerships are consolidated for financial reporting purposes, as the Company owns more than 50% of each of the 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. (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. Consolidated diagnostic imaging revenues principally represent fees for services provided to patients net of physician fees, contractual allowances and certain expenses. For HFHI, the Company recognizes 100% of all medical revenue as the physicians are employees of the Company. Under certain practice management contracts, revenues were recognized pursuant to long-term arrangements with physician groups under which the Company provided the physician group with a full range of services, including, but not limited to, office space, specialized clinical and procedural facilities, medical equipment, data processing and medical record keeping, billing and collection procedures and services, non-physician licensed personnel, such as nurses and technicians, as well as office staff and administrative personnel. In the case of SETCA and CCMG, the Company's practice management revenues were derived from the physician groups' revenues, generally as a purchased service, except for certain physician compensation and employment benefits, which were paid by the physician group on a priority basis. Effective May 31, 2000, the Company discontinued its Practice Management Division. (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. www.raytel.com RAYTEL MEDICAL CORPORATION 19 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (e) MANAGEMENT SERVICE AGREEMENTS -- Management service agreements were each recorded as an intangible asset consisting of the costs of purchasing the rights to manage the medical group. The agreements contain an initial non-cancelable 40-year term. Under these long-term agreements, the medical groups agreed to provide medical services on an exclusive basis only through facilities managed by the Company. The agreements were noncancelable except for performance defaults. Management service agreements were being amortized over twenty years. The unamortized balance at May 31, 2000 was written off as a result of the disposal of the Practice Management Division. (f) INTANGIBLE ASSETS -- Intangible assets principally consist of 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. (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) 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. (i) NEW ACCOUNTING STANDARDS -- The Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities in June 1998 (effective for fiscal 2001). It will not have an effect on the Company's results. (j) FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts of all financial instruments approximate fair value. (k) 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, - ----------------------------------------------------------------- 2000 1999 - ----------------------------------------------------------------- Patient and service receivables $ 39,059 $ 38,978 Less allowance for doubtful accounts (6,690) (5,664) ----------------------- 32,369 33,314 Tax refund and other receivables 4,471 1,544 ----------------------- Total $ 36,840 $ 34,858 =======================
20 RAYTEL MEDICAL CORPORATION www.raytel.com 22 NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
September 30, - ---------------------------------------------------------------------------- 2000 1999 - ---------------------------------------------------------------------------- Equipment, furniture and fixtures $ 39,225 $ 38,011 Leasehold improvements 9,315 9,653 ------------------------ 48,540 47,664 Less accumulated depreciation and amortization (28,889) (25,425) ------------------------ $ 19,651 $ 22,239 ========================
Depreciation expense was $5,495,000, $5,084,000 and $4,708,000 for the years ended September 30, 2000, 1999 and 1998, respectively. NOTE 5. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands):
September 30, - ------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------- Goodwill $ 48,458 $ 48,611 Physician referrals and patient lists 11,037 10,997 Management service agreements -- 7,984 Other 4,993 5,236 ------------------------ 64,488 72,828 Less accumulated amortization (22,816) (21,440) ------------------------ $ 41,672 $ 51,388 ========================
Amortization expense related to intangible assets totaled $2,793,000, $2,859,000 and $3,059,000 for the years ended September 30, 2000, 1999 and 1998, 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, - ----------------------------------------------------- 2000 1999 - ----------------------------------------------------- Promissory notes(a) $ -- $ 2,609 Line of credit(b) 20,258 19,047 Other(c) 4,939 7,714 ------------------------ 25,197 29,370 Less current maturities (1,067) (2,124) ------------------------ $ 24,130 $ 27,246 ========================
(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 was payable quarterly. (b) In August 1996, the Company entered into an agreement with two banks providing for 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 in July 1998 to revise certain covenants and again in July 1999 to revise certain terms and covenants. Under the terms of the agreement, 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, 2001, at which date amounts outstanding will become due and payable. www.raytel.com RAYTEL MEDICAL CORPORATION 21 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 175 to 225 basis points depending on the maintenance of a certain defined ratio, or the bank's prime rate plus 0 to 50 basis points, at the option of the Company. At September 30, 2000, the approximate weighted average interest rate was 9.1%. Borrowings under the line are collateralized by substantially all of the assets of the Company and its subsidiaries. As of September 30, 2000, the Company was in default of one of its financial covenants under the credit facility agreement. The