-----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, QE9czzlIlyvmDfjz0vWRftELDiJdnxNYwg+LeW6JHgWXPJvIb1JpySWjJLOSexxo CqT5tYULakRfNS1PEIHJIQ== 0000891618-02-000285.txt : 20020414 0000891618-02-000285.hdr.sgml : 20020414 ACCESSION NUMBER: 0000891618-02-000285 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20020128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYTEL MEDICAL CORP CENTRAL INDEX KEY: 0001002017 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 942787342 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27186 FILM NUMBER: 02519556 BUSINESS ADDRESS: STREET 1: 2755 CAMPUS DR STREET 2: STE 200 CITY: SAN MATEO STATE: CA ZIP: 94403 BUSINESS PHONE: 6503490800 MAIL ADDRESS: STREET 1: 2755 CAMPUS DRIVE STREET 2: SUITE 200 CITY: SAN MATEO STATE: CA ZIP: 94403 10-K/A 1 f78124a1e10-ka.txt 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K/A AMENDMENT NO. 1 (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, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-27186 --------------------- RAYTEL MEDICAL CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 94-2787342 (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 2755 CAMPUS DRIVE, SUITE 200, SAN MATEO, CA 94403 (Address of principal executive offices) (Zip Code)
(650) 349-0800 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant, based on the closing price of the Registrant's Common Stock as quoted on the Nasdaq SmallCap Market on November 30, 2001, was $8,297,135.60. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the Registrant's Common Stock outstanding as of November 30, 2001, was 2,919,776. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I This report includes a number of forward-looking statements which reflect Raytel's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed in "Item 17. Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Business Environment and Future Financial Results" and elsewhere in this report, that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "intends," "future," "goals" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. ITEM 1. BUSINESS Raytel Medical Corporation is a provider of healthcare services, focusing on the needs of patients with cardiovascular disease, or "CVD". We believe, based on our industry experience, that we are the leading provider of remote cardiac monitoring and testing services utilizing transtelephonic monitoring technology in the United States. Raytel also owns and operates four freestanding cardiovascular diagnostic facilities and two freestanding facilities that provide nuclear cardiology diagnostic services. In addition, we provide outpatient diagnostic imaging services, through operating and investment interests in nine freestanding imaging centers and two ancillary facilities associated with two of the centers. We also manage a diagnostic imaging provider network that operates in eight mid-Atlantic states. Raytel was incorporated in California in October 1981 under the name Raytel Labs, Inc. In August 1987, we were reincorporated in Delaware under the name Raytel Systems Corporation. In October 1992, we changed our name to Raytel Medical Corporation. Unless the context otherwise requires, "Raytel" as used herein refers to Raytel Medical Corporation, a Delaware corporation, and its consolidated subsidiaries. Raytel's executive offices are located at 2755 Campus Drive, Suite 200, San Mateo, California 94403, and its telephone number is (650) 349-0800. RECENT CORPORATE DEVELOPMENTS DISPOSITION OF FLORIDA MEDICAL CLINIC Through its acquisition of Cardiovascular Ventures, Inc. in August 1997, Raytel acquired a 20-physician multi-specialty medical clinic located in Port St. Lucie, Florida, which was operated by Raytel's wholly-owned subsidiary, Heart & Family Health Institute of Port St. Lucie, or "HFHI." Effective January 1, 2001, Raytel completed the sale of HFHI to a new company organized by physicians practicing at HFHI, including David E. Wertheimer, M.D., who had served as President of HFHI, as well as an officer of Raytel and a member of Raytel's Board of Directors. Raytel received a cash purchase price of $8,311,000, net of transaction expenses, in exchange for all of the outstanding common stock of HFHI. Following the completion of the transaction, Dr. Wertheimer resigned as an officer and director of Raytel. Raytel's divestiture of the Port St. Lucie Clinic follows the sale of Raytel's physician practice management operations during 2000 as a part of Raytel's strategy of focusing on its core businesses of providing cardiac monitoring and testing services and operating cardiac diagnostic facilities and diagnostic imaging centers. REVERSE STOCK SPLIT On May 9, 2001, Raytel effected a one-for-three reverse split of its common stock. The reverse split was implemented to increase the per share trading price of Raytel's common stock in order to meet requirements for continued listing on the Nasdaq SmallCap Market. All of the share and per share data in this report reflect the reverse stock split. 1 RESOLUTION OF INVESTIGATION BY THE U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Raytel's wholly-owned subsidiary, Raytel Cardiac Services, or "RCS", was the subject of a grand jury investigation begun in June 2000 and conducted under the direction of the United States Attorney for the District of Connecticut and the Office of the Inspector General of the U.S. Department of Health and Human Services, or the "OIG." The investigation involved allegations of improprieties in RCS' transtelephonic pacemaker monitoring operations and its billing practices related to Medicare-covered services. In June 2001, RCS reached an agreement with the federal government to resolve the issues which were the subject of the investigation. In accordance with that agreement, RCS plead guilty to a charge of obstructing a criminal investigation. In addition, in September 2001, RCS entered into a settlement agreement with the government to resolve related civil claims. Under the criminal and civil settlements, RCS agreed to pay a total of $11,500,000 to the government over a five-year period. See "Item 3. Legal Proceedings." CONSIDERATION OF STRATEGIC ALTERNATIVES In October 2001, Richard F. Bader, Raytel's Chairman and Chief Executive Officer, Albert J. Henry, an investor and former director of Raytel, and RT Acquisition Group, Inc., or "RTA," an entity formed by Messrs. Bader and Henry, filed a Schedule 13-D with the Securities and Exchange Commission to announce that the were evaluating the feasibility of entering into discussions regarding a possible acquisition of Raytel by RTA. On December 18, 2001, this group amended its filing to disclose that Balfour LLC, an entity controlled by Rory Riggs, a Raytel stockholder, had agreed to act in concert with the other filing stockholders for the purpose of submitting a non-binding proposal regarding a possible acquisition of Raytel by RTA. The filing also disclosed a proposal by RTA to acquire all of the outstanding shares of common stock of Raytel not owned by Messrs. Bader, Henry, and Riggs and RTA and Balfour LLC (collectively, the "RTA Bidding Group"). Raytel's Board of Directors has appointed a Special Committee consisting of independent directors Gene I. Miller and Allan Zinberg to act on the Board's behalf with respect to any proposal made by the RTA Bidding Group. The Special Committee has engaged Houlihan, Lokey, Howard & Zukin Capital, Inc. to serve as financial advisors to the Special Committee with respect to the proposal and any potential alternative transactions and also has engaged counsel to advise the Special Committee. Raytel's Board of Directors, on the recommendation of the Special Committee and with Mr. Bader abstaining, has granted to the RTA Bidding Group a limited waiver under the triggering provisions of the Rights Agreement dated as of August 14, 1998 between Raytel and BankBoston, N.A. to the extent necessary to permit the RTA Bidding Group to evaluate, prepare, negotiate and finance a potential acquisition of Raytel. The waiver under the Rights Agreement is conditioned upon the RTA Bidding Group and its affiliates both holding less than 25% of the beneficial ownership of the outstanding common stock of the Company and not acquiring additional securities of Raytel. For stockholders outside the RTA Bidding Group, or in the event that the RTA Bidding Group violates the conditions to the limited waiver, the triggering level under the Rights Agreement remains ownership of 15% or more of Raytel's outstanding shares without the prior approval of Raytel's Board of Directors. In addition, on December 6, 2001, the Special Committee of the Board of Directors and RTA entered into a letter agreement under which Raytel agreed to advance $75,000 to RTA to reimburse RTA for certain expenses incurred by RTA in connection with a potential transaction, including the expenses of RTA's financial advisers and counsel. The expense reimbursement is refundable by RTA to Raytel only in the event that RTA acts in concert with another party who is in the Company's industry, or an affiliate of such a party. The Special Committee has advised Raytel that its financial advisors have recently received additional confidential, non-binding expressions of interest to acquire Raytel from unaffiliated third parties who, unlike the RTA Bidding Group, are not subject to the beneficial ownership disclosure requirements under federal securities laws applicable to stockholders or groups of stockholders who hold in excess of 5% of Raytel's outstanding common stock and who, accordingly, have not made public their expressions of interest. The Special Committee has also advised Raytel that it is undertaking a review of all the expressions of interest, each of which is subject to various conditions. 2 There is no present agreement between any member of the bidding parties and Raytel with regard to any acquisition transaction. There can be no assurance that the Special Committee will recommend to the Board any acquisition proposal, or that any acquisition proposal, if recommended by the Special Committee and approved by the Board, will be consummated. In the absence of any subsequent event that would cause the Company to make a different determination, Raytel does not currently intend to announce the outcome of the Special Committee's deliberations until either a definitive agreement has been entered into or the Special Committee has discontinued its work. 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 1998 data, the American Heart Association estimates that approximately 60.8 million people in the United States suffer from one or more forms of CVD. According to the AHA's estimates, CVD claimed approximately 950,000 lives in 1998, representing 40.6% of all deaths. According to the AHA, the risk of developing coronary heart disease after the age of 40 is 49% for men and 32% for women. Due to the aging of the United States population, Raytel believes that the need for medical services to diagnose and treat CVD will continue to increase significantly in the future. BUSINESS STRATEGY Our principal objective is to maintain and extend our leadership position as a provider of cardiac transtelephonic monitoring and testing services. We are pursuing this objective through the following strategies: Expand Raytel's Telemedical Business. We intend to utilize our technology and expertise to address additional transtelephonic applications in the treatment and management of cardiac patients and thereby widen the range of services that Raytel offers. Develop Affiliations with Providers. We intend to expand our telemedical business in cooperation with cardiology groups and hospitals with a reputation for the delivery of high quality services among referring primary care physicians and the general population in the communities that they serve. Expand Managed Care Relationships. We believe that interaction with managed care organizations will become an increasingly important element in the provision of cardiac care, including care for Medicare patients, and that third-party payors will increasingly prefer to contract with providers offering a wide range of cardiovascular services provided on a multi-state or regional basis. We actively market our existing healthcare services to managed care plans and provide value added services. Pursue Strategic Acquisitions. We have built our existing organization largely through a series of acquisitions. We believe that it is often more cost-effective to acquire and reconfigure an existing business than to establish a new business. We believe that our experience in identifying, structuring and completing acquisitions of healthcare service organizations and effectively integrating these organizations will enable us to take advantage of future acquisition opportunities that arise as a result of the trends toward consolidation of healthcare service providers. We intend to explore opportunities to expand our cardiac businesses through additional strategic acquisitions. RAYTEL CARDIAC INFORMATION SERVICES Raytel is the largest provider of cardiac monitoring and testing services in the United States utilizing transtelephonic pacemaker monitoring, or "TTM," cardiac event detection, and Holter monitoring technologies. We believe that our TTM-based services are the most cost-effective means of testing the performance of implanted cardiac pacemakers and detecting symptoms of transient arrhythmias. 3 PACEMAKER MONITORING We believe, based on our industry experience, that we are the largest provider of transtelephonic pacemaker monitoring services in the United States, currently serving over 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 Raytel's three technical operations centers, where the signal is converted and displayed on a computer screen or strip chart recorder. Raytel's pacemaker monitoring services are prescribed by the patient's physician. After receipt of a prescription and enrollment by Raytel, the patient is sent a transmitter and trained to use the device over the telephone by one of our technologists. Unlike most physician-operated monitoring services, our monitoring services are provided 24 hours a day, seven days a week in order to accommodate unscheduled calls from patients experiencing problems. Each patient is tested on a schedule recommended by his or her prescribing physician with such prescription updated annually. Raytel generates most of its pacemaker monitoring revenues from reimbursement by Medicare and payors of supplemental Medicare benefits. Patients are typically tested between three and twelve times per year. We are reimbursed for pacemaker monitoring services on a per-call basis. Routine pacemaker testing is performed in accordance with a prearranged, computer generated schedule. A trained technologist telephones the patient and requests that the patient initiate transmission of ECG data which is received by recorders in one of our technical operations centers. Once a continuous graph displaying the rhythm of the heart and the pacemaker is generated, this data is interpreted by the technologist to determine the status of the implanted pacemaker and its relationship to the patient's cardiac rhythm. If problems with the pacemaker system are noted or a serious abnormality is detected, including an abnormality in the heart's own rhythm (an arrhythmia), the patient's physician is notified immediately by telephone. After each test, the results are promptly reviewed by a supervising technologist and a cardiologist and a written report is mailed to the patient's physician. CARDIAC EVENT DETECTION SERVICE Raytel operates the Cardiac Event Detection Service, or "CEDS," which tests and documents transtelephonically an ambulatory patient's cardiac rhythm irregularities while the patient is experiencing symptoms. CEDS testing aids in the diagnosis of transient cardiac arrhythmias, including atrial and ventricular abnormalities, such as tachycardia, which causes the heart to beat at an abnormally rapid and potentially life threatening rate. During the fiscal year ended September 30, 2001, we tested approximately 34,000 patients for potential transient arrhythmic events. Upon enrollment in our CEDS program, we provide the patient with a cardiac event recorder for a testing period lasting up to 30 days. Upon experiencing symptoms, the patient activates the event recorder to capture one or more ECGs which the patient will later transmit to one of our two CEDS technical operations centers for analysis. Skilled technologists, under the supervision of cardiac care nurses and cardiologists, make preliminary evaluations of these transmissions for cardiac irregularities. Unlike similar services offered by 4 individuals or small clinics, our centers are staffed 24 hours a day, seven days a week to respond to a patient's needs on a timely basis. Emergency medical response is initiated for CEDS patients when necessary. Regardless of the number of calls placed, payors reimburse Raytel on a 30-day program basis for its CEDS service. HOLTER MONITORING SERVICES We believe, based on our industry experience, that we are the largest provider of Holter monitoring services in the United States. 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. Raytel processed approximately 48,000 Holter monitoring tapes during fiscal 2001. IMPLANTABLE CARDIOVERTER DEFIBRILLATORS In November 1999, Raytel and St. Jude Medical, Inc. announced the launch of the Housecall transtelephonic monitoring system, the first commercially available system capable of downloading a complete set of diagnostic data from an implantable cardioverter-defibrillator, or ICD, over the telephone. ICDs are pacemaker-like devices that can sense ventricular tachyarrhythmias (life-threatening fast heart rates) and automatically deliver an electrical shock to restore a normal rhythm. The number of times the ICD was activated is also monitored. Previously, patients with ICDs were required to return to the physician's office on a routine basis in order to have the ICD's battery tested and for an examination of the ICD system integrity. The Housecall system will reduce the frequency of physician office visits by extending the transtelephonic monitoring procedures presently used for pacemakers to ICDS. The new system enables trained technicians to interrogate the device's memory and transmit stored data as well as real-time clinical and technical information on the patient's cardiac activity and ICD status. The test results are interpreted by trained technicians and a comprehensive report is communicated to the patient's physician for clinical evaluation. Under an exclusive agreement with St. Jude Medical, Raytel manufactures the initial version of the Housecall transmitters and receiving units and monitors St. Jude ICD patients using Housecall. TRAINING AND QUALITY ASSURANCE All of our pacemaker monitoring technologists undergo a formal six-week training program that includes basic cardiac physiology, the operation of pacemaker devices, the interaction of pacemaker systems with the heart, and the administration and interpretation of ECG tests. As technologists become more experienced, they are trained to monitor increasingly complex pacemaker systems. Technologists administering our CEDS and Holter services undergo training in the interpretation of ECG data to detect symptoms of cardiac arrhythmia. We maintain a rigorous quality assurance program. Board-certified cardiologists direct our technologists who have special training in the fields of cardiac pacing and electrophysiology. Each pacemaker-monitoring test is separately reviewed by a supervising technologist and a cardiologist. CEDS transmissions and Holter test results are evaluated by technologists under the supervision of cardiac care nurses and cardiologists. The State of Connecticut has approved Raytel's training program for college credit toward a bachelor of science degree within the Connecticut state university system. RAYTEL CARDIOVASCULAR FACILITIES Raytel currently operates four freestanding cardiovascular diagnostic facilities. Two of our cardiovascular diagnostic facilities are located in Texas and two are located in Louisiana. Raytel also provides consulting services to a hospital relating to its on-site heart center and leases cardiac catheterization equipment and related leasehold improvements to the hospital. 5 CARDIOVASCULAR DIAGNOSTIC FACILITIES Raytel operates four freestanding cardiovascular diagnostic facilities which perform cardiac catheterization and related services (the "Cardiovascular Diagnostic Facilities"). Cardiac catheterization utilizes catheters and sophisticated diagnostic instruments to evaluate the functioning of the heart and the coronary arteries. A narrow, flexible tube, or catheter, is inserted through a main artery in the leg or arm and guided into the patient's coronary arteries, where a cardiologist can use the catheter to perform various tests to diagnose the nature and extent of the patient's coronary artery disease. The Cardiovascular Diagnostic Facilities are located in Texas and Louisiana. At each Cardiovascular Diagnostic Facility, we provide the facilities, equipment, supplies and support personnel necessary for the cardiologist to perform interventional cardiac imaging and peripheral therapeutic procedures. All of the Cardiovascular Diagnostic Facilities are owned by limited partnerships. Raytel, through a separate wholly-owned subsidiary for each limited partnership, serves as the corporate general partner which acts as the day-to-day manager of each facility. Raytel owns a majority interest in two of the facilities. Raytel also owns and operates two nuclear cardiology diagnostic facilities, formerly operated in conjunction with Cardiovascular Diagnostic Facilities. Physicians practicing at the Cardiovascular Diagnostic Facilities are not obligated to refer patients to or practice at these facilities and also practice at nearby hospitals. RAYTEL HEART CENTER AT GRANADA HILLS COMMUNITY HOSPITAL In March 1999, Raytel and Granada Hills Community Hospital, or GHCH, terminated the management consulting agreement which they had entered into in September 1998, as the result of an advisory opinion from the Regional Office of the Health Care Finance Agency which raised issues regarding the hospital's eligibility to continue to participate in the Medicare program. Effective with the termination of the management consulting agreement, the Company entered into a revised five-year consulting services agreement with GHCH, pursuant to which we provide consulting services to the hospital with regard to the operations of its integrated heart center. GHCH is a general acute care hospital located in the San Fernando Valley area of Los Angeles. The hospital's heart program includes cardiac catheterization procedures, stress testing, ultrasound and other diagnostic services, cardiovascular and cardiothoracic surgical procedures and cardiac rehabilitation programs. Under the consulting services agreement, we provide specified consulting services to GHCH, including quality management and assurance, technology assessment and management, strategic planning and other services. We also lease cardiac catheterization equipment and related leasehold improvements to the hospital. All medical services at the facility are the responsibility of the hospital and its medical staff. Through an affiliated medical group, Raytel and GHCH entered into an exclusive agreement for Raytel to act as the exclusive provider of cardiac surgery services at the hospital and to manage the hospital's cardiovascular surgery program. We have entered into an agreement with a leading cardiothoracic surgeon to provide the cardiac surgery services at the hospital. The initial term of the agreement coincides with the term of the consulting agreement with the hospital. Raytel, through a subsidiary, provides management services to the medical group. RAYTEL DIAGNOSTIC IMAGING SERVICES Raytel provides outpatient diagnostic imaging services through operating and investment interests in nine freestanding imaging centers (the "Imaging Centers") and two ancillary facilities associated with two of the Imaging Centers. Raytel also operates the Raytel Imaging Network, a specialized preferred provider network currently consisting of 700 independent imaging centers located from Virginia to New York, including seven centers owned and managed by Raytel. Diagnostic imaging technology consists of a number of medical diagnostic modalities, many of which integrate computer hardware and software. These modalities include magnetic resonance imaging, or MRI, computed tomography, or CT, nuclear medicine, radiography/fluoroscopy, or R/F, ultrasound, general x-ray 6 and mammography. These imaging modalities are generally non-invasive (with the exception of the injection of contrast material in certain techniques and the occasional use of sedating agents) and subject the patient either to sound waves (ultrasound), X-rays (CT, R/F and X-ray mammography) or radio waves and magnetic fields (MRI) to gather data that aid in medical diagnosis. These diagnostic technologies enable physicians to view certain internal body anatomy and pathology and in many instances provide early diagnostic capability and aid in effective treatment planning without the need for more costly exploratory surgery. The principal diagnostic imaging modality in use at the Imaging Centers is MRI. MRI is used to provide high resolution images of the soft tissue of the body. In the field of cardiology, MRI is used for the assessment of congenital and anatomical cardiac defects. Other MRI techniques, such as MR angiography, are also used in the assessment of peripheral vascular and other cardiovascular diseases. The Imaging Centers also provide a wide range of imaging services for the diagnosis of neurological disorders of the head, neck and spine, as well as imaging of the musculoskeletal system and a variety of internal organs, including the liver and prostate, and the female pelvis. RAYTEL IMAGING CENTERS The Imaging Centers are located in four states. All of the Imaging Centers offer MRI services, and four offer other imaging modalities. Raytel owns seven of the Imaging Centers and holds its interests in the other two through investments in limited partnerships (the "Ventures"), to which we provide management services, including data processing, billing and collection, accounting, marketing services and operational supervision. The Ventures have terms that expire between 2008 and 2025. RAYTEL IMAGING NETWORK The trends toward cost containment and managed care have resulted in changes in the patterns of patient referrals to diagnostic imaging facilities, adversely affecting the profitability of independent imaging centers and encouraging the formation of networks of independent centers. Many independent operators of diagnostic imaging facilities lack the management and marketing expertise and systems, as well as the experience in dealing with large managed care organizations, that are necessary to effectively establish and operate such networks. Our experience in dealing with a wide variety of managed care organizations and our established, centralized marketing, scheduling, billing and accounting systems provide us with the capability to establish and operate networks of independent diagnostic imaging centers. In addition, Raytel's purchasing power allows us to provide participating centers with supplies, such as contrast agents, film and other medical and technical supplies, and with equipment maintenance and other services at considerable cost savings. The Raytel Imaging Network (the "Network") is a dedicated network of diagnostic imaging facilities established to provide services to patients participating in healthcare benefit programs offered by municipal and state employers, corporations that self-insure, third-party insurance carriers, union health and welfare plans and managed care providers. Independent imaging centers enter into fixed fee contractual relationships with the Network to provide imaging services to patients referred by payors which have contracted with the Network for services at a negotiated fee. The Network handles scheduling for patients whose healthcare benefit programs participate in the Network and guarantees these participating entities a fixed fee for all radiology procedures performed in Network centers. The Network also offers centralized billing services for those procedures, promptly reports the results of the studies to the patient's referring physician and the outcomes of the studies to the administrators responsible for the management of the patient's healthcare program. The Network is a preferred provider organization with participating imaging centers in the states of New Jersey, Pennsylvania, Delaware, Maryland, New York and Virginia. The Network currently provides diagnostic imaging services under referral arrangements with approximately 135 organizations administering healthcare programs covering more than 700,000 individual participants. 