-----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, CS5TMemzpG0LvRUpXlVk/iKtjfmmjqvmk6rEO2lKJaX86zsj8gRuWGRJVga3sFN5 wEjykpIFzzVxmlSdQ6O8lw== 0000891618-00-000050.txt : 20000202 0000891618-00-000050.hdr.sgml : 20000202 ACCESSION NUMBER: 0000891618-00-000050 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000110 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-K405/A SEC ACT: SEC FILE NUMBER: 000-27186 FILM NUMBER: 504240 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-K405/A 1 10-K405/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended September 30, 1998. (Fee required) [ ] Transitional report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______________ to ______________. Commission File No. 0-27186 RAYTEL MEDICAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-2787342 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 2755 CAMPUS DRIVE, SUITE 200, SAN MATEO, CA 94403 (Address of principal executive offices) (Zip Code) (650) 349-0800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's Common Stock held by non-affiliates as of November 30, 1999 was $23,401,617 based on the closing sale price of the Common Stock, as reported on the Nasdaq National Market System on that day. The number of shares of the registrant's Common Stock outstanding on November 30, 1999 was 8,745,127. DOCUMENTS INCORPORATED BY REFERENCE: DOCUMENT WHERE INCORPORATED Annual Report to Stockholders for fiscal year ended September 30, 1999 PART II Proxy Statement for the Annual Meeting to be held on March 2, 2000 PART III 2 PART I. This report includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed in "Item 17. Management's Discussion and Analysis of Financial Conditions and Results of Operations - Business Environment and Future Financial Results" and elsewhere in this report, that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "intends," "future," "goals" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. ITEM 1. BUSINESS Raytel Medical Corporation is a provider of healthcare services, focusing on the needs of patients with cardiovascular disease ("CVD"). The Company believes, based on its industry experience, that it is the leading provider of remote cardiac monitoring and testing services utilizing transtelephonic monitoring technology in the United States. Raytel currently manages two hospital-based heart centers, one of which is in Southern California and the second of which is in Southeast Texas. The Company also owns and operates seven freestanding cardiovascular diagnostic facilities and two hospital-based cardiac catheterization laboratories, and manages three physician practices. In addition, the Company provides outpatient diagnostic imaging services through operating and investment interests in seven freestanding imaging centers, and manages a diagnostic imaging provider network that operates in eight mid-Atlantic states. Raytel was incorporated in California in October 1981 under the name Ratel Labs, Inc. and changed its name to Raytel Medical Imaging, Inc. in 1983 and to Raytel Systems Corporation in 1985. In August 1987, the Company was reincorporated in Delaware under the name Raytel Systems Corporation. Following the organization of its majority-owned subsidiary Raytel Corporation in 1990, the Company changed its name to Raytel Holding Corporation. In October 1992, the Company changed its name to Raytel Medical Corporation. Unless the context otherwise requires, "Raytel" or the "Company" as used herein refers to Raytel Medical Corporation, a Delaware corporation, and its consolidated subsidiaries. The Company's executive offices are located at 2755 Campus Drive, Suite 200, San Mateo, California 94403, and its telephone number is (650) 349-0800. RECENT CORPORATE DEVELOPMENTS In September 1999, the Company announced that it had retained U.S. Bancorp Piper Jaffray as its financial advisor to assist the Company in considering a range of strategic alternatives for maximizing shareholder value. These alternatives include possible strategic alliances, acquisitions or mergers, the sale of all or some of the Company's businesses, or the continued operation of the businesses as an independent company. There are no pending agreements or commitments concerning any of these alternatives. Heart Center Operations In addition, during the fiscal year ended September 30, 1999, the following developments affecting the Company's heart center operations took place: 2 3 The Baptist Hospital of Southeast Texas During February 1999, The Baptist Hospital of Southeast Texas ("Baptist Hospital") merged with the Memorial Hermann Hospital System, based in Houston, Texas, and as a result of that merger, Memorial Hermann and the Company agreed to modify the existing management agreement entered into in October 1997. Pursuant to the October 1997 agreement, the Company undertook the management of the existing cardiac catheterization facility located at the hospital and the development of a portion of the hospital as the Raytel Heart Center at Baptist Hospital, which began operations in September 1998. Effective February 27, 1999, the original agreement was terminated, and effective March 1, 1999, a revised management services agreement was entered into between Raytel and Baptist Hospital. The revised agreement provides that Raytel will perform multiple functions at the Baptist Hospital to be designated the center of excellence for the management of cardiovascular disease. Raytel's responsibilities include the management of the center of excellence and the development of specialty clinics to support the cardiovascular program. Granada Hills Community Hospital Effective March 27, 1999, Raytel and Granada Hills Community Hospital ("GHCH") terminated the management consulting agreement entered into in September 1998 under which the Company managed the heart program at the hospital, including the existing cardiac catheterization facility located at the hospital, as the result of an advisory opinion from the Regional Office of the Health Care Finance Agency for Region IX which raised issues regarding the hospital's eligibility to continue to participate in the Medicare program. As a result of this opinion, Raytel and GHCH entered into a new consulting services agreement which provides for Raytel to perform more limited consulting services for GHCH, including quality management and assurance, technology assessment and management, strategic planning and other services. As a result of these developments and due to changes in the regulatory environment impacting the development of heart centers, the Company is not currently pursuing new opportunities in this area but will continue to manage the two heart centers currently under contract. Development Agreements with St. Jude Medical, Inc. In June 1997, the Company entered into a licensing and joint development agreement with Pacesetter, a wholly owned subsidiary of St. Jude Medical, Inc. ("St. Jude") for the development of a monitoring device for its new pacemaker product. In November 1998, the Company entered into an exclusive agreement with Ventritex, Inc., a wholly owned subsidiary of St. Jude, to complete the development of the Housecall(TM) dedicated transtelephonic system for monitoring Ventritex's implantable cardioverter defibrillators ("ICDs") and to monitor all of Ventritex's existing Housecall(TM) ICD patients. On November 8, 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 (ICD) over the telephone. Under an exclusive agreement with St. Jude Medical, Raytel will manufacture the Housecall transmitters and receiving units. Raytel will also monitor St. Jude Medical ICD patients with the Housecall system through Raytel Cardiac Services, Inc. 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 1996 3 4 data, the American Heart Association (the "AHA") estimates that approximately 58.8 million people in the United States suffer from one or more forms of CVD. According to the 1996 estimates, CVD claimed approximately 959,227 lives in 1996, representing 41.4% of all deaths, and of that total, coronary heart disease (heart attack) caused approximately 476,124 deaths in the United States during 1996 -- the single leading cause of death in the U.S. Due to the aging of the United States population, the Company believes that the need for medical services to diagnose and treat CVD will continue to increase significantly in the future. BUSINESS STRATEGY Raytel's principal objective is to maintain and extend its leadership position as a provider of cardiac transtelephonic monitoring and testing services. The Company is pursuing this objective through the following strategies: Expand the Company's Telemedical Business. The Company intends to utilize its 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. The Company believes that the focus on new technologies and service opportunities, such as the development of Housecall system for downloading diagnostic data from an implantable cardioverter-defibrillator (ICD) over the telephone, will enhance its ability to market its cardiac monitoring and testing services. Develop Affiliations with Providers. Raytel intends to expand its 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. The Company believes that interaction with managed care organizations will become an increasingly important element in the provision of cardiac care, including care for Medicare patients, and that third-party payors will increasingly prefer to contract with providers offering a wide range of cardiovascular services provided on a multi-state or regional basis. Raytel actively markets its existing healthcare services to managed care plans and provides value added services. Pursue Strategic Acquisitions. Raytel has built its existing organization largely through a series of acquisitions. The Company believes that it is often more cost-effective to acquire and reconfigure an existing business than to establish a new business. The Company believes that its experience in identifying, structuring and completing acquisitions of healthcare service organizations and effectively integrating these organizations will enable it to take advantage of future acquisition opportunities that arise as a result of the trends toward consolidation of healthcare service providers. Raytel intends to explore opportunities to expand its cardiac businesses through additional strategic acquisitions. RAYTEL CARDIAC MONITORING AND TESTING SERVICES The Company is the largest provider of cardiac monitoring and testing services in the United States utilizing transtelephonic pacemaker monitoring ("TTM"), cardiac event detection ("CEDS") and Holter monitoring technologies. The Company believes that its TTM-based services are the most cost-effective means of testing the performance of implanted cardiac pacemakers and detecting symptoms of transient arrhythmias. 4 5 Pacemaker Monitoring The Company believes, based on its industry experience, that it is the largest provider of transtelephonic pacemaker monitoring services in the United States, currently serving over 80,000 patients with implanted pacemaker systems. Pacemaker systems are designed to assist the human heart in maintaining an adequate pumping rate. A pacemaker is an electronic device that is implanted in the patient and is designed to monitor and, if necessary, to stimulate the patient's heartbeat. As it senses the heart's failure to respond to normal physiologic signals, the pacemaker emits electrical pulses directly into the atrium and/or the ventricle of the heart, causing the heart muscle to contract and pump blood through the patient's body. A pacemaker system consists of the generator which includes the device and a battery and the leads from the device to the patient's heart. The purpose of pacemaker monitoring is to enable the patient to maintain a normal lifestyle without the fear of an unexpected system failure. Pacemaker monitoring can detect failures in the pacemaker system as well as changes in the patient's heart rhythms that can cause the system to become ineffective. In TTM-based pacemaker monitoring, the pacemaker system and its interaction with the patient's heart is tested by conducting periodic, prescheduled ECG examinations. The patient is provided with a battery-powered ECG transmitter which detects the heart's impulses from the surface of the skin, converts these impulses into an acoustic signal and transmits the signal over ordinary telephone lines to one of the Company's three technical operations centers, where the signal is converted and displayed on a computer screen or strip chart recorder. The Company's pacemaker monitoring services are prescribed by the patient's physician. After receipt of a prescription and enrollment by the Company, the patient is sent a transmitter and trained to use the device over the telephone by one of the Company's technologists. Unlike most physician-operated monitoring services, the Company's monitoring services are provided 24 hours a day, seven days a week in order to accommodate unscheduled calls from patients experiencing problems. Each patient is tested on a schedule recommended by his or her prescribing physician with such prescription updated annually. The Company generates most of its pacemaker monitoring revenues from reimbursement by Medicare and payors of supplemental Medicare benefits. Patients are typically tested between three and twelve times per year. The Company is reimbursed for pacemaker monitoring services on a per-call basis. Routine pacemaker testing is performed in accordance with a prearranged, computer generated schedule. A trained technologist telephones the patient and requests that the patient initiate transmission of ECG data which is received by recorders in one of the Company's technical operations centers. Once a continuous graph displaying the rhythm of the heart and the pacemaker is generated, this data is interpreted by the technologist to determine the status of the implanted pacemaker and its relationship to the patient's cardiac rhythm. If problems with the pacemaker system are noted or a serious abnormality is detected, including an abnormality in the heart's own rhythm (an arrhythmia), the patient's physician is notified immediately by telephone. After each test, the results are promptly reviewed by a supervising technologist and a cardiologist and a written report is mailed to the patient's physician. Cardiac Event Detection Service The Company operates the Cardiac Event Detection Service ("CEDS"), which tests and documents transtelephonically an ambulatory patient's cardiac rhythm irregularities while the patient is experiencing symptoms. CEDS testing aids in the diagnosis of transient cardiac arrhythmias, including atrial and ventricular abnormalities, such as tachycardia, which causes the heart to beat at an abnormally rapid and potentially life threatening rate. During its fiscal year ended September 30, 1999, Raytel tested approximately 37,000 patients for potential transient arrhythmic events. The Company believes, based on its industry experience, that it is the largest provider of these services in the United States. 5 6 Upon enrollment in its CEDS program, the Company provides the patient with a cardiac event recorder for a testing period lasting up to 30 days. Upon experiencing symptoms, the patient activates the event recorder to capture one or more ECGs which the patient will later transmit to one of the Company's two CEDS technical operations centers for analysis. Skilled technologists, under the supervision of cardiac care nurses and cardiologists, make preliminary evaluations of these transmissions for cardiac irregularities. Unlike similar services offered by individuals or small clinics, the Company's centers are staffed 24 hours a day, seven days a week to respond to a patient's needs on a timely basis. Emergency medical response is initiated for CEDS patients when necessary. Regardless of the number of calls placed, payors reimburse the Company on a 30-day program basis for its CEDs service. Holter Monitoring Services The Company believes, based on its industry experience, that it is the largest provider of Holter monitoring services in the United States, currently serving over 51,000 patients annually. The Company processed approximately 70,000 Holter monitoring tapes during fiscal 1999. 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 On November 8, 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 defibrillators ("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. Currently, patients with ICDs must return to the physician's office on a routine basis in order to have the ICD's battery tested and for an examination of the ICD system integrity. Raytel will also monitor St. Jude Medical ICD patients with the Housecall system through Raytel Cardiac Services, Inc. The Housecall(TM) system will reduce the frequency of physician office visits by extending the transtelephonic monitoring procedures presently used for pacemakers to ICDs. The new system will enable trained technicians to interrogate the device's memory and transmit both stored data as well as real-time clinical and technical information on the patient's cardiac activity and ICD status. The test results are interpreted by trained technicians and a comprehensive report is communicated to the patient's physician for clinical evaluation. Under the exclusive agreement signed in November 1998 with St. Jude Medical, Raytel will manufacture the Housecall transmitters and receiving units. Training and Quality Assurance All of the Company's pacemaker monitoring technologists undergo a formal six-week training program that includes basic cardiac physiology, the operation of pacemaker devices, the interaction of pacemaker systems with the heart, and the administration and interpretation of ECG tests. As technologists become more experienced, they are trained to monitor increasingly complex pacemaker systems. Technologists administering the Company's CEDS and Holter services undergo training in the interpretation of ECG data to detect symptoms of cardiac arrhythmia. The Company maintains a rigorous quality assurance program. Board-certified cardiologists direct the Company's technologists with special training in the fields of cardiac pacing and electrophysiology. Each pacemaker-monitoring test is separately reviewed by a supervising technologist and a cardiologist. CEDS transmissions and Holter test results are evaluated by technologists under the supervision of cardiac care nurses and cardiologists. In order to comply with certain requirements of new federal regulations regarding independent diagnostic testing facilities (see "Government 6 7 Regulation"), the State of Connecticut has approved Raytel's training program for college credit toward a bachelor of science degree within the Connecticut state university system. RAYTEL CARDIOVASCULAR FACILITIES The Company currently operates cardiac catheterization laboratory within a licensed acute care hospital and operates eight additional freestanding diagnostic cardiovascular facilities, one of which is associated with a multi-specialty medical practice in Florida which the Company owns and manages. Four of the seven cardiovascular diagnostic facilities are located in Texas and two are located in Louisiana. In September 1998, the Company entered into a revised 10-year management consulting agreement with GHCH in Southern California under which it is managing an on-site heart center. Effective March 27, 1999, Raytel and Granada Hills Community Hospital terminated the management consulting agreement as the result of a request for an advisory opinion from the Regional Office of the Health Care Finance Agency for Region IX. Raytel and GHCH entered into the 5-year consulting services agreement which provides for Raytel to perform certain specified consulting services to the hospital, including quality management and assurance, technology assessment and management, strategic planning and other services. In October 1997, the Company entered into a 10-year agreement with Baptist Hospital. Pursuant to this agreement, the Company developed and manages a fully integrated heart center with a cardiac catheterization laboratory. During 1998, Baptist Hospital merged with the Memorial Hermann Hospital System, based in Houston, Texas, and as a result of that merger, Memorial Hermann and the Company agreed to modify the existing management agreement. Effective February 27, 1999, the original agreement was terminated and effective March 1, 1999, a revised 3-year management services agreement was entered into between Raytel and Baptist Hospital. The revised agreement provides that Raytel will perform multiple functions at the Baptist Hospital to be designated the center of excellence for the management of cardiovascular disease. Raytel's responsibilities include the management of the center of excellence and the development of specialty clinics to support the cardiovascular program. Cardiovascular Diagnostic Facilities The Company operates three hospital-based cardiac catheterization laboratories and seven free-standing cardiovascular diagnostic facilities (the "Cardiovascular Diagnostic Facilities"). Cardiac catheterization utilizes catheters and sophisticated diagnostic instruments to evaluate the functioning of the heart and the coronary arteries. A narrow, flexible tube, or catheter, is inserted through a main artery in the leg or arm and guided into the patient's coronary arteries, where a cardiologist can use the catheter to perform various tests to diagnose the nature and extent of the patient's coronary artery disease. The Cardiovascular Diagnostic Facilities are located in Texas, Louisiana, Florida and California. At each Cardiovascular Diagnostic Facility, the Company provides the facilities, equipment, supplies and support personnel necessary for the cardiologist to perform interventional cardiac imaging and peripheral therapeutic procedures. In three of the Cardiovascular Diagnostic Facilities, the Company also provides nuclear cardiology diagnostic services. Seven of the Cardiovascular Diagnostic Facilities are owned by limited partnerships, and the Company, through a separate wholly-owned subsidiary for each limited partnership, serves as the corporate general partner which acts as the day-to-day manager of each facility. The Company owns a majority interest in six of the facilities and owns 100% of the Florida facility. The limited partnerships have a term of 20 years or more in all but one facility and that one expires on December 31, 2001. Two of the hospital-based Cardiovascular Diagnostic Facilities are located in Texas. Each is operated under contracts with the respective hospitals under which Raytel provides equipment, technical 7 8 staff and certain management and administrative services. The hospitals provide space for the facility within the hospital, all supplies, and credentialing of physicians. The Company receives a fee from the hospital on a per procedure basis, and in one instance with a guaranteed minimum monthly payment. One contract expires in March 2000, and the other contract expires in December 2000. In addition to diagnostic catheterization procedures, one of these facilities currently performs pacemaker installations, peripheral vascular angioplasty and peripheral stent installations. There can be no assurance that the Company will be successful in negotiating extensions of the terms of the contracts. Physicians practicing at the Cardiovascular Diagnostic Facilities are not obligated to refer patients to or practice at these facilities and in many cases also practice at nearby hospitals. Northern California Heart Center In January 1996, the Company initiated the development of a diagnostic cardiac catheterization facility (the "Northern California Heart Center") in Fremont, California. In November 1996, the Company completed the construction of the facility. In September 1997, the regional office of Licensing and Certification of the California Department of Health Services denied the request for a license to operate the facility. The Company has filed an administrative appeal of the decision by the regional office and the status of the appeal is still pending. In addition, the Company filed a Petition for Writ of Mandate requesting that the Superior Court of California order the Department of Health Services to issue the appropriate license. The Superior Court denied the Company's request for a Writ of Mandate and returned the matter to the administrative appeals office of the Department of Health Services. In December 1997, the Company filed an appeal of the Department's decision denying the application for the appropriate license to operate the facility. In July 1998, the Company and the Department presented the case to an administrative law judge. Final briefs were submitted during November 1998 and a final decision of the administrative law judge was received in late March 1999. Nearly eight months after the administrative hearing, the administrative law judge for the California Department of Health Services issued its decision denying the Company's application for licensure of its freestanding cardiac catheterization laboratory in Fremont. See "Item 3. Legal Proceedings." Raytel Heart Center at Granada Hills Community Hospital Effective March 27, 1999, Raytel and GHCH terminated the management consulting agreement which they entered into effective September 1998, as the result of an advisory opinion from the Regional Office of the Health Care Finance Agency for Region IX 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 5-year consulting services agreement with GHCH, pursuant to which Raytel provides consulting services to the hospital with regard to the operations of the hospital's 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. Raytel and GHCH entered into the 5-year Consulting Services Agreement which provides for Raytel to perform certain specified consulting services to Granada Hills Community Hospital, including quality management and assurance, technology assessment and management, strategic planning and other services. All medical services at the facility are the responsibility of the hospital and its medical staff. Through an affiliated medical group, the Company and GHCH entered into an exclusive agreement for Raytel to be the exclusive provider of cardiac surgery services at the hospital and to manage the hospital's cardiovascular surgery program. The Company has entered into an agreement with a leading cardiothoracic surgeon to provide the cardiac surgery services at the hospital. The initial term of the agreement coincides with the term of the consulting agreement with the hospital to perform consulting services regarding the heart program. The affiliated medical group is owned by David E. 8 9 Wertheimer, M.D., who purchased all of the shares of capital stock from F. David Rollo, M.D., who resigned in October 1999 as the Company's Executive Medical Director. The Company, through a subsidiary, provides management services to the medical group. Raytel Heart Center at The Baptist Hospital of Southeast Texas In October 1997, the Company entered into a 10-year agreement with The Baptist Hospital of Southeast Texas in Beaumont, Texas. Pursuant to this agreement, the Company developed and manages a fully integrated heart center with a cardiac catheterization laboratory. During 1998, The Baptist Hospital of Southeast Texas merged with the Memorial Hermann Hospital System, based in Houston, Texas, and as a result of that merger, Memorial Hermann and the Company agreed to modify the existing management agreement. Effective February 27, 1999, the original agreement was terminated and effective March 1, 1999, a revised 3-year management services agreement was entered into between Raytel and The Baptist Hospital of Southeast Texas. The revised agreement provides that Raytel will perform multiple functions at the Baptist Hospital to be designated the Center of Excellence for the management of cardiovascular disease. Raytel's responsibilities include the management of the Center of Excellence and the development of specialty clinics to support the cardiovascular program. The Baptist Hospital is a general acute care hospital. The hospital's heart program includes cardiac catheterization procedures, stress testing, ultrasound and other diagnostic services, cardiovascular and cardiothoracic surgical procedures and cardiac rehabilitation programs. RAYTEL PHYSICIAN PRACTICE MANAGEMENT The Company continues to manage two cardiology practices, one in Beaumont, Texas, and the other in Granada Hills, California. Through its acquisition of CVI in August 1997, the Company acquired a 20-physician multi-specialty medical group, which focuses on cardiology, located in Port St. Lucie, Florida. DIAGNOSTIC IMAGING SERVICES The Company provides outpatient diagnostic imaging services through operating and investment interests in seven freestanding imaging centers (the "Imaging Centers"). The Company also operates the Raytel Imaging Network, a specialized preferred provider network currently consisting of 475 independent imaging centers located from Virginia to New York, including five centers owned and managed by the Company. Diagnostic imaging technology consists of a number of medical diagnostic modalities, many of which integrate computer hardware and software. These modalities include magnetic resonance imaging (MRI), computed tomography ("CT"), nuclear medicine, radiography/fluoroscopy ("R/F"), ultrasound, general x-ray and mammography. These imaging modalities are generally non-invasive (with the exception of the injection of contrast material in certain techniques and the occasional use of sedating agents) and subject the patient either to sound waves (ultrasound), X-rays (CT, R/F and X-ray mammography) or radio waves and magnetic fields (MRI) to gather data that aid in medical diagnosis. These diagnostic technologies enable physicians to view certain internal body anatomy and pathology and in many instances provide early diagnostic capability and aid in effective treatment planning without the need for more costly exploratory surgery. The principal diagnostic imaging modality in use at the Imaging Centers is MRI. MRI is used to provide high resolution images of the soft tissue of the body. In the field of cardiology, MRI is used for the assessment of congenital and anatomical cardiac defects. Other MRI techniques, such as MR angiography, are also used in the assessment of peripheral vascular and other cardiovascular diseases. The Imaging Centers also provide a wide range of imaging services for the diagnosis of neurological disorders of the head, neck and spine, as well as imaging of the musculoskeletal system and a variety of internal organs, including the liver and prostate, and the female pelvis. 9 10 Raytel Imaging Centers The Imaging Centers are located in four states. All of the Imaging Centers offer MRI services, and four offer other imaging modalities. The Company owns four of the Imaging Centers and holds its interests in the other three through investments in limited partnerships (the "Ventures"), to which the Company provides management services, including data processing, billing and collection, accounting, marketing services and operational supervision. The Ventures have terms that expire between 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. The Company's experience in dealing with a wide variety of managed care organizations and its established, centralized marketing, scheduling, billing and accounting systems provide the Company with the capability to establish and operate networks of independent diagnostic imaging centers. In addition, the Company's purchasing power allows it to provide participating centers with supplies, such as contrast agents, film and other medical and technical supplies, and with equipment maintenance and other services at considerable cost savings. The Raytel Imaging Network (the "Network") is a dedicated network of diagnostic imaging facilities established to provide services to patients participating in healthcare benefit programs offered by municipal and state employers, corporations that self-insure, third-party insurance carriers, union health and welfare plans and managed care providers. Independent imaging centers enter into fixed fee contractual relationships with the Network to provide imaging services to patients referred by payors which have contracted with the Network for services at a negotiated fee. The Network handles scheduling for patients whose healthcare benefit programs participate in the Network and guarantees these participating entities a fixed fee for all radiology procedures performed in Network centers. The Network also offers centralized billing services for those procedures, promptly reports the results of the studies to the patient's referring physician and the outcomes of the studies to the administrators responsible for the management of the patient's healthcare program. The Network is a preferred provider organization with participating imaging centers in the states of New Jersey, Pennsylvania, Delaware, Maryland, New York and Virginia. The Network currently provides diagnostic imaging services under referral arrangements with approximately 90 organizations administering healthcare programs covering more than 600,000 individual participants. SALES AND MARKETING The Company's marketing activities are directed at managed care organizations, cardiologists and referring physicians. The Company maintains a central managed care sales group that negotiates and manages contracts with managed care organizations. The Company's marketing organization also supervises the marketing of its TTM-based services to physicians nationwide and supports the efforts of local centers to market their services to referring physicians in the communities they serve. Raytel Cardiac Monitoring and Testing Services The Company markets its cardiac monitoring and testing services nationwide by using regional sales managers coordinating the activities of approximately 400 sales representatives who are employees of the pacemaker equipment manufacturers. The sales organization is supported by the Company's 10 11 customer service and telemarketing personnel. Raytel works closely with all major pacemaker manufacturers and has agreements with certain manufacturers for the distribution of the Company's services through the direct sales forces of the manufacturers. The Company's sales force works closely with the approximately 12,000 physicians currently prescribing the Company's pacemaker monitoring services. The Company differentiates its cardiac monitoring and testing services from most of its competitors by providing its services 24 hours a day, seven days a week. In addition, the Company offers technologists who specialize in monitoring specific pacemaker models (the more complex the unit, the more expertise a technologist is required to have), extensive quality control procedures, computerized reports for complex pacemakers, detailed reporting procedures for abnormal findings and an extensive database on pacemaker performance. Diagnostic Imaging Services The Company markets services of the Imaging Centers it manages through a team approach tailored to the needs of each Imaging Center. The Company's central sales organization coordinates the Imaging Center's marketing activities with the Imaging Center's radiologists. The principal selling effort is directed toward the local base of referring physicians. In support of the selling effort, the Company provides marketing materials, including newsletters and brochures and holds routine educational sessions for physicians. The Company also assists the Imaging Center in addressing needs of managed care organizations by negotiating contracts with these organizations and working closely with insurance plan administrators, HMO personnel, workers' compensation coordinators and hospital administrators. Raytel Heart Centers and Cardiovascular Diagnostic Facilities The Company markets the services of its Cardiovascular Diagnostic Facilities using the basic approach employed with the Imaging Centers. Each facility undertakes marketing activities specifically structured for its local or regional market. The manager of each facility initiates and maintains contact with local referring physicians. The Company's central sales organization supports the local selling effort with marketing materials and assistance in the development of clinical outreach programs designed to make the capabilities of the center available to underserved segments of the community. The center manager coordinates local physician contacts with the Company's cardiac monitoring and testing sales force to cross-sell the Company's transtelephonic pacemaker monitoring, Holter monitoring and cardiac event detection services. The Company's central sales group negotiates contacts with managed care organizations. This group also assists the center manager in addressing the needs of such organizations. Raytel Physician Practice Management Services The Company markets services of the physician practices it manages through a team approach tailored to the needs of each physician practice, in the same fashion used to market the services of the Imaging Centers and its heart centers and Cardiovascular Diagnostic Facilities. BILLING AND COLLECTION The Company's cardiac monitoring and testing operations generate a high volume of relatively low-cost services delivered to patients living throughout the United States. The Company derives substantially all of its transtelephonic pacemaker monitoring, cardiac event detection services, and Holter monitoring revenues from Medicare and other third-party payors and, in most cases, renders bills to at least two payors for each procedure. In the year ended September 30, 1999 the Company generated more than one million bills to Medicare and other third-party payors related to these businesses. Accordingly, the Company's success in these businesses is substantially dependent upon the efficiency of its billing and collection systems. 