Company has requested a waiver of this default from the banks. If the banks do not grant the waiver, the banks have the right to terminate the credit facility and demand payment in full of the outstanding balance. On December 15, 2000, the agreement was amended to lower the line of credit to $20,000,000 and to revise certain financial and other covenants and terms. The interest rate was changed to be based on LIBOR plus 275 basis points, or the bank's prime rate plus 50 basis points, at the option of the Company and the due date was extended to October 1, 2001. A new non-financial covenant was added which states any civil financial settlement in excess of $1,000,000 and/or criminal charges relating to the ongoing OIG investigation will be an event of default. In addition, the banks granted a waiver for the event of default existing at September 30, 2000. (c) Other debt includes nonrecourse notes and capital lease obligations with varying maturities at interest rates ranging from 7.25% to 11.71% 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, 2000 are as follows: 2001 - $1,067,000; 2002 - $21,414,000; 2003 - $1,210,000; 2004 - $1,084,000 and 2005 - $422,000. NOTE 7. PREFERRED STOCK AND COMMON STOCK Effective upon the closing of the Company's initial public offering (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, 2000, no such shares had been issued. 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, received 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 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, 2000, all such warrants were outstanding. The warrants will expire in December 2000, five years from the effective date of the Offering. 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. 22 RAYTEL MEDICAL CORPORATION www.raytel.com 24 Vesting occurs ratably over a period ranging from two to four years beginning with the effective date of grant. In the event of a change in control, as defined, all options granted become exercisable. 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 2000, 1999 and 1998 using the Black-Scholes option pricing model prescribed by SFAS 123. The weighted average assumptions used are as follows:
September 30, - ------------------------------------------------------------------------------------ 2000 1999 1998 - ------------------------------------------------------------------------------------ Risk free interest rate 6.09%-6.40% 4.10%-5.03% 5.58%-5.86% Expected dividend yield NONE None None Expected lives 3 YEARS 3 years 3 years Expected volatility 84.8% 67.9% 62.9%
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 (loss) and net income (loss) per common share would have decreased to the pro forma amounts indicated below (in thousands, except per share amounts):
For the Year Ended September 30, - --------------------------------------------------------------------------------------------- 2000 1999 1998 - --------------------------------------------------------------------------------------------- Net income (loss): As reported $(3,802) $5,354 $6,093 Pro forma (4,193) 5,188 5,086 Net income (loss) per common share -- basic: As reported (.44) .61 .69 Pro forma (.48) .60 .57 Net income (loss) per common share -- diluted: As reported (.44) .59 .66 Pro forma (.48) .57 .55
www.raytel.com RAYTEL MEDICAL CORPORATION 23 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the status of the Company's three stock option plans at September 30, 2000, 1999 and 1998 and changes during the years then ended is presented in the tables below:
September 30, - ---------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ---------------------------- --------------------------- --------------------------- Outstanding, beginning of year 971,037 $4.00 1,057,409 $6.82 1,026,712 $7.24 Granted 587,000 2.30 668,450 3.69 165,750 6.21 Exercised -- -- (59,206) 2.02 (11,001) 5.04 Expired (248,379) 3.85 (695,616) 8.16 (124,052) 9.66 ---------- ---------- ---------- Outstanding, end of year 1,309,658 3.26 971,037 4.00 1,057,409 6.82 ========== ========== ========== Exercisable, end of year 621,517 3.78 446,198 3.94 597,279 6.09 ========== ========== ========== Weighted average fair value of options granted 2.21 2.21 3.73
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 @ 9/30/00 (in years) Price 9/30/00 Price - -------------------------------------------------------------------------------------------------------------------- $1.42 - $11.875 1,309,658 7.75 $3.26 621,517 $3.78
At September 30, 2000, there were 489,000 shares available for future option grants. 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, 2000, the future minimum rental payments for each fiscal year thereafter under all noncancelable operating leases are as follows (in thousands):
Fiscal Year Ending - ----------------------------------------------------------- 2001 $3,337 2002 2,830 2003 2,806 2004 2,571 2005 2,058 Thereafter 2,802
24 RAYTEL MEDICAL CORPORATION www.raytel.com 26 NOTE 10. INCOME TAXES The provision for income taxes consists of the following (in thousands):
For the Year Ended September 30, - ----------------------------------------------------------------------------------------------- 2000 1999 1998 - ----------------------------------------------------------------------------------------------- Current: Federal $(2,559) $ 2,366 $ 2,782 State (205) 1,053 1,087 ------------------------------------ Total tax (2,764) 3,419 3,869 Less (tax) plus benefit from discontinued operations 3,367 (259) (255) ------------------------------------ Provision for income taxes from continuing operations $ 603 $ 3,160 $ 3,614 ====================================
At September 30, 2000 and 1999, the Company had $2,411,000 and $1,377,000, 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, 2000 and 1999 are as follows (in thousands):