7 SALES AND MARKETING Our marketing activities are directed at managed care organizations, cardiologists and referring physicians. We maintain a central managed care sales group that negotiates and manages contracts with managed care organizations. Our marketing organization also supervises the marketing of our TTM-based services to physicians nationwide and supports the efforts of local centers to market their services to referring physicians in the communities they serve. RAYTEL CARDIAC INFORMATION SERVICES We market our cardiac monitoring and testing services nationwide by using regional sales managers coordinating the activities of approximately 400 sales representatives who are employees of the pacemaker equipment manufacturers or part-time employees of Raytel. Our sales organization is supported by our customer service and telemarketing personnel. We work closely with all major pacemaker manufacturers and have agreements with certain manufacturers for the distribution of Raytel's services through the direct sales forces of the manufacturers. Our sales force works closely with the approximately 10,000 physicians currently prescribing Raytel's pacemaker monitoring services. Raytel differentiates its cardiac monitoring and testing services from most of its competitors by providing its services 24 hours a day, seven days a week. In addition, we offer technologists who specialize in monitoring specific pacemaker models (the more complex the unit, the more expertise a technologist is required to have), extensive quality control procedures, computerized reports for complex pacemakers, detailed reporting procedures for abnormal findings and an extensive database on pacemaker performance. RAYTEL DIAGNOSTIC IMAGING SERVICES We market the services of the Imaging Centers we manage through a team approach tailored to the needs of each Imaging Center. Our central sales organization coordinates the Imaging Center's marketing activities with the Imaging Center's radiologists. The principal selling effort is directed toward the local base of referring physicians. In support of the selling effort, Raytel provides marketing materials, including newsletters and brochures and holds routine educational sessions for physicians. Raytel also assists the Imaging Center in addressing needs of managed care organizations by negotiating contracts with these organizations and working closely with insurance plan administrators, HMO personnel, workers' compensation coordinators and hospital administrators. RAYTEL CARDIOVASCULAR DIAGNOSTIC FACILITIES We market the services of our Cardiovascular Diagnostic Facilities using the basic approach employed with the Imaging Centers. Each facility undertakes marketing activities specifically structured for its local or regional market. The manager of each facility initiates and maintains contact with local referring physicians. Raytel's central sales organization supports the local selling effort with marketing materials and assistance in the development of clinical outreach programs designed to make the capabilities of the center available to underserved segments of the community. The center manager coordinates local physician contacts with our cardiac monitoring and testing sales force to cross-sell our transtelephonic pacemaker monitoring, Holter monitoring and cardiac event detection services. We negotiate contacts with managed care organizations centrally from our Connecticut facility. This central sales group also assists the center manager in addressing the needs of such organizations. BILLING AND COLLECTION Our cardiac monitoring and testing operations generate a high volume of relatively low-cost services delivered to patients living throughout the United States. Raytel derives substantially all of its transtelephonic pacemaker monitoring, cardiac event detection services and Holter monitoring revenues from Medicare and other third-party payors and, in most cases, renders bills for its pacemaker monitoring services to at least two payors for each procedure. In the year ended September 30, 2001, we generated more than 780,000 bills to 8 Medicare and other third-party payors related to these businesses. Accordingly, our success in these businesses is substantially dependent upon the efficiency of our billing and collection systems. All of the billing and collection functions for Raytel's cardiac testing operations are centralized at our facilities in Connecticut. We have specialized data management systems that we use to obtain and record primary and secondary insurance data at the time of patient enrollment and to maintain and update that information. Our billing and collection staff is specially trained in third-party coverage and reimbursement procedures. We communicate continuously with carriers administering Medicare and have established procedures that allow us to submit most primary Medicare claims electronically, on a batch-billing basis. In addition, we maintain a database on the billing procedures and requirements of more than 1,500 insurance carriers, which enables it to efficiently process claims to primary, secondary and tertiary private insurers. Computerized billing and collection reports allow our personnel to continually monitor open accounts. Due to the complexity of the billing and collection process, Raytel, like many other healthcare service providers, experiences normal payment cycles that are considerably longer than those customary in many other industries. We typically experience billing cycles of 60 to 240 days from the billing date, depending on the type and number of third-party payors, although billing cycles can be even longer in certain situations. Based upon our experience, we believe that our specialized data processing system used in billing for our pacemaker monitoring services and our extensive background in processing high volume, third-party claims serve to minimize collection cycles and the incidence of rejected claims due to incomplete or inaccurate information. In 1998, we converted our billing processing for CEDS and Holter monitoring services to a system based on commercially available software. This system has not performed to our expectations, and we are in the process of converting this segment of our billing operations back to our internally-developed system. Raytel also bills and collects for the Imaging Centers, the Cardiovascular Diagnostic Facilities, and the other facilities that it manages. THIRD-PARTY REIMBURSEMENT Raytel derives substantially all of its revenues from Medicare, HMOs and commercial insurers and other third-party payors. Both government and private payment sources have instituted cost containment measures designed to limit payments made to healthcare providers, by reducing reimbursement rates, limiting services covered, increasing utilization review of services, negotiating prospective or discounted contract pricing and seeking competitive bids. There can be no assurance that such measures will not adversely affect the amounts or types of services that may be reimbursable to Raytel in the future, or that the future reimbursement for any service offered by Raytel will be sufficient to cover the costs and overhead allocated to such service, either of which could have a material adverse effect on our operating results. We cannot predict with any certainty whether or when additional changes in Medicare, Medicaid or other third-party reimbursement rates or policies will be implemented. However, such future changes could have a material adverse effect on our business. Reimbursement rates vary depending on the type of third-party payors. Changes in the composition of third-party payors from higher reimbursement rate payors to lower reimbursement rate payors could have an adverse effect on Raytel's operating results. In addition, Raytel anticipates that it may increasingly offer its services to third party payors on a capitated or other risk-sharing basis. To the extent that patients or enrollees covered by a risk-sharing contract require more frequent or extensive services than is anticipated by Raytel, the revenue derived from such contract may be insufficient to cover the costs of the services provided. Insufficient revenue under capitated or other risk-sharing contracts could have a material adverse effect on our business. GOVERNMENT REGULATION The healthcare industry is highly regulated, and there can be no assurance that the regulatory environment in which Raytel operates will not change significantly and adversely in the future. In general, the scrutiny of methods and levels of payment of healthcare providers and companies is increasing. 9 On August 5, 1997, President Clinton signed the Balanced Budget Act of 1997, or the "BBA", into law. Two of the areas affected most profoundly by this law were (1) fraud and abuse, and (2) the effort of the federal government to use its purchasing power to expand health care options for Medicare beneficiaries while using pressure from increased competition to control costs. The fraud and abuse provisions build on many of the provisions that were enacted by the Health Insurance Portability and Accountability Act of 1996, or "HIPPA". In addition to the specific changes, the fraud and abuse provisions of the BBA signify an apparent shift to the Office of the Inspector General of the Department of Health and Human Services, or the "OIG," of not only enforcement power, but policy-making authority as well. In addition, the BBA broadened the authority for the HCFA to enter into contracts for providing managed care to Medicare beneficiaries by expanding the type of managed care options available to Medicare beneficiaries. Raytel believes that healthcare legislation, regulations and interpretations will continue to change and, as a result, routinely monitors developments in healthcare law. We expect to modify our agreements and operations from time to time as the business and regulatory environment changes. While we believe we will be able to structure our agreements and operations in accordance with applicable law, the lack of definitive interpretations of many statutory and regulatory provisions means that there can be no assurance that Raytel's arrangements are in compliance with such provisions or will not be successfully challenged. GOVERNMENT REIMBURSEMENT PROGRAMS The federal government maintains the Medicare health insurance program for the aged. Individual states have programs for medical assistance to the indigent known generally as Medicaid, which are partially financed by the federal government. Federal Medicaid funds are currently conditioned on state compliance with federal requirements. A significant portion of Raytel's revenues is received under Medicare and other government programs. Both the Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, interpretations of policy, intermediary determinations, and government funding restrictions, all of which may materially increase or decrease the rate of program payments to healthcare facilities and other healthcare suppliers and practitioners. Raytel's existing cardiac monitoring and testing services, diagnostic imaging services and Cardiovascular Diagnostic Facilities derive a substantial portion of their revenue from payments made under the Medicare program, and we anticipate that any future facilities or services will also derive significant revenues from these sources. In order to participate in this program, a newly-developed facility must be certified after officials administering the Medicare program in the state where the facility is located, or their designees, have conducted a survey of the facility, a process that cannot commence until the facility opens and begins providing services to patients. Once a facility is certified, it will be reimbursed by Medicare for services performed from the date on which a satisfactory survey is conducted in connection with the certification of the facility or such later date as an acceptable plan is submitted to correct any deficiencies noted in the survey. We expect that delays in the certification process may occur and may increase with the funding limitations being imposed on certifying authorities. Combined with the billing and collection cycle for Medicare reimbursement that all healthcare facilities experience, these delays could result in a three to six month working capital deficiency during the start-up phase for newly developed facilities. These working capital deficiencies will have to be funded by Raytel through working capital advances to the facilities using funds provided by operating or financing activities. THE STARK LAW AND MEDICARE FRAUD AND ABUSE LAWS Raytel is subject to a variety of laws and regulations governing the referral of patients to facilities with whom the referring physician has a financial relationship. Subject to certain exceptions, physicians who have a financial relationship with an entity providing healthcare services are prohibited by federal law, often referred to as the "Stark Law," from referring or admitting patients to that entity for the provision of certain designated services reimbursable under Medicare or Medicaid, as well as certain other federally assisted state healthcare programs. The entity providing healthcare services is also prohibited from presenting, or causing to be presented, a claim or bill for the 10 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. 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." 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, regulations adopted to implement the Stark Law 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 Raytel's 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 Raytel has an ownership interest and, absent the availability of an exception under such laws, could prohibit physicians with ownership interests in Raytel from referring any patients to such facilities. We are also subject to the illegal remuneration provisions of the federal Social Security Act and similar state laws, often referred to as "Fraud and Abuse Laws," which impose civil and criminal sanctions on persons who solicit, offer, receive or pay any remuneration, directly or indirectly, for referring a patient for treatment that is paid for in whole or in part by Medicare, Medicaid or similar state or private programs. The courts and the OIG have stated that the Fraud and Abuse Laws are violated where even one purpose, as opposed to a primary or sole purpose, of the arrangement is to induce referrals. Violations of the Fraud and Abuse Laws are punishable by criminal or civil penalties, which may include exclusion or suspension of the provider from future participation in the Medicare, Medicaid and similar state and federal programs, as well as substantial fines. The federal government has published exemptions, or "safe harbors," for business transactions that will be deemed not to violate the federal Fraud and Abuse Laws. Although satisfaction of the requirements of these safe harbors provides protection from criminal prosecution or penalties under the federal anti-kickback legislation, failure to meet the safe harbors does not necessarily mean a transaction violates the statutory prohibitions. Due to the breadth of the statutory provisions of the Fraud and Abuse Laws and the absence of definitive regulations or court decisions addressing the type of arrangements by which Raytel and its affiliated entities conduct and will conduct their business, from time to time certain of their practices may be subject to challenge under these laws. We have attempted to structure our business relations to comply with the Stark Legislation, the Fraud and Abuse Laws and all other applicable healthcare laws and regulations. However, there can be no assurance that such laws will be interpreted in a manner consistent with our practices. In addition, state legislatures and other governmental entities are considering additional measures restricting or regulating referrals, and there can be no assurance that new laws or regulations will not be enacted which will require restructuring of Raytel's operations or otherwise have a material adverse effect on our business, financial condition or operating results. 11 CERTIFICATES OF NEED AND OTHER LICENSING REQUIREMENTS Certain states in which we operate or may operate in the future prohibit the establishment, expansion or modification of certain healthcare facilities and the services provided at such facilities, including heart centers, catheterization laboratories and diagnostic imaging centers, without first obtaining a certificate of need, or "CON," or comparable license from the appropriate state regulatory agency. In addition to any CON or comparable licensing requirements that may apply, heart centers, catheterization laboratories and diagnostic imaging centers developed or operated by Raytel may also be required to comply with other licensing requirements, which vary from state to state. Obtaining CON approval or comparable licensing is typically an expensive and lengthy process and may involve adversarial proceedings initiated by competing facilities or taxpayer groups. The existence of these laws or future legislation changing these laws may make it more difficult or prohibitive for Raytel to develop heart centers, catheterization laboratories or other diagnostic facilities, maintain existing facilities or expand the services provided at such facilities or its other diagnostic imaging facilities. Raytel from time to time is required to upgrade or modify its facilities in order to maintain its licenses. In many states, a facility, such as a free-standing heart center, must be completed before a license will be issued allowing the facility to operate, and even once the facility is built there can be no assurances that a license or certification for operations will be issued by the appropriate government agency. RESTRICTIONS ON CORPORATE PRACTICE OF MEDICINE The laws of certain states in which we operate or may operate in the future prohibit non-physician entities from practicing medicine, exercising control over physicians or engaging in certain practices such as fee-splitting with physicians. Although we have structured our affiliations with physician groups so that the physicians maintain exclusive authority regarding the delivery of medical care, there can be no assurance that these laws will be interpreted in a manner consistent with our practices or that other laws or regulations will not be enacted in the future that could have a material adverse effect on our business. If a corporate practice of medicine law is interpreted in a manner that is inconsistent with our practices, we would be required to restructure or terminate its relationship with the applicable physician group to bring its activities into compliance with such law. The termination of, or failure of Raytel to successfully restructure, any such relationship could result in fines or a loss of revenue that could have a material adverse effect on our business, financial condition or operating results. MEDICAL MALPRACTICE INSURANCE In general, Raytel does not, itself, engage in the practice of medicine and requires physicians performing medical services at its facilities to maintain medical malpractice insurance. Raytel's employees do not practice medicine. However, certain of our employees are involved in the delivery of healthcare services to the public under the supervision of physicians. To protect Raytel from medical malpractice claims, including claims associated with our employees' activities, Raytel, or the Ventures for which Raytel serves as general partner, maintain professional liability and general liability insurance on a "claims made" basis in amounts deemed appropriate by management based upon the nature and risks of Raytel's business. Such policies provide malpractice coverage in the amount of $1 million per occurrence with an aggregate limit of $3 million. Insurance coverage under such policies is contingent upon a policy being in effect when a claim is made, regardless of when the events which caused the claim occurred. The cost and availability of such coverage has varied widely in recent years. While we believe our insurance policies are adequate in amount and coverage for our current operations, there can be no assurance that the coverage maintained by Raytel is sufficient to cover all future claims. In addition, there can be no assurance that we will be able to obtain such insurance on commercially reasonable terms in the future. COMPETITION The healthcare service businesses in which Raytel is currently engaged are highly competitive. The restructuring of the healthcare system is leading to rapid consolidation of the existing highly fragmented 12 healthcare delivery system into larger and more organized groups and networks of healthcare providers. We expect competition to increase as a result of this consolidation and ongoing cost containment pressures among other factors. In executing Raytel's business strategy, we compete with management services organizations, for-profit and nonprofit hospitals, HMOs and other competitors that are seeking to form strategic alliances with physicians or provide management services to physicians or to diagnostic and therapeutic facilities owned by such physicians. Raytel's cardiac monitoring and testing programs compete with a number of smaller, regional commercial entities as well as hospitals, clinics and physicians who generally provide these services as an adjunct to their primary practice. Principal competitive factors are the availability and quality of service. We believe that we compete favorably with most of our smaller competitors based on our 24-hour a day, seven-day a week service, specialized technical staff and sophisticated billing and collection system. Certain of our competitors, including local physicians and hospitals, may have certain competitive advantages over Raytel based upon their direct relationships with referring physicians. Cardiac catheterization and other cardiac diagnostic and therapeutic procedures, as well as diagnostic imaging procedures, are performed in hospitals, private physicians' offices, clinics operated by group practices of physicians and independent catheterization facilities. Although Raytel and its affiliates operate in locations throughout the United States, competition focuses on physician referrals at the local market level. Principal competitors in each of our markets are hospital and physician affiliated facilities, some of which may have greater financial and other resources than Raytel, more experience and greater name recognition than the local managers and physicians associated with our Imaging Centers and Cardiovascular Diagnostic Facilities, or better ties to the local medical community. Successful competition for referrals is a result of many factors, including quality and timeliness of test results, type and quality of equipment, facility location, convenience of scheduling and, increasingly, relationships with managed care programs. Other independent companies (including some which have substantially greater financial and operating resources than Raytel) are in the business of establishing facilities similar to the facilities in which we have or may obtain interests and providing management services to such facilities. EMPLOYEES As of November 30, 2001, Raytel employed approximately 600 full time equivalent employees. None of our employees are covered by collective bargaining contracts. ITEM 2. PROPERTIES The principal operations of Raytel and its subsidiaries are conducted at facilities located in Windsor, Connecticut; New York, New York; Haddonfield, New Jersey; and San Mateo, California. The Windsor facility, consisting of approximately 45,000 square feet, is occupied under a lease expiring in July 2004. The New York facility, consisting of approximately 23,300 square feet, is occupied under a lease expiring in September 2004. The Haddonfield facility, consisting of approximately 10,000 square feet, is occupied under a lease expiring in June 2002. The San Mateo facility, consisting of approximately 2,400 square feet, is occupied under a lease expiring in May 2003. In addition, through eight of its consolidated Imaging Centers, Raytel leases a total of approximately 36,000 square feet in facilities located in New York, New Jersey, California and Pennsylvania. Through its acquisition of CVI in August 1997, Raytel acquired Cardiovascular Diagnostic Facilities in Texas and Louisiana. The Ventures that operate the Cardiovascular Diagnostic Facilities lease a total of approximately 50,000 square feet in these facilities. We generally consider our properties to be in good condition and suitable for our anticipated needs. ITEM 3. LEGAL PROCEEDINGS Raytel's wholly-owned subsidiary, Raytel Cardiac Services, or "RCS", was the subject of a grand jury investigation begun in June 2000 and conducted under the direction of the United States Attorney for the District of Connecticut and the Office of the Inspector General of the U.S. Department of Health and Human Services, or the "OIG." The investigation involved allegations of improper practices in RCS' transtelephonic 13 pacemaker monitoring operations and its billing practices related to Medicare-covered services. The investigation did not involve Raytel's other healthcare services, such as RCS' cardiac event detection services or Raytel's diagnostic imaging services or other cardiac-related businesses. In connection with the investigation, Raytel has reviewed its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such review, Raytel held Medicare reimbursement checks received subsequent to June 23, 2000 in payment of invoices for pacemaker monitoring services and established a special account for funds inadvertently deposited with respect to such services. In addition, Raytel suspended billing for such services. Most of the checks have been deposited, most of the cash has been released from the special account, and new billings for services performed has commenced, as most of the affected patients' records have been reviewed and found to be in compliance with applicable Medicare requirements. The total amount of such uncashed checks and funds remaining in such special account was approximately $400,000 as of September 30, 2001. In June 2001, RCS reached an agreement with the federal government to resolve the issues which were the subject of the investigation. In accordance with that agreement, RCS plead guilty in U.S. District Court in Hartford, Connecticut to a charge of obstructing a criminal investigation arising out of activities related to the initial stage of the investigation in June 2000. In addition, in September 2001, RCS entered into a settlement agreement with the government to resolve related civil claims. Under the criminal and civil settlement, RCS agreed to pay a total of $11,500,000, plus interest at the rate of 7% per annum, to the government over a five-year period, and Raytel guaranteed RCS' payment obligations. As of September 30, 2001, $1,500,000 had been paid to the government. In connection with the settlement, RCS entered into a corporate integrity agreement under which it agreed that its ongoing operations would conform to specific guidelines. RCS' guilty plea did not constitute the type of conviction that would adversely affect its participation in the Medicare program or other federal healthcare programs. In connection with the OIG investigation and its resolution, RCS incurred substantial legal fees and other expenses. Raytel has accrued a reserve of $4,600,000 to cover the estimated amount of these expenses. Expenses in excess of this reserve, if any, will adversely affect operating results in future periods. The investigation, the related internal review and settlement negotiations with the government also diverted the efforts and attention of Raytel and RCS management and a number of RCS' administrative personnel. The impact of this diversion reduced the efficiency of RCS' pacemaker monitoring operations during the second half of fiscal 2000 and throughout fiscal 2001. Although the investigation has been concluded, implementation of the corporate integrity agreement continues to require the time and attention of RCS management and administrative personnel. In addition, RCS' guilty plea entered into under its agreement with the government constituted a default under Raytel's bank credit facility. In November 2001, Raytel entered into a new revolving credit arrangement and repaid indebtedness under its bank facility. However, RCS' guilty plea could adversely affect Raytel's ability to obtain debt or equity financing in the future. Raytel and its subsidiaries are parties to other litigation and claims arising out of its ongoing business operations. We believe that none of these matters, either individually or in the aggregate, are likely to have a material adverse effect on our business, financial condition or operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of Raytel's fiscal year ended September 30, 2001. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since our initial public offering in December 1995, our common stock has traded in the Nasdaq Stock Market under the symbol "RTEL." Until February 26, 2001, our common stock traded on the Nasdaq National Market, and since that date it has traded on the Nasdaq SmallCap Market. The following table sets forth the range of high and low sales prices of our common stock (adjusted to reflect the one-for-three reverse stock split effected on May 9, 2001), as reported by Nasdaq, for the periods indicated:
FISCAL YEAR ENDED SEPTEMBER 30, ----------------------------------- 2001 2000 --------------- ----------------- HIGH LOW HIGH LOW ------ ------ ------- ------- First quarter.................................... $5.063 $1.313 $12.751 $18.157 Second quarter................................... $3.375 $1.219 $12.376 $ 8.251 Third quarter.................................... $2.250 $1.100 $11.064 $ 4.875 Fourth quarter................................... $8.750 $2.000 $ 5.438 $ .656
As of September 30, 2001, there were 349 holders of record of our common stock. Raytel has never paid cash dividends on its capital stock. It is the present policy of Raytel to retain earnings to finance the development of its business and, therefore, we do not anticipate paying cash dividends in the foreseeable future. 15 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto included elsewhere in this report.