11 12 All of the billing and collection functions for the Company's cardiac testing operations are centralized at the Company's facilities in Connecticut. The Company has specialized data management systems that it uses to obtain and record primary and secondary insurance data at the time of patient enrollment and to maintain and update that information. The Company's billing and collection staff is specially trained in third-party coverage and reimbursement procedures. The Company communicates continuously with carriers administering Medicare and has established procedures that allow it to submit most primary Medicare claims electronically, on a batch-billing basis. In addition, the Company maintains a database on the billing procedures and requirements of more than 1,500 insurance carriers, which enables it to efficiently process claims to primary, secondary and tertiary private insurers. Computerized billing and collection reports allow the Company's personnel to continually monitor open accounts. Due to the complexity of the billing and collection process, the Company, like many other healthcare service providers, experiences normal payment cycles that are considerably longer than those customary in many other industries. The Company typically experiences billing cycles of 60 to 240 days from the billing date, depending on the type and number of third-party payors, although billing cycles can be even longer in certain situations. Based upon its experience, the Company believes that its specialized data processing system and its extensive background in processing high volume, third-party claims serve to minimize collection cycles and the incidence of rejected claims due to incomplete or inaccurate information. The Company bills and collects for the Imaging Centers, physician practices, heart centers and other cardiac facilities that it manages. THIRD-PARTY REIMBURSEMENT The Company derives substantially all of its revenues from Medicare, HMOs and commercial insurers and other third-party payors. Both government and private payment sources have instituted cost containment measures designed to limit payments made to healthcare providers, by reducing reimbursement rates, limiting services covered, increasing utilization review of services, negotiating prospective or discounted contract pricing, adopting capitation strategies and seeking competitive bids. There can be no assurance that such measures will not adversely affect the amounts or types of services that may be reimbursable to the Company in the future, or that the future reimbursement for any service offered by the Company will be sufficient to cover the costs and overhead allocated to such service by the Company, either of which could have a material adverse effect on the Company's operating results. The Company cannot predict with any certainty whether or when additional changes in Medicare, Medicaid or other third-party reimbursement rates or policies will be implemented. However, such future changes could have a material adverse effect on the Company's business, financial condition or operating results. Reimbursement rates vary depending on the type of third-party payors. Changes in the composition of third-party payors from higher reimbursement rate payors to lower reimbursement rate payors could have an adverse effect on the Company's operating results. In addition, the Company anticipates that it may increasingly offer its services to third party payors on a capitated or other risk-sharing basis. To the extent that patients or enrollees covered by a risk-sharing contract require more frequent or extensive services than is anticipated by the Company, the revenue derived from such contract may be insufficient to cover the costs of the services provided. Insufficient revenue under capitated or other risk-sharing contracts could have a material adverse effect on the Company's business, financial condition or operating results. GOVERNMENT REGULATION The healthcare industry is highly regulated, and there can be no assurance that the regulatory environment in which the Company operates will not change significantly and adversely in the future. In 12 13 general, the scrutiny of methods and levels of payment of healthcare providers and companies is increasing. On August 5, 1997, President Clinton signed the Balanced Budget Act of 1997 ("BBA") into law. Two of the areas affected most profoundly by this law are (1) fraud and abuse, and (2) the effort of the federal government to use its purchasing power to expand health care options for Medicare beneficiaries while using pressure from increased competition to control costs. The fraud and abuse provisions build on many of the provisions that were enacted by the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). In addition to the specific changes, the fraud and abuse provisions of the BBA signify an apparent shift to the Office of the Inspector General of the Department of Health and Human Services (the "OIG") of not only enforcement power, but policy-making authority as well. In addition, the BBA broadened the authority for the HCFA to enter into contracts for providing managed care to Medicare beneficiaries by expanding the type of managed care options available to Medicare beneficiaries. On October 31, 1997, the Secretary of the Department of Health and Human Services ("HHS") published final regulations implementing a number of changes proposed in June 1997. One of the changes replaced the independent physiological laboratory ("IPL") with the creation of the independent diagnostic testing facility (the "IDTF"). An IDTF is a diagnostic facility, distinct from a physician's office or hospital, which does not directly use test results to treat patients. The facility exists to perform diagnostic testing procedures. The Company's cardiac monitoring and testing services currently operate as an IPL. The original implementation date was postponed until March 1999, and the Company is in the process of replacing all of its designations as an IPL with the new designation as an IDTF, as required by the new regulations. The Company believes that healthcare legislation, regulations and interpretations will continue to change and, as a result, routinely monitors developments in healthcare law. The Company expects to modify its agreements and operations from time to time as the business and regulatory environment changes. While the Company believes it will be able to structure all of its agreements and operations in accordance with applicable law, the lack of definitive interpretations of many statutory and regulatory provisions means that there can be no assurance that the Company's arrangements are in compliance with such provisions or will not be successfully challenged. Government Reimbursement Programs The federal government maintains the Medicare health insurance program for the aged. Individual states have programs for medical assistance to the indigent known generally as Medicaid, which are partially financed by the federal government. Federal Medicaid funds are currently conditioned on state compliance with federal requirements. A significant portion of the Company's revenues is received under Medicare and other government programs. Both the Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, interpretations of policy, intermediary determinations, and government funding restrictions, all of which may materially increase or decrease the rate of program payments to healthcare facilities and other healthcare suppliers and practitioners. The Company's existing cardiac monitoring and testing services derive a substantial portion of its revenue from the Medicare program. The Company's heart centers, diagnostic imaging, and Cardiovascular Diagnostic Facilities also derive a substantial portion of their revenue from payments made under the Medicare program, and the Company anticipates that future facilities and services will also derive significant revenues from these sources. In order to participate in this program, a newly-developed facility must be certified after officials administering the Medicare program in the state where the facility is located, or their designees, have conducted a survey of the facility, a process that cannot commence until the facility opens and begins providing services to patients. Once a facility is certified, it will be reimbursed by Medicare for services performed from the date on which a satisfactory 13 14 survey is conducted in connection with the certification of the facility or such later date as an acceptable plan is submitted to correct any deficiencies noted in the survey. The Company expects that delays in the certification process may occur and may increase with the funding limitations being imposed on certifying authorities. Combined with the billing and collection cycle for Medicare reimbursement that all healthcare facilities experience, these delays could result in a three to six month working capital deficiency during the start-up phase for newly developed cardiac centers. These working capital deficiencies will have to be funded by the Company through working capital advances to the facilities using funds provided by operating or financing activities. The Stark Law and Medicare Fraud and Abuse Laws The Company is subject to a variety of laws and regulations governing the referral of patients to facilities with whom the referring physician has a financial relationship. Subject to certain exceptions, physicians who have a financial relationship with an entity providing healthcare services are prohibited by federal law (the "Stark Law") from referring or admitting patients to that entity for the provision of certain designated services reimbursable under Medicare or Medicaid, as well as certain other federally assisted state healthcare programs. The entity providing healthcare services is also prohibited from presenting, or causing to be presented, a claim or bill for the designated services furnished pursuant to a prohibited referral. Possible sanctions for violations of the Stark Law include civil monetary penalties, exclusion from the Medicare and Medicaid programs and forfeiture of amounts collected in violation of such prohibition. The Stark Law prohibits a physician who owns stock of a company from referring patients to the medical facilities in which such company has an ownership interest unless such Company's stockholders' equity exceeds $75.0 million. On January 9, 1998, the Health Care Financing Administration ("HCFA") published proposed rules implementing the Stark Law. The regulations have been published in proposed form and HCFA has solicited comments on the proposed regulations. The proposed regulations do not have the force of law, but they do provide information regarding the views of enforcement agencies, such as the 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." Two years later, in 1995, HCFA issued regulations, but these applied only to the original 1989 Stark Law. The recently promulgated regulations apply to the Stark II Law. Generally, the Stark Law prohibits physicians from referring Medicare patients to facilities for "designated health services" if the physician (or immediate family member of the physician) has a financial arrangement with the entity, unless the arrangement fits within an exception. The definition of designated health services specifically includes radiology services, including MRI, CT, ultrasound and nuclear medicine. However, the regulations specifically exclude "invasive" radiology, which includes cardiac catheterization, PTCA and similar imaging modalities used to guide a needle, probe or catheter accurately. Thus, the Stark Law does not prohibit physician ownership of an entity or facility which provides "invasive" radiology, such as cardiac catheterization services provided at the Cardiovascular Diagnostic Facilities. In addition to the limitations of the Stark Law, a number of states have laws which apply to referrals made for services reimbursed by all payors, and not simply Medicare or Medicaid. Some of these laws may extend to the services furnished by medical facilities in which the Company has an 14 15 ownership interest and, absent the availability of an exception under such laws, could prohibit physicians with ownership interests in the Company from referring any patients to such facilities. The Company is also subject to the illegal remuneration provisions of the federal Social Security Act and similar state laws ("Fraud and Abuse Laws") which collectively impose civil and criminal sanctions on persons who solicit, offer, receive or pay any remuneration, directly or indirectly, for referring a patient for treatment that is paid for in whole or in part by Medicare, Medicaid or similar state or private programs. The courts and the OIG have stated that the Fraud and Abuse Laws are violated where even one purpose, as opposed to a primary or sole purpose, of the arrangement is to induce referrals. Violations of the Fraud and Abuse Laws are punishable by criminal or civil penalties, which may include exclusion or suspension of the provider from future participation in the Medicare, Medicaid and similar state and federal programs, as well as substantial fines. The federal government has published exemptions, or "safe harbors," for business transactions that will be deemed not to violate the federal Fraud and Abuse Laws. Although satisfaction of the requirements of these safe harbors provides protection from criminal prosecution or penalties under the federal anti-kickback legislation, failure to meet the safe harbors does not necessarily mean a transaction violates the statutory prohibitions. Due to the breadth of the statutory provisions of the Fraud and Abuse Laws and the absence of definitive regulations or court decisions addressing the type of arrangements by which the Company and its affiliated entities conduct and will conduct their business, from time to time certain of their practices may be subject to challenge under these laws. In October 1995, Congress passed a bill that would extend the prohibitions of the Fraud and Abuse Laws to all third-party payors, governmental and private. In the HIPAA and BBA, Congress expanded the government fraud and abuse controls in a number of ways and added a provision for obtaining advisory opinions from the OIG regarding physician self-referral compliance with the Stark Law. The Company has attempted to structure its business relations to comply with the Stark Legislation, the Fraud and Abuse Laws and all other applicable healthcare laws and regulations. However, there can be no assurance that such laws will be interpreted in a manner consistent with the Company's practices. In addition, state legislatures and other governmental entities are considering additional measures restricting or regulating referrals, and there can be no assurance that new laws or regulations will not be enacted which will require restructuring of the Company's operations or otherwise have a material adverse effect on the Company's business, financial condition or operating results. Certificates of Need and Other Licensing Requirements Certain states in which the Company operates or may operate in the future prohibit the establishment, expansion or modification of certain healthcare facilities and the services provided at such facilities, including heart centers, catheterization laboratories and diagnostic imaging centers, without first obtaining a certificate of need ("CON") or comparable license from the appropriate state regulatory agency. In addition to any CON or comparable licensing requirements that may apply, heart centers, catheterization laboratories and diagnostic imaging centers developed or operated by the Company may also be required to comply with other licensing requirements, which vary from state to state. Obtaining CON approval or comparable licensing is typically an expensive and lengthy process and may involve adversarial proceedings initiated by competing facilities or taxpayer groups. The existence of these laws or future legislation changing these laws may make it more difficult or prohibitive for the Company to develop heart centers, catheterization laboratories or other diagnostic facilities, maintain existing facilities or expand the services provided at such facilities or its other diagnostic imaging facilities. Under current California regulations, the performance of cardiac catheterization procedures is generally restricted to licensed general acute care hospitals. In 1996, the Company applied for a license for its freestanding cardiac catheterization laboratory in Fremont, California under a pilot program. Although this pilot program was repealed in 1993, the Company believes that it meets all of the requirements for the granting of a license, because the entity holding the permit for such a facility was in active status as of December 31, 1993. In September 1997, the regional office of the California 15 16 Department of Health Services notified the Company by letter dated September 8, 1997 that its application for the license was denied. In December 1997, the Company filed an appeal of the Department's decision and filed a Petition for Writ of Mandate requesting that the Superior Court of California order the Department of Health Services to issue the appropriate license. The Superior Court denied the Company's request for a Writ of Mandate and returned the matter to the administrative appeals office of the Department of Health Services. In July 1998, the Company and the Department presented the case to an administrative law judge. Final briefs were submitted in November 1998 and a final decision of the administrative law judge was received in late March 1999. Nearly eight months after the administrative hearing, the administrative law judge for the California Department of Health Services issued its decision denying the Company's application for licensure of its freestanding cardiac catheterization laboratory in Fremont. The Company from time to time is required to upgrade or modify its facilities in order to maintain its licenses. In many states, a facility, such as a free-standing heart center, must be completed before a license will be issued allowing the facility to operate, and even once the facility is built there can be no assurances that a license or certification for operations will be issued by the appropriate government agency. Restrictions on Corporate Practice of Medicine The laws of certain states in which the Company operates or may operate in the future prohibit non-physician entities from practicing medicine, exercising control over physicians or engaging in certain practices such as fee-splitting with physicians. Although the Company has structured its affiliations with physician groups so that the physicians maintain exclusive authority regarding the delivery of medical care, there can be no assurance that these laws will be interpreted in a manner consistent with the Company's practices or that other laws or regulations will not be enacted in the future that could have a material adverse effect on the Company's business. If a corporate practice of medicine law is interpreted in a manner that is inconsistent with the Company's practices, the Company would be required to restructure or terminate its relationship with the applicable physician group to bring its activities into compliance with such law. The termination of, or failure of the Company to successfully restructure, any such relationship could result in fines or a loss of revenue that could have a material adverse effect on the Company's business, financial condition or operating results. MEDICAL MALPRACTICE INSURANCE In general, the Company does not, itself, engage in the practice of medicine and requires physicians performing medical services at its facilities to maintain medical malpractice insurance. In the case of HIPSL, a wholly owned subsidiary, the Company employs approximately 20 physicians, who are performing medical services as members of a multi-specialty medical group. The other licensed professionals in this practice, such as registered nurses, nurse practitioners and technicians, perform their professional duties under the direct supervision of the physicians. With the exception of the physician employees of HIPSL, the Company's employees do not practice medicine. However, certain of its employees are or will be involved in the delivery of healthcare services to the public under the supervision of physicians. To protect the Company from medical malpractice claims, including claims associated with its employees' activities, the Company, or the Ventures for which the Company serves as general partner, maintains professional liability and general liability insurance on a "claims made" basis in amounts deemed appropriate by management based upon the nature and risks of the Company's business. Such policies provide malpractice coverage in the amount of $1 million per occurrence with an aggregate limit of $3 million. Insurance coverage under such policies is contingent upon a policy being in effect when a claim is made, regardless of when the events which caused the claim occurred. The cost and availability of such coverage has varied widely in recent years. While the Company believes its insurance policies are adequate in amount and coverage for its current operations, there can be no assurance that the coverage maintained by the Company is sufficient to cover all future claims. In 16 17 addition, there can be no assurance that the Company will be able to obtain such insurance on commercially reasonable terms in the future. COMPETITION The healthcare service businesses in which the Company is currently engaged are highly competitive. The restructuring of the healthcare system is leading to rapid consolidation of the existing highly fragmented healthcare delivery system into larger and more organized groups and networks of healthcare providers. The Company expects competition to increase as a result of this consolidation and ongoing cost containment pressures among other factors. In executing its business strategy, the Company competes with management services organizations, for-profit and nonprofit hospitals, HMOs and other competitors that are seeking to form strategic alliances with physicians or provide management services to physicians or to diagnostic and therapeutic facilities owned by such physicians. In operating its heart centers, the Company encounters competition from physician groups, general acute care hospitals and freestanding and hospital-based cardiac care facilities located in the same markets. The Company's cardiac monitoring and testing programs compete with a number of smaller, regional commercial entities as well as hospitals, clinics and physicians who generally provide these services as an adjunct to their primary practice. Principal competitive factors are the availability and quality of service. The Company believes that it competes favorably with most of its smaller competitors based on its 24-hour a day, seven-day a week service, specialized technical staff and sophisticated billing and collection system. Certain of its competitors, including local physicians and hospitals, may have certain competitive advantages over the Company based upon their direct relationships with patients. Cardiac catheterization and other cardiac diagnostic and therapeutic procedures, as well as diagnostic imaging procedures, are performed in hospitals, private physicians' offices, clinics operated by group practices of physicians and independent catheterization facilities. Although the Company and its affiliates operate in locations throughout the United States, competition focuses on physician referrals at the local market level. Principal competitors in each of the Company's markets are hospital and physician affiliated facilities, some of which may have greater financial and other resources than the Company, more experience and greater name recognition than the local managers and physicians associated with the Company's Imaging Centers, Cardiovascular Diagnostic Facilities and Catheterization Laboratories, or better ties to the local medical community. Successful competition for referrals is a result of many factors, including quality and timeliness of test results, type and quality of equipment, facility location, convenience of scheduling and, increasingly, relationships with managed care programs. Other independent companies (including some which have substantially greater financial and operating resources than the Company) are in the business of establishing facilities similar to the facilities in which the Company has or may obtain interests and providing management services to such facilities. EMPLOYEES As of November 30, 1999, the Company employed approximately 765 full time equivalent employees. None of the Company's employees are covered by collective bargaining contracts. ITEM 2. PROPERTIES The principal operations of the Company and its subsidiaries are conducted at facilities located in Windsor, Connecticut; New York, New York; Haddonfield, New Jersey; San Mateo, California; and Port St. Lucie, Florida. The Windsor facility, consisting of approximately 36,679 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 11,000 square feet, is occupied under a lease expiring in June 2000. 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 17 18 expiring in December 2002. In addition, through seven of its consolidated Imaging Centers, the Company leases a total of approximately 31,000 square feet in facilities located in New York, New Jersey, California and Pennsylvania. Through its acquisition of CVI in August 1997, the Company acquired eight Cardiovascular Diagnostic Facilities in Texas, Louisiana, Maryland and Florida. The joint ventures that operate the Cardiovascular Diagnostic Facilities lease a total of approximately 89,000 square feet in these facilities. The Company generally considers its properties to be in good condition and suitable for the Company's anticipated needs. ITEM 3. LEGAL PROCEEDINGS In September 1997, the California Department of Health Services denied the Company's application for a license to operate a freestanding diagnostic catheterization facility in Fremont, California. The Company filed an administrative appeal requesting that the Department of Health Services reconsider the denial of the application by the regional office of Licensing and Certification. In addition, in November 1997, the Company filed a Petition for Writ of Mandate requesting that the Superior Court of the State of California for the County of Sacramento order the Department of Health Services to issue the appropriate license, or in the alternative, to find that the Department of Health Services lacks jurisdiction to regulate the operation of the diagnostic catheterization facility. The Court denied the Company's Petition for a Writ of Mandate and remanded the case the administrative law office of the Department of Health Services. In July 1998, the Company and the Department presented their case to an administrative law judge. Final briefs were filed in November 1998 and a final decision of the administrative law judge was received in late March 1999. Nearly eight months after the administrative hearing, the administrative law judge for the California Department of Health Services issued its decision denying the Company's application for licensure of its freestanding cardiac catheterization laboratory in Fremont. In November 1999, the Company filed a demand for arbitration against Comprehensive Cardiology Consultants, a Medical Group, Inc. ("CCMG") with JAMS/Endispute, Inc. The Company provides 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. Therefore, 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. Raytel and its subsidiaries are parties to other litigation and claims arising out of its ongoing business operations. The Company believes that none of these matters, either individually or in the aggregate, are likely to have a material adverse effect on the Company's business, financial condition or operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 18 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to information set forth under the heading "Stock Data Nasdaq Symbol: RTEL" on page 30 of the Company's 1999 Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference to the information set forth under the heading "Five Year Financial Summary" on page 5 of the Company's 1999 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference to information set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 6 to 12 of the Company's 1999 Annual Report to Stockholders. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk The Company does not hold any marketable equity securities, foreign currencies, or derivative financial instruments in its investment portfolio. At the end of the fiscal year 1999, the Company did not hold any investments that are subject to interest rate risk, except for approximately $1,693,000 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, the Company has the ability to hold its fixed income investments until maturity. Therefore, the Company would not expect to recognize an adverse impact in income or cash flows if there were an increase or decrease in interest rates. The Company has not issued any debt securities other than promissory notes with fixed interest rates in connection with certain acquisitions, and therefore does not have any interest rate risk with respect to this type of financing activity. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to the financial statements and supplementary data on pages 13 to 29 of the Company's 1999 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 19 20 PART III Certain information required by Part III is omitted from this report in that the Company intends to file its definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this report, and certain information therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to information set forth in the Proxy Statement under the heading "Proposal No. 1 - Election of Directors - Executive Officers and Directors." The information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to information set forth in the Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to information set forth in the Proxy Statement under the heading "Executive Compensation and Other Matters." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to information set forth in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to information set forth in the Proxy Statement under the heading "Certain Transactions." 20 21 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, 1999, 1998 and 1997 Consolidated Balance Sheets as of September 30, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and 1997 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, 1999 The Company filed no report on Form 8-K during the quarter ended September 30, 1999. 21 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAYTEL MEDICAL CORPORATION Dated: December 28, 1999 By: /s/ RICHARD F. BADER --------------------------------------- Richard F. Bader Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE /s/ RICHARD F. BADER Chairman of the Board and Chief Executive December 28, 1999 - ------------------------ Officer (Principal Executive Officer) (Richard F. Bader) /s/ JOHN F. LAWLER, JR. Senior Vice President and Chief Financial December 28, 1999 - ------------------------ Officer (Principal Financial and Accounting (John F. Lawler, Jr.) Officer) /s/ ALLAN ZINBERG President, Chief Operating Officer and December 28, 1999 - ------------------------ Director (Allan Zinberg) /s/ DAVID E. WERTHEIMER Senior Vice President and Director December 28, 1999 - ------------------------ (David E. Wertheimer) /s/ MARY M. LAMPE Director December 28, 1999 - ------------------------ (Mary M. Lampe) Director December 28, 1999 - ------------------------ (Gene I. Miller) /s/ THOMAS J. FOGARTY Director December 28, 1999 - ------------------------ (Thomas J. Fogarty)
22 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Board of Directors and Stockholders of Raytel Medical Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Raytel Medical Corporation and Subsidiaries included in this Form 10-K, and have issued our report thereon dated November 12, 1999. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements. The information reflected on the schedule has been subjected to the auditing procedures applied in the audits of the basic financial data, and in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ------------------------- Arthur Andersen LLP Hartford, Connecticut November 12, 1999 23 24 Schedule II RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES For the years ended September 30,1999, 1998 and 1997 VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Beginning Cost and Balance at of Year Expenses Other (1) Deductions End of Year DESCRIPTION September 30, 1999 $ 7,093,000 $ 6,467,000 $(7,896,000) $ 5,664,000 Allowance for doubtful accounts September 30, 1998 Allowance for doubtful $ 6,189,000 $ 5,767,000 $(4,863,000) $ 7,093,000 accounts September 30, 1997 Allowance for doubtful $ 5,855,000 $ 5,387,000 $ 1,946,000 $(6,999,000) $ 6,189,000 Accounts
(1) The majority represents a reserve acquired in connection with the purchase of CVI on August 15, 1997. 24 25 INDEX TO EXHIBITS EXHIBIT EXHIBIT TITLE NUMBER 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. 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. 25 26 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 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 Commercial Office Lease dated July 19, 1999 between Registrant and USGC Joint Venture. *10.60 Key Management Retention Agreement dated as of September 1, 1999, by and between Swapan Sen and Raytel Medical Corporation. *10.61 Key Management Retention Agreement dated as of September 1, 1999, by and between David E. Wertheimer, M.D. and Raytel Medical Corporation. *10.62 Key Management Retention Agreement dated as of September 1, 1999, by and between John F. Lawler, Jr. and Raytel Medical Corporation. 13.1 Portions of Annual Report to Stockholders incorporated by reference in this Report on Form 10-K. 21.1 List of subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP. 27 Financial Data Schedule * Constitutes a management contract or compensatory plan required to be filed pursuant to Item 14(c) of Form 10-K. + Confidential treatment has been granted as to a portion of this Exhibit. (1) Incorporated by reference to identically numbered 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"). 26 27 (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 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. 27 EX-10.58 2 EX-10.58 1 EXHIBIT 10.58 FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT This FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "AMENDMENT") dated as of July 30, 1999, is by and among Raytel Medical Corporation (the "BORROWER"), BankBoston, N.A., successor by merger to Bank of Boston Connecticut ("BANKBOSTON"), and Banque Paribas (collectively, the "BANKS") and BankBoston, as agent for the Banks (in such capacity, the "AGENT"). W I T N E S S E T H: WHEREAS, the Borrower, the Banks and the Agent entered into a certain Amended and Restated Credit Agreement dated as of August 14, 1996, as amended by the First Amendment to Amended and Restated Credit Agreement dated as of June 4, 1997, the Second Amendment to Amended and Restated Credit Agreement dated as of September 26, 1997 and the Third Amendment to Amended and Restated Credit Agreement dated as of July 24, 1998 (as amended from time to time, the "CREDIT AGREEMENT"); and WHEREAS, the Borrower has requested that the Credit Agreement be amended in certain respects; and WHEREAS, the Agent and the Banks have agreed to amend the Credit Agreement on the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS. Capitalized terms used herein without definition that are defined in the Credit Agreement shall have the same meanings herein as therein. SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats on and as of the date hereof the representations and warranties made by it in the Credit Agreement, provided that all references therein to the Credit Agreement shall refer to the Credit Agreement as amended hereby. SECTION 3. RATIFICATION, ETC. Except as expressly amended hereby, the Credit Agreement and all documents, instruments and agreements related thereto are hereby ratified and confirmed in all respects and shall continue in full force and effect. This Amendment and the Credit Agreement shall hereafter be read and construed together as a single document, and all references in the Credit Agreement or any related agreement or instrument 2 Page 2 to the Credit Agreement shall hereafter refer to the Credit Agreement as amended by this Amendment. SECTION 4. AMENDMENTS TO CREDIT AGREEMENT. SECTION 4.1. AMENDMENT TO SECTION 2.2. Section 2.2 of the Credit Agreement is hereby amended by deleting the phrase "one-quarter of one percent (1/4%)" from the fourth line thereof and substituting therefor the phrase "one-half of one percent (1/2%)." SECTION 4.2. AMENDMENT TO SECTION 2.5. Section 2.5 of the Credit Agreement is hereby amended by deleting subsections "(a)" and "(b)" from such section and substituting therefor the following: "(a) Each Revolving Credit Base Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of each Interest Period with respect thereto at the Base Rate plus the Applicable Base Rate Margin. With respect to each Revolving Credit Base Rate Loan and each fiscal quarter of the Borrower, the Applicable Base Rate Margin will be determined by the Agent after review of the Leverage Ratio of the Borrower and its Subsidiaries for the period of four (4) consecutive fiscal quarters ending on the fiscal last day of the quarter immediately preceding such fiscal quarter, all as follows:
APPLICABLE BASE RATE LEVERAGE RATIO MARGIN -------------- -------------------- Greater than 2.2:1.0 0.50% Less than or equal to 2.2:1.0 but greater than 1.5:1.0 0.25% Less than or equal to 1.5:1.0 0.00%
The Agent will determine the Applicable Base Rate Margin for each fiscal quarter on the forty-fifth (45th) day following the last day of the immediately preceding fiscal quarter by reference to the financial statements delivered to the Agent and the Banks by the Borrower in accordance with the terms hereof with respect to the period of four (4) consecutive fiscal quarters ending on such immediately preceding fiscal quarter. (b) Each Revolving Credit LIBOR Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of each Interest Period with respect thereto at 3 Page 3 the LIBOR Rate determined for such Interest Period plus the Applicable LIBOR Rate Margin. With respect to each Revolving Credit LIBOR Rate Loan and each fiscal quarter of the Borrower, the Applicable LIBOR Rate Margin will be determined by the Agent after review of the Leverage Ratio of the Borrower and its Subsidiaries for the period of four (4) consecutive fiscal quarters ending on the immediately preceding fiscal quarter, all as follows:
APPLICABLE LIBOR RATE LEVERAGE RATIO MARGIN -------------- --------------------- Greater than 2.2:1.0 2.25% Less than or equal to 2.2:1.0 but greater than 1.5:1.0 2.00% Less than or equal to 1.5:1.0 1.75%
The Agent will determine the Applicable LIBOR Rate Margin for each fiscal quarter on the forty-fifth (45th) day following the last day of the immediately preceding fiscal quarter by reference to the financial statements delivered to the Agent and the Banks by the Borrower in accordance with the terms hereof with respect to the period of four (4) consecutive fiscal quarters ending on such immediately preceding fiscal quarter." SECTION 4.3. AMENDMENT TO SECTION 3.1. The last sentence of Section 3.1 of the Credit Agreement is hereby amended in its entirety to read as follows: "All amounts owing in respect of the Revolving Credit Loans outstanding on the Revolving Credit Termination Date, including unpaid principal and any and all accrued and unpaid interest and fees thereon, shall automatically and without any further act become due and payable on the Revolving Credit Termination Date." SECTION 4.4. AMENDMENT TO SECTION 4. Section 4 of the Credit Agreement is hereby deleted in its entirety and all references to the "Term Loan" in the Credit Agreement are hereby deleted. SECTION 4.5. AMENDMENT TO SECTION 10. Section 10 of the Credit Agreement is hereby amended by adding a new Section "10.4" thereto to read as follows: 4 Page 4 "SECTION 10.4. EARNINGS BEFORE INTEREST AND TAXES, DEPRECIATION AND AMORTIZATION. The Borrower will not permit Earnings Before Interest and Taxes, Depreciation and Amortization of the Borrower and its Subsidiaries to be less than $4,000,000 for any fiscal quarter of the Borrower ending on or after June 30, 1999." SECTION 4.6. AMENDMENTS TO SCHEDULE 2. The definition of "Maturity Date" appearing in Schedule 2 of the Credit Agreement is hereby deleted and the definitions of "Leverage Ratio" and "Revolving Credit Termination Date" appearing in Schedule 2 of the Credit Agreement are hereby amended by deleting each of them in their entirety and substituting therefor, respectively, the following: "Leverage Ratio. With respect to any fiscal period, the ratio of Borrower's Consolidated Total Funded Debt to Earnings Before Interest and Taxes, Depreciation and Amortization of the Borrower and its Subsidiaries for such period." "Revolving Credit Termination Date. August 1, 2001." SECTION 5. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment is subject to the prior satisfaction, on or before August 1, 1999, of the following conditions precedent (the date of such satisfaction herein referred to as the "AMENDMENT EFFECTIVE DATE"): (a) Payment of Amendment Fee. The Borrower shall have paid to the Agent for the account of the Banks a non-refundable amendment fee of $56,250.00. (b) Representations and Warranties. The representations and warranties contained in paragraph 7 of the Credit Agreement shall have been correct at and as of the date made. Such representations and warranties shall also be correct at and as of the date thereof, except to the extent that such representations and warranties expressly related to a specific date or were based on facts which have changes in the ordinary course of business, which changes, either singly or in the aggregate, are not materially adverse. (c) No Event of Default. There shall exist no Event of Default or condition which, with either or both the giving of notice of the lapse of time, would result in an Event of Default upon the execution and delivery of this Amendment. (d) Corporate Action. The Banks and the Agent shall have received evidence reasonably satisfactory to the Bank and the Agent that all requisite corporate action necessary for the valid execution, 5 Page 5 delivery and performance by the Borrower and Guarantors of this Amendment and all other instruments and documents delivered by the Borrower and Guarantors in connection herewith. (e) Delivery of Amendment. The parties hereto shall have executed and delivered this Amendment in form and substance satisfactory to the Banks and the Agent. SECTION 6. EFFECTIVE DATE. This Amendment shall become effective among the parties hereto as of the Amendment Effective Date. Until the Amendment Effective Date, the terms of the Credit Agreement prior to its amendment hereby shall remain in full force and effect. SECTION 7. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers, as of the day and year first above written. RAYTEL MEDICAL CORPORATION By: /s/ JOHN F. LAWLER, JR. ------------------------------- Its: Vice President --------------------------- PARIBAS (Formerly known as Banque Paribas) By: /s/ SEAN CONLON By: /s/ [Signature Illegible] -------------------------------- -------------------------------- Its: Managing Director By: Assistant Vice President ------------------------------- -------------------------------- BANKBOSTON, N.A., individually and as Agent By: /s/ CHRIS PHELAN Its: Director -------------------------------- ------------------------------- 6 Page 6 Each of the undersigned Guarantors acknowledges and accepts the foregoing and ratifies and confirms in all respects such Guarantor's obligations under the Guarantees: RAYTEL CARDIAC SERVICES, INC. By: /s/ JOHN F. LAWLER, JR. ------------------------------------- Its: Vice President --------------------------------- RAYTEL MEDICAL IMAGING, INC. By: /s/ JOHN F. LAWLER, JR. ------------------------------------- Its: Vice President --------------------------------- MEDICAL IMAGING PARTNERS L.P. By: RAYTEL MEDICAL IMAGING, INC., Its General Partner By: /s/ JOHN F. LAWLER, JR. ----------------------------- Its: Vice President ------------------------- RAYTEL IMAGING HOLDINGS, INC. By: /s/ JOHN F. LAWLER, JR. ------------------------------------- Its: Vice President --------------------------------- RAYTEL CARDIOVASCULAR LABS, INC. By: /s/ JOHN F. LAWLER, JR. ------------------------------------- Its: Vice President --------------------------------- 7 Page 7 RAYTEL IMAGING NETWORK, INC. By: /s/ JOHN F. LAWLER, JR. ------------------------------------- Its: Vice President --------------------------------- RAYTEL IMAGING WEST INC. By: /s/ JOHN F. LAWLER, JR. ------------------------------------- Its: Vice President --------------------------------- RAYTEL IMAGING EAST INC. By: /s/ JOHN F. LAWLER, JR. ------------------------------------- Its: Vice President --------------------------------- RAYTEL IMAGING MID-ATLANTIC INC. By: /s/ JOHN F. LAWLER, JR. ------------------------------------- Its: Vice President --------------------------------- RAYTEL GRANADA HILLS INC. By: /s/ JOHN F. LAWLER, JR. ------------------------------------- Its: Vice President --------------------------------- EX-10.59 3 EX-10.59 1 EXHIBIT 10.59 COMMERCIAL OFFICE LEASE BETWEEN USGC JOINT VENTURE AS LANDLORD AND RAYTEL MEDICAL CORPORATION AS TENANT DATED: JULY 19, 1999 2 TABLE OF CONTENTS
Page ---- ARTICLE I BASIC LEASE PROVISIONS 1 ARTICLE II THE PREMISES 4 ARTICLE III TERM 5 ARTICLE IV RENT 5 ARTICLE V INTENTIONALLY DELETED 6 ARTICLE VI OPERATING EXPENSES 6 ARTICLE VII IMPOSITIONS RENTAL 11 ARTICLE VIII INTENTIONALLY DELETED 13 ARTICLE IX USE AND REQUIREMENTS OF LAW 13 ARTICLE X ASSIGNMENT AND SUBLETTING 15 ARTICLE XI MAINTENANCE AND REPAIR 18 ARTICLE XII CONDITION OF PREMISES; INITIAL CONSTRUCTION; ALTERATIONS 19 ARTICLE XIII SIGNS 21 ARTICLE XIV TENANT'S EQUIPMENT AND PROPERTY 22 ARTICLE XV RIGHT OF ENTRY 22
-i- 3
Page ---- ARTICLE XVI INSURANCE 22 ARTICLE XVII LANDLORD SERVICES AND UTILITIES 24 ARTICLE XVIII LIABILITY OF LANDLORD 26 ARTICLE XIX RULES AND REGULATIONS 27 ARTICLE XX DAMAGE; CONDEMNATION 27 ARTICLE XXI DEFAULT OF TENANT 28 ARTICLE XXII MORTGAGES 30 ARTICLE XXIII SURRENDER; HOLDING OVER 31 ARTICLE XXIV QUIET ENJOYMENT 32 ARTICLE XXV MISCELLANEOUS 32 ARTICLE XXVI RIGHT OF FIRST OFFER 35 ARTICLE XXVII OPTION TO RENEW 37
LIST OF EXHIBITS Exhibit A-1 Plan Showing Premises Exhibit A-2 Legal Description of Land Exhibit A-3 Reserved Parking Space Location Exhibit B Listing of Landlord's Work Exhibit B-l Work Agreement (including Schedules I, II, III and IV) Exhibit C Rules and Regulations Exhibit D Secretary's Certificate Exhibit E Janitorial Specifications -ii- 4 COMMERCIAL OFFICE LEASE THIS COMMERCIAL OFFICE LEASE (hereinafter the "Lease") is made as of the 19th day of July, 1999 ("Date of Lease"), by and between USGC JOINT VENTURE, a Connecticut joint venture consisting of Griffin Land & Nurseries, Inc., a Delaware corporation, and USAA Real Estate Company, a Delaware corporation ("Landlord"), and RAYTEL MEDICAL CORPORATION, a Delaware corporation ("Tenant"). Landlord and Tenant, intending legally to be bound, agree as set forth below. ARTICLE I BASIC LEASE PROVISIONS In addition to the terms which are defined elsewhere in this Lease, the following defined terms are used in this Lease: 1.1 Building. The building located at the address indicated below which is on the Land (as hereinafter defined), and all alterations, additions, improvements, restorations or replacements now or hereafter made thereto. 1.2 Building Address: 7 Waterside Crossing Windsor, CT 06095 1.3 Premises. 36,679 Rentable Square Feet (as hereinafter defined), being the entire third floor of the Building and a portion of the second floor of the Building, all as outlined on EXHIBIT A-1 attached hereto and made a part hereof. 1.4 Land. The piece or parcel of land which comprises the Project (as hereinafter defined), as more particularly described on EXHIBIT A-2 attached hereto and made a part hereof, and all rights, easements and appurtenances thereunto belonging or pertaining, or such portion thereof as shall be allocated by Landlord to the Project. 1.5 Project. The development known as 7 Waterside Crossing consisting of the real property and all improvements built thereon including without limitation the Land, Building, Common Area (as hereinafter defined), Parking Facilities (as hereinafter defined), and any other buildings, walkways, driveways, fences and landscaping, containing approximately 80,520 Rentable Square Feet (as hereinafter defined). 1.6 Rentable Square Feet (Foot) or Rentable Area. The rentable area within the Premises or the Building or any other building within the Project, as the case may be, calculated as follows: (i) in the case of a single tenancy floor, all floor area within the inside surface of the exterior walls of the building excluding only the areas ("Service Areas") used for building stairs, fire towers, elevator shafts, flues, vents, stacks, pipe shafts, and vertical ducts, but including any Service Areas which are for the specific use of the particular tenant, such as special stairs or elevators, plus an allocation of the square footage of the building's elevator equipment room, central mechanical room, ground floor lobbies, and all the Common Area on each such floor; and (ii) in the case of a floor to be occupied by more than one tenant, all floor areas within the inside surface of the exterior walls enclosing the Premises on such floor and measured to the mid-point of the walls separating areas leased by or held for lease to other tenants or from the Common -1- 5 Area, but including a proportionate part of the Common Area located on such floor based upon the ratio which the Tenant's Rentable Area (determined by excluding the Common Area) on such floor bears to the aggregate Rentable Area (determined by excluding the Common Areas) on such floor plus an allocation of the square footage of the building's elevator equipment room, central mechanical room, and ground floor lobbies. No deductions from Rentable Area shall be made for columns or projections necessary to the building. 1.7 Permitted Use. The Premises shall be used solely for general business office purposes, including uses reasonably related and ancillary thereto, such as storage. In addition, Landlord consents to an employee breakroom within the Premises. 1.8 Commencement Date. August 1, 1999. 1.9 Expiration Date. July 31, 2004. 1.10 Term. Sixty (60) months (plus any partial month), beginning on the Commencement Date and expiring on the Expiration Date. 1.11 Basic Rent. The amount set forth in the following schedule, subject to adjustment as specified in ARTICLE IV.