Current Asset Long-Term Asset (Liability) (Liability) - ----------------------------------------------------------------------------------------- 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------- Depreciation and amortization $ 151 $ (456) $ 2,085 $ 1,794 Reserves for accounts receivable 54 (203) -- -- Other, net (36) 325 157 (83) --------------------------------------------------- 169 (334) 2,242 1,711 Valuation allowance (169) 334 (2,242) (1,711) --------------------------------------------------- Total deferred income taxes $ -- $ -- $ -- $ -- ===================================================
Reconciliation of the federal statutory rate to the Company's effective tax rate is as follows (dollars in thousands):
For the Year Ended September 30, - -------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Amount Rate Amount Rate Amount Rate -------------------------------------------------------------------------------- Federal income tax at the statutory rate $(2,233) (34.0%) $ 2,983 34.0% $ 3,387 34.0% State income taxes, net of federal benefit (319) (2.5) 695 7.9 1,087 10.9 Other -- -- 421 4.8 (481) (4.8) Federal tax benefit of the utilization of net operating loss and credit carryforwards (212) (2.5) (680) (7.7) (124) (1.2) -------------------------------------------------------------------------------- Total $(2,764) (39.0%) $ 3,419 39.0% $ 3,869 38.9% ================================================================================
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 $619,000, $599,000 and $596,000 for the years ended September 30, 2000, 1999 and 1998, respectively. www.raytel.com RAYTEL MEDICAL CORPORATION 25 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $188,000, $183,000 and $191,000 for the years ended September 30, 2000, 1999 and 1998, respectively. 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 Raytel is currently the subject of a grand jury investigation of unspecified allegations concerning certain business practices of its trans-telephonic cardiac pacemaker monitoring business. In connection with the investigation, Raytel has reviewed its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such confirmation, Raytel held Medicare reimbursement checks received since June 23, 2000 in payment of invoices for pacemaker monitoring services and established an escrow account for funds inadvertently deposited with respect to such services received since the date of the investigation. In addition, Raytel suspended billing for such services. Most of the checks are deposited, most of the cash is released from escrow, and new billings for services performed has commenced. The total amount of such uncashed checks and escrowed funds was approximately $1,580,000 as of September 30, 2000. Since Raytel recognizes revenue when patient services are provided, neither the escrow arrangement nor the deferred billing has had a direct impact on Raytel's operating results. If the Company's review discloses any patient billings that have not been fully compliant with Medicare requirements, any resulting billing adjustments or reversals will be charged against operating results in that current period. In addition, the Company has incurred, and expects to continue to incur, substantial legal fees and other expenses in connection with the investigation and has accrued a reserve of $2,000,000 to cover the estimated amount of these expenses. As of September 30, 2000, the Company had received legal bills and other charges of approximately $896,000 related to the investigation. Expenses in excess of the $2,000,000 reserve, if any, will adversely affect operating results in future periods, regardless of the eventual outcome of the investigation. At this time, the Company cannot determine the additional financial impact, if any, of this investigation. Moreover, the investigation, and the related internal compliance review, also have diverted, and are expected to continue to divert, the efforts and attention of a number of Raytel's management and administrative personnel. Raytel expects that, while the impact of the investigation on the Company's operations will be less significant as the investigation proceeds, it will continue to adversely affect operating results in future periods. The Company is from time to time a party to various other claims and disputes associated with various aspects of its ongoing business operations. In management's opinion, none of these other 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 (LOSS) PER SHARE Those shares under commitments to be issued at specified future dates are considered as outstanding for per share calculations. 26 RAYTEL MEDICAL CORPORATION www.raytel.com 28 For the years ended September 30, 2000, 1999 and 1998, the shares used in calculating diluted earnings per share were determined as follows (in thousands):
For the Year Ended September 30, - ------------------------------------------------------------------------ 2000 1999 1998 - ------------------------------------------------------------------------ Weighted average shares outstanding $8,747 8,711 8,879 Shares to be issued (a) 147 137 Options (a) 182 250 Warrants (a) -- 28 ------------------------------- $8,747 9,040 9,294 ===============================
(a) Due to the loss for the period shown, dilutives are not included in the calculation. Certain options and warrants to purchase shares of common stock were outstanding during the years ended September 30, 2000, 1999 and 1998, 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, - ------------------------------------------------------------------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------- Options and warrants outstanding 1,166,405 626,759 525,722 Range of exercise prices $1.42 - $13.50 $3.63 - $13.50 $5.63 - $13.50