FISCAL YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATION DATA: Revenues: Cardiac information services.................... $ 37,776 $ 40,782 $ 44,731 $ 46,171 $ 47,227 Diagnostic imaging services..................... 25,694 22,652 20,143 19,977 17,610 Heart facilities and other...................... 7,798 8,887 15,047 21,246 12,156 -------- -------- -------- -------- -------- Total revenues.................................... 71,268 72,321 79,921 87,394 76,993 -------- -------- -------- -------- -------- Provision for OIG investigation expenses.......... 2,600 2,000 -- -- -- Settlement with federal government................ 11,500 -- -- -- -- Operating costs and selling, general and administrative expenses......................... 62,898 61,612 64,383 69,077 59,206 Depreciation and amortization..................... 6,485 6,582 6,808 6,653 5,751 -------- -------- -------- -------- -------- Operating income (loss)........................... (12,215) 2,127 8,730 11,664 12,036 Interest expense.................................. 1,774 1,960 2,303 2,666 340 Other expense (income), net....................... (600) (941) (1,099) (783) (3,077) Minority interest................................. 565 602 1,000 1,273 485 -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes (benefit) and extraordinary item... (13,954) 506 6,526 8,508 14,288 Provision for income taxes (benefit).............. (635) 173 2,543 3,304 5,715 -------- -------- -------- -------- -------- Income (loss) from continuing operations before extraordinary item.............................. (13,319) 333 3,983 5,204 8,573 Discontinued operations: Income (loss) from discontinued operations, net of tax (benefit)............................. (192) 830 1,371 889 812 Loss on disposal of discontinued operations, net of tax benefit............................... (19,353) (4,965) -- -- -- Extraordinary item, net of tax benefit............ -- -- -- -- (721) -------- -------- -------- -------- -------- Net income (loss)................................. $(32,864) $ (3,802) $ 5,354 $ 6,093 $ 8,664 ======== ======== ======== ======== ======== Basic income (loss) per share: Income (loss) from continuing operations........ $ (4.57) $ .11 $ 1.37 $ 1.76 $ 3.04 Income (loss) from discontinued operations...... (6.70) (1.41) .47 .30 .29 Loss from extraordinary item.................... -- -- -- -- (.26) -------- -------- -------- -------- -------- Total........................................ $ (11.27) $ (1.30) $ 1.84 $ 2.06 $ 3.07 ======== ======== ======== ======== ======== Diluted income (loss) per share: Income (loss) from contributing operations...... $ (4.57) $ .11 $ 1.32 $ 1.68 $ 2.85 Income (loss) from discontinued operations...... (6.70) (1.41) .46 .29 .27 Loss from extraordinary item.................... -- -- -- -- (.24) -------- -------- -------- -------- -------- Total........................................ $ (11.27) $ (1.30) $ 1.78 $ 1.97 $ 2.88 ======== ======== ======== ======== ======== Weighted average shares outstanding: Basic........................................... 2,917 2,915 2,904 2,960 2,819 ======== ======== ======== ======== ======== Diluted......................................... 2,917 2,915 3,013 3,098 3,013 ======== ======== ======== ======== ======== CONSOLIDATED BALANCE SHEET DATA: Total assets...................................... $ 73,229 $109,597 $117,783 $122,186 $119,421 Long-term debt and capital lease obligations(1)... 25,004 25,197 29,370 36,997 36,354 Total stockholders' equity........................ 34,931 67,862 72,029 66,491 61,899
- --------------- (1) Includes current portion of long-term debt and capital lease obligations. 16 ITEM 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's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed under "Business Environment and Future Results" and elsewhere in this discussion, that could cause actual results to differ materially from historical results or those anticipated. In this discussion, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. OVERVIEW The Company generates its revenues from cardiac information services (which include telephonic monitoring services for cardiac pacemaker patients ("Pacing"), cardiac event detection services ("CEDS") and Holter monitoring), from diagnostic imaging services and from facilities providing diagnostic, therapeutic and patient management services primarily associated with cardiovascular disease. Since 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 has also been provided from: the Raytel Heart Center at Granada Hills ("RHCGH") beginning on February 1, 1996; the management of Southeast Texas Cardiology Associates II, L.L.P. ("SETCA") beginning on September 18, 1996 and ending on May 31, 2000; the management of Comprehensive Cardiology Consultants, a Medical Group, Inc. ("CCMG") beginning on November 1, 1996 and ending on May 31, 2000; and Cardiovascular Ventures, Inc. ("CVI") beginning on August 15, 1997, which included the multi-specialty clinic, Heart and Family Health Institute ("HFHI") and six cardiovascular diagnostic facilities. HFHI was sold effective January 1, 2001. On August 15, 1997, the Company acquired all of the outstanding capital stock of CVI, of New Orleans, Louisiana. CVI managed, owned, and operated cardiovascular diagnostic facilities in Texas, Louisiana and Florida and also owned and managed HFHI in Florida. Total original consideration for the transaction consisted of cash and transaction costs of approximately $16,980,000 and 166,666 shares of Raytel's common stock. During fiscal 1998, there were additional transaction costs of approximately $280,000 and an additional 15,556 shares of the Company's Common Stock has been or will be issued. Contingent promissory notes in the aggregate principal amount of $820,000 delivered as part of the consideration were cancelled in accordance with the terms of the agreement. Effective March 27, 1999, the Company entered into a revised agreement with RHCGH. The new agreement results in significantly lower revenues and expenses than revenues and expenses recognized under the previous agreements. In November 1999, the Company filed a demand for arbitration against CCMG with JAMS/Endispute, Inc. The Company provided management services to CCMG pursuant to a long-term management services agreement entered into between the parties in November 1996. The demand for arbitration asserted that Raytel was entitled to rescission, restitution and/or damages as a result of CCMG's material breaches of the management services agreement. The arbitration was settled in fiscal 2001 with no material adverse effect to the Company. In order to settle a dispute and avoid protracted litigation, initiated by SETCA, effective May 31, 2000, the Company's Board of Directors approved management's plan to sell SETCA. Effective May 31, 2000, the Company sold substantially all of the assets of Raytel Nuclear Imaging-Orange, L.P. and the common stock of Raytel Texas Physicians Services, Inc. in exchange for the cancellation of promissory notes in the aggregate amount of approximately $2,300,000 payable by the Company to the physicians and the physicians' agreement to cancel existing rights to receive 40,689 shares of Raytel's common stock. Accordingly, the Company reported the results of operations of those discontinued entities and the loss on disposal as discontinued operations. The loss on disposal of $4,965,000, recorded at June 30, 2000, is net of an estimated tax benefit of approximately $3,367,000. 17 From June 2000 through June 2001, Raytel was the subject of a grand jury investigation of allegations concerning certain business practices of the trans-telephonic cardiac pacemaker monitoring business conducted by Raytel Cardiac Services, Inc., a wholly-owned subsidiary of the Company ("RCS"). The investigation did not involve Raytel's other healthcare services, such as RCS' cardiac event detection services or Raytel's diagnostic imaging services or other cardiac-related businesses. In connection with the investigation, Raytel has reviewed its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such review, Raytel held Medicare reimbursement checks received subsequent to June 23, 2000 in payment of invoices for pacemaker monitoring services and established a special account for funds inadvertently deposited with respect to such services received since the date the investigation began. In addition, Raytel suspended billing for such services. Most of the checks have been deposited, most of the cash has been released from the special account, and new billings for services performed has commenced as most of the affected patients' records have been reviewed and found to be in compliance with applicable Medicare requirements. The total amount of such uncashed checks and funds deposited in such special account was approximately $400,000 as of September 30, 2001. Since Raytel recognizes revenue when patient services are provided, neither the special account arrangement nor the deferred billing has had a direct impact on Raytel's operating results. If the Company's review discloses any patient billings that have not been fully compliant with Medicare requirements, any resulting billing adjustments or reversals will be charged against operating results in that current period. In addition, the Company has incurred substantial legal fees and other expenses in connection with the investigation and has accrued a reserve of $4,600,000 to cover the estimated amounts of these expenses. Additional expenses, if any, will adversely affect operating results in future periods. As of September 30, 2001, the Company had incurred legal fees and other expenses of approximately $3,945,000 related to the investigation. The remaining balance is included in "accrued other liabilities" on the Company's balance sheet. These expenses include legal fees incurred by certain employees in connection with the on-going investigation which were reimbursed by the Company in accordance with the requirements of Delaware Law and the Company's By-Laws. In June 2001, RCS reached an agreement with the federal government to resolve the issues that were the subject of the investigation. In accordance with that agreement, on June 25, 2001, RCS plead guilty in U.S. District Court in Hartford, Connecticut to a charge of obstructing a criminal investigation arising out of the initial investigation in June 2000. In addition, in September 2001, the Company and RCS entered into an agreement with the government to resolve related civil claims. Under the criminal and civil settlements, RCS agreed to pay a total of $11,500,000 to the government over a five year period, with interest of 7% per annum on the unpaid balance, and Raytel guaranteed RCS payment obligations. RCS also entered into a corporate integrity agreement under which it agreed that its ongoing operations would conform to specified guidelines. As of September 30, 2001, $1,500,000 had been paid to the government, and the next payment of $2,000,000 is due in June 2002. RCS' guilty plea did not constitute the type of conviction that would adversely affect its participation in the Medicare program or other federal healthcare programs. The investigation, the related internal compliance review, and settlement negotiations with the government diverted the efforts and attention of a number of Raytel's management and administrative personnel. The impact of this diversion reduced the efficiency of RCS' pacemaker monitoring operations during the last week of the quarter ended June 30, 2000 and adversely affected both revenues and operating expenses for that period as well as the quarter ended September 30, 2000, and throughout the fiscal year ended September 30, 2001. Although the investigation has been concluded, implementation of the corporate integrity agreement continues to require the time and attention of Raytel and RCS management and a number of RCS' administrative personnel. In addition, RCS' guilty plea entered into under its agreement with the government constituted a default under Raytel's bank credit facility. In November 2001, Raytel entered into a new revolving line of credit arrangement and repaid indebtedness under its bank facility. However, RCS' guilty plea could adversely affect Raytel's ability to obtain debt or equity financing in the future. In March 2001, effective January 1, 2001, the Company completed the sale of its wholly-owned subsidiary, HFHI, to a new company organized by physicians practicing at HFHI, including David Wertheimer, M.D., who had served as President of the subsidiary as well as an officer of Raytel and a member of Raytel's Board of Directors. Raytel received a cash purchase price of $8,311,000, net of transaction 18 expenses, in exchange for all of the common stock of HFHI. Approximately $1,234,000 of the proceeds was used to pre-pay leases for equipment used at the HFHI facility, $5,100,000 was used to reduce the indebtedness under the Company's bank credit facility and the balance was used for working capital purposes. The Company reported the results of operations of HFHI and the loss on disposal as discontinued operations for all applicable periods presented. The loss on disposal of $19,353,000 represents a one-time non-cash charge, consisting primarily of the write-off of intangible assets. Due to the uncertainty of the ultimate tax benefit to be realized as a result of the loss, the Company has not provided for any tax benefit that may result from this transaction. On May 9, 2001, the Board of Directors effected a one-for-three reverse split of the Company's common stock. The accompanying consolidated financial statements reflect such reverse stock split for all periods presented. 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, --------------------- 2001 2000 1999 ----- ----- ----- Total revenues.............................................. 100.0% 100.0% 100.0% Operating costs and selling, general and administrative expenses.................................................. 88.3 85.2 80.6 OIG investigation expenses and settlement................... 19.8 2.8 -- Depreciation and amortization............................... 9.1 9.1 8.5 ----- ----- ----- Operating income (loss)..................................... (17.2) 2.9 10.9 Interest expense and other expense (income)................. 1.6 1.4 1.5 Minority interest........................................... .8 .8 1.2 ----- ----- ----- Income (loss) from continuing operations before income taxes (benefit)................................................. (19.6) .7 8.2 Provision for income taxes (benefit)........................ (.9) .2 3.2 ----- ----- ----- Income (loss) from continuing operations.................... (18.7) .5 5.0 Discontinued operations..................................... (27.4) (5.7) 1.7 ----- ----- ----- Net income (loss)........................................... (46.1)% (5.2)% 6.7% ===== ===== =====
FISCAL YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2000 Revenues. For the fiscal year ended September 30, 2001, total revenues were $71,268,000 compared to $72,321,000 for fiscal 2000, representing a decrease of $1,053,000, or 1.5%. Cardiac information services revenues were $37,776,000 in fiscal 2001, compared to $40,782,000 in fiscal 2000, a decrease of $3,006,000, or 7.4%. The decrease in revenues for cardiac information services was due primarily to lower revenues from Pacing as a result of lower test volumes and lower average selling prices. Diagnostic imaging services revenues were $25,694,000 in fiscal 2001, compared to $22,652,000 in fiscal 2000, an increase of $3,042,000, or 13.4%, due primarily to increases in revenue at certain centers and the imaging network resulting from increases in patient volumes. Heart facilities and other revenues were $7,798,000 in fiscal 2001, compared to $8,887,000 in fiscal 2000, a decrease of $1,089,000, or 12.3%, due primarily to lower revenues at certain cardiovascular diagnostic facilities as a result of restructuring the operating agreements for these facilities to conform to new regulations and the termination of an agreement with Baptist Hospital of Beaumont, Texas. Operating Expenses. Operating costs and selling, general and administrative expenses increased by $1,286,000, or 2.1% (excluding the provision for OIG investigation expenses and the settlement with the federal government), from $61,612,000 in fiscal 2000 to $62,898,000 in fiscal 2001 due primarily to higher 19 expenses at diagnostic imaging services partially offset by decreases in costs and expenses at cardiac information services and heart facilities and other. Operating costs and selling, general and administrative expenses (excluding the provision for OIG investigation expenses and the settlement with the federal government) as a percentage of total revenues increased from 85.2% in fiscal 2000 to 88.3% in fiscal 2001. Provision for OIG Investigation Expenses. The Company provided $2,600,000 and 2,000,000 for expected expenses associated with the OIG investigation for the fiscal years ended September 30, 2001 and 2000, respectively. Settlement with Federal Government. The Company recorded a one-time charge of $11,500,000 in June 2001 related to the settlement of criminal and civil proceedings entered into between its subsidiary, Raytel Cardiac Services, and the federal government. Depreciation and Amortization. Depreciation and amortization expense decreased by $97,000, or 1.5%, from $6,582,000 in fiscal 2000 to $6,485,000 in fiscal 2001 but remained at 9.1% as a percentage of total revenues for both fiscal 2000 and 2001. Operating Income (Loss). As a result of the foregoing factors, the Company had operating income of $2,127,000 in fiscal 2000 compared to an operating loss of $12,215,000 in fiscal 2001. Interest Expense. Interest expense decreased by $186,000, or 9.5%, from $1,960,000 in fiscal 2000 to $1,774,000 in fiscal 2001 due primarily to a decrease in the average amount of debt outstanding and, to a lesser extent, a decline in interest rates. Other Expense (Income). Other income decreased by $341,000 from $941,000 for fiscal 2000 to $600,000 for fiscal 2001 due primarily to a series of insignificant items. Minority Interest. Minority interest decreased by $37,000 from $602,000 in fiscal 2000 to $565,000 in fiscal 2001 due primarily to decreased income in certain cardiovascular diagnostic facilities. Income Taxes (Benefit). The provision for income taxes decreased by $808,000 from income taxes of $173,000 in fiscal 2000 to an income tax benefit of $635,000 in fiscal 2001 as a result of decreased taxable income. Income (Loss) from Continuing Operations. As a result of the foregoing factors, the Company recorded income from continuing operations of $333,000 in fiscal 2000 compared to a loss from continuing operations of $13,319,000 in fiscal 2001. Discontinued Operations. Income from operations of a discontinued segment decreased by $1,022,000 from income of $830,000 in fiscal 2000 to a loss of $192,000 in fiscal 2001, net of tax. The loss on disposal of a discontinued segment increased from $4,965,000 (net of an estimated tax benefit of $3,367,000) to $19,353,000. Due to the uncertainty of the ultimate tax benefit to be realized as a result of the $19,353,000 loss, the Company has not provided for any tax benefit that may result from the HFHI transaction. Net Loss. As a result of the foregoing factors, the Company incurred a net loss of $32,864,000 in fiscal 2001 compared to $3,802,000 in fiscal 2000. FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1999 Revenues. For the fiscal year ended September 30, 2000, total revenues were $72,321,000 compared to $79,921,000 for fiscal year 1999, representing a decrease of $7,600,000, or 9.5%. Cardiac information services revenues were $40,782,000 in fiscal 2000, compared to $44,731,000 in fiscal 1999, a decrease of $3,949,000, or 8.8%. The decrease in revenues for cardiac information services was due primarily to lower revenues from Pacing and CEDS as a result of lower test volumes. Diagnostic imaging services revenue was $22,652,000 in fiscal 2000, compared to $20,143,000 in fiscal 1999, an increase of $2,509,000, or 12.5%, due primarily to increases in revenue at certain centers and the imaging network due to an increase in patient volumes. Heart facilities and other revenues were $8,887,000 in fiscal 2000, compared to 20 $15,047,000 in fiscal 1999, a decrease of $6,160,000, or 40.9%, due primarily to lower revenue at RHCGH due to the amended agreement and, to a lesser extent, lower revenue at certain cardiovascular diagnostic facilities. Operating Expenses. Operating costs and selling, general and administrative expenses decreased by $2,771,000, or 4.3% (excluding the provision for OIG investigation expenses), from $64,383,000 in fiscal 1999 to $61,612,000 in fiscal 2000 due primarily to lower expenses at RHCGH due to the amended agreement, partially offset by increases in costs and expenses in diagnostic imaging services and cardiac information services. Operating costs and selling, general and administrative expenses (excluding the provision for OIG investigation expenses) as a percentage of total revenues increased from 80.6% in fiscal 1999 to 85.2% in fiscal 2000. Provision for OIG Investigation Expenses. The Company provided $2,000,000 for expected expenses associated with the OIG investigation in fiscal 2000. Depreciation and Amortization. Depreciation and amortization expense decreased by $226,000, or 3.3%, from $6,808,000 in fiscal 1999 to $6,582,000 in fiscal 2000 and increased as a percentage of revenues from 8.5% in fiscal 1999 to 9.1% in fiscal 2000. Operating Income. As a result of the foregoing factors, operating income decreased by $6,603,000, or 75.6%, from $8,730,000 in fiscal 1999 to $2,127,000 in fiscal 2000. Interest Expense. Interest expense decreased by $343,000, or 14.9%, from $2,303,000 in fiscal 1999 to $1,960,000 in fiscal 2000 due primarily to a decrease in the average amount of debt outstanding. Other Expense (Income). Other income decreased by $158,000 from $1,099,000 for fiscal 1999 to $941,000 for fiscal 2000 due primarily to a series of insignificant items. Minority Interest. Minority interest decreased by $398,000 from $1,000,000 in fiscal 1999 to $602,000 in fiscal 2000 due primarily to decreased income in certain cardiovascular diagnostic facilities. Income Taxes. The provision for income taxes decreased by $2,370,000, or 93.2%, from $2,543,000 in fiscal 1999 to $173,000 in fiscal 2000 as a result of decreased taxable income. Income from Continuing Operations. As a result of the foregoing factors, income from continuing operations decreased by $3,650,000, or 91.6%, from $3,983,000 in fiscal 1999 to $333,000 in fiscal 2000. Discontinued Operations. Income from operations of a discontinued segment decreased by $541,000 from $1,371,000 in fiscal 1999 to $830,000 in fiscal 2000, net of tax. The loss on disposal of the discontinued segment of $4,965,000 is net of an estimated tax benefit of $3,367,000. Net Income (Loss). As a result of the foregoing factors, the Company incurred a net loss of $3,802,000 in fiscal 2000 versus net income of $5,354,000 in fiscal 1999. BUSINESS ENVIRONMENT AND FUTURE RESULTS The Company's future operating results may be affected by various trends in the healthcare industry as well as by a variety of other factors, some of which are beyond the Company's control. The healthcare industry is undergoing significant change as third-party payors attempt to control the cost, utilization and delivery of healthcare services. Substantially all of the Company's revenues are derived from Medicare, HMOs, commercial insurers and other third-party payors. Both government and private payment sources have instituted cost containment measures designed to limit payments made to healthcare providers by reducing reimbursement rates, limiting services covered, increasing utilization review of services, negotiating prospective or discounted contract pricing and seeking competitive bids. Revenue from the Company's Pacing operations during 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, 1999 and had a negative effect on Pacing revenue for calendar year 1999. There was a slight increase in Medicare reimbursement rates effective January 1, 2000 and again effective January 1, 2001; however, a decrease is expected effective January 1, 2002. The Company cannot predict with any certainty 21 whether or when additional reductions or changes in Medicare or other third-party reimbursement rates or policies will be implemented. There can be no assurance that future changes, if any, will not adversely affect the amounts or types of services that may be reimbursed to the Company, or that future reimbursement of any service offered by the Company will be sufficient to cover the costs and overhead allocated to such service. From time to time, Congress considers legislation to reduce Medicare and Medicaid expenditures. Future legislation of this type could have a material adverse effect on the Company's business, financial condition and operating results. Governmental agencies promulgate regulations which mandate changes in the method of delivering services which could have a material adverse effect on the Company's business. An element of the Company's strategy is to expand, in part, through acquisitions and investments in complementary healthcare businesses. The implementation of this strategy may place significant strain on the Company's administrative, operational and financial resources and increase demands on its systems and controls. There can be no assurances that businesses acquired by the Company, in the future, will be integrated successfully and profitably into the Company's operations, that suitable acquisitions or investment opportunities will be identified, or that any such transactions can be consummated. Providers of healthcare services are subject to numerous federal, state and local laws and regulations that govern various aspects of their business. There can be no assurance that the Company will be able to obtain regulatory approvals that may be required to expand its services or that new laws or regulations will not be enacted or adopted that will have a material adverse effect on the Company's business, financial condition or operating results. The healthcare businesses in which the Company is engaged are highly competitive. The Company expects competition to increase as a result of ongoing consolidations and cost-containment pressures, among other factors. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in the Company's operating results, shortfalls in such operating results from levels forecasted by securities analysts and other events or factors. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations that have particularly affected the market prices of companies in the healthcare service industries and that have often been unrelated to the operating performance of the affected companies. Announcements of changes in reimbursement policies of third-party payors, legislative or regulatory developments, economic news and other external factors may have a significant impact on the market price of healthcare stocks. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, the Company had working capital of $12,942,000, compared to $32,387,000 at September 30, 2000. At September 30, 2001, the Company had cash and temporary cash investments of $6,495,000. In connection with the settlement of the OIG investigation, the Company made payments of $1,500,000 through September 30, 2001. The Company batch-bills Medicare insurance carriers for most cardiac testing services performed during the first few months of each calendar year. This practice results in a temporary build-up of accounts receivable during the Company's second and third fiscal quarters, with the collection of these receivables occurring primarily during the subsequent fourth fiscal quarter. On December 15, 2000, the Company's line of credit agreement with two banks was amended to reduce the line of credit to $20,000,000 and to revise certain financial and other covenants and terms. The interest rate was changed to be based on LIBOR plus 275 basis points, or the bank's prime rate plus 50 basis points, at the option of the Company, and the date for repayment was extended to October 1, 2001. A new non-financial covenant was added under which any civil financial settlement in excess of $1,000,000 or any criminal charges relating to the ongoing OIG investigation would constitute an event of default. On March 16, 2001, the line of credit was further reduced to $14,900,000 in connection with the sale of the Company's HFHI subsidiary. 22 Consistent with the terms of the December 2000 amendment to the line of credit agreement, the line of credit was further reduced by $2,500,000 on June 30, 2001 to $12,400,000. At September 30, 2001, there was approximately $12,300,000 outstanding under the line of credit. The line matured on October 1, 2001 and, therefore, indebtedness outstanding under the line as of September 30, 2001 was classified as a current liability on the Company's balance sheet. In addition, at that date, the Company was in default of certain of its covenants under the credit agreement (including the new covenants relating to the disposition of the OIG investigation). In November 2001, the Company entered into a new two-year revolving credit facility with Healthcare Business Credit Corporation under which it may borrow up to $15,000,000. Loans under the facility will bear interest at prime plus 1% per annum and will be secured by accounts receivable, inventories, capital equipment and other assets of Raytel and certain of its subsidiaries and affiliated entities. Raytel used the proceeds of the new facility to repay outstanding indebtedness of approximately $12,300,000 under the bank credit line that matured on October 1, 2001. The Company's long-term capital requirements will depend on numerous factors, including the rate at which the Company develops new products and services and acquires other businesses, if any. The Company's ability to meet its working capital and capital expenditure needs for the next twelve months is dependent upon its ability to achieve profitability. The Company may require additional capital if, for example, it were to experience operating losses or if it were to pursue one or more business acquisitions. The Company cannot be certain that additional financing will be available when required, or at all. RCS' guilty plea pursuant to the settlement agreement entered into with the federal government in September 2001 could adversely affect Raytel's ability to obtain debt or equity financing in the future. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Raytel does not hold any marketable equity securities, foreign currencies, or derivative financial instruments in its investment portfolio. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Index to Financial Statements on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of Raytel are as follows:
NAME AGE POSITION - ---- --- -------- Richard F. Bader........ 64 Chairman of the Board of Directors and Chief Executive Officer Jason Sholder........... 57 President and Chief Operating Officer, Raytel Cardiac Services, Inc. Swapan Sen.............. 49 President and Chief Operating Officer, Raytel Imaging Holdings, Inc. John F. Lawler, Jr...... 55 Vice President and Chief Financial Officer Gene I. Miller.......... 60 Director Allan Zinberg........... 59 Director
23 RICHARD F. BADER was a founder of Raytel in 1981 and has served as our Chief Executive Officer and as a director since our inception and as Chairman of our Board of Directors since April 1986. Mr. Bader also served as our President from our inception to May 1988 and again from May 1989 to December 1991, and as Chief Financial Officer from February 1990 to December 1991. Prior to founding Raytel, Mr. Bader was employed as President and Chief Executive Officer of Compression Labs, Inc., a developer of video teleconferencing equipment and digital signal compression technology, from 1977 to 1981, and of Integrated Microsystems, a manufacturer of semiconductor microsystems, from 1969 to 1975. JASON SHOLDER joined us in May 2000 as a Senior Vice President of Raytel and President and Chief Operating Officer of our Raytel Cardiac Services subsidiary. From September 1999 until May 2000, he worked as an independent consultant. From June 1997 to September 1999, Mr. Sholder served as President, Cardiac Assist Division, of Datascope Corporation, a manufacturer of cardiac intra-aortic balloon catheters and pumps. From February 1977 to June 1997, he worked at Pacesetter, Inc., a manufacturer of implantable cardiac pacemakers, where most recently he held the position of Senior Vice President, Technology. SWAPAN SEN has been President and Chief Operating Officer of our Raytel Imaging Holdings subsidiary since May 2000 and a Senior Vice President of Raytel since December 1997. Prior thereto, he served as a Vice President of Raytel from February 1990, when he joined Raytel following the acquisition of Cardiac Datacorp, Inc. ("CDI"). Since our acquisition of Cardiovascular Ventures, Inc. ("CVI") in August 1997, Mr. Sen has had primary responsibilities for the day-to-day operations of Raytel's cardiovascular diagnostic facilities, and continues to have primary responsibility for the day-to-day operations of Raytel's imaging centers. From February 1990 to December 1991, he managed the three imaging centers associated with the CDI acquisition. From December 1985 to February 1990, Mr. Sen served in the same capacity with CDI. JOHN F. LAWLER, JR. has served as our Vice President and Chief Financial Officer since May 1999, prior to which he had served as our Vice President-Corporate Controller since March 1993. Mr. Lawler served as Corporate Controller of Zygo Corp., a manufacturer of measuring equipment and optical components, from September 1983 to March 1993. Prior to September 1983, he served with Raymond Industries, Inc., a diversified manufacturing company, and KPMG Peat Marwick. GENE I. MILLER has been one of our directors since February 1989. Mr. Miller has been a general partner of Peregrine Ventures funds, a venture capital firm, since its inception in 1981. Mr. Miller serves on the boards of several privately held companies. ALLAN ZINBERG retired in December 1999 as our President and Chief Operating Officer, a capacity in which he had served since December 1991. Mr. Zinberg joined us as President of our CDI subsidiary in February 1990, when we acquired CDI, and has served on our Board of Directors since that time. From June 1974 to February 1990, Mr. Zinberg was employed by CDI, where he served as a senior executive from June 1979 to February 1990. There are no family relationships among directors or executive officers of Raytel. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater-than-10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on review of the copies of such reports furnished to us, all Section 16(a) filing requirements applicable to our officers, directors and greater-than-10% stockholders were satisfied during the fiscal year ended September 30, 2001. 24 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation earned for services rendered to us during each of the fiscal years ended September 30, 1999, 2000 and 2001 by Chief Executive Officer, our three other executive officers and one former executive officer who would have been among the five most highly compensated executive officers had he been an executive officer as of September 30, 2001 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION(1) COMPENSATION ----------------------- --------------- FISCAL OPTIONS GRANTED ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (SHARES) COMPENSATION - --------------------------- ------ ---------- ---------- --------------- ------------ Richard F. Bader...................... 2001 $293,253 -- -- $10,989(2) Chairman of the Board and 2000 $293,253 $ 75,000 -- $10,497(3) Chief Executive Officer 1999 $299,760 $190,000 100,0000(4) $26,491(5) Jason Sholder(6)...................... 2001 $300,000 -- -- $ 360(2) President and Chief Operating Officer, Raytel Cardiac Services 2000 $111,393 -- 83,333 $ 60(3) Swapan Sen............................ 2001 $250,001 $130,000 -- $10,989(2) President and Chief Operating Officer, Raytel Imaging Holdings 2000 $216,555 $110,000 66,666 $10,497(3) 1999 $186,895 $110,000 20,333(4) $22,886(5) John F. Lawler, Jr.................... 2001 $162,384 -- -- $10,899(2) Vice President and 2000 $152,633 $ 5,000 -- $10,122(3) Chief Financial Officer 1999 $137,525 $ 20,000 2,000(4) $10,288(5) David E. Wertheimer, M.D.(7).......... 2001 $105,000 -- -- $ 36(2) Former Senior Vice President 2000 $420,000 $ 19,636 -- $ 36(3) 1999 $350,000 $ 20,000 12,333 $ 36(5)
- --------------- (1) Includes amounts (if any) deferred under our 401(k) Plan and our Executive Deferred Compensation Plan. (2) Includes matching contributions by Raytel under its 401(k) Plan, contributions by Raytel to the Pension Plan for calendar year 2000 and life insurance premiums paid by Raytel for the benefit of the Named Executive Officer. The amounts representing 401(k) Plan contributions are $2,625 for each of Messrs. Bader, Sen and Lawler. The amounts representing Pension Plan contributions are $7,914 for each of Messrs. Bader, Sen and Lawler. The amounts representing life insurance premiums are $450 for each of Messrs. Bader and Sen, $360 for each of Messrs. Lawler and Sholder and $36 for Dr. Wertheimer. (3) Includes matching contributions by Raytel under its 401(k) Plan, contributions by Raytel to the Pension Plan for calendar year 1999 and life insurance premiums paid by Raytel for the benefit of the Named Executive Officer. The amounts representing 401(k) Plan contributions are $2,625 for each of Messrs. Bader, Sen and Lawler. The amounts representing Pension Plan contributions are $7,422 for each of Messrs. Bader and Sen and $7,137 for Mr. Lawler. The amounts representing life insurance premiums are $450 for each of Messrs. Bader and Sen, $360 for Mr. Lawler, $60 for Mr. Sholder and $36 for Dr. Wertheimer. (4) Consists of options granted in replacement of repriced options. (5) Includes deferred compensation adjustment amounts of $15,993 for Mr. Bader and $12,066 for Mr. Sen. Also includes matching contributions by Raytel under its 401(k) Plan, contributions by Raytel to the Pension Plan for calendar year 1998 and life insurance premiums paid by Raytel for the benefit of the Named Executive Officer. The amounts representing 401(k) Plan contributions are $2,500 for Mr. Bader, $2,822 for Mr. Sen and $2,919 for Mr. Lawler. The amounts representing Pension Plan contributions are $7,548 for each of Messrs. Bader and Sen and for $7,009 for Mr. Lawler. The amounts 25 representing life insurance premiums are $450 for each of Messrs. Bader and Sen, $360 for Mr. Lawler and $36 for Dr. Wertheimer. (6) Mr. Sholder became President of our Raytel Cardiac Services, Inc. subsidiary on May 15, 2000. (7) Dr. Wertheimer's employment with Raytel terminated effective January 1, 2001. STOCK OPTION GRANTS DURING FISCAL YEAR No stock options were granted to any Named Executive Officers during the fiscal year ended September 30, 2001. OPTION EXERCISES AND YEAR-END HOLDINGS None of the Named Executive Officers exercised any options during the fiscal year ended September 30, 2001. The following table sets forth information concerning the stock options held as of September 30, 2001 by the Named Executive Officers: AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SEPTEMBER 30, 2001 SEPTEMBER 30, 2001(1) ------------------------------ --------------------------- NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- -------------- ------------- ----------- ------------- Richard F. Bader........................... 140,508 -- -- -- Jason Sholder.............................. 26,039 57,293 -- -- Swapan Sen................................. 39,080 54,251 -- -- John F. Lawler, Jr......................... 4,500 500 -- -- David E. Wertheimer, M.D................... -- -- -- --
- --------------- (1) Based on the closing price of $5.10 for our Common Stock as quoted on the Nasdaq SmallCap Market on September 28, 2001, less the exercise price. (2) Options granted prior to October 1, 1995, including options granted more recently in replacement of such options, are fully exercisable, subject to Raytel's right to repurchase any unvested shares at the original exercise price in the event of the optionee's termination. Options (or shares issued upon exercise thereof) vest over periods of two to four years from the date of grant. DIRECTOR COMPENSATION Non-employee directors are entitled to a fee of $1,500 for each Board meeting they attend. In addition, our 1995 Outside Directors Stock Option Plan (the "Directors Plan") provides for formula-based grants of options to non-employee directors. The Directors Plan provides that each non-employee director of ours shall be granted an option to purchase 2,000 shares of our common stock on the date on which the individual first becomes a non-employee director. Thereafter, on the date immediately following each annual stockholders' meeting, each non-employee director who is reelected at the meeting shall be granted an additional option to purchase 2,000 shares if, on that date, he or she has served on the Board of Directors for at least six months. The Directors Plan provides that each option shall become exercisable in three equal annual installments, subject to the director's continuous service and subject to adjustment at each scheduled vesting date by multiplying the number of shares eligible for vesting by a fraction, the numerator of which is the number of meetings of the Board of Directors attended by the director during the preceding 12-month period and the denominator of which is the total number of meetings held during such period. Shares which do not vest on a scheduled vesting date as a result of such an adjustment will vest instead, without further adjustment, on the fifth anniversary of the date of grant. All options granted under the Directors Plan have exercise prices equal to 26 the fair market value of one of our shares of common stock on the date of grant. Options granted under the Directors Plan have a term of ten years. In August 1999, upon the announcement of Mr. Zinberg's retirement as our President and Chief Operating Officer effective December 31, 1999, we entered into an employment agreement with Mr. Zinberg pursuant to which he was entitled to receive his annual salary in the amount of $292,253, in addition to standard health and dental benefits, until December 31, 2001. In January 2000, we entered into a written consulting services agreement with Mr. Zinberg, pursuant to which we agreed to compensate Mr. Zinberg in the amount of $140 for each hour, or in the event we require him to travel, a maximum of $1,120 for each day, he performs services for us. Mr. Zinberg has agreed not to compete with us in any business in which we are engaged for the term of the consulting agreement. His consulting agreement is on a month-to-month basis, although we may terminate his services at any time and he may terminate his consulting relationship with us upon 30 days written notice. EMPLOYMENT AGREEMENTS Messrs. Bader, Sen and Sholder have entered into employment agreements with Raytel that entitle each to receive a specified base annual salary, subject to increase by our Board of Directors from time to time, and such bonus as may be authorized from time to time by our Board. The agreement with Messrs. Bader and Sen expire in September 2002 and February 2002, respectively, subject to annual automatic extension for an additional year unless either party elects not to renew the agreement. The agreement with Mr. Sholder expires in May 2002, subject to annual extension for an additional year at our election. Each of the agreements requires the officer to devote his full time and attention to our affairs, with certain exceptions in the case of Mr. Sholder. If we terminate the employment of Mr. Bader, Sen or Sholder other than for cause (or if the officer voluntarily terminates his employment following certain specified actions by us), the officer will be entitled to receive severance payments equal to his then current base salary, plus continued coverage under our employee benefit plans, for a period of 24 months following the date of termination in the cases of Messrs. Bader and Sen and 12 months following the date of termination in the case of Mr. Sholder, provided that the payments to which Mr. Sholder would be entitled during such 12-month period would be offset by any income he received from other employment during that period. The current annual base salaries of Messrs. Bader, Sen and Sholder are $293,253, $280,000 and $300,000, respectively. Mr. Bader is also entitled to an automobile allowance, pursuant to which he currently has exclusive use of an automobile owned by Raytel. Mr. Sholder is also entitled to a monthly automobile allowance in the amount of $700. 27 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to us relating to the beneficial ownership of our common stock by (i) each person who is known by us to be the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each Named Executive Officer, (iii) each director and (iv) all executive officers and directors as a group, as of December 31, 2001:
NUMBER OF SHARES BENEFICIALLY NAME AND ADDRESS OWNED(1) PERCENT(1) - ---------------- ------------ ---------- Rory Riggs(2)............................................... 288,113 12.2 595 Madison Avenue, 19th Floor New York, NY 10022 Richard F. Bader(3)......................................... 355,782 9.4 c/o Raytel Medical Corporation 2755 Campus Drive, Suite 200 San Mateo, CA 94403 Hathaway & Associates, Ltd. ................................ 244,000 8.4 119 Rowayton Avenue Rowayton, CT 06853 Dimensional Fund Advisors, Inc. ............................ 207,766 7.1 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 Allan Zinberg(4)............................................ 67,747 2.3 Swapan Sen(5)............................................... 54,515 1.8 Jason Sholder(6)............................................ 36,456 1.2 Gene I. Miller(7)........................................... 10,341 * John F. Lawler, Jr.(8)...................................... 5,958 * David E. Wertheimer, M.D. .................................. -- * All executive officers and directors as a group (6 persons)(9)............................................... 463,130 14.5
- --------------- * Less than 1% (1) Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable, or will become exercisable within 60 days after December 31, 2001, are deemed outstanding. Such shares, however, are not deemed outstanding for purposes of computing the percentage ownership of any other person. In general, options granted under our 1983 Stock Option Plan, 1990 Stock Option Plan, 2000 Stock Option Plan and Directors Plan are exercisable to the extent they are vested. Options (or shares issued upon exercise thereof) vest over a period of two to four years from the date of grant. Unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. As of December 31, 2001, we had 2,919,472 shares of common stock outstanding. (2) Consists of 342,516 shares held by Balfour LLC, of which Mr. Riggs is the sole member, and 13,266 shares that Mr. Riggs holds jointly with his sister. (3) Includes 140,508 shares issuable upon exercise of stock options that are currently exercisable or will be fully exercisable within 60 days after December 31, 2001. (4) Includes 35,516 shares issuable upon exercise of stock options that are currently exercisable or will be fully exercisable within 60 days after December 31, 2001. (5) Includes 51,182 shares issuable upon exercise of stock options that are currently exercisable or will be fully exercisable within 60 days after December 31, 2001. 28 (6) Consists of shares issuable upon exercise of stock options that are currently exercisable or will be fully exercisable within 60 days after December 31, 2001. (7) Includes 6,833 shares issuable upon exercise of stock options that are currently exercisable or will be fully exercisable within 60 days after December 31, 2001. (8) Includes 4,625 shares issuable upon exercise of stock options that are currently exercisable or will be fully exercisable within 60 days after December 31, 2001. (9) Includes 275,120 shares issuable upon exercise of stock options that are currently exercisable or will be fully exercisable within 60 days after December 31, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS: Report of Independent Public Accountants Consolidated Balance Sheets as of September 30, 2001 and 2000 Consolidated Statements of Operations for the Years Ended September 30, 2001, 2000 and 1999 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the Years Ended September 30, 2001, 2000 and 1999 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 report, or incorporated herein by reference, are set forth in the Exhibit Index, which immediately follows the financial statements. (b) REPORTS ON FORM 8-K DURING THE QUARTER ENDED SEPTEMBER 30, 2001 None. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: January 28, 2002 RAYTEL MEDICAL CORPORATION By: /s/ JOHN F. LAWLER ---------------------------------------------- John F. Lawler Vice President and Chief Financial Officer
30 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE ---- RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants......................... F-2 Consolidated Balance Sheets............................... F-3 Consolidated Statements of Operations..................... F-4 Consolidated Statements of Changes in Stockholders' Equity................................................. F-5 Consolidated Statement of Cash Flows...................... F-6 Notes to Consolidated Financial Statements................ F-7 Supplemental Data: Selected Quarterly Financial Information............................................... F-20 Supplemental Data: Percentage of Consolidated Revenue by Segment................................................... F-21 Report of Independent Accountants on Schedule II to the Consolidated Financial Statements......................... F-22 Schedule II to the Consolidated Financial Statements: Valuation and Qualifying Accounts......................... F-23
F-1 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, 2001 and 2000 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, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Raytel Medical Corporation and Subsidiaries as of September 30, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Hartford, Connecticut November 29, 2001 F-2 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND 2000
SEPTEMBER 30, ------------------- 2001 2000 -------- -------- (000'S OMITTED) ASSETS Current assets: Cash and cash equivalents................................. $ 6,095 $ 7,201 Cash held for special purpose............................. 400 1,580 -------- -------- Total cash........................................... 6,495 8,781 Receivables, net.......................................... 31,404 36,840 Prepaid expenses and other................................ 2,485 2,597 -------- -------- Total current assets................................. 40,384 48,218 Property and equipment, less accumulated depreciation and amortization.............................................. 14,187 19,651 Intangible assets, less accumulated amortization............ 18,590 41,672 Other assets................................................ 68 56 -------- -------- Total assets......................................... $ 73,229 $109,597 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations............................................ $ 15,151 $ 1,067 Accounts payable.......................................... 4,757 5,258 Accrued compensation and benefits......................... 2,636 3,177 Accrued other liabilities................................. 4,898 6,329 -------- -------- Total current liabilities............................ 27,442 15,831 Long-term debt and capital lease obligations, net of current portion................................................... 9,853 24,130 Minority interest in consolidated entities.................. 1,003 1,774 -------- -------- Total liabilities.................................... 38,298 41,735 -------- -------- Commitments and contingencies (Notes 9, 11 and 13) Stockholders' equity: Common stock.............................................. 3 3 Additional paid-in capital................................ 62,672 62,670 Common stock to be issued................................. -- 69 Retained earnings (accumulated deficit)................... (24,122) 8,742 -------- -------- 38,553 71,484 Less treasury stock, at cost.............................. (3,622) (3,622) -------- -------- Total stockholders' equity........................... 34,931 67,862 -------- -------- Total liabilities and stockholders' equity........... $ 73,229 $109,597 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