Approximate Annual Basic Rent Monthly Annual Month(s) Per Rentable Square Foot Basic Rent Basic Rent -------- ------------------------ ---------- ---------- 1 through 24 (plus partial $13.75 $42,028.02 $504,336.24 month, if any) 25 through 36 $14.00 $42,792.17 $513,506.04 37 through 60 $14.25 $43,556.31 $522,675.72
1.12 Base Year. A period of twelve (12) months comprising calendar year 1999. However, solely for purposes of ARTICLE VII hereof, "Base Year" shall mean those Impositions (as hereinafter defined) as set forth on the October 1, 1998 Grand List of the Town of Windsor, CT. 1.13 Lease Year. Each consecutive twelve (12) month period elapsing after: (i) the Commencement Date if the Commencement Date occurs on the first day of a month; or (ii) the first day of the month following the Commencement Date if the Commencement Date does not occur on the first day of a month. Notwithstanding the foregoing, the first Lease Year shall include the additional days, if any, between the Commencement Date and the first day of the month following the Commencement Date, in the event the Commencement Date does not occur on the first day of a month. 1.14 Calendar Year. For the purpose of this Lease, Calendar Year shall be a period of twelve (12) months commencing on each January 1 during the Term, except that the first Calendar Year shall be that period from and including the Commencement Date through December 31 of that same year, and the last Calendar Year shall be that period from and including the last January 1 of the Term through the earlier of the Expiration Date or date of Lease termination. -2- 6 1.15 Tenant's Proportionate Share. Tenant's Proportionate Share of the Project is 45.55% (determined by dividing the Rentable Square Feet of the Premises by the Rentable Square Feet of the Project and multiplying the resulting quotient by one hundred and rounding to the second decimal place). 1.16 Parking Space Allocation. Tenant shall be allocated 146 parking spaces (approximately 4 spaces per 1,000 Rentable Square Feet leased) within the Parking Facilities. Included within such allocation shall be four (4) reserved spaces, said reserved spaces to be initially located as shown on Exhibit A-3 attached hereto; however, Landlord reserves the right to relocate Tenant's four (4) reserved spaces by written notice to Tenant. Except for said reserved spaces, all parking spaces allocated to Tenant shall be unreserved and non-exclusive. Tenant's parking space allocation includes a proportionate share of visitors spaces and handicap spaces. Tenant's parking space allocation (but not the reserved parking) shall be equitably adjusted (up or down) in the event that the size of the Premises ever decreases (i.e., casualty, condemnation) or increases (i.e., ARTICLE XXVI hereof). Tenant's use of the Parking Facilities shall be without any additional change(s) other than those expressly set forth or expressly contemplated in this Lease. 1.17 Security Deposit. None. 1.18 Broker: Steven Fine Associates, Inc. 125 Michael Drive Syosset, NY 11791 1.19 Guarantor(s): None 1.20 Landlord's Notice USAA Real Estate Company Address: 9830 Colonnade Boulevard, Suite 600 San Antonio, Texas 78230-2239 Attention: AVP Portfolio Management with a copy at USAA Real Estate Company the same time to: 9830 Colonnade Boulevard, Suite 600 San Antonio, Texas 78230-2239 Attention: VP Real Estate Counsel with a copy at the Griffin Land & Nurseries, Inc. same time to: 204 West Newberry Road Bloomfield, CT 06002 Attention: Director of Leasing 1.21 Tenant's Notice Address: Raytel Medical Corporation 7 Waterside Crossing Windsor, CT 06095 Attention: Allan Zinberg, President -3- 7 with a copy at the same time to: Raytel Medical Corporation 2755 Campus Drive San Mateo, California 94403 Attention: Richard F. Bader, Chairman 1.22 Guarantor(s) Notice Address: N/A 1.23 Interest Rate: The per annum interest rate listed as the base rate (the "Base Rate") on corporate loans at large U.S. money center commercial banks as published from time to time under "Money Rates" in the Wall Street Journal plus two percent (2%), but in no event greater than the maximum rate permitted by law. In the event the Wall Street Journal ceases to publish the Base Rate, Landlord shall choose, at Landlord's discretion, a similarly published rate. 1.24 Common Area: All areas, improvements, facilities and equipment from time to time designated by Landlord for the general and nonexclusive common use or benefit of Tenant, other tenants of the Project, Landlord and their respective Agents, including, without limitation, roadways, entrances and exits, hallways, stairs, loading areas, landscaped areas, open areas, park areas, exterior lighting, service drives, walkways, sidewalks, atriums, courtyards, concourses, ramps, washrooms, maintenance and utility rooms and closets, exterior utility lines, lobbies, delivery and entrance corridors, elevators and their housing and rooms, common window areas, common walls, common ceilings, common trash areas, vending or mail areas, common pipes, conduits, ducts and wires, and Parking Facilities. 1.25 Agents: Officers, partners, directors, employees, agents, licensees, contractors, customers and invitees; to the extent customers and invitees are under the principal's control or direction. 1.26 Parking Facilities: All parking areas now or hereafter designated by Landlord for use by tenants of the Project and/or their guests and invitees, including, without limitation, surface parking, parking decks, parking structures and parking areas under or within the Project whether reserved, exclusive, non-exclusive or otherwise. ARTICLE II THE PREMISES 2.1 Lease of Premises. (a) In consideration of the agreements contained herein and subject to the provisions of paragraph 2.1(b) below, Landlord hereby leases the Premises to Tenant, and Tenant hereby leases the Premises from Landlord, for the Term and upon the terms and conditions hereinafter provided. It is specifically understood that the Rentable Square Feet of the Premises have been determined by Landlord's architect and that, for the purpose of any calculations which are based on the Rentable Square Feet of the Premises, the number of Rentable Square Feet stated in ARTICLE I shall control. The Premises are leased subject to, and Tenant agrees not to violate, all present and future covenants, conditions and restrictions of record which affect the Land, all of such documents collectively referred to as the "Restrictions"; provided, however, that Tenant shall not be obligated to comply with any Restrictions which prohibit Tenant from the material benefit, enjoyment or use of the Common Area as herein authorized or the Premises for the Permitted Use as defined in SECTION 1.7. As an appurtenance to the Premises, Tenant shall have the general and nonexclusive right, together with Landlord and the other tenants of the Project and their respective Agents (as hereinafter defined), to use the Common Area subject to the terms and conditions of this Lease. (b) Notwithstanding the foregoing, Tenant acknowledges and agrees that a portion of the second floor component of the Premises, containing 3,020 Rentable Square Feet and designated as "Occupied Portion" on Exhibit A-1 (hereinafter the "Occupied Portion"), is currently occupied by another -4- 8 tenant. In the event that for any reason whatsoever said third party tenant does not vacate the Occupied Portion on a timely basis, such that Landlord can complete the Demising Wall (as hereinafter defined) and deliver vacant possession of the Occupied Portion to Tenant on the Commencement Date, then in such event Landlord shall not be subject to any liability of any nature whatsoever to Tenant, nor shall the Commencement Date or the Expiration Date hereunder be deferred or extended. However, upon any such occurrence Basic Rent payable hereunder shall be appropriately reduced (utilizing the Rentable Square Feet of the Occupied Portion) until Landlord notifies Tenant that the Occupied Portion may be occupied by Tenant, whereupon Basic Rent (prorated for any partial month) shall immediately and automatically revert to the full amount as are set forth in SECTION 1.11 hereof). Landlord agrees to utilize all diligent and continuing efforts to ensure that said present third party tenant timely vacates and surrenders the Occupied Portion. 2.2 Landlord's Reservations. Landlord shall retain absolute dominion and control over the Common Area and shall operate and maintain the Common Area in such manner as Landlord in its sole discretion, shall determine; provided however, such exclusive right shall not operate to prohibit Tenant from its material benefit and enjoyment of the Common Areas and the Premises for the Permitted Use as defined in SECTION 1.7, and provided further that Landlord agrees to maintain the Common Area in a manner consistent with other similarly situated/similar quality building(s). Tenant acknowledges that without advance notice to Tenant and without any liability to Tenant in any respect, Landlord shall have the right to (a) Temporarily close any of the Common Area for maintenance, alteration or improvement purposes; and (b) Change, alter, add to, temporarily close or otherwise affect the Parking Facilities or the Parking Space Allocation in such manner as Landlord, in its sole discretion, deems appropriate including, without limitation, the right to designate reserved spaces available only for use by one or more tenants (however, in such event, those parking spaces shall still be deemed Common Area for the purpose of the definition of Operating Expenses), provided that, except in emergency situations or situations beyond Landlord's control, Landlord shall not materially adversely affect ingress and egress and Landlord shall provide alternative Parking Facilities. In addition to the other rights of Landlord under this Lease, Landlord further reserves to itself and its respective successors and assigns the right to use Tenant's name and the Rentable Square Feet of the Premises in promotional materials relating to the Building or the Project; however, Landlord agrees not to utilize Tenant's name in any third party media advertising (i.e. newspapers, television) without Tenant's consent. Subject to the foregoing provisions of this SECTION 2.2, Landlord may exercise any or all of the foregoing rights without being deemed to be guilty of an eviction, actual or constructive, or a disturbance or interruption of the business of Tenant or Tenant's use or occupancy of the Premises. ARTICLE III TERM 3.1 Term. The Term shall commence on the Commencement Date and expire at midnight on the Expiration Date. ARTICLE IV RENT 4.1 Basic Rent. Subject to adjustment upon and subject to the provisions of paragraph 2.1(b) hereof, Tenant shall pay to Landlord the Basic Rent as specified in SECTION 1.11. 4.2 Payment of Basic Rent. Basic Rent shall be payable in monthly installments as specified in SECTION 1.11, in advance, without demand, notice, deduction, offset or counterclaim (except as may be -5- 9 hereinafter expressly set forth) on or before the first day of each and every calendar month during the Term; provided, however, if the Commencement Date occurs on a date other than on the first day of a calendar month, Basic Rent prorated from such date until the first day of the following month shall be due and payable on the Commencement Date . Tenant shall pay the Basic Rent and all Additional Rent as hereinafter defined, by good check or in lawful currency of the United States of America, to Landlord at such address as Landlord specifies to Tenant. Any payment made by Tenant to Landlord on account of Basic Rent may be credited by Landlord to the payment of any late charges then due and payable and to any Basic Rent or Additional Rent then past due before being credited to Basic Rent currently due. 4.3 Additional Rent. All sums payable by Tenant under this Lease, other than Basic Rent, shall be deemed "Additional Rent," and, unless otherwise set forth herein, shall be payable in the same manner as set forth above for Basic Rent. 4.4 Rent. Basic Rent as defined in SECTION 1.11 hereof and Additional Rent as defined in SECTION 4.3 above shall jointly be referred to as "Rent". 4.5 Sales or Excise Taxes. Tenant shall pay to Landlord as Additional Rent, concurrently with payment of Basic Rent or Additional Rent to Landlord all taxes (including, but not limited to any and all sales, rent or excise taxes) on Basic Rent or Additional Rent or other amounts payable by Tenant to or otherwise benefiting Landlord, as levied or assessed by any governmental or political body or subdivision thereof against Landlord on account of such Basic Rent, Additional Rent or other amounts payable by Tenant to or otherwise benefiting Landlord, or any portion thereof. However, Tenant shall not be responsible for any general income, franchise, or inheritance tax assessed against Landlord. ARTICLE V INTENTIONALLY DELETED ARTICLE VI OPERATING EXPENSES 6.1 Operating Expense Rental. Commencing on August 1, 2000, Tenant shall pay to Landlord throughout the remainder of the Term and the Renewal Term, if exercised, as Additional Rent, Tenant's Proportionate Share (as defined in SECTION 1.15) of the amount by which the Operating Expenses (as hereinafter defined) during each full and partial Calendar Year exceed the Operating Expenses for the Base Year (the "Operating Expense Rental"). For the period August 1, 2000 through December 31, 2000 and for the last Calendar Year hereunder (assuming that the Expiration Date is other than December 31), the Operating Expenses for the Base Year and applicable Calendar Year shall be appropriately prorated. 6.2 Operating Expenses Defined. As used herein, the term "Operating Expenses" shall mean all actual expenses, costs and disbursements of every kind and nature, except as specifically excluded otherwise herein, which Landlord incurs because of or in connection with the ownership, maintenance, management and operation of the Project, including, if the Project during the Base Year and/or any subsequent Calendar Year is less than ninety-five percent (95%) occupied, all additional costs and expenses of operation, management and maintenance of the Project (including management fees) which Landlord reasonably determines that it would have paid or incurred during the Base Year and/or any such Calendar Year if the Project had been ninety-five percent (95%) occupied. Operating Expenses may include, without limitation, all costs, expenses and disbursements incurred or made in connection with the following: -6- 10 (a) Wages and salaries of all employees, whether employed by Landlord or the Project's management company, engaged in the operation and maintenance of the Project, and all costs related to or associated with such employees or the carrying out of their duties, including uniforms and their cleaning, taxes, auto allowances and insurance and benefits (including, without limitation, contributions to pension and/or profit sharing plans and vacation or other paid absences); to the extent these employees work on other building(s) and/or projects, such costs shall be pro-rated, based upon time spent on the Project; (b) All supplies, tools, equipment and materials, including janitorial and lighting supplies, used directly in the operation and maintenance of the Project, including any lease payments therefor; provided, however, any such equipment which under generally accepted accounting principles should be classified as capital items shall be amortized on a straight-line basis over their useful lives, not to exceed the Project's useful life, together with interest on the unamortized balance of such cost at the Interest Rate, or such higher or lower rate as may have been paid by Landlord on funds borrowed for the purposes of purchasing such equipment; (c) All utilities, including, without limitation, the Common Area (pay) telephone, water, sewer, power, gas, heating, lighting and air conditioning for the Project; notwithstanding the foregoing, no electricity costs shall be included in Operating Expenses (Tenant shall pay for electricity as set forth in ARTICLE XVII hereof). (d) All maintenance, operation and service agreements for the Project, and any equipment related thereto, including, without limitation, service and/or maintenance agreements for the Parking Facilities, energy management, HVAC, plumbing and electrical systems, and for window cleaning, elevator maintenance, janitorial service, groundskeeping, interior and exterior landscaping and plant maintenance; (e) All insurance purchased by Landlord or the Project's management company relating to the Project and any equipment or other property contained therein or located thereon including, without limitation, casualty, liability, earthquake, rental loss, sprinkler and water damage insurance; (f) All repairs to the Project (excluding to the extent repairs are paid for by the proceeds of insurance or by Tenant or other third parties other than as a part of the Operating Expenses), including interior, exterior, structural or nonstructural repairs, and regardless of whether foreseen or unforeseen; provided, however, any such repairs which under generally accepted accounting principles should be classified as capital improvements shall be amortized on a straight-line basis over their useful lives, not to exceed the Project's useful life, together with interest on the unamortized balance of such cost at the Interest Rate, or such higher or lower rate as may have been paid by Landlord on funds borrowed for the purposes of constructing such capital improvements; (g) All maintenance of the Project, including, without limitation, Common Area and exterior repainting, replacement of wall coverings and window coverings, replacement of carpeting, ice and snow removal, window washing, landscaping, groundskeeping, trash removal and the patching, painting, resealing and complete resurfacing of roads, driveways and parking lots; provided, however, any such maintenance, repairs or replacements which under generally accepted accounting principles should be classified as capital improvements shall be amortized on a straight-line basis over their useful lives, not to exceed the Project's useful life, together with interest on the unamortized balance of such cost at the Interest Rate, or such higher or lower rate as may have been paid by Landlord on funds borrowed for the purposes of constructing such capital improvements; (h) A management fee payable to Landlord or the company or companies managing the Project, if any, not to exceed five percent (5%) of gross revenues from the Project; -7- 11 (i) Accounting and legal fees incurred in connection with the operation and maintenance of the Project, or related thereto; (j) Any additional services not provided to the Project at the Commencement Date but thereafter provided by Landlord which Landlord reasonably deems necessary or desirable in connection with the management or operation of the Project; (k) Any capital improvements made to the Project for the purpose of reducing Operating Expenses or which are required under any governmental law or regulation that was not applicable to the Project as of the Date of Lease (which are not a result of the nature of Tenant's specific use of the Premises, which capital improvements shall be the responsibility of Tenant), the cost of which shall be amortized on a straight-line basis over the improvement's useful life, not to exceed the Project's useful life, together with interest on the unamortized balance of such cost at the Interest Rate, or such higher or lower rate as may have been paid by Landlord on funds borrowed for the purposes of constructing such capital improvements; and (l) Other expenses and costs reasonably necessary for operating and maintaining the Project. Notwithstanding the foregoing, Operating Expenses shall not include: (i) costs associated with the operation of the business of the partnership which constitutes the Landlord, as the same are distinguished from the cost of operation of the Project; (ii) attorneys' fees incurred by Landlord in connection with negotiations for leases with tenants or prospective tenants of the Project and in connection with disputes with and/or enforcement of any leases with tenants or prospective tenants of the Project; provided, however, Operating Expenses shall include those reasonable attorneys' fees and other costs and expenses incurred in connection with Landlord's successful negotiations of disputes or claims related to items of Operating Expenses, enforcement of Rules and Regulations for the Project and such other matters relating to the maintenance of standards required by Landlord under the Lease; (iii) costs of tenant services not offered on a regular basis to all tenants of the Building; (iv) any cost representing an amount paid for services or materials to a person, firm or entity related to Landlord or any general partner of Landlord, to the extent such amount exceeds the amount that would be paid for such services or materials of comparable quality at the then existing market rates to an unrelated person, firm or corporation; (v) costs of tenant improvements, including architectural and engineering costs, "tenant allowances" and "tenant concessions", permit, license and inspection fees, clean-up costs and other costs and expenses incurred in renovating leased space for the exclusive use of a particular tenant of the Project; (vi) capital items other than those referred to in subsection (b), (f), (g) and (l) above; (vii) costs associated with the repair or correction of latent defects in the initial design or construction of the Project; (viii) items and services for which a tenant or any third party specifically reimburses Landlord or for which a tenant pays third persons; -8- 12 (ix) depreciation or amortization of the Project or any other improvements, fixtures or equipment within the Project, except as otherwise provided in subsections (b), (f), (g), and (l) above; (x) interest, principal, points and fees or amortization on any mortgage or any other debt instrument encumbering the Project; (xi) wages, salaries, fees and benefits paid to administrative or executive personnel of Landlord above the level of Project Manager and below such level for any personnel to the extent not involved in the direct management of the Building or Project; (xii) Landlord's cost and expense of cleaning up, removing, remediating or repairing any soil or groundwater contamination or other damage or contamination caused by the presence or any release of Hazardous Materials in, on, from, under or about the premises or Project, except to the extent of Tenant's obligation pursuant to SECTION 9.3 above; (xiii) any compensation paid to persons, including clerks and attendants, in connection with Landlord's operating food or retail concessions, excluding any operation of the Parking Facilities; (xiv) Landlord's advertising and promotional expenses; (xv) expenditures incurred by Landlord for the repair or damage to the Project resulting from fire or other casualty to the extent Landlord is reimbursed by insurance proceeds; (xvi) expenditures incurred by Landlord for the repair of damage to the Project resulting from the exercise of the right of eminent domain or voluntary conveyance in lieu thereof to the extent Landlord is reimbursed by the condemning authority; (xvii) leasing and sales commissions and finders' fees; (xviii) Impositions (as defined in ARTICLE VII hereof); (xix) expenditures which are reimbursed or compensated by warranties; (xx) costs incurred due to Landlord's violation of laws in effect as of the date of this Lease; (xxi) the cost of acquiring and installing signs (other than directional or informational signs) in or on the Building identifying the owner of the Building or the owner of the Project or the costs of acquiring and installing exterior signage on the Building identifying any tenant of the Building or Project; (xxii) all interest, late charges, penalties and attorneys' fees incurred as a result of Landlord's violation of laws promulgated after the date of this Lease, except to the extent resulting from the failure of Tenant to pay Rent in a timely manner; (xxiii) ground rents or underlying lease rental, if any; (xxiv) Landlord's charitable or political contributions; (xxv) bad debt loss, rent loss or reserves for bad debts or rent loss; -9- 13 (xxvi) costs for paintings, sculpture or other works of art, unless decorative and non-investment grade in terms of quality and utilized for cosmetic enhancement of the Common Areas only; and (xxvii) costs of compliance with the ADA to the extent Landlord is responsible for such costs pursuant to SECTION 9.4(A) herein. 6.3 Adjustments to Operating Expense Rental. Landlord shall submit to Tenant, before the expiration of the Base Year and the beginning of each Calendar Year thereafter or as soon thereafter as reasonably possible, a statement of Landlord's reasonable estimate of Tenant's Proportionate Share of the increase in Operating Expenses over Operating Expenses for the Base Year payable by Tenant during such Calendar Year. Commencing upon expiration of the Base Year and in addition to the Basic Rent, Tenant shall pay to Landlord on or before the first day of each month during such Calendar Year an amount equal to one-twelfth (1/12) of Tenant's Proportionate Share of the estimated increase in Operating Expenses over Operating Expenses for the Base Year payable by Tenant for such Calendar Year as set forth in Landlord's statement. If Landlord fails to give Tenant notice of its estimated payments due under this section for any Calendar Year, then Tenant shall continue making monthly estimated payments in accordance with the estimate for the previous Calendar Year until a new estimate is provided. If Landlord reasonably determines that, because of unexpected increases in Operating Expenses, Landlord's estimate of the Operating Expenses was too low, then Landlord shall have the right to give a new statement of the estimated Operating Expenses due from Tenant for such Calendar Year or the balance thereof and to bill Tenant for any deficiency which may have accrued during such Calendar Year, and Tenant shall thereafter pay monthly estimated payments based on such new statement. Within ninety (90) days after the expiration of each Calendar Year following expiration of the Base Year, or as soon thereafter as is practicable, Landlord shall submit a statement to Tenant showing the actual Operating Expenses for such Calendar Year and Tenant's Proportionate Share of the amount by which such Operating Expenses exceed the Operating Expenses for the Base Year. If for any Calendar Year, Tenant's estimated monthly payments exceed Tenant's Proportionate Share of the amount by which the actual Operating Expenses for such Calendar Year exceed the Operating Expenses for the Base Year, then Landlord shall give Tenant a credit (or payment, if this Lease has or is to expire) in the amount of the overpayment toward Tenant's next monthly payments of estimated Operating Expenses. If for any Calendar Year Tenant's estimated monthly payments are less than Tenant's Proportionate Share of the amount by which the actual Operating Expenses for such Calendar Year exceed the Operating Expenses for the Base Year, then Tenant shall pay the total amount of such deficiency to Landlord within fifteen (15) days after receipt of the statement from Landlord. Landlord's and Tenant's obligations with respect to any overpayment or underpayment of Operating Expenses shall survive the expiration or termination of this Lease. Provided that no Event of Default shall exist under this Lease at the time Tenant exercises any audit right hereunder, or would exist but for the pendency of any cure periods provided for under SECTION 21.1, Tenant shall have one hundred and twenty (120) days after receipt of each Landlord's statement itemizing actual Operating Expenses to notify Landlord that Tenant disputes Landlord's calculation; Tenant's failure to so notify Landlord shall render Tenant's audit right hereunder null and void in all respects concerning the Calendar Year covered by such statement. In the event Tenant timely notifies Landlord with respect to any statement, Tenant shall have one hundred eighty (180) days after delivery of the Operating Expenses reconciliation statement within which to complete an audit of Landlord's books and records concerning the Operating Expenses for the Project for such previous -10- 14 Calendar Year, at Tenant's sole cost and expense. Tenant, or an independent certified public accountant designated by Tenant, shall have the right to inspect Landlord's books and records concerning the Operating Expenses for the Project for such previous Calendar Year during Landlord's normal business hours and at Landlord's local office upon at least thirty (30) days prior written notice. Tenant shall be entitled to only one audit per Calendar Year during the Term and in no event shall any audit extend beyond thirty (30) days, nor shall any auditor be compensated on a contingency fee basis. Tenant shall deliver to Landlord a copy of the results of such audit within ten (10) days of receipt by Tenant. In the event that Tenant's review of Landlord's books and records results in a determination that Tenant's payment of Tenant's Proportionate Share of the Operating Expenses exceeded Tenant's Proportionate Share of the actual Operating Expenses which should have been passed through to Tenant, as substantiated, at Landlord's option, by an independent certified public accountant, then a credit in the amount of the overpayment shall be applied towards Tenant's next monthly payments of Operating Expenses. In addition, if Tenant's review of Landlord's books and records results in a determination that Tenant's payment of Tenant's Proportionate Share of Operating Expenses exceeded by 10% or more Tenant's Proportionate Share of actual Operating Expenses which should have been passed through to Tenant, as substantiated, at Landlord's option, by an independent certified public accountant, then Landlord further agrees to reimburse Tenant for the reasonable and documented out-of-pocket fees incurred by Tenant in performing such audit. In the event that Tenant's review of Landlord's books and records results in a determination that Tenant's payment of Tenant's Proportionate Share of the Operating Expenses was less than Tenant's Proportionate Share of the actual Operating Expenses which should have been passed through to Tenant, as substantiated, at Landlord's option, by a certified public accountant, then Tenant shall pay the total amount of such deficiency to Landlord within thirty (30) days after delivery of an invoice from Landlord. Further, it is understood and agreed that at Landlord's option Landlord may require, as a condition precedent to any Tenant audit hereunder, that Tenant and/or Tenant's audit designee execute and deliver to Landlord a confidentiality agreement in form and content satisfactory to Landlord. ARTICLE VII IMPOSITIONS RENTAL 7.1 Impositions Rental. Commencing upon expiration of the Base Year, Tenant shall pay to Landlord, throughout the remainder of the Term and the Renewal Term, if exercised, as Additional Rent, Tenant's Proportionate Share (as defined in SECTION 1.15) of the amount by which the Impositions (as hereinafter defined) during each Calendar Year exceed the Impositions for the Base Year ("Impositions Rental"). In the event that the Expiration Date is other than the last day of a Calendar Year, then Impositions for the Base Year and applicable Calendar Year shall be appropriately prorated. 7.2. Impositions Defined. Impositions shall be defined as all real property taxes and assessments levied against the Project and the various estates therein and the underlying Land, all personal property taxes levied on personal property of Landlord used exclusively in the management, operation, maintenance and repair of the Project (or, if not exclusively used, then an appropriate pro rata portion thereof, based on percentage of usage), all taxes, assessments and reassessments of every kind and nature whatsoever levied or assessed in lieu of or in substitution for existing or additional real or personal property taxes and assessments on the Project or the sale, conveyance, assignment, ground lease or other transfer thereof, service payments in lieu of taxes, excises, transit charges and fees, housing, park and child care assessments, development and other assessments, reassessments, levies, fees or charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind which are assessed, levied, charged, confirmed or imposed by any public authority upon the Project, its operations or the Rent provided for in this Lease, or amounts necessary to be expended because of governmental orders, whether general or special, ordinary or extraordinary, unforeseen as well as foreseen, of any kind and nature for public improvements, services, benefits or any other purposes which are assessed, levied, confirmed, imposed or become a lien upon the Premises or Project or become payable during the Term. Further, for the purposes of this Article, Impositions shall include the reasonable expenses (including, without limitation, attorneys' fees) incurred by Landlord in challenging or obtaining or attempting to obtain a reduction of such Impositions, regardless of the outcome of such challenge. Notwithstanding the -11- 15 foregoing, Landlord shall have no obligation to challenge Impositions. If as a result of any such challenge, a tax refund is made to Landlord, then provided no uncured Event of Default exists under this Lease, the amount of such refund less the actual expenses of the challenge shall be deducted from Impositions due in the Lease Year such refund is received. In the case of any Impositions which may be evidenced by improvement or other bonds or which may be paid in annual or other periodic installments, Landlord shall elect to cause such bonds to be issued or cause such assessment to be paid in installments over the maximum period permitted by law. Nothing contained in this Lease shall require Tenant to pay any franchise, estate, inheritance or succession transfer tax of Landlord, or any income, profits or revenue tax or charge, upon the net income of Landlord from all sources; provided, however, that if at any time during the Term under the laws of the United States Government or the state, or any political subdivision thereof, a tax (including, but not limited to any sales tax) or excise on Rent or other amounts payable by Tenant to Landlord, or any other tax however described, is levied or assessed by any such political body against Landlord on account of Rent, or a portion thereof, Tenant shall pay one hundred percent (100%) of any such tax or excise as Additional Rent as provided in SECTION 4.5 above. 7.3 Adjustments to Impositions Rental. Landlord shall submit to Tenant, before the expiration of the Base Year and the beginning of each Calendar Year thereafter or as soon thereafter as reasonably possible, a statement of Landlord's estimate of Tenant's Proportionate Share of the increase in Impositions over Impositions for the Base Year payable by Tenant during such Calendar Year. Commencing upon expiration of the Base Year and in addition to the Basic Rent, Tenant shall pay to Landlord on or before the first day of each month during such Calendar Year an amount equal to one-twelfth (1/12) of Tenant's Proportionate Share of the estimated increase in Impositions over Impositions for the Base Year payable by Tenant for such Calendar Year as set forth in Landlord's statement. If Landlord fails to give Tenant notice of its estimated payments due under this section for any Calendar Year, then Tenant shall continue making monthly estimated payments in accordance with the estimate for the previous Calendar Year until a new estimate is provided. If Landlord determines that, because of unexpected increases in Impositions or other reasons, Landlord's estimate of the Impositions was too low, then Landlord shall have the right to give a new statement of the Impositions due from Tenant for such Calendar Year or the balance thereof and to bill Tenant for any deficiency which may have accrued during such Calendar Year, and Tenant shall thereafter pay monthly estimated payments based on such new statement. Within ninety (90) days after the expiration of each Calendar Year following expiration of the Base Year, or as soon thereafter as is practicable, Landlord shall submit a statement to Tenant showing the actual Impositions for such Calendar Year and Tenant's Proportionate Share of the amount by which such Impositions exceed the Impositions for the Base Year. If for any Calendar Year, Tenant's estimated monthly payments exceed Tenant's Proportionate Share of the amount by which the actual Impositions for such Calendar Year exceed the Impositions for the Base Year, then Landlord shall give Tenant a credit in the amount of the overpayment toward Tenant's next monthly payments of estimated Impositions. In the event the Lease has expired, any such overpayment shall be paid directly to the Tenant. If for any Calendar Year Tenant's estimated monthly payments are less than Tenant's Proportionate Share of the amount by which the actual Impositions for such Calendar Year exceed the Impositions for the Base Year, then Tenant shall pay the total amount of such deficiency to Landlord within fifteen (15) days after receipt of the statement from Landlord. Landlord's and Tenant's obligations with respect to any overpayment or underpayment of Impositions shall survive the expiration or termination of this Lease. ARTICLE VIII INTENTIONALLY DELETED -12- 16 ARTICLE IX USE AND REQUIREMENTS OF LAW 9.1 Use. The Premises will be used only for the Permitted Use (as defined in SECTION 1.7). Tenant will not: (i) do or permit to be done in or about the Premises, nor bring to, keep or permit to be brought or kept in the Premises, anything which is prohibited by or will in any way conflict with any law, statute, ordinance or governmental rule or regulation which is now in force or which may be enacted or promulgated after the Date of Lease; (ii) do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants of the Building or Project; (iii) use or allow the Premises to be used for any unlawful purpose; (iv) cause, maintain or permit any nuisance in, on or about the Premises or commit or allow to be committed any waste in, on or about the Premises; or (v) subject the Premises to any use which would increase the existing rate of insurance on the Project or any portion thereof or cause any cancellation of any insurance policy covering the Project or any portion thereof, Landlord acknowledging and agreeing that general business office use will not in and of itself increase insurance rates (other than normal annual increases). 9.2 Requirements of Law. Except for the work to be performed by Landlord as set forth on Exhibit B attached hereto, and subject to the remaining provisions of this SECTION 9.2, throughout the term of this Lease Tenant, at its sole cost and expense, shall promptly comply with: (i) all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or in force after the Commencement Date of the Lease; (ii) the requirements of any board of fire underwriters or other similar body constituted now or after the Commencement Date of the Lease; (iii) any direction or occupancy certificate issued pursuant to any law by any public officer or officers; and (iv) all Restrictions. However, Tenant's obligations under this SECTION 9.2 shall be limited to those compliance obligations arising as a result of the particular use, occupation and/or actions by Tenant , or arising as a result of improvements made by or for Tenant. Consistent with the foregoing, Landlord shall be responsible for any compliance obligations which may apply uniformly to the Project as a whole and do not result from Tenant's specific use, occupation, actions or improvements. 9.3 Hazardous Materials.(a) Tenant shall not bring or permit to remain on the Premises or the Project, or allow any of Tenant's employees, agents, customers, visitors, invitees, licensees, contractors, assignees, or subtenants, to bring or permit to remain on the Premises or the Project, any asbestos, petroleum or petroleum products, used oil, explosives, toxic materials or substances defined as hazardous wastes, hazardous materials or hazardous substances under any federal, state or local law or regulation ("Hazardous Materials"), except for routine office (such as copier toner) and janitorial supplies used on the Premises and stored in the usual and customary manner and quantities, and in compliance with all applicable environmental laws and regulations. Further, Tenant may keep and utilize reasonable numbers of batteries at the Premises and a reasonable amount of rubbing alcohol (in one gallon containers), provided the same are handled, stored, utilized and disposed of in full compliance with all applicable environmental laws and regulations and MSDS sheets. Tenant shall not install or operate any underground storage tanks on or under the Premises or the Project. Tenant's violation of the foregoing prohibitions shall constitute a material breach and default hereunder and Tenant shall indemnify, protect, hold harmless and defend (by counsel acceptable to Landlord) Landlord, and its directors, officers, employees, shareholders, agents, contractors and each of their respective successors and assigns, from and against any and all claims, damages, penalties, fines, liabilities and cost (including reasonable attorneys' fees and court costs) caused by or arising out of (i) a violation of the foregoing prohibition or (ii) the presence or release of any Hazardous Materials on, from, under or about the Premises, the Project or other properties as the direct or indirect result of Tenant's occupancy of the Premises. Tenant, at its sole cost and expense, shall clean up, remove, remediate and repair any soil or groundwater contamination or other damage or contamination in conformance with the requirements of applicable law caused by the presence or any -13- 17 release of any Hazardous Materials in, on, from, under or about the Premises during the term of this Lease. Neither the written consent of Landlord to the presence of the Hazardous Materials, nor Tenant's compliance with all laws applicable to such Hazardous Materials, shall relieve Tenant of its indemnification obligation under this Lease. Tenant shall immediately give Landlord written notice (i) of any suspected breach of this section, (ii) upon learning of the presence or any release of any Hazardous Materials, or (iii) upon receiving any notices from governmental agencies or other parties pertaining to Hazardous Materials which may affect the Premises. Landlord shall have the right from time to time, but not the obligation, to enter upon the Premises to conduct such inspections and undertake such sampling and testing activities as Landlord deems necessary or desirable to determine whether Tenant is in compliance with this provision. The obligations of Tenant hereunder shall survive the expiration or earlier termination, for any reason, of this Lease. (b) Landlord shall indemnify, defend and hold harmless Tenant from and against any and all claims, damages, fines, judgments, penalties, costs, liabilities losses and attorneys' fees to the sole extent caused by Landlord and (i) arising out of or in connection with the existence of Hazardous Materials on the Premises, Building or Project; or (ii) relating to any clean-up or remediation of the Premises, Building or Project required under any applicable environmental laws or regulations. The obligations of Landlord under this SECTION 9.3(b) shall survive the expiration or earlier termination, for any reason, of this Lease. 