NOTE 15. SEGMENT INFORMATION The Company's reportable segments are strategic business units that offer different services. The Company has three reportable segments: Cardiac Information Services ("Information"), Diagnostic Imaging Services ("Imaging") and Heart Facilities and Other ("Facilities"). The Information segment provides remote cardiac monitoring and testing services utilizing telephonic and Internet communication technology. The Imaging segment operates a network of imaging centers throughout the United States. The Facilities segment provides diagnostic, therapeutic and patient management services primarily associated with cardiovascular disease. The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that the Company does not allocate all interest expense, taxes or corporate overhead to the individual segments. The Company evaluates performance based on profit or loss from operations before income taxes and unallocated amounts. The totals per the schedules below will not and should not agree to the consolidated totals. www.raytel.com RAYTEL MEDICAL CORPORATION 27 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The difference is due to corporate overhead and other unallocated amounts which are reflected in the reconciliation to consolidated earnings before income taxes and discontinued operations (in thousands):
Information Imaging Facilities Total - ---------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED SEPTEMBER 30, 2000: Net revenue $ 40,782 $ 22,652 $ 26,516 $ 89,950 Total operating expenses 36,839 16,889 20,423 74,151 --------------------------------------------------------- Segment contribution 3,943 5,763 6,093 15,799 Depreciation and amortization 3,070 1,683 3,202 7,955 Interest expense -- 273 232 505 Minority interest/other expense (income) (233) (44) 194 (83) --------------------------------------------------------- Segment profit $ 1,106 $ 3,851 $ 2,465 $ 7,422 ========================================================= Segment assets $ 43,713 $ 14,674 $ 41,710 $ 100,097 ========================================================= Capital expenditures $ 3,468 $ 734 $ 973 $ 5,175 ========================================================= For the year ended September 30, 1999: Net revenue $ 44,731 $ 20,143 $ 30,998 $ 95,872 Total operating expenses 33,859 14,719 24,839 73,417 --------------------------------------------------------- Segment contribution 10,872 5,424 6,159 22,455 Depreciation and amortization 2,889 1,910 2,904 7,703 Interest expense -- 149 356 505 Minority interest/other expense (income) (231) (346) 656 79 --------------------------------------------------------- Segment profit $ 8,214 $ 3,711 $ 2,243 $ 14,168 ========================================================= Segment assets $ 37,416 $ 16,819 $ 46,572 $ 100,807 ========================================================= Capital expenditures $ 2,611 $ 2,901 $ 2,133 $ 7,645 ========================================================= For the year ended September 30, 1998: Net revenue $ 46,171 $ 19,977 $ 36,716 $ 102,864 Total operating expenses 32,598 13,718 31,061 77,377 --------------------------------------------------------- Segment contribution 13,573 6,259 5,655 25,487 Depreciation and amortization 2,890 1,843 2,990 7,723 Interest expense -- 34 506 540 Minority interest/other expense (income) (139) 82 933 876 --------------------------------------------------------- Segment profit $ 10,822 $ 4,300 $ 1,226 $ 16,348 ========================================================= Segment assets $ 37,794 $ 14,813 $ 51,988 $ 104,595 ========================================================= Capital expenditures $ 1,962 $ 1,483 $ 847 $ 4,292 =========================================================
For the Year Ended September 30, - -------------------------------------------------------------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------------------------- Segment profit $ 7,422 $ 14,168 $ 16,348 Unallocated amounts: Corporate general and administrative 3,968 4,103 4,967 Corporate depreciation and amortization 333 240 44 Corporate interest expense 1,463 1,807 2,143 Corporate other expense (income) (103) (90) (112) --------------------------------------- Income from continuing operations before income taxes $ 1,761 $ 8,108 $ 9,306 =======================================
28 RAYTEL MEDICAL CORPORATION www.raytel.com 30 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, 2000 and 1999 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, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut November 10, 2000 (except with respect to the matter discussed in Note 6, as to which the date is December 15, 2000) www.raytel.com RAYTEL MEDICAL CORPORATION 29 31 CORPORATE INFORMATION CORPORATE OFFICES Raytel Medical Corporation 2755 Campus Drive, Suite 200 San Mateo, California 94403 Tel: (650) 349-0800 Fax: (650) 349-8850 http://www.raytel.com ANNUAL MEETING OF STOCKHOLDERS Raytel Medical Corporation's Annual Meeting of Stockholders will be held on Wednesday, April 25, 2001 beginning at 10:00 a.m. Pacific time at the Hotel Sofitel, Salon II, 223 Twin Dolphin Drive, Redwood City, California. All stockholders are invited to attend. INVESTOR RELATIONS A copy of the Company's Annual Report 10-K, as filed with the Securities and Exchange Commission, may be obtained by writing to Investor Relations at the Company's Corporate Offices. STOCK LISTING The Common Stock of Raytel Medical Corporation trades on the NASDAQ National Market under the symbol RTEL. TRANSFER AGENT BankBoston c/o EquiServe, LP PO Box 8040 Boston, MA 02266-8040 LEGAL COUNSEL Gray Cary Ware & Freidenrich LLP Palo Alto, California INDEPENDENT AUDITORS Arthur Andersen LLP Hartford, Connecticut STOCK DATA NASDAQ SYMBOL: RTEL The number of stockholders of record at September 30, 2000, was 404. The Company's common stock is traded over-the-counter and is quoted on the Nasdaq National Market. The Company completed the initial public offering of its common stock in December 1995. The following table shows the high and low sales price as reported by Nasdaq for the fiscal quarters during the fiscal years ended September 30, 2000 and 1999.