SEPTEMBER 30, ---------------------------- 2001 2000 1999 -------- ------- ------- (000'S OMITTED, EXCEPT PER SHARE AMOUNTS) Revenues: Cardiac information services.............................. $ 37,776 $40,782 $44,731 Diagnostic imaging services............................... 25,694 22,652 20,143 Heart facilities and other................................ 7,798 8,887 15,047 -------- ------- ------- Total revenues......................................... 71,268 72,321 79,921 -------- ------- ------- Costs and expenses: Provision for OIG investigation expenses.................. 2,600 2,000 -- Settlement with federal government........................ 11,500 -- -- Operating costs........................................... 33,598 30,829 33,702 Selling, general and administrative....................... 29,300 30,783 30,681 Depreciation and amortization............................. 6,485 6,582 6,808 -------- ------- ------- Total costs and expenses............................... 83,483 70,194 71,191 -------- ------- ------- Operating income (loss)..................................... (12,215) 2,127 8,730 Interest expense............................................ 1,774 1,960 2,303 Other expense (income), net................................. (600) (941) (1,099) Minority interest........................................... 565 602 1,000 -------- ------- ------- Income (loss) from continuing operations before income taxes (benefit)................................................. (13,954) 506 6,526 Provision for income taxes (benefit)........................ (635) 173 2,543 -------- ------- ------- Income (loss) from continuing operations.................... (13,319) 3,983 3,983 Discontinued operations: Income (loss) from discontinued operations, net of tax.... (192) 830 1,371 Loss on disposal of discontinued operations, net of tax benefit................................................ (19,353) (4,965) -- -------- ------- ------- Net income (loss)........................................... $(32,864) $(3,802) $ 5,354 ======== ======= ======= Basic income (loss) per share: Income (loss) from continuing operations.................. $ (4.57) $ .11 $ 1.37 Income (loss) from discontinued operations................ (6.70) (1.41) .47 -------- ------- ------- Total.................................................. $ (11.27) $ (1.30) $ 1.84 ======== ======= ======= Diluted income (loss) per share: Income (loss) from continuing operations.................. $ (4.57) $ .11 $ 1.32 Income (loss) from discontinued operations................ (6.70) (1.41) .46 -------- ------- ------- Total.................................................. $ (11.27) $ (1.30) $ 1.78 ======== ======= ======= Weighted average shares outstanding: Basic..................................................... 2,917 2,915 2,904 ======== ======= ======= Diluted................................................... 2,917 2,915 3,013 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-4 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
RETAINED COMMON STOCK ADDITIONAL COMMON EARNINGS TOTAL ------------------ PAID-IN STOCK TO (ACCUMULATED TREASURY STOCKHOLDERS' SHARES AMOUNT CAPITAL BE ISSUED DEFICIT) STOCK EQUITY --------- ------ ---------- --------- ------------ -------- ------------- (000'S OMITTED, EXCEPT SHARES) Balance at September 30, 1998....................... 2,887,833 $3 $61,796 $1,124 $ 7,190 $(3,622) $ 66,491 Net income................... -- -- -- -- 5,354 -- 5,354 Options exercised............ 19,735 -- 120 -- -- -- 120 Stock compensation grant..... 2,449 -- 37 -- -- -- 37 Employee stock purchase...... 2,325 -- 27 -- -- -- 27 Value of 2,701 shares issued..................... 2,701 -- 79 (79) -- -- -- --------- -- ------- ------ -------- ------- -------- Balance at September 30, 1999....................... 2,915,043 3 62,059 1,045 12,544 (3,622) 72,029 Net loss..................... -- -- -- -- (3,802) -- (3,802) Employee stock purchase...... 1,767 -- 11 -- -- -- 11 Cancellation of 45,787 shares to be issued............... -- -- 600 (976) -- -- (376) --------- -- ------- ------ -------- ------- -------- Balance at September 30, 2000....................... 2,916,810 3 62,670 69 8,742 (3,622) 67,862 Net loss..................... -- -- -- -- (32,864) -- (32,864) Employee stock purchase...... 2,208 -- 2 -- -- -- 2 Cancellation of 2,222 shares to be issued............... -- -- -- (69) -- -- (69) --------- -- ------- ------ -------- ------- -------- Balance at September 30, 2001....................... 2,919,018 $3 $62,672 $ 0 $(24,122) $(3,622) $ 34,931 ========= == ======= ====== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
SEPTEMBER 30, ---------------------------- 2001 2000 1999 -------- ------- ------- (000'S OMITTED) Cash flows from operating activities: Net income (loss)......................................... $(32,864) $(3,802) $ 5,354 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......................... 6,485 6,582 6,808 Minority interest...................................... 565 602 1,000 Payout of deferred compensation........................ -- -- (1,245) Settlement with federal government, net of payments.... 10,000 -- -- Net loss on disposal of discontinued operations........ 19,353 4,965 -- Other, net............................................. 385 1,832 1,745 Changes in operating accounts: Receivables, net..................................... 1,983 (7,042) 646 Prepaid expenses and other........................... (278) 474 853 Accounts payable..................................... (501) 1,556 (856) Accrued liabilities.................................. (1,845) 4,783 411 -------- ------- ------- Net cash provided by operating activities............ 3,283 9,950 14,716 -------- ------- ------- Cash flows from investing activities: Capital expenditures...................................... (3,280) (5,297) (7,773) Proceeds from disposal of discontinued operations......... 8,876 -- -- Other, net................................................ 212 661 (36) -------- ------- ------- Net cash provided by (used in) investing activities........................................ 5,808 (4,636) (7,809) -------- ------- ------- Cash flows from financing activities: Proceeds from (pay-down of) line of credit................ (7,971) 1,211 (9,178) Income distributions to limited partners.................. (1,347) (1,774) (1,594) Proceeds from (principal repayments of) debt.............. (2,073) (2,020) 2,325 Other, net................................................ 14 (60) 187 -------- ------- ------- Net cash used in financing activities................ (11,377) (2,643) (8,260) -------- ------- ------- Net increase (decrease) in cash and cash equivalents........ (2,286) 2,671 (1,353) Cash at beginning of year................................... 8,781 6,110 7,463 -------- ------- ------- Cash at end of year......................................... $ 6,495 $ 8,781 $ 6,110 ======== ======= ======= Supplemental disclosure of cash flow information: Interest paid............................................. $ 1,760 $ 2,036 $ 2,680 ======== ======= ======= Income taxes paid, net of refunds received................ $ (1,960) $ 1,073 $ 2,309 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES 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. Since 1990, the Company has acquired and disposed of various medical services businesses and entered into agreements with various medical service providers. Significant transactions occurring during the past five fiscal years are described below: (a) An agreement, with Granada Hills Community Hospital, became effective February 1, 1996 and provided for the creation of the Company's first integrated heart center, the Raytel Heart Center at Granada Hills ("RHCGH"). Under the agreement, which was amended in September 1998, the Company was responsible for the day-to-day operations of RHCGH, including administrative support and other non-medical aspects of the program. Effective March 27, 1999, the Company entered into a revised agreement with RHCGH, which resulted in significantly lower revenues and expenses than those recognized under the previous agreements. (b) Effective June 11, 1996, the Company acquired certain assets and assumed certain liabilities of Cardio Data Services, Inc. ("CDS"). CDS provides clinical transtelephonic pacemaker monitoring, cardiac event detection and Holter monitoring services. The purchase price of the transaction was $14,254,000 of which $13,985,000 was allocated to the acquisition of intangible assets, the majority of which is being amortized over 25 years. (c) On September 18, 1996, the Company acquired all of the non-medical assets of Southeast Texas Cardiology Associates, P.A. ("SETCA") and entered into a long-term management service agreement whereby the Company managed the non-medical aspects of the practice. The Company assumed responsibility for providing office space as well as billing and collection activities and other management services. Total consideration for the transaction was cash and transaction costs of $4,010,000, promissory notes of $2,289,000 and 40,689 shares of the Company's Common Stock to be delivered at future dates, valued at $852,000. The shares of Common Stock were valued at a discount from the then current trading price after considering all relevant factors, including, but not limited to, normal discounts for marketability due to the time delay in delivery of the shares. The recorded amounts for the aggregate number of shares of Common Stock to be delivered were discounted 40% from comparable cash sales of Common Stock. The scheduled issuance of the shares of Common Stock that the Company was committed to deliver was 28,483 in 2000 and 12,206 in 2001 (See (f) below). (d) On October 18, 1996, the Company entered into a long-term management service agreement whereby the Company managed the non-medical aspects of Comprehensive Cardiology Consultants, a Medical Group, Inc. ("CCMG"), a physician practice. Total consideration for the transaction was cash of $427,000, promissory notes of $620,000 and 4,792 shares of the Company's Common Stock to be delivered at future dates, valued, as described above, at $91,000. In November 1999, the Company filed a demand for arbitration against CCMG with JAMS/ Endispute, Inc. The demand for arbitration asserts that Raytel is entitled to rescission, restitution and/or damages as a result of CCMG's material breaches of the management services agreement. The arbitration was settled in fiscal 2001 with no material adverse effect to the Company. (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 F-7 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in Texas, Louisiana and owned and managed a cardiovascular diagnostic facility and a multi-specialty clinic in Florida ("HFHI") (See (g) below). Total original consideration for the transaction was cash and transaction costs of approximately $16,980,000, 166,666 shares of the Company's Common Stock and contingent promissory notes in the aggregate principal amount of $820,000. During fiscal 1998 there were additional transaction costs of approximately $280,000 and an additional 15,556 shares of the Company's Common Stock was to be issued. Also, the $820,000 of contingent promissory notes were cancelled in accordance with the terms of the agreement. (f) In order to settle a dispute and avoid protracted litigation, initiated by SETCA, effective May 31, 2000, the Company's Board of Directors approved management's plan to sell SETCA. Effective May 31, 2000, the Company sold substantially all of the assets of Raytel Nuclear Imaging-Orange, L.P. and the Common Stock of Raytel Texas Physicians Services, Inc. in exchange for the cancellation of promissory notes in the aggregate principal amount of approximately $2,300,000 payable by the Company to the physicians and the physicians' agreement to cancel rights to receive 40,689 shares of Raytel's Common Stock. The loss on the disposal of $4,965,000, recorded June 30, 2000, was net of an estimated $3,367,000 tax benefit. Accordingly, the results of the operations of these entities have been accounted for as discontinued operations and the related operating results have been reported separately from the Company's continuing operations for all periods presented. Prior year operating results have been restated. Revenues applicable to the above discontinued segments for the years ended September 30, 2001, 2000 and 1999 were $0, $2,432,000 and $5,522,000, respectively. (g) In March 2001, effective January 1, 2001, the Company completed the sale of its wholly-owned subsidiary, HFHI, to a new company organized by physicians practicing at HFHI, including David Wertheimer, M.D., who had served as President of the subsidiary as well as an officer of Raytel and a member of Raytel's Board of Directors. Raytel received a cash purchase price of $8,311,000, net of transaction expenses, for all of the common stock of the subsidiary. Approximately $1,234,000 of the proceeds were used to pre-pay leases for equipment used at the HFHI facility, $5,100,000 was used to reduce the indebtedness under the Company's bank credit facility and the balance was used for working capital purposes. The Company reported the results of operations of HFHI and the loss on disposal as discontinued operations for all applicable periods presented. Prior year operating results have been restated. The loss on disposal of $19,353,000 represents a one-time non-cash charge, consisting primarily of the write-off of intangible assets. Due to the uncertainty of the ultimate tax benefit to be realized as a result of the loss, the Company has not provided for any tax benefit that may result from this transaction. Revenues applicable to this discontinued segment for the years ended September 30, 2001, 2000 and 1999 were $3,948,000, $17,629,000 and $15,951,000, respectively. (h) The Company's acquisitions have been accounted for as purchases in accordance with accounting principles generally accepted in the United States. 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. F-8 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At September 30, 2001, the Company owned seven imaging centers and held interests in two others through investments in various joint ventures and limited partnerships (the "Ventures"). All Ventures are consolidated for financial reporting purposes, as the Company owns more than 50% of each of the Ventures and/or controls their assets and operations. At September 30, 2001, the Company held interests in four cardiovascular diagnostic facilities, through investments in various limited partnerships (the "Partnerships") and wholly-owned two others. All Partnerships are consolidated for financial reporting purposes, as the Company owns more than 50% of each of the Partnerships and/or controls their assets and operations as the Company is the general partner for the four facilities and, as such, makes strategic operating decisions for the partnerships. Minority interests in consolidated entities represent the investment of third-parties in certain consolidated Ventures and Partnerships. All significant intercompany accounts and transactions are eliminated in consolidation. (b) Revenue Recognition -- Net patient and service revenues are recognized at established rates when the services are provided. Contractual allowances are calculated for services provided at less than the established rates as approved by Medicare or other third-party payors and are recorded as deductions from revenue. Consolidated diagnostic imaging revenues principally represent fees for services provided to patients net of physician fees, contractual allowances and certain expenses. (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) Intangible Assets -- Intangible assets principally consist of physician referrals and patient lists, 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 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. (f) 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. (g) Use of Estimates -- The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States 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. (h) New Accounting Standards -- The Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, in July 2001 (effective for the Company's fiscal 2003). Statement No. 141 will not have an effect on the Company's results and the Company is currently assessing what effect, if any, Statement No. 142 will have on its results. F-9 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (i) Fair Value of Financial Instruments -- The carrying amounts of all financial instruments approximate fair value. (j) 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. In those circumstances, the Company estimates the net undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. If the undiscounted expected cash flows are lower than the carrying amount of the asset, an impairment loss would be recorded. NOTE 3. RECEIVABLES: Receivables consist of the following (in thousands):
SEPTEMBER 30, ----------------- 2001 2000 ------- ------- Patient and service receivables............................. $33,966 $39,059 Less allowance for doubtful accounts........................ (4,400) (6,690) ------- ------- 29,566 32,369 Tax refund and other receivables............................ 1,838 4,471 ------- ------- Total..................................................... $31,404 $36,840 ======= =======
NOTE 4. PROPERTY AND EQUIPMENT: Property and equipment consist of the following (in thousands):
SEPTEMBER 30, ------------------- 2001 2000 -------- -------- Equipment, furniture and fixtures........................... $ 36,305 $ 39,225 Leasehold improvements...................................... 7,538 9,315 -------- -------- 43,843 48,540 Less accumulated depreciation and amortization.............. (29,656) (28,889) -------- -------- $ 14,187 $ 19,651 ======== ========
Depreciation expense was $4,790,000, $4,768,000 and $4,701,000 for the years ended September 30, 2001, 2000 and 1999 respectively. NOTE 5. INTANGIBLE ASSETS: Intangible assets consist of the following (in thousands):
SEPTEMBER 30, ------------------- 2001 2000 -------- -------- Goodwill.................................................... $ 27,294 $ 48,458 Physician referrals and patient lists....................... 11,056 11,037 Other....................................................... 4,703 4,993 -------- -------- 43,053 64,488 Less accumulated amortization............................... (24,463) (22,816) -------- -------- $ 18,590 $ 41,672 ======== ========
Amortization expense related to intangible assets totaled $1,695,000, $1,814,000 and $2,107,000 for the years ended September 30, 2001, 2000 and 1999; respectively. F-10 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, ------------------ 2001 2000 -------- ------- Line of credit(a)........................................... $ 12,287 $20,258 Settlement with federal government(b)....................... 10,000 -- Other(c).................................................... 2,717 4,939 -------- ------- 25,004 25,197 Less current maturities..................................... (15,151) (1,067) -------- ------- $ 9,853 $24,130 ======== =======
- --------------- (a) In August 1996, the Company entered into an agreement with two banks providing for a line of credit for $25,000,000. This agreement was amended in September 1997 to expand the line of credit to $45,000,000 and was further amended in July 1998 and July 1999 to revise certain terms and covenants. The Company's access to the line of credit was subject to the maintenance of certain financial covenants related to the Company's level of indebtedness and cash flow. The interest rate was 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. Borrowings under the line were collateralized by substantially all of the assets of the Company and its subsidiaries. On December 15, 2000, the agreement was amended to reduce the line of credit to $20,000,000 and to revise certain financial and other covenants and terms. The interest rate was changed to be based on LIBOR plus 275 basis points, or the bank's prime rate plus 50 basis points, at the option of the Company and the due date was extended to October 1, 2001. A new non-financial covenant was added under which any civil financial settlement in excess of $1,000,000 or any criminal charges relating to the ongoing OIG investigation would constitute an event of default. At September 30, 2001, there was approximately $12,300,000 outstanding under the line of credit. The line matured on October 1, 2001 and, therefore, was classified as a current liability on the Company's consolidated balance sheet. In November 2001, the Company entered into a new two year revolving credit facility with Healthcare Business Credit Corporation under which it may borrow up to $15,000,000. The interest rate is prime plus 1% per annum. Loans under the facility will be secured by accounts receivable, inventories, capital equipment and other assets of Raytel and certain of its subsidiaries and affiliated entities. Raytel used the proceeds of the facility to repay outstanding indebtedness of approximately $12,300,000 under the previous line of credit. The Company's access to the line of credit is subject to the maintenance of certain financial and other covenants. (b) Represents amount due under a settlement with the Federal Government (See Note 13). (c) Other debt includes nonrecourse notes and capital lease obligations with varying maturities at interest rates ranging from 7.25% to 11.71% per annum. The majority of these notes and leases are collateralized by the equipment purchased. Notes payable, long-term debt and capital lease obligations maturing within each of the five years subsequent to September 30, 2001 are as follows: 2002 -- $15,151,000; 2003 -- $2,901,000; 2004 -- $2,740,000; 2005 -- $2,206,000 and 2006 -- $2,006,000. NOTE 7. PREFERRED STOCK AND COMMON STOCK: The Company has 2,000,000 shares of undesignated Preferred Stock authorized for issuance. The Company's Board of Directors has the authority to issue such Preferred Stock in one or more series and to F-11 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) establish the terms of each series which may be greater than the rights of the Common Stock. As of September 30, 2001, no such shares had been issued. In August 1998, the Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan"). Under the Rights Plan, each outstanding share of Raytel Common Stock held of record at the close of business on September 2, 1998 received one right to purchase one one-hundredth of a share of a new series of Preferred Stock for $30.00 per right when someone acquires 15 percent or more of Raytel's Common Stock or announces a tender offer which could result in such person owning 15 percent or more of the Common Stock. The rights expire on August 13, 2008. On May 9, 2001, the Company effected a one-for-three reverse split of the Company's Common Stock. The accompanying consolidated financial statements reflect such reverse stock split for all periods presented. There are 20,000,000 shares of Common Stock, $.001 par value, authorized. NOTE 8. STOCK OPTIONS AND WARRANTS: WARRANTS Upon completion of the Company's initial public offering (the "Offering") in December 1995, in accordance with the terms of a 1993 acquisition, the Company issued the seller warrants to purchase 77,066 shares of Common Stock at an exercise price of $25.20 per share. These warrants expired in December 2000, five years from the effective date of the Offering. STOCK OPTION PLANS The Company has options outstanding under the 1983 Incentive Stock Option Plan as Amended (the "1983 Option Plan") the 1990 Stock Option Plan (the "1990 Option Plan"), and the 2000 Stock Option Plan (the "2000 Option Plan"). Generally, the 1983 Option Plan, the 1990 Option Plan and the 2000 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. In the event of a change in control, as defined, all options granted become exercisable. 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 2,000 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 2,000 shares, as defined. Total vesting occurs, based on a formula, no sooner than three years nor longer than five years. The exercise price per share of all options granted under the Directors Plan shall be equal to the fair market value of a share of the Company's Common Stock on the date of grant. In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), was issued. SFAS 123 requires the measurement of the fair value of stock options or warrants to be included in the statements of operations or disclosed in the notes to financial statements. The Company has determined that it will retain its existing method of accounting for stock options and has elected the pro forma footnote disclosure included in the tables below. Accordingly, SFAS 123 has no effect on the Company's consolidated financial position or results of operations. F-12 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has computed the pro forma disclosures required under SFAS 123 for options granted in fiscal 2001, 2000 and 1999 using the Black-Scholes option pricing model prescribed by SFAS 123. The weighted average assumptions used are as follows:
SEPTEMBER 30, ------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ Risk free interest rate...................... 4.10% - 5.75% 6.09% - 6.40% 4.10% - 5.03% Expected dividend yield...................... None None None Expected lives............................... 3 years 3 years 3 years Expected volatility.......................... 84.9% 84.8% 67.9%
Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates of awards under these plans consistent with the method of SFAS 123, the Company's net income (loss) and net income (loss) per common share would have decreased to the pro forma amounts indicated below (in thousands, except per share amounts):