9.4 ADA Compliance. Notwithstanding any other statement in this Lease, the following provisions shall govern the parties' compliance with the ADA (as defined below): (a) To the extent governmentally required as of the Commencement Date of this Lease, Landlord shall, as promptly as possible either before or after the Commencement Date, comply at its expense, and such expense shall not be included as an Operating Expense of the Project, with Title III of the Americans With Disabilities Act of 1990, as amended from time to time, Public Law 101-336; 42 U.S.C. Sections 12101, et seq. (the "ADA") with respect to any repairs, replacements or alterations to the Common Area of the Project. (b) To the extent governmentally required subsequent to the Commencement Date of this Lease as a result of an amendment to the ADA subsequent to the Commencement Date of this Lease, Landlord shall comply with Title III of the ADA with respect to any repairs, replacements or alterations to the Common Area of the Project, and such expense shall be included as an Operating Expense of the Project. (c) Landlord shall indemnify, defend and hold harmless Tenant and its Agents from all fines, suits, procedures, penalties, claims, liability, losses, expenses and actions of every kind, and all costs associated therewith (including, without limitation, reasonable attorneys' and consultants' fees) arising out of or in any way connected with Landlord's failure to comply with the ADA as required above. (d) Except for the work to be performed by Landlord as listed in Exhibit B, as part of the Tenant Work to be performed by Tenant as more particularly set forth in Exhibit B-1 attached hereto (but without increasing Landlord's monetary obligations as set forth in said Exhibit B-1), Tenant shall ensure that the Premises complies with the ADA as of the Commencement Date. To the extent governmentally required subsequent to the Commencement Date, or if required as a result of Tenant's acts, or Tenant's operations from the Premises, or any Tenant alternations, Tenant shall comply, at its expense, with the ADA with respect to the Premises. (e) Tenant shall indemnify, defend and hold harmless Landlord and its Agents from all fines, suits, procedures, penalties, claims, liability, losses, expenses and actions of every kind, and all costs associated therewith (including, without limitation, reasonable attorneys' and consultants' fees) arising out of or in any way connected with Tenant's failure to comply with the ADA as required above. -14- 18 ARTICLE X ASSIGNMENT AND SUBLETTING 10.1 Landlord's Consent. (a) Tenant shall not assign, transfer, mortgage or otherwise encumber this Lease or sublet or rent (or permit a third party to occupy or use) the Premises, or any part thereof, nor shall any assignment or transfer of this Lease or the right of occupancy hereunder be effected by operation of law or otherwise, without the prior written consent of Landlord. Landlord agrees not to unreasonably with hold or delay its consent with respect to an assignment or subletting for general business office use (but the foregoing shall not be construed as waiving Landlord's recapture right if and to the extent then available under and subject to the provisions of SECTION 10.4 below). Subject to the provisions of SECTION 10.6 below, a transfer at any one time or from time to time of fifty percent (50%) or more of an interest in Tenant (whether stock, partnership interest or other form of ownership or control) by any person(s) or entity(ties) having an interest in ownership or control of Tenant shall be deemed to be an assignment of this Lease. Within fifteen (15) days following Landlord's receipt of Tenant's request for Landlord's consent to a proposed assignment, sublease, or other encumbrance, together with all information required to be delivered by Tenant pursuant to the provisions of SECTION 10.2 hereof, Landlord shall: (i) consent to such proposed transaction; (ii) refuse such consent; or (iii) if and only to the extent then available under and pursuant to the provisions of SECTION 10.4 below, elect to fully or partially terminate this Lease in accordance with and subject to the provisions of SECTION 10.4 below. Any assignment, sublease or other encumbrance without Landlord's written consent shall be voidable by Landlord and, at Landlord's election, constitute an Event of Default hereunder. In the event Landlord refuses such consent, Landlord shall notify Tenant of the reason for such refusal. Without limiting the other instances in which Landlord may withhold its consent, Landlord and Tenant acknowledge that Landlord may withhold its consent if the proposed assignee or sublessee is a person or entity of unsavory character or reputation, or which is engaged in a business which is inconsistent with the quality of the Project; however, Landlord agrees to use reasonable business judgment in making such determinations. (b) Notwithstanding that the prior express written permission of Landlord to any of the aforesaid transactions may have been obtained, the following shall apply: (i) In the event of an assignment, contemporaneously with the granting of Landlord's aforesaid consent, Tenant shall cause the assignee to expressly assume in writing and agree to perform all of the covenants, duties, and obligations of Tenant hereunder and such assignee shall be jointly and severally liable therefore along with Tenant. (ii) All terms and provisions of the Lease shall continue to apply after any such transaction. (iii) In any case where Landlord consents to an assignment, transfer, encumbrance or subletting, the undersigned Tenant and any Guarantor shall nevertheless remain directly and primarily liable for the performance of all of the covenants, duties, and obligations of Tenant hereunder (including, without limitation, the obligation to pay all Rent and other sums herein provided to be paid), and Landlord shall be permitted to enforce the provisions of this instrument against the undersigned Tenant, any Guarantor and/or any assignee without demand upon or proceeding in any way against any other person. Neither the consent by Landlord to any assignment, transfer, encumbrance or subletting nor the collection or acceptance by Landlord of rent from any assignee, subtenant or occupant shall be construed as a waiver or release of the initial Tenant or any Guarantor from the terms and conditions of this Lease or relieve Tenant or any subtenant, assignee or other party -15- 19 from obtaining the consent in writing of Landlord to any further assignment, transfer, encumbrance or subletting. (iv) Tenant hereby assigns to Landlord the rent and other sums due from any subtenant, assignee or other occupant of the Premises and hereby authorizes and directs each such subtenant, assignee or other occupant to pay such rent or other sums directly to Landlord; provided however, that until the occurrence of an Event of Default, Tenant shall have the license to continue collecting such rent and other sums. Notwithstanding the foregoing, in the event that the rent due and payable by a sublessee under any such permitted sublease (or a combination of the rent payable under such sublease plus any bonus or other consideration therefor or incident thereto) exceeds the hereinabove provided Rent payable under this Lease, or if with respect to a permitted assignment, permitted license, or other transfer by Tenant permitted by Landlord, the consideration payable to Tenant by the assignee, licensee, or other transferee exceeds the Rent payable under this Lease, then Tenant shall be bound and obligated to pay Landlord fifty percent (50%) of the Net Profits received by Tenant. The term "Net Profits" as used herein shall mean such portion of the Rent payable by such assignee or subtenant in excess of the Rent payable by Tenant under this Lease (or pro rata portion thereof in the event of a subletting) for the corresponding period, after deducting from such excess Rent the following: A. all of Tenant's reasonable, documented third party costs associated with such assignment or subletting, including, without limitation, broker commissions, architectural fees, engineers' fees and attorney fees; B. Any reasonable, documented costs incurred by Tenant to prepare or alter the Premises, or portion thereof, for the assignee or sublessee; C. Any reasonable, documented design, construction or moving allowances, rental concessions or other reasonable, documented out of pocket concession or cost incurred by Tenant. In the event of an assignment of this Lease whereby a lump sum consideration is received by Tenant for such assignment, the "Net Profits" shall mean the lump sum actually received by Tenant after deducting from such consideration Tenant's costs and expenses as set forth in Paragraphs A, B and C above. 10.2 Submission of Information. If Tenant requests Landlord's consent to a specific assignment or subletting, Tenant will submit in writing to Landlord: (i) the name and address of the proposed assignee or subtenant; (ii) a counterpart of the proposed agreement of assignment or sublease; (iii) reasonably satisfactory information as to the nature and character of the business of the proposed assignee or subtenant, and as to the nature of its proposed use of the space; (iv) banking, financial or other credit information reasonably sufficient to enable Landlord to determine the financial responsibility and character of the proposed assignee or subtenant; (v) executed estoppel certificates from Tenant containing such information as provided in SECTION 25.4 herein; and (vi) any other information reasonably requested by Landlord. Landlord agrees to keep confidential any information revealed to it pursuant to this subsection. 10.3 Intentionally Deleted. 10.4 Landlord's Option to Recapture Premises. Prior to any assignment of this Lease or any subletting of all or any portion of the Premises, and prior to commencing any marketing efforts with respect thereto, Tenant shall inform Landlord of its intention by written notice. To be effective, such -16- 20 notice shall specify whether or not all of the Premises shall be available for assignment/sublet and, if less than all of the Premises will be made available, Tenant shall further specify the location and Rentable Square Feet of that portion of the Premises which Tenant desires to sublet (each such written notice by Tenant under this SECTION 10.4 being hereinafter referred to as "Tenant's Assign/Sublet Notice"). Upon receipt of each Tenant's Assign/Sublet Notice, Landlord may, at its option upon written notice to Tenant given within twenty (20) days thereafter, elect to recapture the Premises (or applicable portion, as the case may be, consistent with Tenant's Assign/Sublet Notice). Upon Landlord's election to recapture, this Lease shall fully terminate (in the event Tenant's Assign/Sublet Notice specifies the entire Premises) or partially terminate as to the applicable portion of the Premises (in the event Tenant's Assign/Sublet Notice specifies less than all of the Premises). If a portion of the Premises is recaptured, the Rent payable under this Lease shall be proportionately reduced based on the square footage of the Rentable Square Feet retained by Tenant and the square footage of the Rentable Square Feet leased by Tenant immediately prior to such recapture and termination, and Landlord and Tenant shall thereupon execute an amendment to this Lease in accordance therewith. Landlord may thereafter, without limitation, lease the recaptured portion of the Premises to any person or entity without liability to Tenant. Upon any such termination, Landlord and Tenant shall have no further obligations or liabilities to each other under this Lease with respect to the recaptured portion of the Premises, except with respect to obligations or liabilities which accrue or have accrued hereunder as of the date of such termination (in the same manner as if the date of such termination were the date originally fixed for the expiration of the term hereof). In the event that Landlord does not exercise its election to terminate within twenty (20) days of receipt of Tenant's Assign/Sublet Notice, Tenant shall thereafter be entitled to assign or sublet (subject to obtaining Landlord's consent, not to be unreasonably withheld and to be granted or withheld within fifteen (15) days, as aforesaid) without Landlord having the right to terminate, provided, however, that such assignment or subletting must be completed (i.e., all appropriate documentation executed and delivered) on or before the date which is fifteen (15) months after the date of Tenant's Assign/Sublet Notice (such fifteen (15) month period following the date of Tenant's Assignment/Sublet Notice being referred to herein as the "Assign/Sublet Period"). If (i) Tenant has not completed all assignment/subletting activity prior to expiration of the Assign/Sublet Period (and Tenant still desires to assign or sublet); or (ii) during the Assign/Sublet Period Tenant desires to assign/sublet space which is (a) more than 3,000 square feet larger than the space which was specified in Tenant's Assign/Sublet Notice (if the original specified space was 15,000 square feet or less), or (b) more than 4,000 square feet larger than the space which was specified in Tenant's Assignment/Sublet Notice (if the original specified space was over 15,000 square feet), then in any such event Tenant shall provide Landlord with a new Tenant's Assign/Sublet Notice, and Landlord shall again have the option to recapture within twenty (20) days thereafter, consistent with the foregoing provisions. This procedure shall be repeated, as necessary, until Landlord has recaptured the Premises or Tenant has completed an assignment or sublet consistent with the foregoing and within the applicable Assign/Sublet Period. 10.5 Transfers to Related Entities. Notwithstanding anything in this ARTICLE X to the contrary, provided no Event of Default exists under this Lease or would exist but for the pendency of any cure periods provided for under SECTION 21.1, Tenant may, without Landlord's consent, but after providing written notice to Landlord, assign this Lease or sublet all or any portion of the Premises to any Related Entity (as hereinafter defined) provided that (i) in the event of an assignment, such Related Entity assumes in full all of Tenant's obligations under this Lease; (ii) Landlord is provided with a counterpart of the fully executed agreement of assignment or sublease; (iii) Tenant remains liable under the terms of this Lease; (iv) such Related Entity is not a governmental entity or agency; (v) such Related Entity's use requirement does not differ from the permitted use described in SECTION 1.7 hereof; (vi) such Related Entity does not require additional services other than those agreed to be provided by Landlord under the terms of this Lease; and (vii) the net worth (computed in accordance with generally accepted accounting principles) of any assignee after such transfer is greater than or equal to the greater of (a) the net worth (computed in -17- 21 accordance with generally accepted accounting principles) of Tenant as of the date of this Lease; or (b) the net worth (computed in accordance with generally accepted accounting principles) of Tenant immediately prior to such transfer, and proof satisfactory to Landlord that such net worth standards have been met shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction. SECTIONS 10.1(a), 10.1(b), 10.1(c)(iv), 10.2 AND 10.4 shall not apply to any assignment or sublease pursuant to this SECTION 10.5. "Related Entity" shall be defined as any parent company, subsidiary, affiliate or related corporate entity of Tenant. 10.6 Merger; Asset or Stock Transfer. Notwithstanding anything in this ARTICLE X to the contrary, provided no Event of Default exists under this Lease or would exist but for the pendency of any cure periods provided for under SECTION 21.1, Tenant may, without Landlord's consent and without triggering Landlord's option to recapture under SECTION 10.4, transfer 50% or more of its stock without the same being considered an assignment hereunder, assign this Lease in connection with the sale of all or substantially all of its assets, or consolidate or merge with or into another entity, provided in any such case Tenant shall satisfy and comply with the provisions of this SECTION 10.6. In the event Tenant desires to complete any such transaction, at least ten (10) days prior to the culmination or effectiveness thereof Tenant shall notify Landlord in writing relative to the structure and other relevant details of the proposed transaction, which notice shall specifically include (i) a representation that the use of the Premises shall remain as permitted by SECTION 1.7 hereof; and (ii) financial information and documentation sufficient to establish and confirm that, following completion of the transaction, Tenant's (in the event the transaction is a stock transfer) or the assignee's or the surviving entity's (in the event the transaction is an assignment or a merger or consolidation) net worth will equal at least Ten Million ($10,000,000.00) Dollars. As utilized in this SECTION 10.6, net worth shall be computed in accordance with generally accepted accounting principles and intangible assets shall be excluded. In addition to the foregoing, in the event of an assignment the assignee shall fully assume (jointly and severally with Tenant) all of Tenant's obligations hereunder, and upon completion of such transaction Landlord shall be provided with a fully executed counterpart of the agreement of assignment. ARTICLE XI MAINTENANCE AND REPAIR 11.1 Landlord's Obligation. Landlord will maintain, repair and restore in reasonably good order and condition and in a manner consistent with buildings which are similarly situated and of similar quality to the Building (i) the Common Area, including lobbies, stairs, elevators, corridors, restrooms; (ii) the windows in the Building; (iii) the Common Area mechanical, plumbing and electrical equipment serving the Building; and (iv) the structure of the Building. The cost of such maintenance and repairs to the Building, the Common Area and said equipment shall be included in the Operating Expenses and paid by Tenant as provided in ARTICLE VI herein. 11.2 Tenant's Obligation. Tenant, at its expense, shall maintain the Premises (including Tenant's leasehold improvements, equipment, personal property and trade fixtures located in the Premises) in their condition at the time they were delivered to Tenant, reasonable wear and tear excepted. Tenant will immediately advise Landlord of any damage to the Premises or the Project. All damage or injury to the Premises or the Project, or the fixtures, appurtenances and equipment in the Premises or the Project which is caused by Tenant or its Agents, may be repaired, restored or replaced by Landlord, at the expense of Tenant and such expense (plus fifteen percent (15%) of such expense for Landlord's overhead) will be collectible as Additional Rent and will be paid by Tenant upon demand. Neither Tenant nor its Agents shall repair, restore or replace any damage or injury to the Premises or the Project without the prior written consent of Landlord. -18- 22 11.3 Landlord's Right to Maintain or Repair. If Tenant fails to maintain the Premises or if Landlord agrees to allow Tenant to repair, restore or replace any damage or injury as provided in SECTION 11.2 and Tenant fails within five (5) days following notice to Tenant, to commence to maintain or to repair, restore or replace any damage to the Premises or Project caused by Tenant or its Agents and diligently pursue to completion such maintenance or repair, restoration or replacement, Landlord may, at its option, cause all required maintenance or repairs, restorations or replacements to be made and Tenant shall pay Landlord pursuant to SECTION 11.2. ARTICLE XII CONDITION OF THE PREMISES; INITIAL CONSTRUCTION; ALTERATIONS 12.1 Initial Construction. (a) TENANT SHALL ACCEPT THE PREMISES "AS IS", "WHERE IS" AND WITH ANY AND ALL FAULTS, AND LANDLORD NEITHER MAKES NOR HAS MADE ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE QUALITY, SUITABILITY OR FITNESS OF THE PREMISES, OR THE CONDITION OR REPAIR THEREOF. TENANT TAKING POSSESSION OF THE PREMISES SHALL BE CONCLUSIVE EVIDENCE FOR ALL PURPOSES OF TENANT'S ACCEPTANCE OF THE PREMISES IN GOOD ORDER AND SATISFACTORY CONDITION, AND IN A STATE AND CONDITION SATISFACTORY, ACCEPTABLE AND SUITABLE FOR THE TENANT'S USE PURSUANT TO THIS LEASE. Landlord does agree to construct and complete the demising wall necessary to add the Occupied Portion to the remainder of the Premises, the location of said demising wall (referred to herein as the "Demising Wall") being shown and designated on Exhibit A-1. Although Landlord agrees to utilize reasonable efforts to complete the Demising Wall by the Commencement Date, such completion shall not be considered a requirement or condition of the Commencement Date (however, the provisions of paragraph 2.1(b) hereof shall be applicable until Landlord has completed the Demising Wall). The cost of the Demising Wall shall be paid for by Landlord, but one half of such cost shall reduce the Tenant Improvement Allowance as defined in and as contemplated by the Work Agreement attached hereto as Exhibit B-1. Although specifically not a requirement or condition to the occurrence of the Commencement Date, Landlord additionally agrees to perform certain work to the Premises and/or the Project as more particularly set forth in Exhibit B attached hereto ("Landlord's Work"). Landlord may (but shall not be under any obligation to) complete certain portions of Landlord's Work prior to the date hereof and/or prior to the Commencement Date. However, except and subject to the provisions of Exhibit B Landlord agrees to complete all items of Landlord's Work on or before the first anniversary of the Commencement Date. Landlord hereby reserves and Tenant hereby grants Landlord access to the Premises as shall be necessary to complete Landlord's Work. (b) Landlord and Tenant agree that Tenant desires to perform certain work to the Premises, and that such work shall be commenced, performed and completed by Tenant in full accordance with and only after compliance with the terms, conditions and provisions of the Work Agreement attached hereto as Exhibit B-1 and executed by Landlord and Tenant of even date herewith (including the schedules attached thereto). 12.2 Alterations. Tenant shall not make or permit any alterations, decorations, additions or improvements of any kind or nature to the Premises or the Project, whether structural or nonstructural, interior, exterior or otherwise ("Alterations") without the prior written consent of Landlord, said consent not to be unreasonably withheld or delayed. However, Landlord's consent shall not be required where the work consists solely of interior redecorating, such as wall hangings. Landlord may impose any reasonable conditions to its consent, including, without limitation: (i) delivery to Landlord of written and unconditional waivers of mechanic's and materialmen's liens as to the Project for all work, labor and services to be performed and materials to be furnished, signed by all contractors, subcontractors, materialmen and laborers participating in the Alterations; (ii) prior approval of the plans and specifications -19- 23 and contractor(s) with respect to the Alterations and any other documents and information reasonably requested by Landlord; (iii) where the Alteration is structural in nature or includes modifications to any Building system, supervision by Landlord's representative, at Tenant's expense (not to exceed 3% of total cost), of the Alterations; (iv) at Landlord's option for any Alteration in excess of $100,000, delivery to Landlord of payment and performance bonds naming Landlord and Mortgagee as obligees; and (v) proof of worker's compensation insurance and commercial general liability insurance in such amounts and meeting such requirements as requested by Landlord. The Alterations shall conform to the requirements of Landlord's and Tenant's insurers and of the federal, state and local governments having jurisdiction over the Premises and shall be performed in accordance with the terms and provisions of this Lease and in a good and workmanlike manner befitting a first class office building. If the Alterations are not performed as herein required, Landlord shall have the right, at Landlord's option, to halt any further Alterations, or to require Tenant to perform the Alterations as herein required or to require Tenant to return the Premises to its condition before such Alterations. Subject to SECTION 12.4 herein, all Alterations and fixtures, whether temporary or permanent in character, made in or upon the Premises either by Tenant or Landlord, will immediately become Landlord's property and, at the end of the Term will remain on the Premises without compensation to Tenant. 12.3 Mechanics' Liens. Tenant will pay or cause to be paid all costs and charges for: (i) work done by Tenant or caused to be done by Tenant, in or to the Premises; and (ii) materials furnished for or in connection with such work. Tenant will indemnify Landlord against and hold Landlord, the Premises, and the Project free, clear and harmless of and from all mechanics' liens and claims of liens, and all other liabilities, liens, claims, and demands on account of such work by or on behalf of Tenant. If any such lien, at any time, is filed against the Premises, or any part of the Project, Tenant will cause such lien to be discharged of record within thirty (30) days after the filing of such lien, except that if Tenant desires to contest such lien, it will furnish Landlord, within such thirty (30) day period, security reasonably satisfactory to Landlord of at least 100% of the amount of the claim, plus estimated costs and interests (or such larger sum as Landlord's title insurance company may require in order to insure over such lien). If a final judgment establishing the validity or existence of a lien for any amount is entered, Tenant will immediately pay and satisfy the same. If Tenant fails to pay any charge for which a mechanic's lien has been filed, and has not given Landlord security as described above, Landlord may, at its option, pay such charge and related costs and interest, and the amount so paid, together with attorneys' fees incurred in connection with such lien, will be immediately due from Tenant to Landlord as Additional Rent. Nothing contained in this Lease will be deemed the consent or agreement of Landlord to subject Landlord's interest in all or any portion of the Project to liability under any mechanics' lien or to other lien law. If Tenant receives notice that a lien has been or is about to be filed against the Premises or any part of the Project or any action affecting title to the Project has been commenced on account of work done by or for or materials furnished to or for Tenant, it will immediately give Landlord written notice of such notice. At least fifteen (15) days prior to the commencement of any work (including, but not limited to, any maintenance, repairs or Alteration) in or to the Premises, by or for Tenant, Tenant will give Landlord written notice of the proposed work and the names and addresses of the persons supplying labor and materials for the proposed work. Landlord will have the right to post notices of non-responsibility or similar notices, if applicable, on the Premises or in the public records in order to protect the Premises against such liens. 12.4 Removal of Alterations. All or any part of the Alterations (including, without limitation, wiring), whether made with or without the consent of Landlord, shall, at the election of Landlord, either be removed by Tenant at its expense before the expiration of the Term or shall remain upon the Premises and be surrendered therewith at the Expiration Date or earlier termination of this Lease as the property of Landlord without disturbance, molestation or injury. However, upon Tenant's request with respect to any proposed Alteration, Landlord agrees to inform Tenant whether or not Landlord shall require the removal thereof at expiration of the Term. If Landlord requires the removal of all or part of the Alterations, -20- 24 Tenant, at its expense, shall repair any damage to the Premises or the Project caused by such removal and restore the Premises to its condition prior to the construction of such Alterations. If Tenant fails to remove the Alterations upon Landlord's request and repair and restore the Premises and Project, then Landlord may (but shall not be obligated to) remove, repair and restore the same and the cost of such removal, repair and restoration together with any and all damages which Landlord may suffer and sustain by reason of the failure of Tenant to remove, repair and restore the same, shall be charged to Tenant and paid upon demand. 12.5 Landlord Alterations. Landlord shall have no obligation to make any Alterations in or to the Premises or the Project except as specifically provided in Exhibit B. Landlord hereby reserves the right, from time to time, to make Alterations to the Project, change the Building dimensions, erect additional stories thereon and attach other buildings and structures thereto, and to erect such scaffolding and other aids to construction as Landlord deems appropriate, and no such Alterations, changes, construction or erection shall constitute an eviction, constructive or otherwise, or permit Tenant any abatement of Rent or claim. ARTICLE XIII SIGNS No sign, advertisement or notice shall be inscribed, painted, affixed, placed or otherwise displayed by Tenant on any part of the Project or the outside or the inside (including, without limitation, the windows) of the Building or the Premises. Landlord shall provide, at Landlord's expense, a directory in the lobby of the Building listing all Building tenants (Tenant will be entitled to one listing per floor of the Premises), but shall have no obligation to list any assignees or subtenants. Landlord also shall, at Landlord's expense, place a sign in the Building standard sign material and lettering identifying the suite number and/or Tenant name on or in the immediate vicinity of the entry door to the Premises (one such sign on each floor of the Premises). Landlord shall have no obligation to provide any entry door signage for the benefit of any assignee or subtenant and any such signage provided by another party identifying the suite number and/or assignee or subtenant name in the Building shall be consistent with Building standard sign material and lettering and located on or in the immediate vicinity of the entry door to the assigned or sublet portion of the Premises. If any prohibited sign, advertisement or notice is nevertheless exhibited by Tenant, Landlord shall have the right to remove the same, and Tenant shall pay upon demand any and all expenses incurred by Landlord in such removal, together with interest thereon at the Interest Rate from the demand date. However, Landlord agrees that Tenant shall be entitled to retain its current monument sign (at the same size, style and location as exists on the date hereof). ARTICLE XIV TENANT'S EQUIPMENT AND PROPERTY 14.1 Moving Tenant's Property. Any and all damage or injury to the Premises or the Project caused by moving the property of Tenant into or out of the Premises, or due to the same being on the Premises, shall be repaired by Landlord (with respect to areas outside of the Premises) or by Tenant (with respect to the Premises), in both cases at the expense of Tenant. No furniture, equipment or other bulky matter of any description shall be received into the Building or carried in the elevators except as may be approved in writing by Landlord, and the same shall be delivered only through the designated delivery entrance and -21- 25 freight elevator in the Building, at such times as shall be designated by Landlord. All moving of furniture, equipment, and other materials shall be subject to such reasonable rules and regulations as Landlord may promulgate from time to time; provided however, in no event shall Landlord be responsible for any damages to or charges for moving the same. Tenant shall promptly remove from the Common Area any of Tenant's furniture, equipment or other property there deposited. 14.2 Installing and Operating Tenant's Equipment. Without first obtaining the written consent of Landlord, Tenant shall not install or operate in the Premises (i) any electrically operated equipment or other machinery, other than standard office equipment that does not require wiring, cooling or other service in excess of Building standards, (ii) any equipment of any kind or nature whatsoever which will require any changes, replacements or additions to, or changes in the use of, any water, heating, plumbing, air conditioning or electrical system of the Premises or the Project, or (iii) any equipment which exceeds the load capacity per square foot for the Building. Landlord's consent to such installation or operation may be conditioned upon the payment by Tenant of additional compensation for any excess consumption of utilities and any additional power, wiring, cooling or other service (as determined in the sole discretion of Landlord) that may result from such equipment. Machines and equipment which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein so as to be objectionable to Landlord or any other Project tenant shall be installed and maintained by Tenant, at its expense, on vibration eliminators or other devices sufficient to eliminate such noise and vibration. ARTICLE XV RIGHT OF ENTRY Tenant shall permit Landlord or its Agents, at any time and on reasonable notice (except in an emergency), to enter the Premises, without charge therefor to Landlord and without diminution of Rent: (i) to examine, inspect and protect the Premises and the Project; (ii) to make such alterations and repairs which in the reasonable judgment of Landlord may be deemed necessary or desirable; (iii) to exhibit the same to prospective purchaser(s) of the Building or the Project or to present or future Mortgagees; or (iv) to exhibit the same to prospective tenants during the last eighteen (18) months of the Term. Landlord agrees to utilize all commercially reasonable efforts not to interfere with (or to minimize interference, as the case may be) the operation of Tenant's business in the exercise of Landlord's rights under this ARTICLE XV. ARTICLE XVI INSURANCE 16.1 Certain Insurance Risks. Tenant will not do or permit to be done any act or thing upon the Premises or the Project which would: (i) jeopardize or be in conflict with fire insurance policies covering the Project, and fixtures and property in the Project; or (ii) increase the rate of fire insurance applicable to the Project to an amount higher than it otherwise would be for general office use of the Project; or (iii) subject Landlord to any liability or responsibility for injury to any person or persons or to property by reason of any business or operation being conducted upon the Premises. Landlord agrees that utilizing the Premises for general business office use will not cause any of the effects prohibited by this SECTION 16.1. 16.2 Landlord's Insurance. At all times during the Term, Landlord will carry and maintain the following insurance issued by good and reputable insurance companies: (a) "All risk" fire and extended coverage insurance covering the Building in the amount of the full replacement value of the Building; -22- 26 (b) Bodily injury and property damage insurance with a combined single occurrence limit of not less than $1,000,000. All such insurance will be on an occurrence commercial general liability form including personal injury coverage; (c) Umbrella liability insurance in excess of the underlying coverage listed in paragraph (b), with limits of not less than $4,000,000 per occurrence/$4,000,000 per aggregate; and (d) Such other insurance as Landlord reasonably determines from time to time. The insurance coverages and amounts in this SECTION 16.2 will be determined by Landlord in the exercise of its reasonable discretion. 16.3 Tenant's Insurance. At all times during the Term, Tenant will carry and maintain, at Tenant's expense, the following insurance, in the amounts specified below or such other amounts as Landlord may from time to time reasonably request, with insurance companies and on forms satisfactory to Landlord: (a) Bodily injury and property damage liability insurance, with a combined single occurrence limit of not less than $5,000,000. All such insurance will be on an occurrence commercial general liability form including without limitation, personal injury and contractual liability coverage for the performance by Tenant of the indemnity agreements set forth in ARTICLE XVIII of this Lease. Such insurance shall include Waiver of Subrogation Rights against Landlord. (b) Insurance covering all of Tenant's furniture and fixtures, machinery, equipment, stock and any other personal property owned and used in Tenant's business and found in, on or about the Project, and any leasehold improvements to the Premises in excess of any initial buildout of the Premises by the Landlord, in an amount not less than the full replacement cost. Property forms will provide coverage on an open perils basis insuring against "all risks of direct physical loss." All policy proceeds will be used for the repair or replacement of the property damaged or destroyed, however, if this Lease ceases under the provisions of ARTICLE XX, Tenant will be entitled to any proceeds resulting from damage to Tenant's furniture and fixtures, machinery and equipment, stock and any other personal property; (c) Worker's compensation insurance insuring against and satisfying Tenant's obligations and liabilities under the worker's compensation laws of the state in which the Premises are located, including employer's liability insurance in the limit of $1,000,000 aggregate. Such insurance shall include Waiver of Subrogation Rights against Landlord; and (d) If Tenant operates owned, hired, or non-owned vehicles on the Project, comprehensive automobile liability will be carried at a limit of liability not less than $1,000,000 combined bodily injury and property damage. (e) All insurance required under this ARTICLE XVI shall be issued by such good and reputable insurance companies qualified to do and doing business in the state in which the Premises are located and having a rating not less than A-xiii as rated in the most current copy of Best's Insurance Report in the form customary to this locality. 16.4 Forms of the Policies. Certificates of insurance together with copies of the endorsements when applicable naming Landlord, Landlord's management company, and any others specified by Landlord as additional insureds will be delivered to Landlord prior to Tenant's occupancy of the Premises and from time to time at least ten (10) days prior to the expiration of the term of each such policy. All policies maintained by Tenant will name Landlord, Landlord's management company, and any such other persons or firms as Landlord specifies from time to time as additional insureds. All policies maintained by Tenant will provide that they may not be terminated nor may coverage be reduced except after thirty (30) days' -23- 27 prior written notice to Landlord. All commercial general liability and property policies maintained by Tenant will be written as primary policies, not contributing with and not supplemental to the coverage that Landlord may carry. Commercial general liability insurance required to be maintained by Tenant by this ARTICLE XVI will not be subject to a deductible of greater than $10,000.00. 16.5 Waiver of Subrogation. Landlord and Tenant each waive any and all rights to recover against the other or against the Agents of such other party for any loss or damage to such waiving party in excess of deductible amounts arising from any cause covered by any property insurance required to be carried by such party pursuant to this ARTICLE XVI or any other property insurance actually carried by such party to the extent of the limits of such policy. Landlord and Tenant, from time to time, will cause their respective insurers to issue appropriate waiver of subrogation rights endorsements to all property insurance policies carried in connection with the Project or the Premises or the contents of the Project or the Premises. Tenant agrees to cause all other occupants of the Premises claiming by, under or through Tenant, to execute and deliver to Landlord such a waiver of claims and to obtain such waiver of subrogation rights endorsements. 16.6 Adequacy of Coverage. Landlord and its Agents make no representation that the limits of liability specified to be carried by Tenant pursuant to this ARTICLE XVI are adequate to protect Tenant. If Tenant believes that any of such insurance coverage is inadequate, Tenant will obtain such additional insurance coverage as Tenant deems adequate, at Tenant's sole expense. ARTICLE XVII LANDLORD SERVICES AND UTILITIES 17.1 Ordinary Services to the Premises. Landlord shall furnish to the Premises throughout the Term: (i) facilities to furnish heating, ventilation, and air conditioning ("HVAC") appropriate for the Permitted Use during Normal Business Hours (as defined in the Rules and Regulations), except for legal holidays observed by the federal government; (ii) reasonable janitorial service as more particularly set forth on Exhibit E attached hereto; (iii) regular trash removal from the Premises; (iv) hot and cold water from points of supply; (v) restrooms; (vi) elevator service, provided that Landlord shall have the right to remove such elevators from service as may be required for moving freight or for servicing or maintaining the elevators or the Building; and (vii) facilities to furnish electricity sufficient for Building standard lighting, typewriters, dictating equipment, calculating machines, personal computers and other machines of similar low electrical consumption, but not including electricity and air conditioning units required for equipment of Tenant that is in excess of Building standard or that is beyond Normal Business Hours. However, nothing contained in this SECTION 17.1 shall be construed as requiring Landlord to upgrade the existing electrical system servicing the Premises; if any such upgrade is necessary Tenant shall complete the same as a component of Tenant's Work and in accordance and in compliance with the Work Agreement. The cost of all services provided by Landlord hereunder shall be included within Operating Expenses, unless charged directly to Tenant as set forth in SECTION 17.2 below and except that all electricity and telephone charges shall not be included within Operating Expenses and shall be paid by Tenant as more particularly set forth in SECTION 17.5 below. Landlord will not be responsible for any inadequacy or failure of the air conditioning system if such inadequacy or failure results from the occupancy of the Premises by more than an average of one person for each 110 square feet. In addition, Tenant shall not install and operate machines and appliances the total connected electrical load of which exceeds 2.5 watts per square foot of area. 17.2 Additional Services. Should Tenant desire any additional services beyond those described in SECTION 17.1 hereof or a rendition of any of such services outside the normal times for providing such service, Landlord may (at Landlord's option), upon reasonable advance notice from Tenant to Landlord, -24- 28 furnish such services, and Tenant agrees to pay Landlord upon demand Landlord's additional expenses resulting therefrom. Landlord may, from time to time during the Term, set a per hour charge for after-hours service which shall include the cost of the utility, service, labor costs, administrative costs and a cost for depreciation of the equipment used to provide such after-hours service. 