Fiscal Years Ended September 30, - ------------------------------------------------------------------------ 2000 1999 - ------------------------------------------------------------------------ High Low High Low - ------------------------------------------------------------------------ First quarter $ 4 1/4 $2 23/32 $6 3/4 $3 5/8 Second quarter 4 1/8 2 3/4 5 3/16 4 1/16 Third quarter 3 11/16 1 5/8 6 9/16 3 11/16 Fourth quarter 1 13/16 7/32 4 3/4 2 1/8
The Company has not paid cash dividends during the fiscal years ended September 30, 2000 and 1999. 30 RAYTEL MEDICAL CORPORATION www.raytel.com 32 CORPORATE DIRECTORY BOARD OF DIRECTORS AND OFFICERS Richard F. Bader Chairman of the Board of Directors and Chief Executive Officer Swapan Sen President Raytel Imaging Holdings, Inc. Jason Sholder President Raytel Cardiac Services, Inc. David E. Wertheimer, M.D. Senior Vice President and Director John F. Lawler, Jr. Vice President, Chief Financial Officer and Corporate Controller Thomas J. Fogarty, M.D. Professor of Surgery at Stanford University Medical School General Partner, Three Arch Ventures, L.D. Mary M. Lampe Chief Operating Officer, Cardiovascular Research Foundation Gene I. Miller General Partner, Peregrine Venture Funds Allan Zinberg Secretary, Raytel Medical Corporation and Director www.raytel.com RAYTEL MEDICAL CORPORATION 31 33 RAYTEL MEDICAL CORPORATION [RAYTEL MEDICAL CORPORATION LOGO] 2755 Campus Drive, Suite 200 San Mateo, CA 94403 www.raytel.com EX-21.1 3 f68198ex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 RAYTEL MEDICAL CORPORATION Federal EIN: 94-2787342 For the year ended September 30, 2000
NAME & ADDRESS STATE OF ORGANIZATION Raytel Cardiac Services, Inc. Delaware 7 Waterside Crossing Windsor, CT 06095 Raytel Cardiovascular Labs, Inc. Delaware 7 Waterside Crossing Windsor, CT 06095 Raytel Imaging Holdings, Inc. Delaware 7 Waterside Crossing Windsor, CT 06095 Raytel Imaging Network, Inc. Delaware 7 Waterside Crossing Windsor, CT 06095 Raytel Medical Imaging, Inc. Delaware 7 Waterside Crossing Windsor, CT 06095 Raytel Management Holdings, Inc. Delaware 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Raytel Granada Hills, Inc. Delaware 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Raytel California Physician Services, Inc. Delaware 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Raytel Texas Heart Center Management Company, Inc. Delaware 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Cardiovascular Ventures Inc. Delaware 7 Waterside Crossing Windsor, CT 06095
EX-23.1 4 f68198ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 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 10, 2000 (except with respect to the matter discussed in Note 6 of the consolidated financial statements, as to which the date is December 15, 2000). It should be noted that we have not audited any financial statements of the company subsequent to September 30, 2000 or performed any audit procedures subsequent to the date of our report. /s/ ARTHUR ANDERSEN LLP Hartford, Connecticut December 28, 2000 EX-27.1 5 f68198ex27-1.txt 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 12-MOS SEP-30-2000 OCT-01-1999 SEP-30-2000 8,781 0 36,840 0 0 48,218 48,540 28,889 109,597 15,831 0 0 0 9 67,853 109,597 0 89,950 0 86,407 (186) 0 1,968 1,761 603 1,158 (4,960) 0 0 (3,802) (0.44) (0.44) (RECEIVABLES) REPRESENTS NET RECEIVABLES (LOSS PROVISION) INCLUDED IN (TOTAL COSTS)
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