FOR THE YEAR ENDED SEPTEMBER 30, --------------------------------- 2001 2000 1999 ---------- --------- -------- Net income (loss): As reported........................................... $(32,864) $(3,802) $5,354 Pro forma............................................. (33,065) (4,193) 5,188 Net income (loss) per common share -- basic: As reported........................................... (11.27) (1.30) 1.84 Pro forma............................................. (11.34) (1.44) 1.79 Net income (loss) per common share -- diluted: As reported........................................... (11.27) (1.30) 1.78 Pro forma............................................. (11.34) (1.44) 1.72
A summary of the status of the Company's three stock option plans at September 30, 2001, 2000 and 1999 and changes during the years then ended is presented in the tables below:
SEPTEMBER 30, ------------------------------------------------------------- 2001 2000 1999 ------------------ ------------------ ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- ------- -------- -------- -------- Outstanding, beginning of year..... 436,553 $9.78 323,679 $12.00 352,469 $20.46 Granted............................ 67,500 3.66 195,667 6.90 222,817 11.07 Exercised.......................... -- -- -- -- (19,735) 6.06 Expired............................ (35,047) 10.67 (82,793) 11.55 (231,872) 24.48 ------- ------- -------- Outstanding, end of year........... 469,006 8.94 436,553 9.78 323,679 12.00 ======= ======= ======== Exercisable, end of year........... 289,135 10.27 207,172 11.34 148,733 11.82 ======= ======= ======== Weighted average fair value of options granted.................. 8.52 6.63 6.63
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------- ---------------------- WEIGHTED WEIGHTED NUMBER WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE OPTIONS OUTSTANDING SUMMARY OUTSTANDING REMAINING EXERCISE AS OF EXERCISE RANGE OF EXERCISE PRICES AT 9/30/01 LIFE (IN YEARS) PRICE 9/30/01 PRICE - --------------------------- -------------- --------------- -------- ----------- -------- $2.625 - $35.625....... 494,056 7.12 $8.94 289,135 10.27
F-13 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At September 30, 2001, there were 157,666 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, 2001, the future minimum rental payments for each fiscal year thereafter under all noncancelable operating leases are as follows (in thousands):
FISCAL YEAR ENDING SEPTEMBER 30: ------------------ 2002................................................... $4,181 2003................................................... 3,827 2004................................................... 3,358 2005................................................... 2,159 2006................................................... 2,115 Thereafter............................................. 745
NOTE 10. INCOME TAXES: The provision for income taxes consists of the following (in thousands):
FOR THE YEAR ENDED SEPTEMBER 30, -------------------------------- 2001 2000 1999 --------- --------- -------- Current: Federal................................................ $(1,128) $(2,559) $2,366 State.................................................. 493 (205) 1,053 ------- ------- ------ Total tax (benefit)............................ (635) (2,764) 3,419 Less (tax) plus benefit from discontinued operations..... -- 2,937 (876) ------- ------- ------ Provision for income taxes (benefit) from continuing operations............................................. $ (635) $ 173 $2,543 ======= ======= ======
At September 30, 2001 and 2000, the Company had $6,413,000 and $2,411,000, 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, 2001 and 2000 are as follows (in thousands):
CURRENT ASSET LONG-TERM ASSET (LIABILITY) (LIABILITY) --------------- ----------------- 2001 2000 2001 2000 ------- ----- ------- ------- OIG settlement.................................. $ -- $ -- $ 2,356 $ -- Depreciation and amortization................... -- 151 1,139 2,085 Net operating loss and tax credits.............. -- -- 395 -- Reserves for accounts receivable................ 1,402 54 -- -- Other, net...................................... 1,121 (36) -- 157 ------- ----- ------- ------- 2,523 169 3,890 2,242 Valuation allowance............................. (2,523) (169) (3,890) (2,242) ------- ----- ------- ------- Total deferred income taxes..................... $ -- $ -- $ -- $ -- ======= ===== ======= =======
F-14 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliation of the federal statutory rate from continuing operations to the Company's effective tax rate is as follows (dollars in thousands):
FOR THE YEAR ENDED SEPTEMBER 30, -------------------------------------------------- 2001 2000 1999 --------------- -------------- ------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ------- ----- ------ ----- ------ ---- Federal income tax (benefit) at the statutory rate........................... $(4,744) (34.0)% $ 172 34.0% $2,219 34.0% State income taxes, net of federal benefit.................................. 325 2.3 (135) (26.7)% 695 10.7 OIG settlement............................. 1,700 12.2 -- -- -- -- Valuation allowance........................ 1,862 13.3 -- -- -- -- Other...................................... 222 1.6 136 26.9 (371) (5.7) ------- ----- ----- ----- ------ ---- Total............................ $ (635) (4.6)% $ 173 (34.2)% $2,543 39.0% ======= ===== ===== ===== ====== ====
At September 30, 2001, the Company had federal tax loss carryforwards of $195,000, state carryforwards of $3,253,000 and AMT credit carryforwards of $158,000. 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 $628,000, $619,000 and $599,000 for the years ended September 30, 2001, 2000 and 1999; 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 $182,000, $188,000 and $183,000 for the years ended September 30, 2001, 2000 and 1999; respectively. NOTE 12. PRINCIPAL CUSTOMERS: All services performed by the Company are performed in the United States. No one customer accounted for more than 10% of the Company's total net patient and service revenues. However, certain sources of payment for the services, such as Medicare, HMOs, commercial insurers and other third party payors, do or could account for more than 10% of payments received. NOTE 13. CONTINGENCIES: From June 2000 through June 2001, Raytel was the subject of a grand jury investigation of unspecified allegations concerning certain business practices of the trans-telephonic cardiac pacemaker monitoring business conducted by Raytel Cardiac Services, Inc., a wholly-owned subsidiary of the Company ("RCS"). The investigation did not involve Raytel's other healthcare services, such as RCS' cardiac event detection services or Raytel's diagnostic imaging services or other cardiac-related businesses. In connection with the investigation, Raytel has reviewed its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such review, Raytel held Medicare reimbursement checks received subsequent to June 23, 2000 in payment of invoices for pacemaker monitoring services and established a special account for funds inadvertently deposited with respect to such services received since the date the investigation began. In addition, Raytel suspended billing for such services. Most of the checks have been deposited, most of the cash has been released from the special account, and new billings for services performed has commenced as most of the affected patients' records have been reviewed and found to be in compliance with applicable Medicare requirements. The total amount of such uncashed checks and funds deposited in such special account was approximately $400,000 as of September 30, 2001. Since Raytel recognizes revenue when patient services are provided, neither the special account arrangement nor the F-15 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deferred billing has had a direct impact on Raytel's operating results. If the Company's review discloses any patient billings that have not been fully compliant with Medicare requirements, any resulting billing adjustments or reversals will be charged against operating results in that current period. In addition, the Company has incurred substantial legal fees and other expenses in connection with the investigation and has accrued a reserve of $4,600,000 to cover the estimated amounts of these expenses. Additional expenses, if any, will adversely affect operating results in future periods. As of September 30, 2001, the Company had incurred legal fees and other expenses of approximately $3,945,000 related to the investigation. The remaining balance is included in "accrued other liabilities" on the Company's balance sheet. These expenses include legal fees incurred by certain employees in connection with the on-going investigation which were reimbursed by the Company in accordance with the requirements of Delaware Law and the Company's By-Laws. In June 2001, RCS reached an agreement with the federal government to resolve the issues that were the subject of the investigation. In accordance with that agreement, on June 25, 2001 RCS plead guilty in U.S. District Court in Hartford, Connecticut to a charge of obstructing a criminal investigation arising out of the initial investigation in June 2000. In addition, in September 2001, the Company and RCS entered into an agreement with the government to resolve related civil claims. Under the criminal and civil settlements, RCS agreed to pay a total of $11,500,000 to the government over a five year period, with interest of 7% per annum on the unpaid balance, and Raytel guaranteed RCS' payment obligations. RCS also entered into a corporate integrity agreement under which it agreed that its ongoing operations would conform to specified guidelines. As of September 30, 2001, $1,500,000 had been paid to the government, and the next payment of $2,000,000 is due in June 2002. RCS' guilty plea did not constitute the type of conviction that would adversely affect its participation in the Medicare program or other federal healthcare programs. The investigation, the related internal compliance review and the settlement negotiations with the government diverted the efforts and attention of a number of Raytel's management and administrative personnel. The impact of this diversion reduced the efficiency of RCS' pacemaker monitoring operations during the last week of the quarter ended June 30, 2000 and adversely affected both revenues and operating expenses for that period as well as the quarter ended September 30, 2000, and throughout the fiscal year ended September 30, 2001. Although the investigation has been concluded, implementation of the corporate integrity agreement continues to require the time and attention of Raytel and RCS management and a number of RCS' administrative personnel. In addition, RCS' guilty plea entered into under its agreement with the government constituted a default under Raytel's bank credit facility. In November 2001, Raytel entered into a new revolving line of credit arrangement and repaid indebtedness under its bank facility. However, RCS' guilty plea could adversely affect Raytel's ability to obtain debt or equity financing in the future. The Company is from time to time a party to various other claims and disputes associated with various aspects of its ongoing business operations. In management's opinion, none of these other claims or disputes are expected, either individually or in the aggregate, to have a material adverse effect on the Company's financial position or results of operations. F-16 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14. NET INCOME (LOSS) PER SHARE: Those shares under commitments to be issued at specified future dates are considered as outstanding for per share calculations. For the years ended September 30, 2001, 2000 and 1999, the shares used in calculating diluted earnings per share were determined as follows (in thousands):
FOR THE YEAR ENDED SEPTEMBER 30, --------------------------------- 2001 2000 1999 ------- ------- ------- Weighted average shares outstanding..................... 2,917 2,915 2,904 Shares to be issued..................................... (a) (a) 49 Options................................................. (a) (a) 60 Warrants................................................ (a) (a) -- ----- ----- ----- 2,917 2,915 3,013 ===== ===== =====
- --------------- (a) Due to the loss for the period shown, dilutives are not included in the calculation. Certain options and warrants to purchase shares of common stock were outstanding during the years ended September 30, 2001, 2000 and 1999, but were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the period. The options and warrants outstanding and their exercise prices are as follows:
FOR THE YEAR ENDED SEPTEMBER 30, -------------------------------------------------- 2001 2000 1999 --------------- -------------- --------------- Options and warrants outstanding..... 446,624 388,802 208,920 Range of exercise prices............. $ 2.63 - $35.63 $4.26 - $40.50 $10.89 - $40.50
NOTE 15. SEGMENT INFORMATION: The Company's reportable segments are strategic business units that offer different services. The Company has three reportable segments: Cardiac Information Services ("Information"), Diagnostic Imaging Services ("Imaging") and Heart Facilities and Other ("Facilities"). The Information segment provides remote cardiac monitoring and testing services utilizing telephonic and Internet communication technology. The Imaging segment operates a network of imaging centers throughout the United States. The Facilities segment provides diagnostic, therapeutic and patient management services primarily associated with cardiovascular disease. The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that the Company does not allocate all interest expense, taxes or corporate overhead to the individual segments. The Company evaluates performance based on profit or loss from operations before income taxes and unallocated amounts. The totals per the schedules below will not and should not agree to the consolidated totals. The difference is due to corporate overhead and other unallocated F-17 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amounts which are reflected in the reconciliation to consolidated earnings before income taxes and discontinued operations (in thousands):
INFORMATION IMAGING FACILITIES TOTAL ----------- ------- ---------- ------- For the year ended September 30, 2001: Total revenues..................................... $ 37,776 $25,694 $ 7,798 $71,268 Total operating expenses........................... 48,318 19,349 5,306 72,973 -------- ------- ------- ------- Segment contribution (loss)........................ (10,542) 6,345 2,492 (1,705) Depreciation and amortization...................... 3,451 1,628 1,017 6,096 Interest expense................................... -- 192 118 310 Minority interest/other expense (income)........... (136) (254) 220 (170) -------- ------- ------- ------- Segment profit (loss).............................. $(13,857) $ 4,779 $ 1,137 $(7,941) ======== ======= ======= ======= Segment assets..................................... $ 41,460 $14,475 $10,812 $66,747 ======== ======= ======= ======= Capital expenditures............................... $ 2,854 $ 197 $ 98 $ 3,149 ======== ======= ======= ======= For the year ended September 30, 2000: Total revenues..................................... $ 40,782 $22,652 $ 8,887 $72,321 Total operating expenses........................... 36,839 16,889 5,916 59,644 -------- ------- ------- ------- Segment contribution............................... 3,943 5,763 2,971 12,677 Depreciation and amortization...................... 3,070 1,683 1,496 6,249 Interest expense................................... -- 273 224 497 Minority interest/other expense (income)........... (233) (44) 41 (236) -------- ------- ------- ------- Segment profit..................................... $ 1,106 $ 3,851 $ 1,210 $ 6,167 ======== ======= ======= ======= Segment assets..................................... $ 43,713 $14,674 $34,577 $92,964 ======== ======= ======= ======= Capital expenditures............................... $ 3,468 $ 734 $ 514 $ 4,716 ======== ======= ======= ======= For the year ended September 30, 1999: Total revenues..................................... $ 44,731 $20,143 $15,047 $79,921 Total operating expenses........................... 33,859 14,719 11,702 60,280 -------- ------- ------- ------- Segment contribution............................... 10,872 5,424 3,345 19,641 Depreciation and amortization...................... 2,889 1,910 1,769 6,568 Interest expense................................... -- 149 347 496 Minority interest/other expense (income)........... (231) (346) 568 (9) -------- ------- ------- ------- Segment profit..................................... $ 8,214 $ 3,711 $ 661 $12,586 ======== ======= ======= ======= Segment assets..................................... $ 37,416 $16,819 $40,377 $94,612 ======== ======= ======= ======= Capital expenditures............................... $ 2,611 $ 2,901 $ 28 $ 5,540 ======== ======= ======= =======
F-18 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED SEPTEMBER 30, --------------------------------- 2001 2000 1999 ---------- -------- --------- Segment profit (loss)....................................... $ (7,941) $6,167 $12,586 Unallocated amounts: Corporate general and administrative...................... 4,025 3,968 4,103 Corporate depreciation and amortization................... 389 333 240 Corporate interest expense................................ 1,464 1,463 1,807 Corporate other expense (income).......................... 135 (103) (90) -------- ------ ------- Income (loss) from continuing operations before income taxes.................................................. $(13,954) $ 506 $ 6,526 ======== ====== =======
NOTE 16. SUBSEQUENT EVENT: In October 2001, the Company received notice from an investor group (of which the Chief Executive Officer of the Company is a member) that the investor group is evaluating the feasibility of entering into discussions regarding the possible acquisition of Raytel. The Board of Directors of the Company has appointed a Special Committee of the Board of Directors, and the Special Committee has engaged financial advisors and counsel to assist it in evaluating any proposals that might be received. The Special Committee has also received expressions of interest from other unaffiliated parties. At the present time there are no agreements between any party and the Company with regard to any acquisition transaction. F-19 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL YEAR ENDED SEPTEMBER 30, 2001 --------------------------------------------------- DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, ------------ --------- -------- ------------- (000'S OMITTED, EXCEPT PER SHARE AMOUNTS) Net revenues................................... $17,248 $ 18,146 $ 18,261 $17,613 ======= ======== ======== ======= Income (loss) from continuing operations before income taxes (benefit)....................... $ 246 $ (1,724) $(11,238) $(1,238) Provision for income taxes (benefit)........... 95 (671) (1,124) 1,065 ------- -------- -------- ------- Income (loss) from continuing operations....... 151 (1,053) (10,114) (2,303) Income (loss) from discontinued operations..... (141) (19,404) -- -- ------- -------- -------- ------- Net income (loss).............................. $ 10 $(20,457) $(10,114) $(2,303) ======= ======== ======== ======= Net income (loss) per share(1): Basic........................................ $ .00 $ (7.01) $ (3.47) $ (.79) ======= ======== ======== ======= Diluted...................................... $ .00 $ (7.01) $ (3.47) $ (.79) ======= ======== ======== =======
FISCAL YEAR ENDED SEPTEMBER 30, 2000 --------------------------------------------------- DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, ------------ --------- -------- ------------- Net revenues.................................... $18,042 $18,462 $18,350 $17,467 ======= ======= ======= ======= Income (loss) from continuing operations before income taxes (benefit)........................ $ 865 $ 602 $(1,486) $ 525 Provision for income taxes (benefit)............ 337 235 (579) 180 ------- ------- ------- ------- Income (loss) from continuing operations........ 528 367 (907) 345 Income (loss) from discontinued operations...... 372 513 (4,881) (139) ------- ------- ------- ------- Net income (loss)............................... $ 900 $ 880 $(5,788) $ 206 ======= ======= ======= ======= Net income (loss) per share(1): Basic......................................... $ .31 $ .30 $ (1.98) $ .07 ======= ======= ======= ======= Diluted....................................... $ .30 $ .30 $ (1.98) $ .07 ======= ======= ======= =======
- --------------- (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. F-20 RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES PERCENTAGE OF CONSOLIDATED REVENUES BY SEGMENT (UNAUDITED)
FISCAL YEAR ENDED SEPTEMBER 30, ------------------ 2001 2000 1999 ---- ---- ---- Cardiac information services................................ 53% 57% 56% Diagnostic imaging services................................. 36% 31% 25% Heart facilities and other.................................. 11% 12% 19% --- --- --- Total..................................................... 100% 100% 100% === === ===
F-21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II To the Board of Directors and Stockholders of Raytel Medical Corporation: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Raytel Medical Corporation and Subsidiaries included in this Form 10-K, and have issued our report thereon dated November 29, 2001. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The accompanying schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The information reflected on the schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Hartford, Connecticut November 29, 2001 F-22 SCHEDULE II RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
BALANCE AT CHARGED TO BEGINNING COST AND BALANCE AT DESCRIPTION OF YEAR EXPENSES(1) DEDUCTIONS END OF YEAR ----------- ---------- ----------- ----------- ----------- September 30, 2001 Allowance for doubtful accounts........... $6,690,000 $4,361,000 $(6,651,000) $4,400,000 September 30, 2000 Allowance for doubtful accounts........... $5,664,000 $6,012,000 $(4,986,000) $6,690,000 September 30, 1999 Allowance for doubtful accounts........... $7,093,000 $6,467,000 $(7,896,000) $5,664,000
- --------------- (1) The decrease in fiscal 2001 is due primarily to the sale of HFHI. F-23 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE - --------- ------------- 3.1(1) Restated Certificate of Incorporation of the Registrant. 3.2(2) Bylaws of the Registrant, as amended. 3.3(3) Certificate of Amendment of Certificate of Incorporation. 4.1(4) Rights Agreement dated as of August 14, 1998 between the Registrant and BankBoston N.A., as Rights Agent. *10.1(5) 1983 Incentive Stock Option Plan, as amended. *10.2(5) 1990 Stock Option Plan, as amended. *10.3(5) 1995 Outside Directors Stock Option Plan. *10.7(5) Form of Indemnity Agreement for officers and directors. *10.8(5) Employment Agreement dated September 28, 1995 between the Registrant and Richard F. Bader. *10.9(5) Employment Agreement dated September 28, 1995 between the Registrant and Allan Zinberg. 10.22(5) Lease Agreement dated March 6, 1992 between the Registrant and Peninsula Office Park, as amended. 10.24(5) 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(5) 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(5) 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. *10.41(6) Employee Stock Purchase Plan dated May 8, 1996. 10.42(6) 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. 10.45(7) 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(7) 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. 10.50(7) Noncompetition Agreement, dated as of August 15, 1997, by and between David E. Wertheimer and Raytel Medical Corporation. *10.52(8) Employment Agreement dated as of March 1, 1998, by and between Swapan Sen and Raytel Medical Corporation. 10.55(9) 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. 10.58(10) 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(10) Commercial Office Lease dated July 19, 1999 between Registrant and USGC Joint Venture. *10.60(10) Key Management Retention Agreement dated as of September 1, 1999, by and between Swapan Sen and Raytel Medical Corporation. *10.62(10) Key Management Retention Agreement dated as of September 1, 1999, by and between John F. Lawler, Jr. and Raytel Medical Corporation. *10.63(11) Employment Agreement dated as of August 4, 1999, by and between Allan Zinberg and Raytel Medical Corporation. *10.64(11) Consulting Agreement dated as of January 1, 2000 by and between Allan Zinberg and Raytel Medical Corporation. 10.65(12) Stock Purchase Agreement dated as of May 31, 2000 between and among RTPS Acquisition Company, LLC, Raytel Medical Corporation, Raytel Texas Physician Services, Inc.
F-24
EXHIBIT NUMBER EXHIBIT TITLE - --------- ------------- 10.66(13) Master Termination Agreement entered into as of May 31, 2000 and effective as of November 10, 1999 between and among Southeast Texas Cardiology Associates, P.A., Southeast Texas Cardiology Associates II, P.A., Southeast Texas Cardiology Associates II, LLP, Rodolfo P. Sotolongo, M.D., Wayne S. Margolis, M.D., and Michael L. Smith, M.D., Raytel Southeast Management, L.P., Raytel Texas Physician Services, Inc., Raytel Management Holdings, Inc. and Raytel Medical Corporation. 10.67(14) Fifth Amendment and Waiver to Amended and Restated Credit Agreement, dated December 15, 2000 among the Registrant, Fleet National Bank and BNP Paribas. 10.68(15) Stock Purchase Agreement dated as of March 9, 2001 and effective as of January 1, 2001, among Heart Institute Acquisition Corporation, Raytel Medical Corporation, Cardiovascular Ventures, Inc., and The Heart Institute of Port S. Lucie, Inc. 10.69(3) Plea Agreement dated June 25, 2001, resolving the U.S. Government's criminal investigation of the Registrant. *10.70 2000 Stock Option Plan. *10.71 Employment Agreement dated as of May 22, 2000, by and between Jason Sholder, Raytel Medical Corporation and Raytel Cardiac Services Corporation. 21.1 List of subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP.