17.3 Interruption of Services. Landlord will not be liable to Tenant or any other person, for direct or consequential damage, or otherwise, for any failure to supply any heat, air conditioning, elevator, cleaning, lighting or security or for any surges or interruptions of electricity, or other service Landlord has agreed to supply during any period when Landlord uses reasonable diligence to supply such services. Landlord reserves the right temporarily to discontinue such services, or any of them, at such times as may be necessary by reason of accident, repairs, alterations or improvement, strikes, lockouts, riots, acts of God, governmental preemption in connection with a national or local emergency, any rule, order or regulation of any governmental agency, conditions of supply and demand which make any product unavailable, Landlord's compliance with any mandatory or voluntary governmental energy conservation or environmental protection program, or any other happening beyond the control of Landlord. Landlord will not be liable to Tenant or any other person or entity for direct or consequential damages resulting from the admission to or exclusion from the Building or Project of any person. In the event of invasion, mob, riot, public excitement or other circumstances rendering such action advisable in Landlord's reasonable opinion, Landlord will have the right to prevent access to the Building or Project during the continuance of the same by such means as Landlord, in its reasonable discretion, may deem appropriate, including, without limitation, locking doors and closing Parking Facilities and the Common Area. Landlord will not be liable for damages to persons or property or for injury to, or interruption of, business for any discontinuance permitted under this ARTICLE XVII, nor will such discontinuance in any way be construed as an eviction of Tenant or cause an abatement of rent or operate to release Tenant from any of Tenant's obligations under this Lease. Notwithstanding the foregoing, if (i) any interruption of utilities or services shall continue for five (5) business days after written notice from Tenant to Landlord; (ii) such interruption of utilities or services shall render any portion of the Premises unusable for the normal conduct of Tenant's business and Tenant, in fact, ceases to use and occupy such portion of the Premises for the normal conduct of its business; and (iii) such interruption of utilities or services is primarily due to the negligence or willful misconduct of Landlord, then all Rent payable hereunder with respect to such portion of the Premises rendered unusable for the normal conduct of Tenant's business in which Tenant, in fact, ceases to use and occupy, shall be abated after the expiration of such five (5) business day period, in the event such utilities or services are not restored, and such abatement shall continue until such time that the utilities or services are restored. 17.4 Meters; Utility Providers. Landlord reserves the right to separately meter or monitor the utility services provided to the Premises or any portion thereof and bill the charges directly to Tenant or to separately meter any other tenant and bill the charges directly to such tenant and to make appropriate adjustments based upon such monitoring in the event that Landlord reasonably determines that the degree or scope of usage warrants an adjustment. Effective immediately and automatically upon the Commencement Date (and whether or not Tenant pays utility charges to Landlord or directly to any utility company), it is expressly acknowledged and agreed that Landlord shall have the sole and exclusive right to designate all utility provider(s) to the Premises, the Building and the Project (including without limitation electricity and gas). 17.5 Electricity and Telephone Charges. Tenant and Landlord agree that Tenant shall be separately charged for and shall pay as Additional Rent all telephone and telecommunication charges (these charges shall be paid by Tenant directly to the service provider(s)), and all electricity consumed within the Premises by Tenant and by Tenant's lighting, office machines, equipment, heating or air-conditioning systems serving the Premises or by Tenant's other uses, specialized or otherwise, hereinafter collectively referred to as Premises Electricity. At Landlord's option, Tenant shall either (i) pay for the Premises Electricity directly to the utility providing such electrical service, or (ii) reimburse Landlord for such costs. -25- 29 In this connection, it is understood that that portion of the Premises located on the third floor of the Building is separately metered for electricity, while that portion of the Premises located on the second floor of the Building is not. Therefore, for purposes of calculating Premises Electricity Tenant shall pay (i) 100% of the charges applicable to the third floor meter; and (ii) that percentage of the charges applicable to the second floor meter which is equal to a fraction, the numerator of which is the Rentable Square Feet of the Premises located on the second floor and the denominator of which is the total amount of leased and occupied Rentable Square Feet located on the second floor. In addition and separately, Tenant shall pay as Additional Rent Tenant's Proportionate Share of the cost of electricity used by Landlord to provide lighting and services to the Common Areas including without limitation all parking areas, hereinafter collectively referred to as Common Area Electricity, the cost of which Common Area Electricity shall not be included in Operating Expenses. From and after the Commencement Date, Tenant shall be responsible for and pay as Additional Rent both Premises Electricity and Common Area Electricity, said payments to be made within fifteen (15) days of invoice date. ARTICLE XVIII LIABILITY OF LANDLORD 18.1 Indemnification. Tenant will neither hold nor attempt to hold Landlord or its respective Agents liable for, and Tenant will indemnify and hold harmless Landlord, and its respective Agents, from and against, any and all demands, claims, causes of action, fines, penalties, damages (including consequential damages), liabilities, judgments, and expenses (including, without limitation, attorneys' fees) incurred in connection with or arising from: (a) The use or occupancy or manner of use or occupancy of the Premises by Tenant or any person claiming under Tenant or the Agents of Tenant or any such person; (b) Any activity, work or thing done, permitted or suffered by Tenant, any person claiming under Tenant or the Agents of Tenant or any such person in or about the Premises or the Project; (c) Any acts, omissions or negligence of Tenant or any person claiming under Tenant, or the Agents of Tenant or any such person; (d) Any breach, violation or nonperformance by Tenant or any person claiming under Tenant or the Agents of Tenant or any such person of any term, covenant or provision of this Lease or any law, ordinance or governmental requirement of any kind; (e) Any injury or damage to the person, property or business of Tenant, any person claiming under Tenant or the Agents of Tenant or any such person or any other person entering upon the Premises or the Project under the express or implied invitation of Tenant; except as to each of the indemnifications set forth above for any injury or damage to persons or property to the extent caused by the negligence or willful misconduct of Landlord, unless covered by insurance required to be obtained and maintained by Tenant pursuant to ARTICLE XVI hereof, in which event the indemnifications set forth in this SECTION 18.1 shall apply. If any action or proceeding is brought against Landlord, or its respective Agents by reason of any such claim for which Tenant has indemnified Landlord, or its respective Agents, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense with counsel reasonably satisfactory to Landlord, as appropriate. 18.2 Waiver and Release. Tenant, as a material part of the consideration to Landlord for this Lease, by this SECTION 18.2 waives and releases all claims against Landlord, and its Agents with respect to all -26- 30 matters for which Landlord has disclaimed liability pursuant to the provisions of this Lease. Tenant covenants and agrees that Landlord and its Agents will not at any time or to any extent whatsoever be liable, responsible or in any way accountable for any loss, injury, death or damage (including consequential damages) to persons, property or Tenant's business occasioned by any acts or omissions of any other tenant, occupant or visitor of the Project, or from any cause, either ordinary or extraordinary, beyond the control of Landlord, except to the extent caused by the negligence or willful misconduct of Landlord and not otherwise covered by insurance required to be obtained and maintained by Tenant pursuant to ARTICLE XVI hereof. ARTICLE XIX RULES AND REGULATIONS Tenant and its Agents shall at all times abide by and observe the Rules and Regulations set forth in EXHIBIT C and any reasonable amendments thereto that may be promulgated from time to time by Landlord for the operation and maintenance of the Project and the Rules and Regulations shall be deemed to be covenants of the Lease to be performed and/or observed by Tenant. Nothing contained in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations, or the terms or provisions contained in any other lease, against any other tenant of the Project. Landlord shall not be liable to Tenant for any violation by any party of the Rules and Regulations or the terms of any other Project lease. If there is any inconsistency between this Lease (other than EXHIBIT C) and the then current Rules and Regulations, this Lease shall govern. Landlord reserves the right to amend and modify the Rules and Regulations as is reasonably necessary. ARTICLE XX DAMAGE; CONDEMNATION 20.1 Damage to the Premises. If the Premises or the Building shall be damaged by fire or other insured cause not resulting from the willful misconduct of Tenant or its Agents, Landlord shall diligently and as soon as practicable after such damage occurs (taking into account the time necessary to effect a satisfactory settlement with any insurance company involved) repair such damage at the expense of Landlord; provided, however, that Landlord's obligation to repair such damage shall not exceed the proceeds of insurance available to Landlord (reduced by any proceeds retained pursuant to the rights of Mortgagee). Notwithstanding the foregoing, if the Premises or the Building are damaged by fire or other insured cause to such an extent that, in Landlord's sole judgment, the damage cannot be substantially repaired within two hundred ten (210) days after the date of such damage, or if the Premises are substantially damaged during the last Lease Year, then: (i) Landlord may terminate this Lease as of the date of such damage by written notice to Tenant; or (ii) provided such damage or casualty has not been caused by the Tenant or its Agents, Tenant may terminate this Lease as of the date of such damage by written notice to Landlord within ten (10) days after (a) Landlord's delivery of a notice that the repairs cannot be made within such 210-day period (Landlord shall use reasonable efforts to deliver to Tenant such notice within sixty (60) days of the date of such damage or casualty); or (b) the date of damage, in the event the damage occurs during the last year of the Lease. Rent shall be apportioned and paid to the date of such termination. During the period that Tenant is deprived of the use of the damaged portion of the Premises, and provided such damage is not the consequence of the fault or negligence of Tenant or its Agents, Basic Rent and Tenant's Proportionate Share shall be reduced by the ratio that the Rentable Square Footage of the Premises damaged bears to the total Rentable Square Footage of the Premises before such damage. All injury or damage to the Premises or the Project resulting from the fault or negligence of Tenant or its Agents shall be repaired by Tenant, at Tenant's expense, and Rent shall not abate. If Tenant shall fail to do so or if Landlord shall so elect, Landlord shall have the right to make such repairs, and any expense so -27- 31 incurred by Landlord, together with interest thereon at the Interest Rate from the demand date, shall be paid by Tenant upon demand. Notwithstanding anything herein to the contrary, Landlord shall not be required to rebuild, replace, or repair any of the following: (i) specialized Tenant improvements as reasonably determined by Landlord; (ii) Alterations; or (iii) any other personal property of Tenant. 20.2 Condemnation. If twenty percent (20%) or more of the Building or 50% or more of the Land shall be taken or condemned by any governmental or quasi-governmental authority for any public or quasi-public use or purpose (including, without limitation, sale under threat of such a taking), then the Term shall cease and terminate as of the date when title vests in such governmental or quasi-governmental authority, and Rent shall be prorated to the date when title vests in such governmental or quasi-governmental authority. If less than twenty percent (20%) of the Building or a Substantial Part of the Land is taken or condemned by any governmental or quasi-governmental authority for any public or quasi-public use or purpose (including, without limitation, sale under threat of such a taking), Basic Rent and Tenant's Proportionate Share shall be reduced by the ratio that the Rentable Square Footage of the portion of the Premises so taken bears to the Rentable Square Footage of the Premises before such taking, effective as of the date when title vests in such governmental or quasi-governmental authority, and this Lease shall otherwise continue in full force and effect. Tenant shall have no claim against Landlord (or otherwise) as a result of such taking, and Tenant hereby agrees to make no claim against the condemning authority for any portion of the amount that may be awarded as compensation or damages as a result of such taking; provided, however, that Tenant may, to the extent allowed by law, claim an award for moving expenses and for the taking of any of Tenant's property (other than its leasehold interest in the Premises) which does not, under the terms of this Lease, become the property of Landlord at the termination hereof, as long as such claim is separate and distinct from any claim of Landlord and does not diminish Landlord's award. Tenant hereby assigns to Landlord any right and interest it may have in any award for its leasehold interest in the Premises. Tenant hereby assigns to Landlord any right and interest it may have in any award for its leasehold interest in the Premises. ARTICLE XXI DEFAULT OF TENANT 21.1 Events of Default. Each of the following shall constitute an Event of Default: (i) Tenant fails to pay Rent within ten (10) days after written notice from Landlord; provided that no such notice shall be required if at least two such notices shall have been given during the previous twelve (12) months; (ii) Tenant fails to observe or perform any other term, condition or covenant herein binding upon or obligating Tenant within ten (10) days after written notice from Landlord; provided, however, that if Landlord reasonably determines that such failure cannot be cured within said 10-day period, then Landlord may in its reasonable discretion extend the period to cure the default for as long as is reasonably necessary to complete the cure, provided Tenant has commenced to cure the default within the 10-day period and diligently and continuously pursues such cure to completion; (iii) Tenant abandons the Premises; (iv) Tenant or any Guarantor makes or consents to a general assignment for the benefit of creditors or a common law composition of creditors, or a receiver of the Premises for all or substantially all of Tenant's or Guarantor's assets is appointed; (v) Tenant or Guarantor files a voluntary petition in any bankruptcy or insolvency proceeding, or an involuntary petition in any bankruptcy or insolvency proceeding is filed against Tenant or Guarantor and is not discharged by Tenant or Guarantor within one hundred twenty (120) days or; (vi) Tenant fails to immediately remedy or discontinue any hazardous conditions which Tenant has created or permitted in violation of law or of this Lease. 21.2 Landlord's Remedies. Upon the occurrence of an Event of Default, Landlord, at its option, without further notice or demand to Tenant, may, in addition to all other rights and remedies provided in this Lease, at law or in equity elect one or more of the following remedies: -28- 32 (a) Terminate this Lease and Tenant's right of possession of the Premises, and recover all damages to which Landlord is entitled under law, specifically including but without limitation, all of Landlord's expenses of reletting (including, without limitation, rental concessions to new tenants, repairs, Alterations, legal fees and brokerage commissions). If Landlord elects to terminate this Lease, every obligation of the parties shall cease as of the date of such termination, except that Tenant shall remain liable for payment of Rent, performance of all other terms and conditions of this Lease to the date of termination and performance of all other terms and conditions of this Lease which expressly survive termination hereof; (b) Terminate Tenant's right of possession of the Premises without terminating this Lease, in which event Landlord may, but shall not be obligated to, relet the Premises, or any part thereof, for the account of Tenant, for such rent and term and upon such other conditions as are acceptable to Landlord. For purposes of such reletting, Landlord is authorized to redecorate, repair, alter and improve the Premises to the extent necessary in Landlord's discretion. Until Landlord relets the Premises, Tenant shall remain obligated to pay Rent to Landlord as provided in this Lease. If and when the Premises are relet and if a sufficient sum is not realized from such reletting after payment of all of Landlord's expenses of reletting (including, without limitation, rental concessions to new tenants, repairs, Alterations, legal fees and brokerage commissions) to satisfy the payment of Rent due under this Lease for any month, Tenant shall pay Landlord any such deficiency upon demand. Tenant agrees that Landlord may file suit to recover any sums due Landlord under this Section from time to time and that such suit or recovery of any amount due Landlord shall not be any defense to any subsequent action brought for any amount not previously reduced to judgment in favor of Landlord; (c) Terminate this Lease and Tenant's right of possession of the Premises, and recover from Tenant the net present value of the Rent due from the date of termination until the Expiration Date, discounted at the lesser of the "base rate" referenced in the definition of the Interest Rate and calculated as of the date of termination or ten percent (10%) per annum; and (d) In addition to the foregoing, re-enter and repossess the Premises and remove all persons and effects therefrom, by summary proceeding, ejectment or other legal action. Landlord shall have no liability by reason of any such re-entry, repossession or removal. 21.3 Rights Upon Possession. If Landlord takes possession pursuant to this ARTICLE XXI, with or without terminating this Lease, Landlord may, at its option, remove Tenant's Alterations, signs, personal property, equipment and other evidences of tenancy, and store them at Tenant's risk and expense or dispose of them as Landlord may see fit, and take and hold possession of the Premises; provided, however, that if Landlord elects to take possession only without terminating this Lease, such entry and possession shall not terminate this Lease or release Tenant or any Guarantor, in whole or in part, from the obligation to pay the Rent reserved hereunder for the full Term or from any other obligation under this Lease or any guaranty thereof. 21.4 No Waiver. If Landlord or Tenant shall institute proceedings hereunder and a compromise or settlement thereof shall be made, the same shall not constitute a waiver of any other covenant, condition or agreement herein contained, nor of any other rights hereunder. No waiver by either party hereto of any breach shall operate as a waiver of such covenant, condition or agreement itself, or of any subsequent breach thereof. No payment of Rent by Tenant or acceptance of Rent by Landlord shall operate as a waiver of any breach or default by Tenant under this Lease. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment of Rent herein stipulated shall be deemed to be other than a payment on account of the earliest unpaid Rent, nor shall any endorsement or statement on any check or communication accompanying a check for the payment of Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance -29- 33 of such Rent or to pursue any other remedy provided in this Lease. No re-entry by Landlord, and no acceptance by Landlord of keys from Tenant, shall be considered an acceptance of a surrender of the Lease. 21.5 Right of Landlord to Cure Tenant's Default. If an Event of Default shall occur, then Landlord may (but shall not be obligated to) make such payment or do such act to cure the Event of Default, and charge the amount of the expense thereof to Tenant. Such payment shall be due and payable upon demand; however, the making of such payment or the taking of such action by Landlord shall not be deemed to cure the Event of Default or to stop Landlord from the pursuit of any remedy to which Landlord would otherwise be entitled. Any such payment made by Landlord on Tenant's behalf shall bear interest until paid at the Interest Rate. 21.6 Late Payment. If Tenant fails to pay any Rent within ten (10) days after such Rent becomes due and payable, Tenant shall pay to Landlord a late charge of ten percent (10%) of the amount of such overdue Rent. In addition, any such late Rent payment shall bear interest from the date such Rent became due and payable to the date of payment thereof by Tenant at the Interest Rate. Such late charge and interest shall be due and payable within two (2) days after written demand from Landlord. ARTICLE XXII MORTGAGES 22.1 Subordination. This Lease is subject and subordinate to all ground or underlying leases and to any superior Mortgage(s) which may now or hereafter affect such leases or the Land and to all renewals, modifications, consolidations, replacements and extensions thereof. This subordination shall be self-operative; however, in confirmation thereof, Tenant shall execute promptly any instrument that Landlord or any Mortgagee may request confirming such subordination, provided such Mortgagee confirms its agreement not to disturb Tenant's possession absent an Event of Default hereunder. In this connection, Landlord hereby confirms that there is currently no mortgage encumbering the Project. In the event the Project is hereafter mortgaged, Landlord agrees to cause the Mortgagee to execute (with Tenant) Mortgagee's form non-disturbance agreement. Notwithstanding the foregoing, before any foreclosure sale under a Mortgage, the Mortgagee shall have the right to subordinate the Mortgage to this Lease, and, in the event of a foreclosure, this Lease may continue in full force and effect and Tenant shall attorn to and recognize as its landlord the purchaser of Landlord's interest under this Lease. Tenant shall, upon the request of a Mortgagee or purchaser at foreclosure, execute, acknowledge and deliver any instrument that has for its purpose and effect the subordination of the lien of any Mortgage to this Lease or Tenant's attornment to such Purchaser. 22.2 Mortgagee Protection. Tenant agrees to give any Mortgagee by certified mail, return receipt requested, a copy of any notice of default served upon Landlord, provided that before such notice Tenant has been notified in writing of the address of such Mortgagee. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then Mortgagee shall have an additional ten (10) days within which to cure such default; provided, however, that if such default cannot be reasonably cured within that time, then such Mortgagee shall have such additional time as may be necessary to cure such default so long as Mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including, without limitation, the commencement of foreclosure proceedings, if necessary), in which event this Lease shall not be terminated or Rent abated while such remedies are being so diligently pursued. In the event of the sale of the Land, the Building or the Project by foreclosure or deed in lieu thereof, the Mortgagee or purchaser at such sale shall be responsible for the return of the Security Deposit only to the extent that such Mortgagee or purchaser actually received the Security Deposit. -30- 34 ARTICLE XXIII SURRENDER; HOLDING OVER 23.1 Surrender of the Premises. Tenant shall peaceably surrender the Premises to Landlord on the Expiration Date or earlier termination of this Lease, in broom-clean condition and in as good condition as when Tenant took possession, including, without limitation, the repair of any damage to the Premises caused by the removal of any of Tenant's personal property or trade fixtures from the Premises, except for reasonable wear and tear and loss by fire or other casualty not caused by the willful misconduct of Tenant or its Agents. All trade fixtures, equipment, furniture, inventory, effects, alterations, additions and improvements left on or in the Premises or the Project after the Expiration Date or earlier termination of this Lease will be deemed conclusively to have been abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without notice to Tenant or any other person and without obligation to account for them; and Tenant will pay Landlord for all expenses incurred in connection with the removal of such property (unless Landlord has previously determined, in writing, that Tenant may leave such property at the Premises upon expiration, as contemplated by SECTION 12.4 hereof), including, but not limited to, the costs of repairing any damage to the Premises or the Project caused by the removal of such property. Tenant's obligation to observe and perform this covenant will survive the expiration or other termination of this Lease. 23.2 Holding Over. In the event that Tenant shall not immediately surrender the Premises to Landlord on the Expiration Date or earlier termination of this Lease, Tenant shall be deemed to be a tenant-at-will pursuant to the terms and provisions of this Lease, except the daily Basic Rent shall be one-hundred and fifty percent (150%) of the daily Basic Rent in effect on the Expiration Date or earlier termination of this Lease (computed on the basis of a thirty (30) day month). Notwithstanding the foregoing, if Tenant shall hold over after the Expiration Date or earlier termination of this Lease, and Landlord shall desire to regain possession of the Premises, then Landlord may immediately or at any time thereafter commence any legal process provided under applicable state law. In addition to the increased Basic Rent during hold over, as aforesaid, Tenant shall indemnify Landlord against all liabilities and damages sustained by Landlord by reason of such retention of possession. ARTICLE XXIV QUIET ENJOYMENT Landlord covenants that it owns the Project in fee simple and that if Tenant shall pay Rent and perform all of the terms and conditions of this Lease to be performed by Tenant, Tenant shall during the Term peaceably and quietly occupy and enjoy possession of the Premises without molestation or hindrance by Landlord or any party claiming through or under Landlord, subject to the provisions of this Lease, the Restrictions and any Mortgage to which this Lease is subordinate. ARTICLE XXV MISCELLANEOUS 25.1 No Representations by Landlord. Tenant acknowledges that neither Landlord nor its Agents nor any broker has made any representation or promise with respect to the Premises, the Project, the Land or the Common Area, except as herein expressly set forth, and no rights, privileges, easements or licenses are acquired by Tenant except as herein expressly set forth. -31- 35 25.2 No Partnership. Nothing contained in this Lease shall be deemed or construed to create a partnership or joint venture of or between Landlord and Tenant, or to create any other relationship between Landlord and Tenant other than that of landlord and tenant. 25.3 Brokers. Landlord recognizes Broker(s) as the sole broker(s) procuring this Lease and shall pay Broker(s) a commission therefor pursuant to a separate agreement between Broker(s) and Landlord. Landlord and Tenant each represents and warrants to the other that it has not employed any broker, agent or finder other than Broker(s) relating to this Lease. Landlord shall indemnify and hold Tenant harmless, and Tenant shall indemnify and hold Landlord harmless, from and against any claim for brokerage or other commission arising from or out of any breach of the indemnitor's representation and warranty. 25.4 Estoppel Certificate. Tenant shall, without charge, at any time and from time to time, within ten (10) days after request therefor by Landlord, Mortgagee, any purchaser of all or any portion of the Project or any other interested person, execute, acknowledge and deliver to such requesting party a written estoppel certificate certifying, as of the date of such estoppel certificate, the following: (i) that this Lease is unmodified and in full force and effect (or if modified, that the Lease is in full force and effect as modified and setting forth such modifications); (ii) that the Term has commenced (and setting forth the Commencement Date and Expiration Date); (iii) that Tenant is presently occupying the Premises; (iv) the amounts of Basic Rent and Additional Rent currently due and payable by Tenant; (v) that any Alterations required by the Lease to have been made by Landlord have been made to the satisfaction of Tenant; (vi) that there are no existing set-offs, charges, liens, claims or defenses against the enforcement of any right hereunder, including, without limitation, Basic Rent or Additional Rent (or, if alleged, specifying the same in detail); (vii) that no Basic Rent (except the first installment thereof) has been paid more than thirty (30) days in advance of its due date; (viii) that Tenant has no knowledge of any then uncured default by Landlord of its obligations under this Lease (or, if Tenant has such knowledge, specifying the same in detail); (ix) that Tenant is not in default; (x) that the address to which notices to Tenant should be sent is as set forth in the Lease (or, if not, specifying the correct address); and (xi) any other certifications requested by Landlord. 25.5 Waiver of Jury Trial. LANDLORD AND TENANT EACH WAIVE TRIAL BY JURY IN CONNECTION WITH PROCEEDINGS OR COUNTERCLAIMS BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER WITH RESPECT TO ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT HEREUNDER OR TENANT'S USE OR OCCUPANCY OF THE PREMISES. 25.6 Notices. All notices or other communications hereunder shall be in writing and shall be deemed duly given if addressed and delivered to the respective parties' addresses, as set forth in ARTICLE I: (i) in person; (ii) by Federal Express or similar overnight carrier service; or (iii) mailed by certified or registered mail, return receipt requested, postage prepaid. Such notices shall be deemed received upon the earlier of receipt or, if mailed by certified or registered mail, three (3) days after such mailing. Landlord and Tenant may from time to time by written notice to the other designate another address for receipt of future notices. 25.7 Invalidity of Particular Provisions. If any provisions of this Lease or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and be enforced to the full extent permitted by law. 25.8 Gender and Number. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number or gender as the context may require. -32- 36 25.9 Benefit and Burden. Subject to the provisions of ARTICLE X and except as otherwise expressly provided, the provisions of this Lease shall be binding upon, and shall inure to the benefit of, the parties hereto and each of their respective representatives, heirs, successors and assigns. Landlord may freely and fully assign its interest hereunder. 25.10 Entire Agreement. This Lease (which includes the Exhibits attached hereto) contains and embodies the entire agreement of the parties hereto, and no representations, inducements or agreements, oral or otherwise, between the parties not contained in this Lease shall be of any force or effect. This Lease (other than the Rules and Regulations, which may be changed from time to time as provided herein) may not be modified, changed or terminated in whole or in part in any manner other than by an agreement in writing duly signed by Landlord and Tenant. 25.11 Authority. (a) Tenant hereby represents and warrants that Tenant is a duly formed and validly existing corporation, in good standing, qualified to do business in the district in which the Project is located, that the corporation has full power and authority to enter into this Lease and that the person executing this Lease on behalf of Tenant is authorized to do so by the corporation. Tenant further agrees that it shall provide Landlord with a secretary's certificate from the secretary of said corporation certifying as to the above in the form of EXHIBIT D attached hereto and made a part hereof. (b) Landlord hereby represents and warrants that Landlord is a duly formed, validly existing partnership qualified to do business in the applicable state, that the partnership has full power and authority to enter into this Lease, and that the entities executing this Lease on behalf of the partnership are authorized to do so. 25.12 Attorneys' Fees. In any action or proceeding bought hereunder, the prevailing party shall be entitled to collect all reasonable attorney's fees and costs from the non-prevailing party. 25.13 Interpretation. This Lease is governed by the laws of the state in which the Project is located. Furthermore, this Lease shall not be construed against either party more or less favorably by reason of authorship or origin of language. 25.14 Landlord's Consent. Wherever and whenever in this Lease Landlord's consent or agreement is required, unless otherwise provided, Landlord may withhold its consent for any reason whatsoever. 25.15 No Personal Liability; Sale. Neither Landlord nor its Agents, whether disclosed or undisclosed, shall have any personal liability under any provision of this Lease. If Landlord defaults in the performance of any of its obligations hereunder or otherwise, Tenant shall look solely to Landlord's equity, interest and rights in the Building for satisfaction of Tenant's remedies on account thereof. Landlord or any successor owner shall have the right to transfer and assign to a third party, in whole or part, all of its rights and obligations hereunder and in the Building and Land, and in such event, all liabilities and obligations on the part of the original Landlord, or such successor owner, under this Lease occurring thereafter shall terminate as of the day of such sale, and thereupon all such liabilities and obligations shall be binding on the new owner. Tenant agrees to attorn to such new owner. Any successor to Landlord's interest shall not be bound by: (i) any payment of Basic Rent or Additional Rent for more than one (1) month in advance, except for the payment of the first installment of first year Basic Rent; or (ii) as to any Mortgagee or any purchaser at foreclosure, any amendment or modification of this Lease made without the consent of such Mortgagee. -33- 37 25.16 Time of the Essence. Time is of the essence as with respect to all obligations contained in this Lease. 25.17 Force Majeure. Landlord and Tenant (except with respect to the payment of Rent) shall not be chargeable with, liable for, or responsible to the other for anything or in any amount for any failure to perform or delay caused by: fire; earthquake; explosion; flood; hurricane; the elements; acts of God or the public enemy; actions, restrictions, governmental authorities (permitting or inspection), governmental regulation of the sale of materials or supplies or the transportation thereof; war; invasion; insurrection; rebellion; riots; strikes or lockouts, inability to obtain necessary materials, goods, equipment, services, utilities or labor; or any other cause whether similar or dissimilar to the foregoing which is beyond the reasonable control of such party (collectively, "Events of Force Majeure"); and any such failure or delay due to said causes or any of them shall not be deemed to be a breach of or default in the performance of this Lease. 25.18 Headings. Captions and headings are for convenience of reference only. 25.19 Memorandum of Lease. Tenant shall, at the request of Landlord, execute and deliver a memorandum of lease in recordable form. Tenant shall not record such a memorandum or this Lease without Landlord's consent. The party requesting recordation of a memorandum of this Lease shall be obligated to pay all costs, fees and taxes, if any, associated with such recordation. 25.20 Intentionally Deleted. 25.21 Financial Reports. Within thirty (30) days after Landlord's request, Tenant will furnish Tenant's most recent financial statements (including any notes to them) which Tenant has provided to the Securities and Exchange Commission, together with other generally available, public financial information on Tenant. 25.22 Landlord's Fees. Whenever Tenant requests Landlord to take any action or give any consent required or permitted under this Lease, Tenant will reimburse Landlord for all of Landlord's actual out-of-pocket third party costs incurred in reviewing the proposed action or consent, including, without limitation, reasonable attorneys', engineers' or architects' fees, within ten (10) days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action. 25.23 Intentionally Deleted 25.24 Effectiveness. The furnishing of the form of this Lease shall not constitute an offer and this Lease shall become effective upon and only upon its execution by and delivery to each party hereto. 25.25 Light, Air or View Rights. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to or in the vicinity of the Building and Project shall not affect this Lease, abate any payment owed by Tenant hereunder or otherwise impose any liability on Landlord. 25.26 Special Damages. Under no circumstances whatsoever shall Landlord ever be liable hereunder for consequential damages or special damages unless Landlord engages in fraud. 25.27 Remedies Cumulative. The remedies of Landlord hereunder shall be deemed cumulative and no remedy of Landlord, whether exercised by Landlord or not, shall be deemed to be in exclusion of any other. -34- 38 25.28 Independent Covenant. The obligation of Tenant to pay all Rent and other sums hereunder provided to be paid by Tenant and the obligation of Tenant to perform Tenant's other covenants and duties hereunder constitute independent, unconditional obligations to be performed at all times provided for hereunder, save and except only when an abatement thereof or reduction therein is hereinabove expressly provided for and not otherwise. Tenant waives and relinquishes all rights which Tenant might have to claim any nature of a prejudgment lien against or withhold, or deduct from, or offset against any rent and other sums provided hereunder to be paid Landlord by Tenant. ARTICLE XXVI RIGHT OF FIRST OFFER 26.1 General. If at any time within the Term any portion of all remaining leaseable space located on the first and second floors of the Building (collectively, the "Right of First Offering Space") becomes or Landlord receives notice will become vacant and is not subject to a lease, option, right of extension or an expansion right contained in any other lease heretofore granted, Landlord shall so notify Tenant in writing. Tenant shall then have a period of ten (10) days after receipt of such notice in which to elect either to lease all of the Right of First Offering Space described in Landlord's notice or refuse to lease the same ("Right of First Offering"). Failure of Tenant to respond shall be deemed refusal to lease such Right of First Offering Space. This Right of First Offering shall not apply to space which is currently vacant until such currently vacant space is leased and subsequently becomes vacant and is subject to the rights of existing tenants in any lease, option, right of extension (heretofore or hereafter granted) or expansion right heretofore granted. In the event Tenant refuses to lease such Right of First Offering Space, Tenant's Right of First Offering with respect to all of the Right of First Offering Space shall automatically cease and forever terminate. If Tenant elects to lease the Right of First Offering Space, then Landlord and Tenant, within thirty (30) days after Tenant delivers to Landlord notice of the exercise of such option, shall execute an amendment to this Lease which shall (i) add the applicable Right of First Offering Space to the Premises under this Lease; (ii) increase the annual Basic Rent by an amount equal to the product of the then prevailing annual Market Rate (as determined in accordance with SECTION 26.2 below) multiplied by the total number of Rentable Square Feet in the applicable Right of First Offering Space; and (iii) increase Tenant's Proportionate Share in direct proportion to the increase of Rentable Square Footage in the Premises as a result of said amendment. Except as otherwise specifically indicated in this ARTICLE XXVI, all of the terms and conditions contained in this Lease shall apply to the Right of First Offering Space; provided, however, no improvement allowances shall be provided to Tenant. The commencement date for any Right of First Offering Space shall be thirty (30) days after the later of (i) notice of Tenant's election to lease said Right of First Offering Space or (ii) vacation of such Right of First Offering Space by the previous tenant; provided, however in the event Tenant actually occupies the Right of First Offering Space prior to such date for the conduct of its business, the commencement date shall be the earlier date upon which such space is occupied. In the event Tenant exercises any Right of First Offering, the Term with respect to such Right of First Offering Space shall be coterminous with the current remaining Term with respect to the Premises as may be extended. 