- --------------- * Constitutes a management contract or compensatory plan required to be filed pursuant to Item 14(c) of Form 10-K. (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 the identically numbered exhibit to the Registrant's Form 10-Q Report for the quarter ended June 30, 2001. (4) Incorporated by reference to Exhibit 1 to the October 1998 Form 8-K. (5) 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"). (6) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-K Report for the year ended September 30, 1996. (7) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-K Report for the year ended September 30, 1997. (8) Incorporated by reference to Exhibit 2.1 to the March 1998 Form 10-Q. (9) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-K Report for the year ended September 30, 1998. (10) Incorporated by reference to identically numbered exhibits to the Registrant's Form 10-K Report for the year ended September 30, 1999. (11) Incorporated by reference to the identically numbered exhibits to the Registrant's Form 10-Q Report for the quarter ended December 31, 1999. (12) Incorporated by reference to Exhibit 10.59 to the Registrant's Form 10-Q Report for the quarter ended June 30, 2000 (the "June 2000 10-Q"). (13) Incorporated by reference to Exhibit 10.60 to the June 2000 10-Q. (14) Incorporated by reference to the identically numbered exhibit to the Registrant's Form 10-Q Report for the quarter ended December 31, 2000. (15) Incorporated by reference to the identically numbered exhibit to the Registrant's Form 10-Q Report for the quarter ended March 31, 2001. F-25 EX-10.70 3 f78124a1ex10-70.txt EXHIBIT 10.70 EXHIBIT 10.70 RAYTEL MEDICAL CORPORATION 2000 STOCK OPTION PLAN 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1.1 ESTABLISHMENT. The Raytel Medical Corporation 2000 Stock Option Plan (the "PLAN") is hereby established effective as of the date on which it is approved by the stockholders of the Company (the "EFFECTIVE DATE"). 1.2 PURPOSE. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract and retain persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. 1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options granted under the Plan have lapsed. However, all Incentive Stock Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company. 2. DEFINITIONS AND CONSTRUCTION. 2.1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "BOARD" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (d) "COMPANY" means Raytel Medical Corporation, a Delaware corporation, or any successor corporation thereto. 1 (e) "CONSULTANT" means a person engaged to provide consulting or advisory services (other than as an Employee or a Director) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on a Form S-8 Registration Statement under the Securities Act. (f) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (g) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company Group because of the sickness or injury of the Optionee. (h) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (j) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its discretion. (ii) If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be as determined by the Board in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse. 2 (k) "INCENTIVE STOCK OPTION" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. (l) "INSIDER" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (m) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. (n) "OPTION" means a right to purchase Stock (subject to adjustment as provided in Section 4.3) pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. (o) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof. An Option Agreement may consist of a form of "Notice of Grant of Stock Option" and a form of "Stock Option Agreement" incorporated therein by reference, or such other form or forms as the Board may approve from time to time. (p) "OPTIONEE" means a person who has been granted one or more Options. (q) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (r) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (s) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (t) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (u) "SECTION 162(m)" means Section 162(m) of the Code, as amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66). (v) "SECURITIES ACT" means the Securities Act of 1933, as amended. (w) "SERVICE" means an Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. An Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company 3 Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, an Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Optionee's Option Agreement. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (x) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.3. (y) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. (z) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the time an Option is granted to the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 2.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3. ADMINISTRATION. 3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Option shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Option. 3.2 AUTHORITY OF OFFICERS. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election. 4 3.3 POWERS OF THE BOARD. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its discretion: (a) to determine the persons to whom, and the time or times at which, Options shall be granted and the number of shares of Stock to be subject to each Option; (b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options; (c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Option (which need not be identical) and any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Option or such shares, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi) the effect of the Optionee's termination of Service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Option or such shares not inconsistent with the terms of the Plan; (e) to approve one or more forms of Option Agreement; (f) to amend, modify, extend, cancel or renew any Option or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the exercise thereof; (g) to accelerate, continue, extend or defer the exercisability of any Option or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following an Optionee's termination of Service with the Participating Company Group; (h) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and (i) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement and to make all other determinations and take such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent not inconsistent with the provisions of the Plan or applicable law. 5 3.4 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3. 3.5 COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), the Board may establish a Committee of "outside directors" within the meaning of Section 162(m) to approve the grant of any Option which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m). 3.6 INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 4. SHARES SUBJECT TO PLAN. 4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided in Sections 4.2 and 4.3, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be four hundred twenty five thousand (425,000) and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Option for any reason expires or is terminated or canceled or if shares of Stock are acquired upon the exercise of an Option subject to a Company repurchase option and are repurchased by the Company at the Optionee's exercise price, the shares of Stock allocable to the unexercised portion of such Option or such repurchased shares of Stock shall again be available for issuance under the Plan. 4.2 OPTION REPRICING. Without the approval of a majority of the shares of Stock present or represented by proxy and voting at a meeting of the stockholders of the Company at which a quorum representing a majority of all outstanding shares of Stock is present or represented by proxy, the Board shall not approve a program providing for either (i) the cancellation of outstanding Options and the grant in substitution therefore of new Options having 6 a lower exercise price or (ii) the amendment of outstanding Options to reduce the exercise price thereof, unless the number of shares subject to such canceled Options or a number of shares equal to the number of shares subject to such amended Options, as the case may be, are excluded from the number of shares available for future Option grants pursuant to Section 4.1 above. This paragraph shall not be construed to apply to "issuing or assuming a stock option in a transaction to which section 424(a) applies," within the meaning of Section 424 of the Code. 4.3 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Options, in the Section 162(m) Grant Limit set forth in Section 5.4, and in the exercise price per share of any outstanding Options. If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 8.1) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.3 shall be rounded down to the nearest whole number, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 4.3 shall be final, binding and conclusive. 5. ELIGIBILITY AND OPTION LIMITATIONS. 5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to Employees, Consultants, and Directors. For purposes of the foregoing sentence, "Employees," "Consultants" and "Directors" shall include prospective Employees, prospective Consultants and prospective Directors to whom Options are granted in connection with written offers of an employment or other service relationship with the Participating Company Group. Eligible persons may be granted more than one (1) Option. 5.2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences Service with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.1. 5.3 FAIR MARKET VALUE LIMITATION. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portions of such options which exceed such amount shall be treated as 7 Nonstatutory Stock Options. For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. 5.4 SECTION 162(m) GRANT LIMIT. Subject to adjustment as provided in Section 4.3, no Employee or prospective Employee shall be granted one or more Options within any fiscal year of the Company which in the aggregate are for the purchase of more than three hundred thousand (300,000) shares (the "SECTION 162(m) GRANT LIMIT"). An Option which is canceled in the same fiscal year in which it was granted shall continue to be counted against the Section 162(m) Grant Limit for such period. 6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement. Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 6.1 EXERCISE PRICE. The exercise price for each Option shall be established in the discretion of the Board; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 6.2 EXERCISABILITY AND TERM OF OPTIONS. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Option shall be 8 exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service with a Participating Company. Subject to the foregoing, unless otherwise specified by the Board in the grant of an Option, any Option granted hereunder shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions. 6.3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the exercise price, (iii) by delivery of a properly executed notice together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) provided that the Optionee is an Employee (unless otherwise not prohibited by law, including, without limitation, any regulation promulgated by the Board of Governors of the Federal Reserve System) and in the Company's sole discretion at the time the Option is exercised, by delivery of the Optionee's promissory note in a form approved by the Company for the aggregate exercise price, provided that, if the Company is incorporated in the State of Delaware, the Optionee shall pay in cash that portion of the aggregate exercise price not less than the par value of the shares being acquired, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Board may at any time or from time to time, by approval of or by amendment to the standard forms of Option Agreement described in Section 7, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. 9 (b) LIMITATIONS ON FORMS OF CONSIDERATION. (i) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (ii) CASHLESS EXERCISE. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (iii) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 6.4 TAX WITHHOLDING. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its discretion, the Company shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating Company Group arising in connection with the Option or the shares acquired upon the exercise thereof. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates. The Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Option Agreement until the Participating Company Group's tax withholding obligations have been satisfied by the Optionee. 10 6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to a right of first refusal, one or more repurchase options, or other conditions and restrictions as determined by the Board in its discretion at the time the Option is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Optionee shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions. 6.6 EFFECT OF TERMINATION OF SERVICE. (a) OPTION EXERCISABILITY. Subject to earlier termination of the Option as otherwise provided herein and unless otherwise provided by the Board in the grant of an Option and set forth in the Option Agreement, an Option shall be exercisable after an Optionee's termination of Service only during the applicable time period determined in accordance with this Section 6.6 and thereafter shall terminate: (i) DISABILITY. If the Optionee's Service with the Participating Company Group terminates because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the date of expiration of the Option's term as set forth in the Option Agreement evidencing such Option (the "OPTION EXPIRATION DATE"). (ii) DEATH. If the Optionee's Service with the Participating Company Group terminates because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months (or such longer period of time as determined by the Board, in its discretion) after the Optionee's termination of Service. (iii) TERMINATION AFTER CHANGE IN CONTROL. The Board may, in its discretion, provide in any Option Agreement that if the Optionee's Service with the Participating Company Group ceases as a result of "Termination After Change in Control" (as defined in such Option Agreement), then (1) the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of six (6) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date, and (2) the exercisability and vesting of the Option and any shares acquired upon the exercise thereof shall be accelerated effective as of the date on which the 11 Optionee's Service terminated to such extent, if any, as shall have been determined by the Board, in its discretion, and set forth in the Option Agreement. Notwithstanding the foregoing, if it is determined that the provisions or operation of this Section 6.6(a)(iii) would preclude treatment of a Change in Control as a "pooling-of-interests" for accounting purposes and provided further that in the absence of the preceding sentence such Change in Control would be treated as a "pooling-of-interests" for accounting purposes, then this Section 6.6(a)(iii) shall be void ab initio, and the vesting and exercisability of the Option shall be determined under any other applicable provision of the Plan or the Option Agreement evidencing such Option. (iv) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability, death or Termination After Change in Control, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee at any time prior to the expiration of three (3) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of an Option within the applicable time periods set forth in Section 6.6(a) is prevented by the provisions of Section 10 below, the Option shall remain exercisable until three (3) months (or such longer period of time as determined by the Board, in its discretion) after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. (c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 6.6(a) of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 6.7 TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee's guardian or legal representative. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Board, in its discretion, and set forth in the Option Agreement evidencing such Option, a Nonstatutory Stock Option shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S-8 Registration Statement under the Securities Act. 7. STANDARD FORMS OF OPTION AGREEMENT. 7.1 OPTION AGREEMENT. Unless otherwise provided by the Board at the time the Option is granted, an Option shall comply with and be subject to the terms and conditions set 12 forth in the form of Option Agreement approved by the Board concurrently with its adoption of the Plan and as amended from time to time. 7.2 AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of any standard form of Option Agreement described in this Section 7 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan. 8. CHANGE IN CONTROL. 8.1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, a "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation's stock. In the event the Acquiring Corporation elects not to assume or substitute for outstanding Options in connection with a Change in Control, any unexercisable or unvested portions of outstanding Options and any shares acquired upon the exercise thereof held by Optionees whose Service has not terminated prior to such date shall be immediately exercisable and and the Vested in full as of 13 the date ten (10) days prior to the date of the Change in Control. The exercise or vesting of any Option and any shares acquired upon the exercise thereof that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Change in Control. Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of an Option prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of the Option Agreement evidencing such Option except as otherwise provided in such Option Agreement. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the outstanding Options immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Options shall not terminate unless the Board otherwise provides in its discretion. 9. PROVISION OF INFORMATION. Each Optionee shall be given access to information concerning the Company equivalent to that information generally made available to the Company's common stockholders. 10. COMPLIANCE WITH SECURITIES LAW. The grant of Options and the issuance of shares of Stock upon exercise of Options shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities. Options may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Option may be exercised unless (a) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of any Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 14 11. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company's stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.3), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company's stockholders under any applicable law, regulation or rule. No termination or amendment of the Plan shall affect any then outstanding Option unless expressly provided by the Board. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option without the consent of the Optionee, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule. IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing sets forth the Raytel Medical Corporation 2000 Stock Option Plan as duly adopted by the Board on _____________________, 2000. ---------------------------------------- Secretary 15 RAYTEL MEDICAL CORPORATION STANDARD FORM OF STOCK OPTION AGREEMENT RAYTEL MEDICAL CORPORATION STOCK OPTION AGREEMENT Raytel Medical Corporation has granted to the individual (the "OPTIONEE") named in the Notice of Grant of Stock Option (the "NOTICE") to which this Stock Option Agreement (the "OPTION AGREEMENT") is attached an option (the "OPTION") to purchase certain shares of Stock upon the terms and conditions set forth in the Notice and this Option Agreement. The Option has been granted pursuant to and shall in all respects be subject to the terms and conditions of the Raytel Medical Corporation 2000 Stock Option Plan (the "PLAN"), as amended to the Date of Option Grant, the provisions of which are incorporated herein by reference. By signing the Notice, the Optionee: (a) represents that the Optionee has read and is familiar with the terms and conditions of the Notice, the Plan and this Option Agreement, (b) accepts the Option subject to all of the terms and conditions of the Notice and this Option Agreement, (c) agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Notice, the Plan or this Option Agreement, and (d) acknowledges receipt of a copy of the Notice and this Option Agreement. 1. DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. Whenever used herein, capitalized terms shall have the meanings assigned to such terms in the Notice or as set forth below: (a) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (d) "COMPANY" means Raytel Medical Corporation, a Delaware corporation, or any successor corporation thereto. (e) "CONSULTANT" means a person engaged to provide consulting or advisory services (other than as an Employee or a Director) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person 1 pursuant to the Plan in reliance on registration on a Form S-8 Registration Statement under the Securities Act. (f) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (g) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company Group because of the sickness or injury of the Optionee. (h) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and, if the Notice designates this Option as an Incentive Stock Option, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (j) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its discretion. (ii) If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be as determined by the Board in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse. (k) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. 2 (l) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (m) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (n) "SECURITIES ACT" means the Securities Act of 1933, as amended. (o) "SERVICE" means an Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. An Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, an Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Optionee's Option Agreement. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (p) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 9. (q) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 1.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 2. TAX CONSEQUENCES. 2.1 TAX STATUS OF OPTION. This Option is intended to have the tax status designated in the Notice. 3 (a) INCENTIVE STOCK OPTION. If the Notice so designates, this Option is intended to be an Incentive Stock Option within the meaning of Section 422(b) of the Code, but the Company does not represent or warrant that this Option qualifies as such. The Optionee should consult with the Optionee's own tax advisor regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. (NOTE TO OPTIONEE: If the Option is exercised more than three (3) months after the date on which you cease to be an Employee (other than by reason of your death or permanent and total disability as defined in Section 22(e)(3) of the Code), the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by Section 422 of the Code.) (b) NONSTATUTORY STOCK OPTION. If the Notice so designates, this Option is intended to be a Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code. 2.2 ISO FAIR MARKET VALUE LIMITATION. If the Notice designates this Option as an Incentive Stock Option, then to the extent that the Option (together with all Incentive Stock Options granted to the Optionee under all stock option plans of the Participating Company Group, including the Plan) becomes exercisable for the first time during any calendar year for shares having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount will be treated as Nonstatutory Stock Options. For purposes of this Section 2.2, options designated as Incentive Stock Options are taken into account in the order in which they were granted, and the Fair Market Value of stock is determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 2.2, such different limitation shall be deemed incorporated herein effective as of the date required or permitted by such amendment to the Code. If the Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 2.2, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. (NOTE TO OPTIONEE: If the aggregate Exercise Price of the Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive Stock Options you hold (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is greater than $100,000, you should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as an Incentive Stock Option.) 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election 4 which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Vesting Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the number of Vested Shares less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. 4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company in the form attached hereto, which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased. The Option shall be deemed to be exercised upon receipt by the Company of such written notice and the aggregate Exercise Price. 4.3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent; (ii) by tender to the Company, or attestation to the ownership, of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price; (iii) by means of a Cashless Exercise, as defined in Section 4.3(b); or (iv) by any combination of the foregoing. (b) LIMITATIONS ON FORMS OF CONSIDERATION. (i) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. The Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. 5 (ii) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the delivery of a properly executed notice together with irrevocable instructions to a broker in a form acceptable to the Company providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve or terminate any such program or procedure. 4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Company shall have no obligation to deliver shares of Stock until the tax withholding obligations of the Participating Company Group have been satisfied by the Optionee. 4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the 6 lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 4.7 FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Change in Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 7.1 OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service with the Participating Company Group terminates because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) DEATH. If the Optionee's Service with the Participating Company Group terminates because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. 7 (c) TERMINATION AFTER CHANGE IN CONTROL. If the Optionee's Service with the Participating Company Group ceases as a result of Termination After Change in Control (as defined below), (i) the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of six (6) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date, and (ii) the Option shall become immediately exercisable in full and the Vested Ratio shall be deemed to be 1/1 as of the date on which the Optionee's Service terminated. Notwithstanding the foregoing, if it is determined that the provisions or operation of this Section 7.1(c) would preclude treatment of a Change in Control as a "pooling-of-interests" for accounting purposes and provided further that in the absence of the preceding sentence such Change in Control would be treated as a "pooling-of-interests" for accounting purposes, then this Section 7.1(c) shall be void ab initio, and the vesting and exercisability of the Option shall be determined under any other applicable provision of the Option Agreement. (d) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability, death or Termination After Change in Control, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee at any time prior to the expiration of three (3) months (or such other longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. 7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 7.4 CERTAIN DEFINITIONS. (a) "TERMINATION AFTER CHANGE IN CONTROL" shall mean either of the following events occurring within twelve (12) months after a Change in Control: (i) termination by the Participating Company Group of the Optionee's Service with the Participating Company Group for any reason other than for Cause (as defined below); or 8 (ii) the Optionee's resignation for Good Reason (as defined below) from all capacities in which the Optionee is then rendering Service to the Participating Company Group within a reasonable period of time following the event constituting Good Reason. Notwithstanding any provision herein to the contrary, Termination After Change in Control shall not include any termination of the Optionee's Service with the Participating Company Group which (1) is for Cause (as defined below); (2) is a result of the Optionee's death or disability; (3) is a result of the Optionee's voluntary termination of Service other than for Good Reason; or (4) occurs prior to the effectiveness of a Change in Control. (b) "CAUSE" shall mean any of the following: (i) the Optionee's theft, dishonesty, or falsification of any Participating Company documents or records; (ii) the Optionee's improper use or disclosure of a Participating Company's confidential or proprietary information; (iii) any action by the Optionee which has a detrimental effect on a Participating Company's reputation or business; (iv) the Optionee's failure or inability to perform any reasonable assigned duties after written notice from a Participating Company of, and a reasonable opportunity to cure, such failure or inability; (v) any material breach by the Optionee of any employment agreement between the Optionee and a Participating Company, which breach is not cured pursuant to the terms of such agreement; or (vi) the Optionee's conviction (including any plea of guilty or nolo contendere) of any criminal act which impairs the Optionee's ability to perform his or her duties with a Participating Company. (c) "GOOD REASON" shall mean any one or more of the following: (i) without the Optionee's express written consent, the assignment to the Optionee of any duties, or any limitation of the Optionee's responsibilities, substantially inconsistent with the Optionee's positions, duties, responsibilities and status with the Participating Company Group immediately prior to the date of the Change in Control; (ii) without the Optionee's express written consent, the relocation of the principal place of the Optionee's Service to a location that is more than fifty (50) miles from the Optionee's principal place of Service immediately prior to the date of the Change in Control, or the imposition of travel requirements substantially more demanding of the Optionee than such travel requirements existing immediately prior to the date of the Change in Control; (iii) any failure by the Participating Company Group to pay, or any material reduction by the Participating Company Group of, (1) the Optionee's base salary in effect immediately prior to the date of the Change in Control (unless reductions comparable in amount and duration are concurrently made for all other employees of the Participating Company Group with responsibilities, organizational level and title comparable to the Optionee's), or (2) the Optionee's bonus compensation, if any, in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Optionee); or 9 (iv) any failure by the Participating Company Group to (1) continue to provide the Optionee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any employee or service provider group which customarily includes a person holding the employment or service provider position or a comparable position with the Participating Company Group then held by the Optionee, in any benefit or compensation plans and programs, including, but not limited to, the Participating Company Group's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans, if any, in which the Optionee was participating immediately prior to the date of the Change in Control, or their equivalent, or (2) provide the Optionee with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any employee or service provider group which customarily includes a person holding the employment or service provider position or a comparable position with the Participating Company Group then held by the Optionee. 