26.2 Market Rate. As used herein "Market Rate" shall mean the then prevailing market rate for full service base rent (and with any charges for parking only to the extent parking charges are then levied in market leases, which parking charges shall be included within the determination of Market Rate herein) for tenants of comparable quality for leases in buildings of comparable size, use and location in the Hartford, Connecticut Area, taking into consideration the extent of the availability of space as large as the Premises in the marketplace and all other economic terms then customarily prevailing in such leases in said marketplace. 26.3 Condition of Premises. Tenant shall accept any Right of First Offering Space in "as is" condition as of the date of any election to lease such space hereunder. -35- 39 26.4 Conditions Precedent. Tenant's Right of First Offering is expressly subject to the following conditions precedent: (i) this Lease is in full force and effect; (ii) no material, adverse change in Tenant's financial condition has occurred, and (iii) no Event of Default shall exist or would exist but for the pendency of any cure periods provided for in SECTION 21.1 herein, either at the time of giving written notice of Tenant's election to Landlord or at the time possession of any such space is delivered to Tenant. 26.5 Holdover. Landlord shall not be liable for the failure to give possession of any Right of First Offering space to Tenant by reason of the unauthorized holding over or retention of possession by any other tenant or occupant thereof, nor shall such failure impair the validity of this Lease nor extend the Term thereof. 26.6 Termination of Right of First Offering. This Right of First Offering shall terminate on the first to occur of (i) Tenant's subleasing or assignment of more than one-third of the Premises, or (ii) two (2) Lease Years prior to the expiration of the Term unless Tenant delivers to Landlord a Renewal Notice and renews the Lease in accordance with ARTICLE XXVII, in which event such Right of First Offering shall terminate two (2) Lease Years prior to the expiration of the Term, as extended. 26.7 Personal Right. This Right of First Offering is personal with respect to Raytel Medical Corporation. Any assignment or subletting , other than as permitted by SECTION 10.5, shall automatically terminate this ARTICLE XXVI in all respects. ARTICLE XXVII OPTION TO RENEW 27.1 Grant of Option and General Terms. Provided that (i) no material adverse change has occurred in Tenant's financial condition; (ii) this Lease is in full force and effect, and (iii) no Event of Default shall exist under this Lease, or would exist but for the pendency of any cure periods provided under SECTION 21.1, either on the date Tenant exercises its Renewal Option (as hereinafter defined) or as of the effective date of the Renewal Term (as hereinafter defined), Tenant shall have the option to extend the term of this Lease for one (1) additional period (the "Renewal Option") of five (5) years (the "Renewal Term"). The Renewal Option shall be subject to all of the terms and conditions contained in the Lease except that (i) the Renewal Rent (as hereinafter defined) shall be as set forth below; (ii) Landlord shall have no obligation to improve the Premises; and (iii) there shall be no further option to extend the Term of the Lease beyond the Renewal Term. 27.2 Renewal Rent. The Renewal Rent for the Renewal Term shall be an amount equal to the prevailing Market Rate. As used herein "Market Rate" shall mean the greater of the amount of Basic Rent and Additional Rent payable hereunder during the last year of the initial Term (said amount to be payable for each year of the Renewal Term) or the then prevailing market rate for full service base rent (and with any charges for parking only to the extent parking changes are then levied in market leases, which parking charges shall be included within the determination of Market Rate herein) for tenants of comparable quality for renewal leases in buildings of comparable size, use and location in the Hartford, Connecticut Area, taking into consideration the extent of the availability of space as large as the Premises in the marketplace and all other economic terms then customarily prevailing in such renewal leases in said marketplace. 27.3 Determination of Market Rate. Tenant shall send Landlord a preliminary expression of Tenant's willingness to renew this Lease no earlier than eighteen (18) months or later than twelve (12) months prior to the expiration of the initial Term of this Lease ("Renewal Notice"). Tenant and Landlord shall negotiate in good faith to determine and mutually agree upon the Market Rate for the Renewal Term. If Landlord -36- 40 and Tenant are unable to agree upon the Market Rate for the Renewal Term, on or before nine (9) months prior to the expiration of the executed by both Landlord and Tenant, then within five (5) days after the last day of the Negotiation Period, Tenant may, by written notice to Landlord (the "Notice of Exercise"), irrevocably elect to exercise such Renewal Option, Tenant shall send the Notice of Exercise to Landlord stating (i) that Tenant is irrevocable exercising its right to extend the Term pursuant to ARTICLE XXVII; and (ii) Landlord and Tenant shall be irrevocably bound by the determination of Market Rate set forth hereinafter in this SECTION 27.3, and if applicable, SECTION 27.4. If Tenant shall fail to deliver the Notice of Exercise on or before five (5) days after the last day of the Negotiation Period, then Tenant shall have waived any right to exercise the Renewal Option. In the event any date referenced in this SECTION 27.3 falls on a day other than a business day, such date shall be deemed to be the next following business day. In the event Tenant timely delivers the Notice of Exercise to Landlord, Landlord and Tenant shall each simultaneously present to the other party their final determinations of the Market Rate for the Renewal Term (the "Final Offers') within ten (10) days after the last day of the Negotiation Period. If either party fails to timely deliver a Final Offer, then Market Rate shall equal the other party's Final Offer. If the Market Rate as determined by the lower of the two (2) proposed Final Offers is not more than ten percent (10%) below the higher, then the Market Rate shall be determined by averaging the two (2) Final Offers. If the difference between the lower of the two (2) proposed Final Offers is more than ten percent (10%) below the higher, then the Market Rate shall be determined by Baseball Arbitration (as hereinafter defined) in accordance with the procedure set forth in SECTION 27.4. 27.4 Baseball Arbitration. For all purposes of this Lease, Baseball Arbitration shall follow the following procedures: (a) Within twenty (20) days after Landlord's receipt of Tenant's Notice of Exercise, Tenant and Landlord shall each select an arbitrator (Tenant's Arbitrator" and "Landlord's Arbitrator", respectively) who shall be a qualified and impartial person licensed in the State of Connecticut as MAI appraiser with at least five (5) years of experience in appraising the type of matters for which they are called on to appraise hereunder in the Hartford, Connecticut Area. (b) Landlord's Arbitrator and Tenant's Arbitrator shall name a third arbitrator, similarly qualified, within ten (10) days after the appointment of Landlord's Arbitrator and Tenant's Arbitrator. (c) Said third arbitrator shall, after due consideration of the factors to be taken into account under the definition of Market Rate set forth in SECTION 27.2 and hearing whatever evidence the arbitrator deems appropriate from Landlord, Tenant and others, and obtaining any other information the arbitrator deems necessary in good faith, make its own determination of the Market Rate for the Premises as of the commencement of the Renewal Term (the "Arbitrator's Initial Determination") and thereafter select either Landlord's Final Offer or the Tenant's Final Offer, but no other, whichever is closest to the Arbitrator's Initial Determination (the "Final Determination"), such determination to be made within thirty (30) days and the market information upon which determinations are based shall be in writing and counterparts thereof shall be delivered to Landlord and Tenant within said thirty (30) day period. The arbitrator shall have no right or ability to determine the Market Rate in any other manner. The Final Determination shall be binding upon the parties hereto. (d) The costs and fees of the third arbitrator shall be paid by Landlord if the Final Determination shall be Tenant's Final Offer or by Tenant if the Final Determination shall be Landlord's Final Offer. -37- 41 (e) If Tenant fails to appoint Tenant's Arbitrator in the manner and within the time specified in SECTION 27.4, then the Market Rate for the Renewal Term shall be the Market Rate contained in the Landlord's Final Offer. If Landlord fails to appoint Landlord's Arbitrator in the manner and within the time specified in SECTION 27.4 then the Market Rate for the Renewal Term shall be the Market Rate contained in the Tenant's Final Offer. If Tenant's Arbitrator and Landlord's Arbitrator fail to appoint the third arbitrator within the time and in the manner prescribed in SECTION 27.4, then Landlord and Tenant shall jointly and promptly apply to the local office of the American Arbitration Association for the appointment of the third arbitrator. 27.5 Personal Option. This Renewal Option is personal with respect to Raytel Medical Corporation. Any assignment or subletting , other than as permitted by SECTION 10.5, shall automatically terminate this ARTICLE XXVII in all respects. -38- 42 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the Date of Lease. LANDLORD: USGC JOINT VENTURE By: USAA Real Estate Company ATTEST/WITNESS: Its Partner /s/ PAULA MORTENSON By: /s/ T. PATRICK DUNCAN - ----------------------------------- -------------------------------- Name: PAULA MORTENSON Name: T. PATRICK DUNCAN ------------------------------ ------------------------------ Title: Senior Vice President ----------------------------- By: Griffin Land & Nurseries, Inc. Its Partner /s/ THOMAS H. HALLIGAN By: /s/ MARTHA COLLIER - ----------------------------------- -------------------------------- Name: Thomas H. Halligan Name: MARTHA COLLIER ------------------------------ ------------------------------ Title: Sr. V.P. ----------------------------- TENANT: ATTEST/WITNESS: RAYTEL MEDICAL CORPORATION /s/ GEOFFREY KIRKHAM By: /s/ JOHN F. LAWLER, JR. - ----------------------------------- -------------------------------- Name: Geoffrey Kirkham Name: JOHN F. LAWLER, JR. ------------------------------ ------------------------------ Title: CFO ----------------------------- -39- EX-10.60 4 EX-10.60 1 EXHIBIT 10.60 KEY MANAGEMENT RETENTION AGREEMENT THIS KEY MANAGEMENT RETENTION AGREEMENT (the "Agreement"), dated September 1, 1999 (the "Effective Date"), is made and entered into by and between RAYTEL MEDICAL CORPORATION, a Delaware corporation (the "Company"), and Swapan Sen (the "Key Executive"). RECITALS A. The Company desires to continue the employment of the Key Executive as its Senior Vice President and as the Senior Vice President of Raytel Imaging Holdings, Inc., a Delaware corporation ("RIH") on the same terms and conditions under which the Key Executive is now employed pursuant to a written employment agreement dated as of March 1, 1998, and the Key Executive desires to accept such continued employment. B. The employment of the Key Executive by the Company is supplemented pursuant to this Agreement, which provides for a retention and severance arrangement in the event there is a change of control transaction (as that term is defined in Paragraph 1.2, herein); and C. The Company and the Key Executive hereby enter into this Agreement setting forth each and all of the terms and conditions of the retention and severance arrangement. NOW THEREFORE, in consideration of the premises and the agreements, representations and warranties, contained in this Agreement, the Company and the Key Executive hereby agree as follows: AGREEMENT 1. Retention and Severance Arrangement. 1.1 Retention Bonuses. Provided that the conditions set forth in Paragraph 1.3 are fulfilled, then in the event the Company enters into and consummates a Change of Control Transaction (as defined in Paragraph 1.2 below), the Key Executive shall be entitled to receive a cash bonus (the "Retention Bonus") in the amount of Three Hundred Fifty Thousand and no/100 Dollars ($350,000.00), payable promptly upon the fulfillment of the conditions set forth in Paragraph 1.3, herein. The Retention Bonus shall be paid by the acquiring company to the Key Executive but not out of the sales proceeds payable to the Company or its selling stockholders. -1- 2 (i) The Key Employee may elect to reduce the amount of the Retention Bonus by an amount that will reduce or eliminate any excise tax calculated pursuant to Internal Revenue Code Section 280G. (ii) The election to reduce the Retention Bonus must be made in a timely fashion in order to satisfy the requirements of Internal Revenue Code Section 280G. 1.2 Change of Control Defined. For purposes of this Agreement, and at any time during the term hereof, the term Change of Control shall mean any of the following occurrences: (i) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of sixty-seven percent (67.0%) or more of the combined voting power of the Company's then outstanding Voting Securities; (ii) Approval by the board of directors or, if required due to the magnitude and materiality of the transaction, by the shareholders of the Company of: (1) a merger, consolidation or reorganization involving the Company; (2) a complete liquidation or dissolution of the Company; or (3) an agreement for the sale or other disposition of all or substantially all (as defined herein below) of the assets of the Company to any Person; or (iii) Approval by the board of directors or, if required due to the magnitude and materiality of the transaction, by the shareholders of the Company, of the sale of either the stock or substantially all (as defined herein below) of the assets of RIH, a subsidiary of the Company (hereinafter the "Business Unit"). (iv) For purposes of this Agreement the term "substantially all" shall include but not be limited to any disposition of a Business Unit or series of dispositions of Business Units or other assets that collectively generated at least sixty-seven percent (67.0%) of the Business Unit's revenues or profits (as measured by the Business Unit's June 30, 1999 financial statements, a copy of which are attached hereto as Exhibit 1.2. -2- 3 1.3 Conditions for Receipt of the Retention Bonus. In order to receive the Retention Bonus set forth in Paragraph 1.1, above, the following conditions must be met in their entirety: (a) The Key Executive must be continuously employed by the Company through the closing of the Change of Control Transaction; and (b) The Key Executive must continue to be continuously employed by the Company, RIH, the acquiring company or another affiliate of the acquiring company during the six-month period following the closing of the Change of Control Transaction, unless the failure to be so employed is a result of (i) his involuntary termination by the Company other than for cause, or (ii) his voluntary termination following a constructive termination (i.e., demotion, reduction in responsibilities, forced relocation or reduction in base salary). 1.4 No Reduction. The Retention Bonus payable to the Key Executive shall not be reduced in any amount by the severance payments paid to such Key Executive under the terms of any Company policy regarding severance benefits or his existing written employment agreement between the Key Executive and the Company. 1.5 Acceleration of Option Vesting. The option agreements between the Company and the Key Executive shall be amended to provide that the vesting of all outstanding options to purchase the Company's common stock shall be accelerated so that such options will vest and become exercisable, in full, upon the closing of the Change of Control Transaction. 1.6 Annual Bonus. The Retention Bonus is not intended to replace the Company's existing annual incentive bonus program, which shall continue to be administered in accordance with the Company's existing policies. 1.7 Not an Employment Agreement. This Key Management Retention Agreement is not an employment agreement and is in addition to, and not in substitution for, any rights that the Key Executive may have under an existing employment agreement, if any. 1.8 Term. The term of this Agreement shall be twelve (12) calendar months from the Effective Date of this Agreement. 2. General. 2.1 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of and be binding upon the Company, the Key Executive and each -3- 4 and all of their respective heirs, legal representatives, successors and assigns. The duties, responsibilities and obligations of the Key Executive under this Agreement shall be personal and not assignable or delegable by the Key Executive in any manner whatsoever to any person, corporation, partnerships, firm, company, joint venture or other entity. The Key Executive may not assign, transfer, convey, mortgage, pledge or in any other manner encumber the compensation or other benefits to be received by him or any rights which he may have pursuant to the terms and provisions of this Agreement. Notwithstanding the foregoing, the Company covenants and agrees to require that any successor to the Company and any person acquiring the Company's shares through a Change of Control shall agree to honor the obligation of the Company under this Agreement. Furthermore, the Company will insure such safeguards as would be reasonably expected to insure compliance with the aforementioned obligation. 2.2 Waiver. No waiver of any breach of any warranty, representation, agreement, promise, covenant, paragraph, term or provision of this Agreement shall be deemed to be a waiver of any proceeding or succeeding breach of the same or any other warranty, representation, agreement, promise, covenant, paragraph, term and/or provision of this Agreement. No extension of the time for the performance of any obligation or other act required or permitted by this Agreement shall be deemed to be an extension of the time of the performance of any other obligation or any other act required or permitted by this Agreement. 2.3 Sole and Entire Agreement. This Agreement, and the other agreements referred to herein, including the Company's benefit plans, are the sole, complete and entire contract, agreement and understanding between the Company and the Key Executive concerning the Retention Bonus. Except as otherwise provided herein, the Agreement supersedes any and all prior contracts, agreements, plans, agreements in principle, correspondence, letters of intent, understandings, and negotiations, whether oral or written, concerning the Retention Bonus. 2.4 Amendments. No amendment, modification, waiver, or consent relating to this Agreement will be effective unless and until it is embodied in a written document signed by the Company and by the Key Executive. 2.5 Originals. The Agreement may be executed by the Company and by the Key Executive in counterparts, each of which shall be deemed an original and which together shall constitute one instrument. 2.6 Headings. Each and all of the headings contained in this Agreement are for reference purposes only and shall not in any manner whatsoever affect the construction or interpretation of this Agreement or be deemed a part of this Agreement for any purpose whatsoever. -4- 5 2.7 Savings Provision. To the extent that any provisions of this Agreement or any Paragraph, term, provision, sentence, phrase, clause or word of this Agreement shall be found to be illegal or unenforceable for any reason, such Paragraph, term, provision, sentence, phrase, clause or word shall be modified or deleted in such a manner as to make this Agreement, as so modified, legal and enforceable under applicable laws. The remainder of this Agreement shall continue in full force and effect. 2.8 Applicable Law. This Agreement and each and every provision of this Agreement shall be interpreted solely pursuant to the internal laws of the State of California without regard to any conflicts of law principles thereof. 2.9 Construction. The language of this Agreement and of each and every paragraph, term and provisions of this Agreement shall, in all cases, for any and all purposes, and in any and all circumstances whatsoever be construed as a whole, according to its fair meaning, not strictly for or against the Key Executive or the Company, and with no regard whatsoever to the identity or status of any person or persons who drafted all or any portion of this Agreement. 2.10 Notices. Any notices to be given pursuant to this Agreement by either party to the other party may be effected by personal delivery or by registered or certified mail, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses stated below, but each party may change its or his address by written notice to the other in accordance with this Paragraph 2.10. Notices delivered personally shall be deemed received on the date of delivery. Notices delivered by mail shall be deemed received on the third business day after the mailing thereof. Mailed notices to the Key Executive shall be addressed as follows: Swapan Sen 63 BUNNING DRIVE VOORHEES, N.J. 08043 Mailed notices to the Company shall be addressed as follows: Raytel Medical Corporation 2755 Campus Drive, Suite 200 San Mateo, California 94403-2515 Attention: Chief Executive Officer 2.11 Arbitration. Except as otherwise expressly provided in this Agreement, any and all controversies, disputes and/or claims in any manner arising out -5- 6 of or relating to this Agreement shall be settled solely be arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Such arbitration proceeding shall take place in the state and county of the Company's office where the Key Executive is based. Judgment on any decision rendered by the arbitrator may be entered in any court having jurisdiction thereof. Each party shall bear its own attorney's fees and expenses and other costs in any arbitration proceeding. All administrative fees and the fee of the arbitrator shall be borne by the parties equally. Except as otherwise expressly provided in this Agreement, the arbitration provisions set forth above in this Paragraph 2.11 are intended by the Key Executive and by the Company to be absolutely exclusive for all purposes whatsoever, and applicable to each and every controversy, dispute and/or claim in any manner arising out o f or relating to this Agreement, the meaning, application and/or interpretation of this Agreement, any breach or claimed breach thereof and/or any voluntary or involuntary termination of this Agreement with or without cause, including, without limitation, any such controversy, dispute and/or claim which, if pursued through any state or federal court or administrative agency, would arise at law, in equity and/or pursuant to statutory, regulatory and/or common law rules, regardless of whether such dispute, controversy and/or claim would arise in and/or from contract, tort or any other legal and/or equitable theory or basis. Notwithstanding anything to the contrary contained in this Paragraph 2.11, the Company shall at all times have and retain the full, complete and unrestricted right to immediate and permanent injunctive and other relief. IN WITNESS THEREOF, the Company and the Key Executive have each duly executed this Agreement as of the date first set forth above. RAYTEL MEDICAL CORPORATION KEY EXECUTIVE By: /s/ RICHARD F. BADER /s/ SWAPAN SEN ------------------------------ ----------------------------------- Richard F. Bader Swapan Sen Its: Chairman and Chief Executive Officer -6- EX-10.61 5 EX-10.61 1 EXHIBIT 10.61 KEY MANAGEMENT RETENTION AGREEMENT THIS KEY MANAGEMENT RETENTION AGREEMENT (the "Agreement"), dated September 1, 1999 (the "Effective Date"), is made and entered into by and between RAYTEL MEDICAL CORPORATION, a Delaware corporation (the "Company"), and David E. Wertheimer, M.D. (the "Key Executive"). RECITALS A. The Company desires to continue the employment of the Key Executive as its Senior Vice President and as the President of The Heart Institute of Port St. Lucie, Inc., a Delaware corporation, doing business as Heart and Family Health Institute ("HFHI") on the same terms and conditions under which the Key Executive is now employed, and the Key Executive desires to accept such continued employment. B. The employment of the Key Executive by the Company is supplemented pursuant to this Agreement, which provides for a retention and severance arrangement in the event there is a change of control transaction (as that term is defined in Paragraph 1.2, herein); and C. The Company and the Key Executive hereby enter into this Agreement setting forth each and all of the terms and conditions of the retention and severance arrangement. NOW THEREFORE, in consideration of the premises and the agreements, representations and warranties, contained in this Agreement, the Company and the Key Executive hereby agree as follows: AGREEMENT 1. Retention and Severance Arrangement. 1.1 Retention Bonuses. Provided that the conditions set forth in Paragraph 1.3 are fulfilled, then in the event the Company enters into and consummates a Change of Control Transaction (as defined in Paragraph 1.2 below), the Key Executive shall be entitled to receive a cash bonus (the "Retention Bonus") in the amount of Three Hundred Fifty Thousand and no/100 Dollars ($350,000.00), payable promptly upon the fulfillment of the conditions set forth in Paragraph 1.3, herein. The Retention Bonus shall be paid by the acquiring company to the Key -1- 2 Employee but not out of the sales proceeds payable to the Company, HFHI or its selling stockholders. 1.2 Change of Control Defined. For purposes of this Agreement, and at any time during the term hereof, the term Change of Control shall mean any of the following occurrences: (i) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of sixty-seven percent (67.0%) or more of the combined voting power of the Company's then outstanding Voting Securities; (ii) Approval by the board of directors or, if required due to the magnitude and materiality of the transaction, by the shareholders of the Company of: (1) a merger, consolidation or reorganization involving the Company; (2) a complete liquidation or dissolution of the Company; or (3) an agreement for the sale or other disposition of all or substantially all (as defined herein below) of the assets of the Company to any Person; or (iii) Approval by the board of directors or, if required due to the magnitude and materiality of the transaction, by the shareholders of the Company, of the sale of either the stock or substantially all (as defined herein below) of the assets of The Heart Institute of Port St. Lucie, Inc., a subsidiary of the Company (hereinafter the "Business Unit"). (iv) For purposes of this Agreement the term "substantially all" shall include but not be limited to any disposition of a Business Unit or series of dispositions of Business Units or other assets that collectively generated at least sixty-seven percent (67.0%) of the Business Unit's revenues or profits (as measured by the Business Unit's June 30, 1999 financial statements, a copy of which are attached hereto as Exhibit 1.2. 1.3 Conditions for Receipt of the Retention Bonus. In order to receive the Retention Bonus set forth in Paragraph 1.1, above, the following conditions must be met in their entirety: -2- 3 (a) The Key Executive must be continuously employed by the Company through the closing of the Change of Control Transaction; and (b) The Key Executive must continue to be continuously employed by the Company, The Heart Institute of Port St. Lucie, the acquiring company or another affiliate of the acquiring company during the six-month period following the closing of the Change of Control Transaction, unless the failure to be so employed is a result of (i) his involuntary termination by the Company other than for cause, or (ii) his voluntary termination following a constructive termination (i.e., demotion, reduction in responsibilities, forced relocation or reduction in base salary). 1.4 Reduction. The Retention Bonus payable to the Key Executive shall be reduced in an amount equal to any severance payments paid to such Key Executive under the terms of any Company policy regarding severance benefits or any existing employment agreement between the Key Executive and the Company. 1.5 Acceleration of Option Vesting. The option agreements between the Company and the Key Executive shall be amended to provide that the vesting of all outstanding options to purchase the Company's common stock shall be accelerated so that such options will vest and become exercisable, in full, upon the closing of the Change of Control Transaction. 1.6 Annual Bonus. The Retention Bonus is not intended to replace the Company's existing annual incentive bonus program, which shall continue to be administered in accordance with the Company's existing policies. 1.7 Not an Employment Agreement. This Key Management Retention Agreement is not an employment agreement and is in addition to, and not in substitution for, any rights that the Key Executive may have under an existing employment agreement, if any. 1.8 Term. The term of this Agreement shall be twelve (12) calendar months from the Effective Date of this Agreement. 2. General. 2.1 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of and be binding upon the Company, the Key Executive and each and all of their respective heirs, legal representatives, successors and assigns. The duties, responsibilities and obligations of the Key Executive under this Agreement -3- 4 shall be personal and not assignable or delegable by the Key Executive in any manner whatsoever to any person, corporation, partnerships, firm, company, joint venture or other entity. The Key Executive may not assign, transfer, convey, mortgage, pledge or in any other manner encumber the compensation or other benefits to be received by him or any rights which he may have pursuant to the terms and provisions of this Agreement. Notwithstanding the foregoing, the Company covenants and agrees to require that any successor to the Company and any person acquiring the Company's shares through a Change of Control shall agree to honor the obligation of the Company under this Agreement. Furthermore, the Company will insure such safeguards as would be reasonably expected to insure compliance with the aforementioned obligation. 2.2 Waiver. No waiver of any breach of any warranty, representation, agreement, promise, covenant, paragraph, term or provision of this Agreement shall be deemed to be a waiver of any proceeding or succeeding breach of the same or any other warranty, representation, agreement, promise, covenant, paragraph, term and/or provision of this Agreement. No extension of the time for the performance of any obligation or other act required or permitted by this Agreement shall be deemed to be an extension of the time of the performance of any other obligation or any other act required or permitted by this Agreement. 2.3 Sole and Entire Agreement. This Agreement, and the other agreements referred to herein, including the Company's benefit plans, are the sole, complete and entire contract, agreement and understanding between the Company and the Key Executive concerning the Retention Bonus. Except as otherwise provided herein, the Agreement supersedes any and all prior contracts, agreements, plans, agreements in principle, correspondence, letters of intent, understandings, and negotiations, whether oral or written, concerning the Retention Bonus. 2.4 Amendments. No amendment, modification, waiver, or consent relating to this Agreement will be effective unless and until it is embodied in a written document signed by the Company and by the Key Executive. 2.5 Originals. The Agreement may be executed by the Company and by the Key Executive in counterparts, each of which shall be deemed an original and which together shall constitute one instrument. 2.6 Headings. Each and all of the headings contained in this Agreement are for reference purposes only and shall not in any manner whatsoever affect the construction or interpretation of this Agreement or be deemed a part of this Agreement for any purpose whatsoever. -4- 5 2.7 Savings Provision. To the extent that any provisions of this Agreement or any Paragraph, term, provision, sentence, phrase, clause or word of this Agreement shall be found to be illegal or unenforceable for any reason, such Paragraph, term, provision, sentence, phrase, clause or word shall be modified or deleted in such a manner as to make this Agreement, as so modified, legal and enforceable under applicable laws. The remainder of this Agreement shall continue in full force and effect. 2.8 Applicable Law. This Agreement and each and every provision of this Agreement shall be interpreted solely pursuant to the internal laws of the State of California without regard to any conflicts of law principles thereof. 2.9 Construction. The language of this Agreement and of each and every paragraph, term and provisions of this Agreement shall, in all cases, for any and all purposes, and in any and all circumstances whatsoever be construed as a whole, according to its fair meaning, not strictly for or against the Key Executive or the Company, and with no regard whatsoever to the identity or status of any person or persons who drafted all or any portion of this Agreement. 2.10 Notices. Any notices to be given pursuant to this Agreement by either party to the other party may be effected by personal delivery or by registered or certified mail, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses stated below, but each party may change its or his address by written notice to the other in accordance with this Paragraph 2.10. Notices delivered personally shall be deemed received on the date of delivery. Notices delivered by mail shall be deemed received on the third business day after the mailing thereof. Mailed notices to the Key Executive shall be addressed as follows: David E. Wertheimer, M.D. ------------- Mailed notices to the Company shall be addressed as follows: Raytel Medical Corporation 2755 Campus Drive, Suite 200 San Mateo, California 94403-2515 Attention: Chief Executive Officer -5- 6 2.11 Arbitration. Except as otherwise expressly provided in this Agreement, any and all controversies, disputes and/or claims in any manner arising out of or relating to this Agreement shall be settled solely be arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Such arbitration proceeding shall take place in the state and county of the Company's office where the Key Executive is based. Judgment on any decision rendered by the arbitrator may be entered in any court having jurisdiction thereof. Each party shall bear its own attorney's fees and expenses and other costs in any arbitration proceeding. All administrative fees and the fee of the arbitrator shall be borne by the parties equally. Except as otherwise expressly provided in this Agreement, the arbitration provisions set forth above in this Paragraph 2.11 are intended by the Key Executive and by the Company to be absolutely exclusive for all purposes whatsoever, and applicable to each and every controversy, dispute and/or claim in any manner arising out o f or relating to this Agreement, the meaning, application and/or interpretation of this Agreement, any breach or claimed breach thereof and/or any voluntary or involuntary termination of this Agreement with or without cause, including, without limitation, any such controversy, dispute and/or claim which, if pursued through any state or federal court or administrative agency, would arise at law, in equity and/or pursuant to statutory, regulatory and/or common law rules, regardless of whether such dispute, controversy and/or claim would arise in and/or from contract, tort or any other legal and/or equitable theory or basis. Notwithstanding anything to the contrary contained in this Paragraph 2.11, the Company shall at all times have and retain the full, complete and unrestricted right to immediate and permanent injunctive and other relief. IN WITNESS THEREOF, the Company and the Key Executive have each duly executed this Agreement as of the date first set forth above. RAYTEL MEDICAL CORPORATION KEY EXECUTIVE By: /s/ RICHARD F. BADER /s/ DAVID E. WERTHEIMER ------------------------------------- ----------------------------------- Richard F. Bader David E. Wertheimer, M.D. Its: Chairman and Chief Executive Officer -6- EX-10.62 6 EX-10.62 1 EXHIBIT 10.62 KEY MANAGEMENT RETENTION AGREEMENT THIS KEY MANAGEMENT RETENTION AGREEMENT (the "Agreement"), dated September 1, 1999 (the "Effective Date"), is made and entered into by and between RAYTEL MEDICAL CORPORATION, a Delaware corporation (the "Company"), and John Lawler (the "Key Executive"). RECITALS A. The Company desires to continue the employment of the Key Executive as its Vice President and as the Vice President of Raytel Cardiac Services, Inc., a Delaware corporation ("RCS") on the same terms and conditions under which the Key Executive is now employed, and the Key Executive desires to accept such continued employment. B. The employment of the Key Executive by the Company is supplemented pursuant to this Agreement, which provides for a retention and severance arrangement in the event there is a change of control transaction (as that term is defined in Paragraph 1.2, herein); and C. The Company and the Key Executive hereby enter into this Agreement setting forth each and all of the terms and conditions of the retention and severance arrangement. NOW THEREFORE, in consideration of the premises and the agreements, representations and warranties, contained in this Agreement, the Company and the Key Executive hereby agree as follows: AGREEMENT 1. Retention and Severance Arrangement. 1.1 Retention Bonuses. Provided that the conditions set forth in Paragraph 1.3 are fulfilled, then in the event the Company enters into and consummates a Change of Control Transaction (as defined in Paragraph 1.2 below), the Key Executive shall be entitled to receive a cash bonus (the "Retention Bonus") in the amount of One Hundred Fifty Thousand and no/100 Dollars ($150,000.00), payable promptly upon the fulfillment of the conditions set forth in Paragraph 1.3, herein. The Retention Bonus shall be paid by the acquiring company to the Key -1- 2 Executive but not out of the sales proceeds payable to the Company or its selling stockholders. 1.2 Change of Control Defined. For purposes of this Agreement, and at any time during the term hereof, the term Change of Control shall mean any of the following occurrences: (i) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of sixty-seven percent (67.0%) or more of the combined voting power of the Company's then outstanding Voting Securities; or (ii) Approval by the board of directors or, if required due to the magnitude and materiality of the transaction, by the shareholders of the Company of: (1) a merger, consolidation or reorganization involving the Company; (2) a complete liquidation or dissolution of the Company; or (3) an agreement for the sale or other disposition of all of the assets of the Company to any Person. 1.3 Conditions for Receipt of the Retention Bonus. In order to receive the Retention Bonus set forth in Paragraph 1.1, above, the following conditions must be met in their entirety: (a) The Key Executive must be continuously employed by the Company through the closing of the Change of Control Transaction; and (b) The Key Executive must continue to be continuously employed by the Company, Raytel Cardiac Services, Inc., the acquiring company or another affiliate of the acquiring company during the six-month period following the closing of the Change of Control Transaction, unless the failure to be so employed is a result of (i) his involuntary termination by the Company other than for cause, or (ii) his voluntary termination following a constructive termination (i.e., demotion, reduction in responsibilities, forced relocation or reduction in base salary). -2- 3 1.4 Reduction. The Retention Bonus payable to the Key Executive shall be reduced in an amount equal to any severance payments paid to such Key Executive under the terms of any Company policy regarding severance benefits or any existing employment agreement between the Key Executive and the Company. 1.5 Acceleration of Option Vesting. The option agreements between the Company and the Key Executive shall be amended to provide that the vesting of all outstanding options to purchase the Company's common stock shall be accelerated so that such options will vest and become exercisable, in full, upon the closing of the Change of Control Transaction. 1.6 Annual Bonus. The Retention Bonus is not intended to replace the Company's existing annual incentive bonus program, which shall continue to be administered in accordance with the Company's existing policies. 1.7 Not an Employment Agreement. This Key Management Retention Agreement is not an employment agreement and is in addition to, and not in substitution for, any rights that the Key Executive may have under an existing employment agreement, if any. 1.8 Term. The term of this Agreement shall be twelve (12) calendar months from the Effective Date of this Agreement. 2. General. 2.1 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of and be binding upon the Company, the Key Executive and each and all of their respective heirs, legal representatives, successors and assigns. The duties, responsibilities and obligations of the Key Executive under this Agreement shall be personal and not assignable or delegable by the Key Executive in any manner whatsoever to any person, corporation, partnerships, firm, company, joint venture or other entity. The Key Executive may not assign, transfer, convey, mortgage, pledge or in any other manner encumber the compensation or other benefits to be received by him or any rights which he may have pursuant to the terms and provisions of this Agreement. Notwithstanding the foregoing, the Company covenants and agrees to require that any successor to the Company and any person acquiring the Company's shares through a Change of Control shall agree to honor the obligation of the Company under this Agreement. Furthermore, the Company will insure such safeguards as would be reasonably expected to insure compliance with the aforementioned obligation. 2.2 Waiver. No waiver of any breach of any warranty, representation, agreement, promise, covenant, paragraph, term or provision of this -3- 4 Agreement shall be deemed to be a waiver of any proceeding or succeeding breach of the same or any other warranty, representation, agreement, promise, covenant, paragraph, term and/or provision of this Agreement. No extension of the time for the performance of any obligation or other act required or permitted by this Agreement shall be deemed to be an extension of the time of the performance of any other obligation or any other act required or permitted by this Agreement. 2.3 Sole and Entire Agreement. This Agreement, and the other agreements referred to herein, including the Company's benefit plans, are the sole, complete and entire contract, agreement and understanding between the Company and the Key Executive concerning the Retention Bonus. Except as otherwise provided herein, the Agreement supersedes any and all prior contracts, agreements, plans, agreements in principle, correspondence, letters of intent, understandings, and negotiations, whether oral or written, concerning the Retention Bonus. 2.4 Amendments. No amendment, modification, waiver, or consent relating to this Agreement will be effective unless and until it is embodied in a written document signed by the Company and by the Key Executive. 2.5 Originals. The Agreement may be executed by the Company and by the Key Executive in counterparts, each of which shall be deemed an original and which together shall constitute one instrument. 2.6 Headings. Each and all of the headings contained in this Agreement are for reference purposes only and shall not in any manner whatsoever affect the construction or interpretation of this Agreement or be deemed a part of this Agreement for any purpose whatsoever. 2.7 Savings Provision. To the extent that any provisions of this Agreement or any Paragraph, term, provision, sentence, phrase, clause or word of this Agreement shall be found to be illegal or unenforceable for any reason, such Paragraph, term, provision, sentence, phrase, clause or word shall be modified or deleted in such a manner as to make this Agreement, as so modified, legal and enforceable under applicable laws. The remainder of this Agreement shall continue in full force and effect. 2.8 Applicable Law. This Agreement and each and every provision of this Agreement shall be interpreted solely pursuant to the internal laws of the State of California without regard to any conflicts of law principles thereof. 2.9 Construction. The language of this Agreement and of each and every paragraph, term and provisions of this Agreement shall, in all cases, for any and all purposes, and in any and all circumstances whatsoever be construed as a -4- 5 whole, according to its fair meaning, not strictly for or against the Key Executive or the Company, and with no regard whatsoever to the identity or status of any person or persons who drafted all or any portion of this Agreement. 2.10 Notices. Any notices to be given pursuant to this Agreement by either party to the other party may be effected by personal delivery or by registered or certified mail, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses stated below, but each party may change its or his address by written notice to the other in accordance with this Paragraph 2.10. Notices delivered personally shall be deemed received on the date of delivery. Notices delivered by mail shall be deemed received on the third business day after the mailing thereof. Mailed notices to the Key Executive shall be addressed as follows: John Lawler ------------- Mailed notices to the Company shall be addressed as follows: Raytel Medical Corporation 2755 Campus Drive, Suite 200 San Mateo, California 94403-2515 Attention: Chief Executive Officer 2.11 Arbitration. Except as otherwise expressly provided in this Agreement, any and all controversies, disputes and/or claims in any manner arising out of or relating to this Agreement shall be settled solely be arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Such arbitration proceeding shall take place in the state and county of the Company's office where the Key Executive is based. Judgment on any decision rendered by the arbitrator may be entered in any court having jurisdiction thereof. Each party shall bear its own attorney's fees and expenses and other costs in any arbitration proceeding. All administrative fees and the fee of the arbitrator shall be borne by the parties equally. Except as otherwise expressly provided in this Agreement, the arbitration provisions set forth above in this Paragraph 2.11 are intended by the Key Executive and by the Company to be absolutely exclusive for all purposes whatsoever, and applicable to each and every controversy, dispute and/or claim in any manner arising out o f or relating to this Agreement, the meaning, application and/or interpretation of this Agreement, any breach or claimed breach thereof and/or any voluntary or involuntary termination of this Agreement with or without cause, -5- 6 including, without limitation, any such controversy, dispute and/or claim which, if pursued through any state or federal court or administrative agency, would arise at law, in equity and/or pursuant to statutory, regulatory and/or common law rules, regardless of whether such dispute, controversy and/or claim would arise in and/or from contract, tort or any other legal and/or equitable theory or basis. Notwithstanding anything to the contrary contained in this Paragraph 2.11, the Company shall at all times have and retain the full, complete and unrestricted right to immediate and permanent injunctive and other relief. IN WITNESS THEREOF, the Company and the Key Executive have each duly executed this Agreement as of the date first set forth above. RAYTEL MEDICAL CORPORATION KEY EXECUTIVE By: /s/ RICHARD F. BADER /s/ JOHN LAWLER ------------------------------------- ----------------------------------- Richard F. Bader John Lawler Its: Chairman and Chief Executive Officer -6- EX-13.1 7 EX-13.1 1 EXHIBIT 13.1 www.raytel.com MEDICAL INFORMATION PATIENT CARE MANAGEMENT RAYTEL MEDICAL CORPORATION 1999 ANNUAL REPORT 2 COMPANY PROFILE RAYTEL MEDICAL CORPORATION is the leading provider of services and efficient dissemination of technical information to physicians and patients with cardiovascular disease. These services include remote cardiac monitoring and testing services utilizing transtelephonic technology and various Internet initiatives, as well as cardiovascular centers of excellence and ambulatory diagnostic imaging centers, nationwide. Raytel's imaging operations include MRI, CT and other radiological exams provided in convenient, state-of-the-art facilities. Our imaging operations also include a network with over 550 multi-modality diagnostic imaging facilities located throughout the East Coast. The network provides services to over 600,000 beneficiaries participating in occupational injury and management programs and group health plans. The Internet initiatives, which are available to over 12,000 physicians who routinely use Raytel's monitoring services, include test results, patient records, medical books, physician office supplies and information on pharmaceuticals, implantable devices and other medical technology. The information Raytel supplies includes a combination of patient data, test results, and diagnostic quality imaging including ECGs and cardiac angiograms. Raytel has a database of more than 500 different pacemaker models, which it relies upon in the preparation of this information. TOTAL REVENUES [BAR CHART] OPERATING INCOME [BAR CHART] NET INCOME [BAR CHART] STOCKHOLDERS' EQUITY [BAR CHART] 3 TO THE RAYTEL STOCKHOLDERS: As we move into a new millennium, we can reflect on 1999 as a year of transition for Raytel Medical Corporation. Several external factors, including changes in governmental policy and Y2K concerns, had an impact on our operations this year. Reimbursement from Medicare was reduced by approximately 5% at the beginning of the year. Government regulations that redefined questionable relationships prompted our Company to rewrite contracts with hospitals and change relationships with doctors. Y2K issues became important to resolve, particularly in light of the Company's commitment to automation. Also this year, Raytel's President/Chief Operating Officer made the decision to retire, an internal change that has resulted in transition within Raytel, as well. Taking into account these events, the management of the Company continued its dedication to enhancing shareholder value by retaining U.S. Bancorp Piper Jaffray as its financial advisor to assist the Company in considering a range of strategic alternatives for maximizing shareholder value. Competitive pressures within the cardiac monitoring environment have also contributed some deterioration in the average procedure selling price -- across all product lines. In response, Raytel has taken positive actions over the last year, which have resulted in an improvement in our market share. In keeping with our commitment to automation going into the new millennium, we have fully automated our Cardiac Event Detection (CED) operating system and have expanded our Web-based Patient Management Database (PMD) system to enable our physicians to store and retrieve medical records over the secured Internet site (WWW.PMD.RAYTEL.COM). We expect to introduce the second generation Pacemaker monitoring system during Raytel's second quarter. The number of patients receiving our cardiac monitoring services has steadily increased from earlier this year and in comparison to the same quarter last year. Although 1999 has been a transitional year with many factors impacting our operations, the cardiac monitoring operations continue to yield strong cash flows. While Raytel's pacemaker monitoring business has been increasing in volume, due to Medicare price reductions last year, we experienced a decrease in average selling price. Revenues, therefore, have been relatively flat on a quarter-to-quarter basis despite pacemaker patient volume being higher than we have experienced in the last 12 months. With the recent announcement of Medicare rates for the year 2000 in the Federal Register, we anticipate posting an increase in revenue for pacemaker monitoring and cardiac event detection operations next calendar year. Depending upon the region, reimbursement for pacemakers in the year 2000 will either remain the same as last year or increase slightly, while cardiac event detection reimbursement will be increased. High expenditures associated with our automated second-generation pacemaker monitoring system continued throughout this past year. We expect to have our present pacemaker system replaced with the new system in the early part of calendar year 2000. We also expect to reduce our MIS expenditures in FY 2000 by at least $1 million with the completion of these projects. Although cardiac event detection continued to experience increased patient volume during the year, it also continued to experience decreases in price. The effect this will have on the market is not easy to predict, however, we believe that it will present a major opportunity for Raytel over the next six months. We anticipate stabilization of the average selling price next year partially due to the increase in reimbursement from Medicare. Despite some market uncertainty, we expect to see improvement in cash flow and profits due to increased reimbursement, and the deployment of our new automated monitoring system. This new system should be stable and completely implemented by the end of the year. Our diagnostic imaging centers have been solid performers through 1999 and I am pleased to say that trend is continuing. This can be attributed to our commitment to upgrading and maintaining state-of-the-art diagnostic equipment at our facilities and the addition of new modalities at some locations. Two Raytel centers in the Philadelphia area performed exceptionally well this past fiscal year due to increased volumes from the MRI units that had been installed at both locations. Despite an increase in new competition surrounding our Queens, NY, facility, the Center has successfully returned to its previous substantial volume levels. This year, Raytel acquired the nuclear imaging services that had previously been leased to a third party at the Queens facility, which has further enhanced the Center's revenue. We are also pleased to announce that in the first quarter of year 2000, Raytel will be opening a new MRI facility in Pennsylvania and a satellite facility offering x-ray and ultrasound services in New Jersey, further expanding our network of diagnostic imaging facilities nationwide. Raytel's imaging network also continues to perform and had another banner year, increasing both profits and revenue. From a concept developed in a strategic planning meeting seven years ago, the network has developed a solid reputation for quality and dependability that has not been equaled by its competitors. New partnerships being developed will further enhance the value of this initiative. The continued application of our conservative accounting policies resulted in increased contractual allowances at our Port St. Lucie, FL, practice reducing what would have been an otherwise sterling performance, however, Raytel's heart center and physician management sector reported a good year. Our physician practice management operations in Port St. Lucie, FL, and Beaumont, TX, reported slight increases in revenues over the prior year's quarter. A contributing factor to this increase in revenues for the quarter was the installation of a complete imaging center, including MRI, at the Port St. Lucie, FL, location. We continued to focus on operational improvements at all our facility locations. As a result, we have streamlined PAGE 2 * WWW.RAYTEL.COM 4 our Florida facility by reducing administrative costs and improving operating efficiencies. Our physician practice management operations in Beaumont, TX, and Granada Hills, CA, contributed operating profits for the year, however, cash contribution was minimal due to the investment in new physicians. We continued to see contributions to operations from our revised agreement with Baptist Hospital, Beaumont, TX. During the last quarter of 1999, the congestive heart failure clinic began operations and the lipid management clinic experienced a continued increase in volume. While the revised agreement at Granada Hills, CA, materially reduced our revenue for the year, the contract is successfully producing profits and continued cash flow. In preparation for Y2K and in an effort to improve the efficiency of our billing and collection department, we purchased a billing system from an outside vendor to replace the Raytel developed system. After a year, the conversion of all the files in the existing system to the new system still is not complete. Consequently, we have been forced to upgrade the existing system. Although the expenditure was significantly greater than expected, I am happy to report the conversion was successful and Raytel has the time to properly convert the remainder of the files to the new system. When completed, all tests will be taken by computer and the testing and billing systems will be able to communicate effectively reducing labor and improving the efficiency of the billing department and decreasing the length of time necessary to collect outstanding receivables. Other significant developments during the year included the introduction of three new initiatives. FIRST, Raytel and St. Jude Medical jointly launched the Housecall(TM) Transtelephonic Monitoring System, the first commercially available system capable of downloading a complete set of diagnostic data from an implantable cardioverterdefibrillator (ICD) via the telephone. Under an exclusive agreement with St. Jude Medical, Raytel will manufacture the Housecall(TM) transmitters and receiving units. This monitoring system for Pacesetter ICD devices was recently approved by the FDA and was jointly announced at the American Heart Association this past November. Development of the Housecall(TM) System for remote telephonic ICD monitoring is a technological expansion of our business and marks Raytel's entry into the ICD monitoring market. SECOND, we have started clinical tests involving transtelephonic monitoring of heart valve patients in a joint venture with Sulzer Carbomedics, the world's leader in mechanical heart valves. Raytel will provide the surveillance and reporting of home test results for the Sulzer Carbomedics INRange(TM) Monitored Heart Valve. Applying Raytel's proven ability to remotely monitor heart patients to the anticoagulated patient is an exciting development in the use of patient surveillance technology to improve clinical outcomes. Collaborating on the INRange(TM) Monitored Heart Valve System is a logical extension of our current lines of business. THIRD, we introduced the second-generation of our Internet-based clinical test reporting system (WWW.PMD.RAYTEL.COM), which offers over 12,000 physicians who routinely use Raytel's monitoring services access to free e-mail, medical books at discounted prices, and other medical supplies and equipment for their practices. The service was officially launched by Raytel at the American Heart Association this past November. Raytel's enhanced Internet-based system is the first in a series of Web-based clinical and practice management tools that Raytel will be offering to physicians. As I noted at the beginning of this letter, Allan Zinberg, President and Chief Operating Officer of Raytel will retire at the end of the calendar year. Allan has provided invaluable management and leadership to the Company over the last 25 years, leading the Company before Raytel acquired it in 1990. I am confident that our strong executive team will manage this transition smoothly. We will continue to have the advantage of Allan's knowledge and experience on the Board of Directors after his retirement. I want to express the Company's gratitude for the efforts he has expended during this time. We wish him well. As a result of Allan's decision to retire, I have temporarily assumed his responsibilities. The primary objective for this fiscal year is to work with investment bankers hired by the Company to improve shareholder value. My first operational priority is to improve our automation programs so that our expectations of the system are met and we realize the efficiency improvements that we project. My second priority is to improve telephonic monitoring sales through aggressive marketing activities and our continued commitment to the highest level of service to our physicians and their patients. FY 1999 was certainly a year of transition for Raytel. As we enter into a new millennium, I am looking forward to enjoying the fruits of some of the investments we have made and the new initiatives we are implementing to further enhance Raytel's revenues. We welcome you to follow our progress by visiting us on our web site at WWW.RAYTEL.COM. Finally, I wish to extend my deepest thanks and appreciation to the Raytel employees, referring physicians, and the patients and the hospitals who use our service and who have contributed to our success this past year. Sincerely, /s/ RICHARD F. BADER Richard F. Bader Chairman and Chief Executive Officer WWW.RAYTEL.COM * PAGE 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
6 FIVE YEAR FINANCIAL SUMMARY
Fiscal Year Ended September 30, - ------------------------------------------------------------------------------------------------------------------------- (000's omitted, except per share data) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Cardiac information services $ 44,731 $ 46,171 $ 47,227 $ 43,649 $ 41,384 Diagnostic imaging service 20,143 19,977 17,610 19,970 20,516 Heart facilities and other 36,520 41,481 18,578 8,896 1,562 --------------------------------------------------------------------- Total revenues 101,394 107,629 83,415 72,515 63,462 Operating costs and selling, general and administrative expenses 81,538 85,633 63,273 56,412 47,353 Depreciation and amortization 8,475 8,282 6,306 5,590 5,806 Non-recurring tender offer expense -- -- -- -- 1,050 --------------------------------------------------------------------- Operating income 11,381 13,714 13,836 10,513 9,253 Interest expense 2,619 2,990 785 514 2,118 Other (income) (1,011) (511) (3,076) (591) (347) Minority interest 1,000 1,273 485 762 1,161 --------------------------------------------------------------------- Income before income taxes 8,773 9,962 15,642 9,828 6,321 Provision for income taxes 3,419 3,869 6,257 3,248 1,960 --------------------------------------------------------------------- Income before extraordinary item 5,354 6,093 9,385 6,580 4,361 Extraordinary item, net of related tax benefit -- -- 721 449 -- --------------------------------------------------------------------- Net income $ 5,354 $ 6,093 $ 8,664 $ 6,131 $ 4,361 --------------------------------------------------------------------- Net income per share before extraordinary item: Basic $ .61 $ .69 $ 1.11 $ .86 $ .84 --------------------------------------------------------------------- Diluted $ .59 $ .66 $ 1.04 $ .80 $ .78 --------------------------------------------------------------------- Net income per share: Basic $ .61 $ .69 $ 1.02 $ .80 $ .84 --------------------------------------------------------------------- Diluted $ .59 $ .66 $ .96 $ .75 $ .78 --------------------------------------------------------------------- Weighted average shares outstanding: Basic 8,711 8,879 8,458 7,623 5,210 --------------------------------------------------------------------- Diluted 9,040 9,294 9,039 8,194 5,617 --------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET DATA: Total assets $ 117,783 $ 122,186 $ 119,421 $ 68,030 $ 46,768 Long-term debt and capital lease obligations(1) 29,370 36,997 36,354 7,576 14,550 Total stockholders' equity 72,029 66,491 61,899 48,878 21,499
(1) Includes current portion of long-term debt and capital lease obligations. WWW.RAYTEL.COM * PAGE 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 Section, that could cause actual results to differ materially from historical results or those anticipated. In this Section, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. OVERVIEW The Company generates the majority of its revenues from cardiac information services which includes telephonic monitoring services for cardiac pacemaker patients ("Pacing"), cardiac event detection services ("CEDS") and Holter, diagnostic imaging services and from heart facilities. Following the Company's initial public offering in December 1995, the Company has entered into a series of transactions which have expanded its heart center and physician practice management businesses. As a result, revenue is also being provided from: the Raytel Heart Center at Granada Hills ("RHCGH") beginning on February 1, 1996; the management of Southeast Texas Cardiology Associates II P.A. ("SETCA") beginning on September 18, 1996; the management of Comprehensive Cardiology Consultants, a Medical Group, Inc. ("CCMG") beginning on November 1, 1996; and Cardiovascular Ventures, Inc. ("CVI") beginning on August 15, 1997, which included the multi-specialty medical clinic, Heart and Family Health Institute ("HFHI") and seven cardiovascular diagnostic facilities. The Company's investments in two ventures ("Ventures") that operated four of the consolidated diagnostic imaging centers expired during fiscal 1997. Revenue contributed by these ventures was $1,318,000 for the year ended September 30, 1997. On October 18, 1996, the Company, through a subsidiary, entered into a long-term management service agreement whereby the Company will manage the non-medical aspects of the CCMG practice. Total consideration for the transaction was cash of $427,000, promissory notes of $620,000 and 14,376 shares of the Company's Common Stock to be delivered at future dates, valued at $91,000 (which represents a discount from the trading price of the stock at the time of the transaction due primarily to the delay in the delivery of the shares). In September 1996, the Company received a favorable administrative decision related to a billing dispute with a New York Medicare carrier whereby it was entitled to receive approximately $4.0 million. The time period for the Healthcare Finance Administration ("HCFA") and the Social Security Administration to file an appeal expired on February 10, 1997. After accounting for administrative costs and reimbursements due to Medtronic under the terms of the acquisition of CardioCare and a separate provision against the value of a non-operating asset, the Company recognized other income of $2,510,000 pretax in its second fiscal quarter ending March 31, 1997, with a positive after tax effect of $1,506,000 or $.17 per share (the "Decision"). Under certain practice management contracts, revenues are recognized pursuant to long-term arrangements with physician groups under which the Company provides the physician group with a full range of services, including, but not limited to, office space, specialized clinical and procedural facilities, medical equipment, data processing and medical record keeping, billing and collection procedures and services, non-physician licensed personnel, such as nurses and technicians, as well as office staff and administrative personnel. In the case of SETCA and CCMG, the Company's practice management revenues are derived from the physician groups' revenues, generally as a purchased service, except for certain physician compensation and employment benefits, which are paid by the physician group on a priority basis. Under the above management services arrangements, the Company's practice management revenues represent PAGE 6 * WWW.RAYTEL.COM 8 approximately 71%, 56% and 56% of the revenues of the physician groups for the years ended September 30, 1999, 1998 and 1997, respectively. 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 costs of approximately $16,980,000, and 500,000 shares of Raytel Common Stock. During fiscal 1998, there were additional transaction costs of approximately $280,000 and an additional 46,668 shares of the Company's Common Stock has been or will be issued. The contingent promissory notes in the aggregate principal amount of $820,000 were cancelled in accordance with the terms of the agreement. On October 9, 1997, the Company announced it had entered into an agreement with The Baptist Hospital of Southeast Texas ("Baptist") to develop a Raytel Cardiovascular Center at the hospital. Under the agreement, Raytel was to manage the cardiovascular center, which would provide the entire continuum of cardiovascular services, including diagnostic, therapeutic and patient management programs. Among other duties, Raytel was to be responsible for the day-to-day operations of the heart center, including administrative support, information systems management, marketing and public relations activities. The Company began operations at Baptist during its fourth quarter of fiscal 1998. Due to the recent merger between Baptist and the Memorial Hermann Hospital System, a modified agreement became effective March 1, 1999. Therefore, during the first five months of fiscal 1999, the Company only recognized revenue to the extent of expenses. Effective March 1, 1999, the Company is recognizing revenue based on the modified agreement which calls for the Company to manage portions of the cardiovascular surgery and cardiology programs at Baptist and to develop and manage specialty clinics to support the cardiovascular program. Effective March 27, 1999, the Company entered into a revised agreement with RHCGH. The new agreement will result in significantly lower revenues and expenses than revenues and expenses recognized under the previous agreements. However, under the new agreement, the Company expects to generate operating income. Under the old agreements, operating expenses were in excess of revenues. 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, - ----------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------- Total revenues 100.0% 100.0% 100.0% Operating costs and selling, general and administrative expenses 80.4 79.6 75.9 Depreciation and amortization 8.4 7.7 7.6 ----------------------------- Operating income 11.2 12.7 16.5 Interest expense and other (income) expense 1.6 2.3 (2.8) Minority interest .9 1.2 .5 ----------------------------- Income before income taxes 8.7 9.2 18.8 Provision for income taxes 3.4 3.6 7.5 ----------------------------- Income before extraordinary item 5.3 5.6 11.3 Extraordinary item -- -- .9 ----------------------------- Net income 5.3% 5.6% 10.4% -----------------------------
WWW.RAYTEL.COM * PAGE 7 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1998 REVENUES. Cardiac information services revenues decreased by $1,440,000, or 3.1%, from $46,171,000 in fiscal 1998 to $44,731,000 in fiscal 1999, due primarily to slight decreases in Pacing and CEDS revenue. Diagnostic imaging service revenues increased by $166,000 or .8%, from $19,977,000 in fiscal 1998 to $20,143,000 in fiscal 1999. Heart facilities and other revenues decreased by $4,961,000 or 12.0% from $41,481,000 in fiscal 1998 to $36,520,000 in fiscal 1999 due primarily to lower revenues at RHCGH due to the amended agreement. As a result of the foregoing factors, total revenues decreased by $6,235,000, or 5.8%, from $107,629,000, in fiscal 1998 to $101,394,000 in fiscal 1999. OPERATING EXPENSES. Operating costs and selling, general and administrative expenses decreased by $4,095,000, or 4.8%, from $85,633,000 in fiscal 1998 to $81,538,000 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 79.6% in fiscal 1998 to 80.4% 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 $193,000, or 2.3%, from $8,282,000 in fiscal 1998 to $8,475,000 in fiscal 1999 and increased as a percentage of revenues from 7.7% in fiscal 1998 to 8.4% in fiscal 1999. OPERATING INCOME. As a result of the foregoing factors, operating income decreased by $2,333,000, or 17.0%, from $13,714,000 in fiscal 1998 to $11,381,000 in fiscal 1999. INTEREST EXPENSE. Interest expense decreased by $371,000, or 12.4%, from $2,990,000 in fiscal 1998 to $2,619,000 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 $500,000 from $511,000 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 $450,000, or 11.6%, from $3,869,000 in fiscal 1998 to $3,419,000 in fiscal 1999 as a result of decreased taxable income. 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. FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1997 The operations of CVI are included in the Company's Consolidated Statements of Operations since August 15, 1997, the effective date of the Company's acquisition of CVI. Accordingly, such results are included for fiscal 1998, but are only included for 45 days of fiscal 1997. REVENUES. Cardiac information services revenues decreased by $1,056,000, or 2.2%, from $47,227,000 in fiscal 1997 to $46,171,000 in fiscal 1998, due primarily to a combination of competitive pressures and lower reimbursement rates for CEDS. Diagnostic imaging service revenues increased by $2,367,000, or 13.4%, from $17,610,000 in fiscal 1997 to $19,977,000 in fiscal 1998 due primarily to increases in revenues at certain centers due to an increase in volume, partially offset by decreased revenues due to the termination of two Ventures in fiscal 1997. Heart Facilities and other revenues increased by $22,903,000, or 123.3%, from $18,578,000 in fiscal 1997 to $41,481,000 in fiscal 1998 due primarily to the inclusion of revenues from CVI. PAGE 8 * WWW.RAYTEL.COM 10 As a result of the foregoing factors, total revenues increased by $24,214,000, or 29.0%, from $83,415,000 in fiscal 1997 to $107,629,000 in fiscal 1998. OPERATING EXPENSES. Operating costs and selling, general and administrative expenses increased by $22,360,000, or 35.3%, from $63,273,000 in fiscal 1997 to $85,633,000 in fiscal 1998, due primarily to the inclusion of costs and expenses from CVI. Operating costs and selling, general and administrative expenses as a percentage of total revenues increased from 75.9% in fiscal 1997 to 79.6% in fiscal 1998 due primarily to the inclusion of revenues and costs and expenses from CVI. At RHCGH operating expenses were slightly in excess of revenues for both fiscal years. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by $1,976,000, or 31.3%, from $6,306,000 in fiscal 1997 to $8,282,000 in fiscal 1998, due primarily to the inclusion of CVI, but remained relatively unchanged as a percentage of revenues. OPERATING INCOME. As a result of the foregoing factors, operating income decreased by $122,000, or 0.9%, from $13,836,000 in fiscal 1997 to $13,714,000 in fiscal 1998. INTEREST EXPENSE. Interest expense increased by $2,205,000, or 280.9%, from $785,000 in fiscal 1997 to $2,990,000 in fiscal 1998 due primarily to an increase in debt due to the CVI acquisition. OTHER EXPENSE (INCOME). Other income decreased by $2,565,000 or 83.4% from $3,076,000 in fiscal 1997 to $511,000 in fiscal 1998 due primarily to non-recurring income resulting from the Decision. MINORITY INTEREST. Minority interest increased by $788,000, or 162.5%, from $485,000 in fiscal 1997 to $1,273,000 in fiscal 1998 due primarily to the inclusion of CVI. INCOME TAXES. The provision for income taxes decreased by $2,388,000, or 38.2%, from $6,257,000 in fiscal 1997 to $3,869,000 in fiscal 1998 as a result of decreased taxable income. EXTRAORDINARY ITEM. An extraordinary charge of $721,000, net of the related tax benefit, for the cost of restructuring certain indebtedness acquired with the CVI purchase was recorded during the year ended September 30, 1997. NET INCOME. As a result of the foregoing factors, net income decreased by $2,571,000, or 29.7%, from $8,664,000 in fiscal 1997 to $6,093,000 in fiscal 1998. BUSINESS ENVIRONMENT AND FUTURE RESULTS The Company's future operating results may be affected by various trends in the healthcare industry as well as by a variety of other factors, some of which are beyond the Company's control. The healthcare industry is undergoing significant change as third-party payors attempt to control the cost, utilization and delivery of healthcare services. Substantially all of the Company's revenues are derived from Medicare, HMOs, and commercial insurers and other third-party payors. Both government and private payment sources have instituted cost containment measures designed to limit payments made to healthcare providers by reducing reimbursement rates, limiting services covered, increasing utilization review of services, negotiating prospective or discounted contract pricing, adopting capitation strategies and seeking competitive bids. 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 WWW.RAYTEL.COM * PAGE 9 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS on Pacing revenue for the last three quarters of fiscal 1999. The Company cannot predict with any certainty whether or when additional reductions or changes in Medicare or other third-party reimbursement rates or policies will be implemented. There can be no assurance that future changes, if any, will not adversely affect the amounts or types of services that may be reimbursed to the Company, or that future reimbursement of any service offered by the Company will be sufficient to cover the costs and overhead allocated to such service. From time to time, Congress considers legislation to reduce Medicare and Medicaid expenditures. Future legislation of this type could have a material adverse effect on the Company's business, financial condition and operating results. Governmental agencies promulgate regulations which mandate changes in the method of delivering services which could have a material adverse effect on the Company's business. A key element of the Company's long-range strategy was the development and operation of integrated heart centers and the acquisition of healthcare providers specializing in cardiology related services and the assets of physician practices and other businesses related to its current operations. The success of the Company's existing heart centers and physician practices depends upon several factors, including the Company's ability to: obtain and operate in compliance with appropriate licenses; control costs and realize operating efficiencies; educate patients, referring physicians and third-party payors about the benefits of such heart centers; and provide cost-effective services that meet or exceed existing standards of care. An element of the Company's strategy is to expand, in part, through acquisitions and investments in complementary healthcare businesses. The implementation of this strategy may place significant strain on the Company's administrative, operational and financial resources and increased demands on its systems and controls. There can be no assurances that businesses acquired by the Company, either recently or in the future, will be integrated successfully and profitably into the Company's operations, that suitable acquisitions or investment opportunities will be identified, or that any such transactions can be consummated. Providers of healthcare services are subject to numerous federal, state and local laws and regulations that govern various aspects of their business. There can be no assurance that the Company will be able to obtain regulatory approvals that may be required to expand its services or that new laws or regulations will not be enacted or adopted that will have a material adverse effect on the Company's business, financial condition or operating results. The healthcare businesses in which the Company is engaged are highly competitive. The Company expects competition to increase as a result of ongoing consolidations and cost-containment pressures, among other factors. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in the Company's operating results, shortfalls in such operating results from levels forecasted by securities analysts and other events or factors. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations that have particularly affected the market prices of companies in the healthcare service industries and that have often been unrelated to the operating performance of the affected companies. Announcements of changes in reimbursement policies of third-party payors, legislative or regulatory developments, economic news and other external factors may have a significant impact on the market price of healthcare stocks. LIQUIDITY AND CAPITAL RESOURCES The Company acquired CDS in June 1996 for cash in the amount of $14,254,000, SETCA in September 1996 for cash in the amount of $4,010,000, CCMG in November 1996 for cash in the amount of $427,000 and CVI in August 1997 for cash in the amount of $16,980,000 plus $280,000 paid during fiscal 1998. At September 30, 1999, the Company had working capital of $28,599,000, compared to $31,168,000 at September 30, 1998. At September 30, 1999, the PAGE 10 * WWW.RAYTEL.COM 12 Company had cash and temporary cash investments of $6,110,000. At September 30, 1999, $19,047,000 was outstanding under the Company's line of credit. The Company batch-bills Medicare insurance carriers for most cardiac testing services performed during the first few months of each calendar year. This practice results in a temporary build-up of accounts receivable during the Company's second and third fiscal quarters and the collection of these receivables primarily during the subsequent fourth fiscal quarter. The Company has a revolving line of credit with two banks in the amount of $45,000,000 to fund working capital needs, future acquisitions, equipment purchases and other business needs. Amounts outstanding under the line of credit bear interest based on a defined formula and are subject to certain covenants. The line of credit expires in August 2001 at which time any outstanding balance will be due and payable. The Company's long-term capital requirements will depend on numerous factors, including the rate at which the Company develops and opens new heart centers or acquires existing heart centers, physician practices or other businesses, if any. The Company believes that its cash and cash equivalent balances, together with amounts available from bank borrowings and cash generated by its operating activities, will be adequate to meet the Company's anticipated needs for working capital and capital expenditures through fiscal 2000. YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the programming code in existing computer systems as the Year 2000 approaches. Many existing computer programs use only two digits instead of four to identify a year in the date field. The Company has completed a thorough review of its material computer applications. The Company has begun installation of a new billing and collection system and a new accounting system has been installed. These new systems are Year 2000 compliant. The Company had planned on replacing them regardless of the Year 2000 issue. There are other systems being used by the Company which may not be Year 2000 compliant, however, the Company anticipates that all such systems will be either replaced or made Year 2000 compliant before the Year 2000. There can be no assurances that any systems at companies purchased by or affiliated with the Company in the future will be Year 2000 compliant or, if not, will be converted on a timely basis. At the present time, the Company does not anticipate that any additional cost for it to become Year 2000 compliant will have a material impact on the Company's financial statements. The Company has initiated a program to determine whether the computer applications of its significant vendors will be upgraded in a timely manner. The Company has also initiated a program to determine whether embedded applications which control medical and other equipment will be affected. The Company has not yet completed these reviews. The Company has begun discussions with its payors to determine the status of their systems. Many of the Company's payors are related to the Federal government. The Federal government and its agents have made conflicting public statements regarding their ability to be Year 2000 compliant. The Company has no control over their ability to be compliant. The nature of the Company's business is such that any failure to these types of applications may have a material adverse effect on its business. Because of the many uncertainties associated with Year 2000 compliance issues, and because the Company's assessment is necessarily based on information from third-party vendors, payors and suppliers, there can be no assurance that the Company's assessment is correct or as to the materiality or effect of any failure of such assessment to be correct. At the present time, the Company has not developed a contingency plan relative to Year 2000 compliance. WWW.PAYTEL.COM * PAGE 11 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUALITATIVE 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, - ---------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------- Cardiac information services 44% 43% 57% Diagnostic imaging service 20% 19% 21% Heart facilities and other 36% 38% 22% ---------------------------- Total 100% 100% 100% ----------------------------
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
Fiscal Year Ended September 30, 1999 - ---------------------------------------------------------------------------------------------------------------------- (000's omitted, except per share amounts) December 31, March 31, June 30, September 30, - ---------------------------------------------------------------------------------------------------------------------- Net revenues $ 25,805 $ 27,056 $ 24,581 $ 23,952 ----------------------------------------------------------------------------------- Income before income taxes $ 2,213 $ 2,202 $ 2,190 $ 2,168 Provision for income taxes 863 859 854 843 ----------------------------------------------------------------------------------- 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 -----------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1998 - ---------------------------------------------------------------------------------------------------------------------- December 31, March 31, June 30, September 30, - ---------------------------------------------------------------------------------------------------------------------- Net revenues $ 25,864 $ 27,151 $ 28,131 $ 26,483 ----------------------------------------------------------------------------------- Income before income taxes $ 2,210 $ 2,657 $ 2,609 $ 2,486 Provision for income taxes 884 1,063 1,043 879 ----------------------------------------------------------------------------------- Net income $ 1,326 $ 1,594 $ 1,566 $ 1,607 ----------------------------------------------------------------------------------- Net income per share(1): Basic $ .15 $ .18 $ .18 $ .18 ----------------------------------------------------------------------------------- Diluted $ .14 $ .17 $ .17 $ .18 -----------------------------------------------------------------------------------
(1) Quarterly per share earnings do not necessarily equal the total per share earnings reported for the year as a result of the dilutive effect of common stock equivalents on the calculation of per share earnings. PAGE 12 * WWW.RAYTEL.COM 14 CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND 1998
September 30, - --------------------------------------------------------------------------------------------------------- (000's omitted) 1999 1998 - --------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 6,110 $ 7,463 Receivables, net 34,858 35,504 Prepaid expenses and other 3,143 3,996 ---------------------------- Total current assets 44,111 46,963 Property and equipment, less accumulated depreciation and amortization 22,239 19,681 Intangible assets, less accumulated amortization 51,388 55,497 Other assets 45 45 ---------------------------- Total assets $ 117,783 $ 122,186 ---------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations $ 2,124 $ 1,962 Accounts payable 3,793 4,649 Accrued compensation and benefits 3,391 2,920 Accrued other liabilities 6,204 6,264 ---------------------------- Total current liabilities 15,512 15,795 Long-term debt and capital lease obligations, net of current portion 27,246 35,035 Deferred liabilities 129 1,405 Minority interest in consolidated entities 2,867 3,460 ---------------------------- Total liabilities 45,754 55,695 ---------------------------- Commitments and contingencies (Notes 9 and 13) Stockholders' equity: Common stock 9 9 Additional paid-in capital 62,053 61,790 Common stock to be issued 1,045 1,124 Retained earnings 12,544 7,190 ---------------------------- 75,651 70,113 Less treasury stock, at cost (3,622) (3,622) ---------------------------- Total stockholders' equity 72,029 66,491 ---------------------------- Total liabilities and stockholders' equity $ 117,783 $ 122,186 ----------------------------
The accompanying notes are an integral part of these consolidated financial statements. WWW.RAYTEL.COM * PAGE 13 15 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
September 30, - ------------------------------------------------------------------------------------------------------------ (000's omitted, except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Revenues: Cardiac information services $ 44,731 $ 46,171 $ 47,227 Diagnostic imaging service 20,143 19,977 17,610 Heart facilities and other 36,520 41,481 18,578 ----------------------------------------------- Total revenues 101,394 107,629 83,415 ----------------------------------------------- Costs and expenses: Operating costs 45,091 50,143 33,536 Selling, general and administrative 36,447 35,490 29,737 Depreciation and amortization 8,475 8,282 6,306 ----------------------------------------------- Total costs and expenses 90,013 93,915 69,579 ----------------------------------------------- Operating income 11,381 13,714 13,836 Interest expense 2,619 2,990 785 Other expense (income) (1,011) (511) (3,076) Minority interest 1,000 1,273 485 ----------------------------------------------- Income before income taxes and extraordinary item 8,773 9,962 15,642 Provision for income taxes 3,419 3,869 6,257 ----------------------------------------------- Income before extraordinary item 5,354 6,093 9,385 Extraordinary item, net of related tax benefit -- -- 721 ----------------------------------------------- Net income $ 5,354 $ 6,093 $ 8,664 ----------------------------------------------- Net income per share before extraordinary item: Basic $ .61 $ .69 $ 1.11 ----------------------------------------------- Diluted $ .59 $ .66 $ 1.04 ----------------------------------------------- Net income per share: Basic $ .61 $ .69 $ 1.02 ----------------------------------------------- Diluted $ .59 $ .66 $ .96 ----------------------------------------------- Weighted average shares: Basic 8,711 8,879 8,458 ----------------------------------------------- Diluted 9,040 9,294 9,039 -----------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. PAGE 14 * WWW.RAYTEL.COM 16 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Common Stock Additional Common -------------------------- Paid-in Stock to (000's omitted, except shares) Shares Amount Capital be Issued - ---------------------------------------------------------------------------------------------------- Balance at September 30, 1996 8,332,924 $ 8 $ 55,585 $ 852 Net income -- -- -- -- Warrants exercised 10,505 -- 42 -- Options exercised 191,494 -- 369 -- Repurchase of shares (134,434) -- -- -- Employee stock purchase 5,908 -- 63 -- Value of 14,376 shares to be issued -- -- -- 91 Issuance of common stock for purchase of a company 500,000 1 5,202 -- ------------------------------------------------------------- Balance at September 30, 1997 8,906,397 9 61,261 943 Net income -- -- -- -- Warrants exercised 31,359 -- 125 -- Options exercised 11,001 -- 55 -- Repurchase of shares (322,600) -- -- -- Employee stock purchase 6,361 -- 44 -- Value of 46,668 shares to be issued -- -- -- 486 Value of 30,981 shares issued 30,981 -- 305 (305) ------------------------------------------------------------- Balance at September 30, 1998 8,663,499 9 61,790 1,124 Net income -- -- -- -- Options exercised 59,206 -- 120 -- Stock compensation grant 7,348 -- 37 -- Employee stock purchase 6,973 -- 27 -- Issuance of shares to be issued 8,104 -- 79 (79) ------------------------------------------------------------- Balance at September 30, 1999 8,745,130 $ 9 $ 62,053 $ 1,045 -------------------------------------------------------------
Retained Total Earnings Treasury Stockholders' (000's omitted, except shares) (Deficit) Stock Equity - ---------------------------------------------------------------------------------- Balance at September 30, 1996 $ (7,567) $ -- $ 48,878 Net income 8,664 -- 8,664 Warrants exercised -- -- 42 Options exercised -- -- 369 Repurchase of shares -- (1,411) (1,411) Employee stock purchase -- -- 63 Value of 14,376 shares to be issued -- -- 91 Issuance of common stock for purchase of a company -- -- 5,203 ------------------------------------------- Balance at September 30, 1997 1,097 (1,411) 61,899 Net income 6,093 -- 6,093 Warrants exercised -- -- 125 Options exercised -- -- 55 Repurchase of shares -- (2,211) (2,211) Employee stock purchase -- -- 44 Value of 46,668 shares to be issued -- -- 486 Value of 30,981 shares issued -- -- -- ------------------------------------------- Balance at September 30, 1998 7,190 (3,622) 66,491 Net income 5,354 -- 5,354 Options exercised -- -- 120 Stock compensation grant -- -- 37 Employee stock purchase -- -- 27 Issuance of shares to be issued -- -- -- ------------------------------------------- Balance at September 30, 1999 $ 12,544 $ (3,622) $ 72,029 -------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. WWW.RAYTEL.COM * PAGE 15 17 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
September 30, - ---------------------------------------------------------------------------------------------------- (000's omitted) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 5,354 $ 6,093 $ 8,664 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,475 8,282 6,306 Minority interest 1,000 1,273 485 Payout of deferred compensation (1,245) -- -- Other, net 78 211 (735) Changes in operating accounts: Receivables, net 646 (5,813) (3,137) Prepaid expenses and other 853 (25) (987) Accounts payable (856) (429) 1,494 Accrued compensation, benefits and other liabilities 411 (1,286) 435 ------------------------------------ Net cash provided by operating activities 14,716 8,306 12,525 ------------------------------------ Cash flows from investing activities: Capital expenditures (7,773) (5,092) (3,828) Purchases of net assets and physician practice -- -- (427) Purchase of a company -- -- (16,980) Additional costs of company previously purchased -- (280) -- Cash acquired in purchase of a company -- -- 1,384 Other, net (36) (396) 487 ------------------------------------ Net cash used in investing activities (7,809) (5,768) (19,364) ------------------------------------ Cash flows from financing activities: Proceeds from (paydown of) line of credit (9,178) 2,264 23,599 Income distributions to noncontrolling investors (1,594) (1,560) (862) Repurchase of company stock -- (2,211) (1,411) Proceeds from (principal repayments of) debt, net 2,325 (1,665) (12,822) Other, net 187 224 471 ------------------------------------ Net cash provided by (used in) financing activities (8,260) (2,948) 8,975 ------------------------------------ Net increase (decrease) in cash and cash equivalents (1,353) (410) 2,136 Cash and cash equivalents at beginning of period 7,463 7,873 5,737 ------------------------------------ Cash and cash equivalents at end of period $ 6,110 $ 7,463 $ 7,873 ------------------------------------ Supplemental disclosure of cash flow information: Interest paid $ 2,680 $ 2,925 $ 822 ------------------------------------ Income taxes paid $ 2,309 $ 3,710 $ 6,687 ------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. PAGE 16 * 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 acquiring cardiology-related physician practices, assets and facilities. Since 1990, the Company has acquired and/or entered into agreements with various medical service providers. The significant transactions occurring during the past three fiscal years are described below: (a) An agreement, with Granada Hills Community Hospital, became effective February 1, 1996 and provided for the creation of the Company's first integrated heart center, the Raytel Heart Center at Granada Hills ("RHCGH"). The Company is responsible for the day-to-day operations of RHCGH, including administrative support and other non-medical aspects of the program. On September 29, 1998, the Company announced that it had reached a new agreement with the hospital which included revised financial terms. Effective March 27, 1999, the then current agreement was replaced with a revised agreement. The revised agreement will result in significantly lower revenues and expenses than revenues and expenses recognized under the previous agreements. However, under the revised agreement, the Company expects to generate operating income. Under the old agreements, operating expenses were in excess of revenues. (b) Effective June 11, 1996, the Company acquired certain assets and assumed certain liabilities of Cardio Data Services, Inc. ("CDS"). CDS provides clinical transtelephonic pacemaker monitoring, cardiac event detection and Holter monitoring services. The purchase price of the transaction was $14,254,000 and of such amount $13,985,000 was allocated to the acquisition of intangible assets, the majority of which is being amortized over 25 years. (c) On September 18, 1996, the Company acquired all of the non-medical assets of Southeast Texas Cardiology Associates, P.A. ("SETCA") and entered into a long-term management service agreement whereby the Company will manage the non-medical aspects of the practice. The Company has assumed responsibility for providing office space as well as billing and collection activities and other management services. Total consideration for the transaction was cash and transaction costs of $4,010,000, promissory notes of $2,289,000 and 122,068 shares of the Company's Common Stock to be delivered at future dates, valued at $852,000. The shares of Common Stock were valued at a discount from the then current trading price of a share after considering all relevant factors, including, but not limited to, normal discounts for marketability due to the time delay in delivery of the shares. The recorded amounts for the aggregate number of shares of Common Stock to be delivered were discounted 40% from comparable cash sales of Common Stock. The scheduled issuance of the shares of Common Stock that the Company is committed to deliver are 85,448 in 2000 and 36,620 in 2001. (d) On October 18, 1996, the Company entered into a long-term management service agreement whereby the Company will manage the non-medical aspects of Comprehensive Cardiology Consultants, a Medical Group, Inc. ("CCMG"), a physician practice. Total consideration for the transaction was cash of $427,000, promissory notes of $620,000 and 14,376 shares of the Company's Common Stock to be delivered at future dates, valued, as described above, at $91,000. (e) On August 15, 1997, the Company acquired all of the outstanding capital stock of Cardiovascular Ventures Inc. ("CVI"). CVI manages, owns and operates several cardiovascular diagnostic facilities in Texas, Louisiana and Florida and owns and manages a clinic in Florida. WWW.RAYTEL.COM * PAGE 17 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. Unaudited pro forma consolidated financial information for the year ended September 30, 1997, as though the acquisitions of CVI and CDS had occurred at the beginning of fiscal 1996, is as shown in the table below (in thousands, except per share amounts):
- ---------------------------------------------------- September 30, 1997 - ---------------------------------------------------- Revenues $104,345 Net income $ 9,446 Net income per share: Basic $ 1.05 Diluted $ .99 Weighted average shares outstanding: Basic 8,958 Diluted 9,539
(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 will provide the entire continuum of cardiovascular services, including diagnostic, therapeutic and patient management programs. Among other duties, Raytel was to be responsible for the day-to-day operations of the heart center, including administrative support, information systems management, marketing and public relations activities. The Company began operations at Baptist during its fourth quarter of fiscal 1998. Due to the recent merger between Baptist and the Memorial Hermann Hospital System, a modified agreement became effective March 1, 1999. Therefore, during the first five months of fiscal 1999, the Company only recognized revenue to the extent of expenses. Effective March 1, 1999, the Company is recognizing revenue based on the modified agreement which calls for the Company to manage portions of the cardiovascular surgery and cardiology programs at Baptist and to develop and manage specialty clinics to support the cardiovascular program. 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, 1999, the Company owned five 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 those Ventures and/or controls their assets and operations. PAGE 18 * WWW.RAYTEL.COM 20 Two Ventures that operated four consolidated imaging centers expired during fiscal 1997. Revenues contributed by these Ventures was $1,318,000 for the year ended September 30, 1997. At September 30, 1999, the Company held interests in seven cardiovascular diagnostic facilities, through investments in various limited partnerships (the "Partnerships") and wholly-owned one other. All Partnerships are consolidated for financial reporting purposes, as the Company owns more than 50% of those Partnerships and/or controls their assets and operations. Minority interests in consolidated entities represent the investment of third-parties in certain consolidated Ventures and Partnerships. All significant intercompany accounts and transactions are eliminated in consolidation. (b) REVENUE RECOGNITION -- Net patient and service revenues are recognized at established rates when the services are provided. Contractual allowances are calculated for services provided at less than the established rates as approved by Medicare or other third-party payors and are recorded as deductions from revenue. Diagnostic imaging service revenues principally represent net fees of the consolidated Ventures for services provided to patients net of physician fees and certain expenses. In certain practice management contracts, revenues are recognized pursuant to long-term arrangements with physician groups pursuant to which the Company provides the physician group with a full range of services, including, but not limited to, office space, specialized clinical and procedural facilities, medical equipment, data processing and medical record keeping, billing and collection procedures and services, non-physician licensed personnel, such as nurses and technicians, as well as office staff and administrative personnel. In the case of SETCA and CCMG, the Company's practice management revenues are derived from the physician groups' revenues, generally as a purchased service, except for physician compensation and employment benefits, which are paid by the physician group on a priority basis. Under the above management services arrangements, the Company's practice management revenues represent approximately 71%, 56% and 56% of the revenues of the physician groups for the years ended September 30, 1999, 1998 and 1997, respectively. For the clinic acquired with the CVI acquisition, the Company recognizes 100% of all medical revenue as the physicians are employees of the Company. Other revenues include other revenue and equity earnings of unconsolidated entities. (c) CASH EQUIVALENTS -- For purposes of reporting cash flows, the Company considers temporary investments with original maturities of three months or less to be cash equivalents. The temporary investments are stated at cost, which approximates market. (d) PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets which range from three to ten years. Capital leases are recorded at the present value of the future minimum lease payments. Capital leases are amortized over the terms of the related lease on a straight-line basis. (e) MANAGEMENT SERVICE AGREEMENTS -- Management service agreements are each recorded as an intangible asset consisting of the costs of purchasing the rights to manage the medical group. The agreements contain an initial noncancelable 40-year term. Under these long-term agreements, the medical groups have agreed to provide medical services on an exclusive basis only through facilities managed by the Company. The agreements are noncancelable except for performance defaults. In the event a medical group breaches the agreement, or if the Company terminates with cause, the medical group is required to purchase all related assets, including the unamortized portion of any management service agreement and any other intangible assets, at the then net book value. Management service agreements are being amortized over twenty years. WWW.RAYTEL.COM * PAGE 19 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (f) INTANGIBLE ASSETS -- Intangible assets principally consist of the excess of cost over the fair value of the net tangible assets acquired. Such intangible assets represent physician referrals and patient lists, joint venture/partnership interests, non-compete covenants, capitalized debt issuance expense and goodwill. Amortization of capitalized debt issuance expense and goodwill is provided on a straight-line basis. Amortization of physician referrals and patient lists and joint venture/partnership interests is provided based upon the ratio of expected annual revenues to expected total revenues to be generated over the estimated life of the asset. The amortization periods of the intangibles range from two to twenty-five years, with physician referrals and patient lists being amortized over fifteen years and goodwill being amortized over ten to twenty-five years. (g) INCOME TAXES -- The Company and its subsidiaries file consolidated federal and state income tax returns. The Company accounts for income taxes in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. (h) EXTRAORDINARY ITEM -- An extraordinary charge of $721,000 ($1,202,000 less $481,000 of related tax benefit) for the cost of restructuring certain indebtedness acquired with the CVI purchase was recorded during the year ended September 30, 1997. (i) USE OF ESTIMATES -- The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the related disclosures. Actual results could differ from those estimates. (j) NEW ACCOUNTING STANDARDS -- Recently, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information and SFAS No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits. All statements are effective for fiscal 1999 and relate only to additional disclosures. Therefore, the adoption of these accounting standards had no effect on the Company's results of operations or financial position. Also SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities was issued in June 1998 (effective for fiscal 2000). It will have no effect on the Company's results. (k) FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts of all financial instruments approximate fair value. (l) LONG-LIVED ASSETS -- The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. NOTE 3. RECEIVABLES Receivables consist of the following (in thousands):
September 30, - --------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------- Patient and service receivables $ 38,978 $ 41,239 Less allowance for doubtful accounts (5,664) (7,093) ---------------------- 33,314 34,146 Other receivables 1,544 1,358 ---------------------- Total $ 34,858 $ 35,504 ----------------------
PAGE 20 * WWW.RAYTEL.COM 22 NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
September 30, - ------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------ Equipment, furniture and fixtures $ 38,011 $ 31,263 Leasehold improvements 9,653 8,928 ---------------------- 47,664 40,191 Less accumulated depreciation (25,425) (20,510) ---------------------- $ 22,239 $ 19,681 ----------------------
Depreciation expense was $5,213,000, $4,820,000 and $3,712,000 for the years ended September 30, 1999, 1998 and 1997, respectively. NOTE 5. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands):
September 30, - ---------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------- Goodwill $ 48,611 $ 48,752 Physician referrals and patient lists 10,997 10,940 Management service agreements 7,984 7,984 Other 5,236 6,245 ---------------------- 72,828 73,921 Less accumulated amortization (21,440) (18,424) ---------------------- $ 51,388 $ 55,497 ----------------------
Amortization expense related to intangible assets totaled $3,262,000, $3,462,000 and $2,594,000 for the years ended September 30, 1999, 1998 and 1997, 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, ---------------------- 1999 1998 ---------------------- Promissory notes(a) $ 2,609 $ 2,609 Line of credit (b) 19,047 28,225 Other(c) 7,714 6,163 ---------------------- 29,370 36,997 Less current maturities (2,124) (1,962) ---------------------- $ 27,246 $ 35,035 ----------------------
(a) In connection with the SETCA and CCMG transactions, the Company issued promissory notes bearing interest at rates ranging from 10% to 12% per annum. Interest is payable quarterly. (b) In August 1996, the Company entered into a line of credit for $25,000,000. This agreement was amended in September 1997 to expand the line of credit to $45,000,000 and was further amended on July 24, 1998 adjusting certain covenants and again on July 30, 1999 changing the terms and adjusting certain covenants. Under terms of the agreement with two banks, this credit facility can be used to fund acquisitions and for working capital purposes. The Company can draw amounts under the line of credit until August 1, 2001, at which date amounts outstanding will become due and payable. WWW.RAYTEL.COM * PAGE 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, 1999, the approximate weighted average interest rate was 7.58%. The line is collateralized by substantially all of the assets of the Company and its subsidiaries. (c) Other debt includes nonrecourse notes and capital lease obligations with varying maturities at interest rates ranging from 7.33% to 12.16% 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, 1999 are as follows: 2000 -- $2,124,000; 2001 -- $21,694,000; 2002 -- $2,731,000; 2003 -- $1,392,000, and 2004 -- $1,049,000. 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, 1999, no such shares had been issued. The previously outstanding shares of Preferred Stock were entitled to receive dividends. Upon the completion of the Offering, all accumulated dividends on the Preferred Stock were paid with Common Stock in amounts determined by dividing the total accumulated dividends by the Offering price. In August 1998, the Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan"). Under the Rights Plan, each outstanding share of Raytel Common Stock held of record at the close of business on September 2, 1998, 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, 1999, all such warrants are outstanding. The warrants will expire 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. Vesting occurs ratably over a period ranging from two to four years beginning with the effective date of grant. PAGE 22 * WWW.RAYTEL.COM 24 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 No. 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 1999, 1998 and 1997 using the Black-Scholes option pricing model prescribed by SFAS 123. The weighted average assumptions used are as follows:
September 30, - ------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------- Risk free interest rate 4.10% - 5.03% 5.58% - 5.86% 5.74% - 6.68% Expected dividend yield None None None Expected lives 3 years 3 years 3 years Expected volatility 67.9% 62.9% 61.6%
Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates of awards under these plans consistent with the method of SFAS 123, the Company's net income and net income per common share would have decreased to the pro forma amounts indicated below (in thousands, except per share amounts):
September 30, - --------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------- Net income: As reported $5,354 $6,093 $8,664 Pro forma 5,188 5,086 8,338 Net income per common share -- basic: As reported .61 .69 1.02 Pro forma .60 .57 .99 Net income per common share -- diluted: As reported .59 .66 .96 Pro forma .57 .55 .92
Because SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. WWW.RAYTEL.COM * PAGE 23 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the status of the Company's three stock option plans at September 30, 1999, 1998 and 1997 and changes during the years then ended is presented in the tables below:
September 30, - --------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ------------------------- ------------------------- ------------------------- Outstanding, beginning of year 1,057,409 $6.82 1,026,712 $7.24 1,122,050 $ 7.34 Granted 668,450 3.69 165,750 6.21 653,150 9.17 Exercised (59,206) 2.02 (11,001) 5.04 (191,494) 1.93 Expired (695,616) 8.16 (124,052) 9.66 (556,994) 11.38 --------- --------- --------- Outstanding, end of year 971,037 4.00 1,057,409 6.82 1,026,712 7.24 --------- --------- --------- Exercisable, end of year 446,198 3.94 597,279 6.09 435,813 4.61 --------- --------- --------- Weighted average fair value of options granted 2.21 3.73 5.26
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 @ 9/30/99 (in years) Price 9/30/99 Price - ---------------------------------------------------------------------------------------------------------- $1.42 - $ 2.30 143,772 3.26 $2.09 143,772 $ 2.09 3.625 - 3.625 592,150 9.04 3.63 178,616 3.63 4.563 - 13.50 235,115 7.57 6.09 123,810 6.54 ------- ------- 1.42 - 13.50 971,037 446,198 ------- -------
At September 30, 1999, there were 497,432 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, 1999, the future minimum rental payments for each fiscal year thereafter under all noncancelable operating leases are as follows (in thousands):
Fiscal Year Ending - -------------------------------------------------------------- 2000 $3,319 2001 3,186 2002 2,112 2003 1,958 2004 1,791 Thereafter 2,858
PAGE 24 * WWW.RAYTEL.COM 26 NOTE 10. INCOME TAXES The provision for income taxes consists of the following (in thousands):
September 30, - ------------------------------------------------- 1999 1998 1997 - ------------------------------------------------- Current: Federal $2,366 $2,782 $4,233 State 1,053 1,087 2,024 -------------------------------- Total $3,419 $3,869 $6,257 --------------------------------
At September 30, 1999 and 1998, the Company had $1,377,000 and $1,710,000, 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, 1999 and 1998, are as follows (in thousands):
Current Asset Long-Term Asset (Liability) (Liability) - ------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------- Depreciation and amortization $ (456) $ 758 $ 1,794 $ 1,494 Reserves for accounts receivable (203) 451 -- -- Other, net 325 (376) (83) (617) ---------------------------------------------------- (334) 833 1,711 877 Valuation allowance 334 (833) (1,711) (877) ---------------------------------------------------- Total deferred income taxes $ -- $ -- $ -- $ -- ----------------------------------------------------
Reconciliation of the federal statutory rate to the Company's effective tax rate is as follows (dollars in thousands):
September 30, - ------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Amount Rate Amount Rate Amount Rate ------------------------------------------------------------------------------------ Federal income tax at the statutory rate $ 2,983 34.0% $ 3,387 34.0% $ 5,318 34.0% State income taxes, net of federal benefit 695 7.9 1,087 10.9 1,336 8.5 Other 421 4.8 (481) (4.8) (397) (2.5) Federal tax benefit of the utilization of net operating loss and credit carryforwards (680) (7.7) (124) (1.2) -- -- ------------------------------------------------------------------------------------ Total $ 3,419 39.0% $ 3,869 38.9% $ 6,257 40.0% ------------------------------------------------------------------------------------
At September 30, 1999, the Company had $2,436,000 of federal net operating loss carryforwards acquired in the CVI transaction. Such carryforwards have certain limitations on use. WWW.RAYTEL.COM * PAGE 25 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $599,000, $596,000 and $547,000 for the years ended September 30, 1999, 1998 and 1997, respectively. The Company maintains a tax-qualified Retirement Savings Plan (the "401(k) Plan") which covers substantially all employees. Eligible employees may make salary deferral (before tax) contributions up to a specified maximum. The Company makes a matching contribution of 25% of the amount deferred. Total expense under the 401(k) Plan amounted to $183,000, $191,000, and $178,000 for the years ended September 30, 1999, 1998 and 1997, respectively. Executive officers and key employees of the Company are eligible to participate in an executive deferred compensation plan at the discretion of the Board of Directors. Participants may defer a portion of their compensation, as defined. NOTE 12. PRINCIPAL CUSTOMERS All services performed by the Company are performed in the United States. No one customer accounted for more than 10% of the Company's total net patient and service revenues. However, certain sources of payment for the services, such as Medicare, HMOs, commercial insurers and other third party payors, do or could account for more than 10% of payments received. NOTE 13. CONTINGENCIES The Company is from time to time a party to various unrelated claims and disputes associated with various aspects of its ongoing business operations. In management's opinion, none of these claims or disputes are expected, either individually or in the aggregate, to have a material adverse effect on the Company's financial position or results of operations. NOTE 14. NET INCOME PER SHARE All previously outstanding preferred shares and accumulated preferred dividends were converted to Common Stock for all periods presented for purposes of the income per share calculation. Also, those shares under commitments to be issued at specified future dates are considered as outstanding for per share calculations. For the years ended September 30, 1999, 1998 and 1997, basic and diluted earnings per share are calculated as follows (in thousands, except per share amounts):
For the Year Ended September 30, - -------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------- BASIC EARNINGS PER SHARE: Net income $5,354 $6,093 $8,664 -------------------------------- Weighted average shares outstanding 8,711 8,879 8,458 -------------------------------- Per share $ .61 $ .69 $ 1.02 --------------------------------
PAGE 26 * WWW.RAYTEL.COM 28
For the Year Ended September 30, - -------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE: Net income $5,354 $6,093 $8,664 -------------------------------- Weighted average shares outstanding 8,711 8,879 8,458 Shares to be issued 147 137 135 Options 182 250 350 Warrants -- 28 96 -------------------------------- 9,040 9,294 9,039 -------------------------------- Per share $ .59 $ .66 $ .96 --------------------------------
Certain options and warrants to purchase shares of common stock were outstanding during the years ended September 30, 1999, 1998 and 1997, 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, - ------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Options and warrants outstanding 626,759 525,722 307,542 Range of exercise prices $3.63 - $13.50 $5.63 - $13.50 $10.00 - $13.88
NOTE 15. DEFERRED LITIGATION AWARD In September 1996, the Company received a favorable administrative decision related to a billing dispute with a New York Medicare carrier whereby it was entitled to approximately $4.0 million. The time period for the Healthcare Finance Administration ("HCFA") and the Social Security Administration to file an appeal expired on February 10, 1997. After accounting for administrative costs and reimbursements due to Medtronic as a result of the terms of the acquisition of CardioCare and a separate provision against the value of a non-operating asset, the Company recognized other income of $2,510,000 pretax in its second fiscal quarter ending March 31, 1997, with a positive after tax effect of $1,506,000 or $.17 per share (the "Decision"). NOTE 16. 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 * PAGE 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 (in thousands):
Information Imaging Facilities Total - ------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED SEPTEMBER 30 1999: Net revenue $ 44,731 $ 20,143 $ 36,520 $ 101,394 Total operating expenses 33,859 14,719 28,857 77,435 ----------------------------------------------------------- Segment contribution 10,872 5,424 7,663 23,959 Depreciation & amortization 2,889 1,910 3,436 8,235 Interest expense -- 149 663 812 Minority interest/other expense (income) (231) (346) 656 79 ----------------------------------------------------------- Segment profit $ 8,214 $ 3,711 $ 2,908 $ 14,833 ----------------------------------------------------------- Segment assets $ 37,416 $ 16,819 $ 58,820 $ 113,055 ----------------------------------------------------------- Capital expenditures $ 2,611 $ 4,585 $ 540 $ 7,736 ----------------------------------------------------------- For the year ended September 30, 1998: Net revenue $ 46,171 $ 19,977 $ 41,481 $ 107,629 Total operating expenses 32,598 13,718 34,350 80,666 ----------------------------------------------------------- Segment contribution 13,573 6,259 7,131 26,963 Depreciation & amortization 2,890 1,843 3,505 8,238 Interest expense -- 34 813 847 Minority interest/other expense (income) (139) 82 931 874 ----------------------------------------------------------- Segment profit $ 10,822 $ 4,300 $ 1,882 $ 17,004 ----------------------------------------------------------- Segment assets $ 37,794 $ 14,813 $ 63,487 $ 116,094 ----------------------------------------------------------- Capital expenditures $ 1,962 $ 1,483 $ 893 $ 4,338 ----------------------------------------------------------- For the year ended September 30, 1997: Net revenue $ 47,227 $ 17,610 $ 18,578 $ 83,415 Total operating expenses 32,187 12,325 15,151 59,663 ----------------------------------------------------------- Segment contribution 15,040 5,285 3,427 23,752 Depreciation & amortization 3,194 1,843 1,138 6,175 Interest expense -- 88 500 588 Minority interest/other expense (income) (2,704) 240 87 (2,377) ----------------------------------------------------------- Segment profit $ 14,550 $ 3,114 $ 1,702 $ 19,366 ----------------------------------------------------------- Segment assets $ 36,926 $ 14,669 $ 62,575 $ 114,170 ----------------------------------------------------------- Capital expenditures $ 923 $ 1,066 $ 1,600 $ 3,589 -----------------------------------------------------------
September 30, - -------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------- Segment profit $ 14,833 $ 17,004 $ 19,366 Unallocated amounts: Corporate general and administrative 4,103 4,967 3,610 Corporate depreciation and amortization 240 44 131 Corporate interest expense 1,807 2,143 197 Corporate other expense (income) (90) (112) (214) ---------------------------------------- Earnings before income taxes and extraordinary item $ 8,773 $ 9,962 $ 15,642 ----------------------------------------
PAGE 28 * 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, 1999 and 1998 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, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Raytel Medical Corporation and Subsidiaries as of September 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended September 30, 1999 in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut November 12, 1999 WWW.RAYTEL.COM * PAGE 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 Thursday, March 2, 2000 beginning at 10:30 a.m. EST at LeMeridien, the Timberlay B Room, 250 Franklin Street, Boston, Massachusetts. 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, Professional Corporation Palo Alto, California INDEPENDENT AUDITORS Arthur Andersen LLP Hartford, Connecticut STOCK DATA NASDAQ SYMBOL:RTEL The number of stockholders of record at September 30, 1999, was 446. 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, 1999 and 1998.
Fiscal Year Ended September 30, - -------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------- High Low High Low - -------------------------------------------------------------------- First quarter $ 6 3/4 $ 3 5/8 $ 14 3/4 $ 10 1/2 Second quarter 5 3/16 4 1/16 13 1/16 7 3/8 Third quarter 6 9/16 3 11/16 7 15/16 5 Fourth quarter 4 3/4 2 1/8 6 1/4 4 1/2
The Company has not paid cash dividends during the fiscal years ended September 30, 1999 and 1998. PAGE 30 * WWW.RAYTEL.COM 32 CORPORATE DIRECTORY BOARD OF DIRECTORS AND OFFICERS Richard F. Bader Chairman of the Board of Directors and Chief Executive Officer Allan Zinberg President, Raytel Medical Corporation, emeritus, and Director David E. Wertheimer, M.D. Senior Vice President and Director Swapan Sen Senior Vice President, General Manager, Medical Facility Operations Michael O. Kokesh Vice President, General Counsel and Secretary 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.P. Mary M. Lampe Chief Operating Officer, Cardiovascular Research Foundation Gene I. Miller General Partner, Peregrine Venture Funds 33 [RAYTEL MEDICAL CORPORATION LOGO] RAYTEL MEDICAL CORPORATION 2755 Campus Drive, Suite 200 San Mateo, CA 94403 www.raytel.com 1463-AR-00 EX-21.1 8 EX-21.1 1 EXHIBIT 21.1 RAYTEL MEDICAL CORPORATION Federal EIN: 94-2787342 For the year ended September 30, 1999
NAME & ADDRESS FEDERAL EIN TAX PD Raytel Cardiac Services, Inc. 06-1287427 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Cardiovascular Labs, Inc. 94-3210502 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Imaging Holdings, Inc. 06-1406441 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Imaging Network, Inc. 94-3210501 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Medical Imaging, Inc. 06-1332098 9/98 7 Waterside Crossing Windsor, CT 06095 Raytel Management Holdings, Inc. 94-3251759 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Raytel Texas Physician Services, Inc. 94-3249951 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Raytel Granada Hills, Inc. 94-3221261 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Raytel California Physician Services, Inc. 94-3253644 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Raytel Texas Heart Center Management Company, Inc. 94-3286082 9/98 2755 Campus Drive, Suite 200 San Mateo, CA 94403 CardioCare 11-3145721 9/98 7 Waterside Crossing Windsor, CT 06095 Cardiovascular Ventures Inc. 65-0294084 9/98 7 Waterside Crossing Windsor, CT 06095
1 EX-23.1 9 EX-23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accounts, we hereby consent to the incorporation by reference in this Form 10-K of our report dated November 12, 1999. It should be noted that we have not audited any financial statements of the company subsequent to September 30, 1999, or performed any audit procedures subsequent to the date of our report. Hartford, Connecticut /s/ Arthur Andersen LLP December 21, 1999 ------------------------------------ EX-27 10 EX-27
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-30-1999 OCT-01-1998 SEP-30-1999 6,110 0 34,858 0 0 44,111 47,664 25,425 117,783 15,512 0 0 0 9 72,020 117,783 0 101,394 0 90,013 (11) 0 2,619 8,773 3,419 5,354 0 0 0 5,354 0.61 0.59 REPRESENTS NET RECEIVABLES INCLUDED IN TOTAL COSTS
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