8. CHANGE IN CONTROL. 8.1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, a "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2 EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent 10 option for the Acquiring Corporation's stock. In the event the Acquiring Corporation elects not to assume the Company's rights and obligations under the Option or substitute for the Option in connection with the Change in Control, and provided that the Optionee's Service has not terminated prior to such date, any unexercised portion of the Option shall be immediately exercisable and the Vested Ratio shall be deemed to be 1/1 as of the date ten (10) days prior to the date of the Change in Control. Any exercise of the Option that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Change in Control. The Option shall terminate and cease to be outstanding effective as of the date of the Change in Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of this Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its discretion. 8.3 FAIR MARKET VALUE LIMITATION. If the Notice designates this Option as an Incentive Stock Option, should the exercisability of this Option be accelerated in connection with a Change in Control in accordance with Section 7.1(c) or 8.2, then to the extent that the aggregate Fair Market Value of the shares of Stock with respect to which the Optionee may exercise the Option for the first time during the calendar year of such acceleration, when added to the aggregate Fair Market Value of the shares subject to any other options designated as Incentive Stock Options granted to the Optionee under all stock option plans of the Participating Company Group prior to the Date of Option Grant with respect to which such options are exercisable for the first time during the same calendar year, exceeds One Hundred Thousand Dollars ($100,000) (or such other limit, if any, imposed by Section 422 of the Code), the portion of the Option which exceeds such amount shall be treated as a Nonstatutory Stock Option. For purposes of the preceding sentence, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of shares of stock shall be determined as of the time the option with respect to such shares is granted. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the 11 Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded down to the nearest whole number, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, if the Notice designates this Option as an Incentive Stock Option, the Optionee shall (a) promptly notify the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant and (b) provide the Company with a description of the circumstances of such disposition. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee's name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company's stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. 12 12. LEGENDS. The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("ISO"). IN ORDER TO OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO [INSERT DISQUALIFYING DISPOSITION DATE HERE]. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE." 13. MISCELLANEOUS PROVISIONS. 13.1 BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 13.2 TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Change in Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable the Option, if designated an Incentive Stock Option in the Notice, to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing. 13.3 NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 13 13.4 INTEGRATED AGREEMENT. The Notice and this Option Agreement constitute the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein and supersedes any prior agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein, the provisions of the Notice and the Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 13.5 APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. 13.6 COUNTERPARTS. The Notice may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14 * Incentive Stock Option Optionee: * Nonstatutory Stock Option -------------------------- Date: --------------------- STOCK OPTION EXERCISE NOTICE Raytel Medical Corporation Attention: Chief Financial Officer 2755 Campus Dr., Suite 200 San Mateo, CA 94403 Ladies and Gentlemen: 1. OPTION. I was granted an option (the "OPTION") to purchase shares of the common stock (the "SHARES") of Raytel Medical Corporation (the "COMPANY") pursuant to the Company's 2000 Stock Option Plan (the "PLAN"), my Notice of Grant of Stock Option (the "NOTICE") and my Stock Option Agreement (the "OPTION AGREEMENT") as follows: Grant Number: -------------------------- Date of Option Grant: -------------------------- Number of Option Shares: -------------------------- Exercise Price per Share: $ -------------------------- 2. EXERCISE OF OPTION. I hereby elect to exercise the Option to purchase the following number of Shares, all of which are Vested Shares in accordance with the Notice and the Option Agreement: Total Shares Purchased: -------------------------- Total Exercise Price (Total Shares X Price per Share): $ -------------------------- 3. PAYMENTS. I enclose payment in full of the total exercise price for the Shares in the following form(s), as authorized by my Option Agreement: * Cash: $ -------------------------- * Check: $ -------------------------- * Tender of Company Stock: Contact Plan Administrator * Cashless exercise (same-day sale): Contact Plan Administrator 1 4. TAX WITHHOLDING. I authorize payroll withholding and otherwise will make adequate provision for the federal, state, local and foreign tax withholding obligations of the Company, if any, in connection with the Option. If I am exercising a Nonstatutory Stock Option, I enclose payment in full of my withholding taxes, if any, as follows: (CONTACT PLAN ADMINISTRATOR FOR AMOUNT OF TAX DUE.) * Cash: $ -------------------------- * Check: $ -------------------------- 5. OPTIONEE INFORMATION. My address is: --------------------------------------------------- --------------------------------------------------- My Social Security Number is: ------------------------------------ 6. NOTICE OF DISQUALIFYING DISPOSITION. If the Option is an Incentive Stock Option, I agree that I will promptly notify the Chief Financial Officer of the Company if I transfer any of the Shares within one (1) year from the date I exercise all or part of the Option or within two (2) years of the Date of Option Grant. 7. BINDING EFFECT. I agree that the Shares are being acquired in accordance with and subject to the terms, provisions and conditions of the Notice and the Option Agreement, to all of which I hereby expressly assent. This Agreement shall inure to the benefit of and be binding upon the my heirs, executors, administrators, successors and assigns. Very truly yours, ----------------------------------- (Signature) Receipt of the above is hereby acknowledged. RAYTEL MEDICAL CORPORATION By: ------------------------------------- Title: ---------------------------------- Dated: ---------------------------------- 2 EX-10.71 4 f78124a1ex10-71.txt EXHIBIT 10.71 EXHIBIT 10.71 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), dated May 22, 2000, (the "Effective Date"), is made and entered into by and between RAYTEL MEDICAL CORPORATION, ("RAYTEL") a Delaware corporation and its Subsidiary RAYTEL CARDIAC SERVICES CORPORATION (the "Company"), and Jason Sholder, (the "Employee"). RECITALS A. The Company desires to continue the employment of the Employee as its President and Chief Operating Officer, and the Employee desires to accept such continued employment. The employment of the Employee by the Company pursuant to this Agreement is hereinafter sometimes referred to as the "Employment"; and B. The Company and the Employee hereby enter into this Agreement setting forth each and all of the terms and conditions of the Employment. NOW THEREFORE, in consideration of the premises and the agreements, representations and warranties, contained in this Agreement, the Company and the Employee hereby agree as follows: 1. Duties Term and Exclusive Employment. 1.1 Duties and Responsibilities. Within the limitations established by the Company's Bylaws, the Employee shall have each and all of the duties and responsibilities as President and Chief Operating Officer of the Company as well as certain other related subsidiaries of Raytel to be named by the Raytel Board of Directors (the "Board") from time to time. As such, the Employee shall have responsibility and authority with respect to the Company's operations, subject to the direction of the Company's Chief Executive Officer ("CEO"). 1.2 Term of Employment. The Employment hereunder shall begin on the Effective Date and, unless earlier terminated as provided in Paragraph 3 hereof, the Employment shall continue until midnight on the first anniversary of the Effective Date. The Employment shall be extended for additional one (1) year terms upon each anniversary of the Effective Date, beginning on May 15, 2000, upon the Company's -1- written notice to the Employee at least thirty (30) days prior to the expiration of the initial term (or, if applicable, any extended term) of its election to extend the Employment for the subsequent term. 1.3 No Other Employment or Business Activities. During the term of the Employment, the Employees shall diligently and conscientiously devote all of his working time and attention to discharging his duties to the Company and shall not, without the express prior written consent of the Board, render to any other person, corporation, partnership, firm, company, joint venture or other entity any services of any kind for compensation or engage in any other activity that would in any manner whatsoever interfere with the performance of the Employee's duties on behalf of the Company. The foregoing notwithstanding, nothing herein shall prevent the Employee from engaging in charitable activities or activities of professional associations, from managing any personal investments on his own personal time, provided that such investments are not otherwise competitive with the Company except for those activities contained in Exhibit A. 1.4 Proprietary Information and Inventions Agreement. The Employee acknowledges his obligations under the Employment Agreement regarding Proprietary Information and Inventions of even date herewith, attached hereto as Exhibit B (the "Proprietary Information and Inventions Agreement"), and agrees to be bound by the provisions thereof. 1.5 Indemnity Agreement. The parties acknowledge their respective obligations under the Indemnity Agreement of even date herewith, attached hereto as Exhibit C (the "Indemnity Agreement"), and agree to be bound by the provisions thereof. 1.6 Relocation Agreement. During the Employment the Company and the Employee acknowledge that the Employee may be required to move his residence to the state of Connecticut or such other location which is within reasonable commuting distance of one of the Company's major facilities. Upon mutual agreement between the Employee and the Company with regard to the major facility, the Company agrees to reimburse the Employee for all reasonable and customary moving expenses, as defined by Company policy, as long as those expenses do not exceed $45,000 and are pre-approved by the Company. -2- 1.7 Non Competition Agreement. The Employee acknowledges his obligations under the Agreement regarding non competition with Raytel attached herewith as Exhibit D (the "Agreement and Covenant Not to Compete"), and agrees to be bound by the provisions thereof. 2. Compensation. In full and complete consideration for the Employment and each and all of the services to be rendered to the Company, and any subsidiary or affiliate of the Company, by the Employee, the Employee shall receive compensation as follows, except as otherwise provided in Paragraph 3 hereof: 2.1 Base Salary. The Employee shall receive from the Company a base salary, at the initial rate of Three Hundred Thousand Dollars ($300,000) per year, payable in periodic installments in accordance with the Company's payroll policy as in effect from time to time. The base salary will be reviewed at least annually during the continuation of the Employment and may be increased by the Company in the sole discretion of the Board or its designees based upon such factors as the CEO and the Board deems relevant, including the earnings and revenue growth of the Company. From each salary payment the Company will withhold any pay to the proper governmental authorities any and all amounts required by law to be withheld for federal income tax, state income tax, federal social security tax, state disability insurance premiums, and any and all other amounts required by law to be withheld from the Employee's salary. The Company will also deduct from the Employee's salary payments those sums, if any, authorized by the Employee in writing and approved by the Company. The Company will make payments and contribution, such as unemployment insurance premiums, workers' compensation insurance premiums and the employer's portion of federal social security tax, which are required by law to be made by the Company for the Employee's benefit without any deduction from the Employee's salary payments. 2.2 Bonus Awards. The Employee will be eligible for consideration for incentive compensation ("Bonus Awards"), although no Bonus Awards are required to be paid hereunder. All Bonus Awards shall be determined by the Board based upon the recommendations of the CEO in its sole discretion for such fiscal periods as it shall determine and based upon such factors as it deems relevant. Each Bonus award will be deemed to be earned at the end of the applicable fiscal period and will be paid to the Employee within ninety (90) days following the end of the fiscal period for which such award is made; provided, however, that if, prior to the end of any such fiscal period, (i) the Employment is terminated as a result of the Employee's death or disability; (ii) -3- the Company terminated the Employment other than For Cause pursuant to Paragraph 3.2 hereof; (iii) the Employment is terminated by the Company giving notice pursuant to Paragraph 1.2 hereof; or (iv) the Employee terminates the Employment for Good Reason pursuant to Paragraph 3.4 hereof, in each case, the Employee shall be entitled to receive a prorated Bonus Award determined by multiplying the amount of the Bonus Award, if any, that the Employee would have received had the Employee been employed for the full fiscal period by a fraction, the numerator of which is the number of full months of Employment completed during the fiscal period and the denominator of which is the number of months in the fiscal period. Any such prorated bonus award will be paid to the Employee within ninety (90) days following the end of the fiscal period for which such award is made. 2.3 Deferred Compensation Plan. The Employee shall be entitled to participate in the Company's Deferred Compensation Plan so long as it is available, and in any successor plan which may be adopted and in effect from time to time during the Employment. 2.4 Stock Options. The Employee is the holder of stock options granted under the Company's 1990 Stock Option Plan, which options are subject to separate written Option Agreements. No such Option Agreement constitutes an agreement of employment, and no provision of any such Option Agreement shall operate to extend the term of the Employment hereunder. During the Employment, the Employee will be eligible for the grant of additional options at the sole discretion of the Board based upon such factors as it deems relevant. The Stock Option Plan shall be modified in accordance with the Board resolution, a copy of which is attached as Exhibit E. 2.5 Vacation. The Employee shall be entitled to paid vacation in accordance with the Company's vacation policy for senior executives, as in effect from time to time. 2.6 Automobile Allowance. The Employee shall be entitled to the payment of a $700 monthly allowance for automobile expenses throughout the term of the Employment, in the same amount and in accordance with the arrangements currently in effect, or to such alternate automobile allowance of comparable economic value as may be in effect from time to time. -4- 2.7 Insurance and Other Benefits. The Employee shall be entitled to participate in any life, medical, dental and/or disability insurance plans, together with any supplemental insurance plans, as may be offered by the Company to its executive employees from time to time during the Employment. The Employee shall be eligible to participate in any other fringe benefits as may be provided by the Company to its executives, generally, during the Employment. 3. Termination of Employment. The Employment may be terminated prior to the end of the term specified in Paragraph 1.2 hereof upon the occurrence of any of the following: 3.1 Death and Disability. The Employment shall automatically terminate upon the death of the Employee. The Company shall have the right, but not the obligation, to terminate the Employment at any time following determination of the Employee's total disability (as defined pursuant to the Company's long-term disability insurance plan covering the Employee if any such plan is then in effect, or otherwise as determined by the Company's Board of Directors). In this event of the Employee's total disability, the Employee's base salary pursuant to Paragraph 2.1 hereof, shall be continued for the lesser of: (i) the duration of the Employee's total disability, or (ii) the waiting period determined in the Company's long-term disability policy then in effect or (iii) one (1) year if no such policy is then in effect. In the event of the Employee's death or total disability, the Employee or his estate shall be entitled to receive: (A) the Employee's base salary through the date of termination of the Employment (as extended, in the case of total disability), plus, (B) any Bonus Award earned by the Employee as of the date of termination of the Employment pursuant to Paragraph 2.2 hereof but not yet paid, plus (C) any other benefits to which the Employee is entitled pursuant to the plans described in Paragraphs 2.3 and 2.7 hereof. In the event of a partial disability that prevents the Employee from effectively performing his duties and responsibilities hereunder, the parties will attempt, in good faith, to negotiate a basis upon which the Employee may continue as an employee of the Company in a reduced capacity and at appropriately reduced compensation. If no such arrangement is agreed upon, the Company may elect to treat the Employee's disability as a total disability for purposes of this Paragraph 3.1 3.2 Termination of Employment by the Company "For Cause". The Company shall have the unrestricted right, but not the obligation, to terminate the Employment at any time "For Cause" in the event of the Employee's: (1) willful and repeated neglect of his duties hereunder (other than as a result of a physical disability -5- not related to substance abuse), (ii) conviction of a crime involving moral turpitude, (iii) commission of any act of fraud or dishonesty against the Company, or (iv) breach of the Employee's obligations hereunder or under the Proprietary Information and Inventions Agreement which, if curable, is not cured within ten (10) days following notice thereof by the Company. The decisions to terminate the Employment For Cause, to take other action or to take no action in response to such occurrence shall be in the sole and exclusive discretion of the Company. Upon any termination of the Employment by the Company For Cause, the Employee shall be entitled to receive: (A) the Employee's base salary through the date of such termination, plus (B) any bonus Award earned by the Employee as of the date of termination of the Employment pursuant to Paragraph 2.2 hereof but not yet paid, plus any other benefits to which the Employee is entitled pursuant to the plans described in Paragraphs 2.3 and 2.7 hereof. 3.3 Other Termination of Employment by the Company. Through the term of this Agreement the Company may terminate the Employment hereunder at any time for any reason. However, if the Employment is terminated by the Company for any reason other than pursuant to Paragraphs 3.1 or 3.2 hereof (including a termination pursuant to notice given under Section 1.2 hereof), the Employee shall be entitled to receive his base salary through the date of termination of the Employment, plus an amount (the "Severance Payment") equal to his then current base salary for a period of twelve (12) months following the date of termination (the "Severance Period"). The Severance Payment shall be paid in periodic installments during the Severance Period, in accordance with the Company's payroll policy as in effect from time to time, and shall be in lieu of any other severance pay or other benefit to which the Employee might otherwise be entitled. In addition, in the event of such a termination, the Company will, to the extent its plans permit, continue to provide to the Employee coverage under its life, medical, dental and/or disability plans, as in effect on the date of termination, during the Severance Period. In the event that the Company may not continue to provide the benefit of any such plans, the Severance Payment shall be increased by an amount equal to the Employee's cost of providing such discontinued coverage for himself and his dependents during the Severance Period, assuming, where applicable, the timely compliance by the Employee with any notification procedure required in order to obtain continuation coverage at group rates. The Employee shall also be entitled, upon any such termination, to receive: (A) any Bonus Award earned by the Employee as of the date of termination of the Employment pursuant to Paragraph 2.2 hereof but not yet paid, plus, (B) any other benefits to which the Employee is entitled pursuant to the plans described in paragraphs 2.3 and 2.7 hereof. However, should the Employee become employed during the Severance Period the -6- Severance Payment will be reduced by the amount of compensation received from the new employer for the remainder of the Severance Period. 3.4 Termination of Employment by the Employee for "Good Reason". The Employee shall have the right to terminate the Employment at any time for "Good Reason" in the event that, other than pursuant to Paragraphs 3.1 or 3.2 hereof, the Company, without the Employee's prior written consent, (i) materially alters or reduces the Employee's duties, responsibilities and status with the Company from those which exist as of the Effective Date; (ii) materially breaches the terms of this Agreement in respect to the payment of compensation or benefits or in any other material respect and such breach is not cured within thirty (30) days after notice thereof; or (iii) required the Employee, as a condition to the Employment, to perform illegal or fraudulent acts or omissions. If the Employee voluntarily terminates the Employment for Good Reason pursuant to this Paragraph 3.4, the Employee shall be entitled to receive the payments and other benefits specified in paragraph 3.3 hereof with respect to a termination by the Company other than For Cause. 3.5 Termination of Employment by the Employee Without "Good Reason". Upon any voluntary termination of the Employment by the Employee, other than for Good Reason pursuant to Paragraph 3.4 hereof, the Employee shall be entitled to receive (i) the Employee's base salary through the date of such termination, plus (ii) any Bonus award earned by the Employee as of the date of termination of the Employment pursuant to Paragraph 2.2 hereof but not yet paid, plus (iii) any other benefits to which the Employee is entitled pursuant to the plans described in Paragraphs 2.3 and 2.7 hereof through the date of such termination. 4. Expenses. The Company will reimburse the Employee for those customary, ordinary and necessary business expenses incurred by him in the performance of his duties and activities on behalf of the Company. Such expenses will be reimbursed upon presentation by the Employee of appropriate documentation to substantiate such expenses pursuant to the policies and procedures of the Company governing reimbursement of business expenses to its executives. The Employee will use his best efforts to minimize such expenses in accordance with Company policies. 5. Conflicts of Interest. The Employee covenants, warrants and represents to the Company that he has the full right and authority to enter into the Employment and this Agreement, that he has no agreement, duty, commitment or responsibility of any kind or nature whatsoever with or to any other person, corporation, partnership, -7- firm, company, joint venture or other entity which would conflict in any manner whatsoever with any of his duties, obligations or responsibilities to the Company pursuant to the Employment and/or this Agreement. As a condition of the Employment and of the Company's entering into this Agreement, the Company requires that the Employee not, and the Employee hereby specifically agrees, covenants, warrants and represents that during the Employment he will not, without the Board's express prior written consent, accept any employment, contractual or other relationship of any kind or nature whatsoever or engage in any association or dealing of any kind or nature whatsoever with any person, corporation, partnership, firm, company, joint venture, or other entity in competition with any actual or proposed business of the Company; provided that nothing herein shall prohibit Employee from owning up to five percent (5%) of the outstanding shares of any class of equity securities of a corporation engaged in any such prohibited activity whose securities are listed on a national securities exchange or quoted daily in the over-the-counter listings of The Wall Street Journal. 6. Duties of the Employee After Any Notice of Termination of the Employment. Following any notice of termination of the Employment, the Employee shall fully cooperate with the Company in all matters relating to the winding up of the Employee's work on behalf of the Company and the orderly transfer of all pending work and of the Employee's duties and responsibilities to such other person or persons as may be designated by the Company in its sole discretion. Upon any termination of the Employment, the Employee will immediately deliver to the Company any and all of the Company's property of any kind or nature whatsoever in the Employee's possession, custody or control, including, without limitation any and all Confidential Information as that term is defined in the Proprietary Information and Inventions Agreement. 7. No Solicitation. During the Employment and for two (2) years following any termination of the Employment, the Employee will not, without having received prior written permission of the Board to do so, directly or indirectly, on his own behalf or in the service of others, interfere with or raid the officers, employees, consultants, agents and/or independent contractors of the Company or in any manner attempt to persuade any such person to discontinue any relationship with the Company. The Employee and the Company confirm that this Paragraph 7 is reasonable and necessary for the protection of the trade secrets and proprietary information of the Company. -8- 8. 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 or the Employment shall be settled solely by 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 Employee 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 8 are intended by the Employee 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 of or relating to this Agreement, and the Employment, 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 8, the Company shall at all times have and retain the full, complete and unrestricted right to immediate and permanent injunctive and other relief as provided in Paragraph 9 below. 9. The Company's Right to Immediate Injunctive Relief. The Employee recognizes, acknowledges and agrees that any breach or any threatened breach of any Paragraph, term, provision or covenant of any of Paragraphs 1, 4, 5, 6, 7 and 8 of this Agreement or of the Proprietary Information and Inventions Agreement would cause irreparable injury to the Company which could not be adequately compensable in monetary damages and that the remedy at law for any such breach will be entirely insufficient and inadequate to protect the Company's legitimate interests. Therefore, the Employee specifically recognizes, acknowledges and agrees that the Company shall at any and all times be and remain fully entitled to seek and obtain immediate temporary, preliminary and permanent injunctive relief for any such breach or threatened breach from any court of competent jurisdiction. The prevailing party in any action instituted pursuant to this paragraph 8 shall be entitled to recover from the other party its reasonable attorneys' fees and other expenses incurred in such litigation. -9- 10. Survival of Certain Provisions of this Agreement. Except as may otherwise be provided herein, each and all of the terms, provisions and covenants of each of paragraphs 1, 4, 6, 7, 8, 9, 10 and 11 of this Agreement shall, for any and all purposes whatsoever, survive any termination of the Employment, regardless of whether such termination is by the Employee, the Company, by expiration or otherwise. 11. General. 11.1 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of and be binding upon the Company, the Employee and each and all of their respective heirs, legal representatives, successors and assigns. The duties, responsibilities and obligations of the Employee under this Agreement shall be personal and not assignable or delegable by the Employee in any manner whatsoever to any person, corporation, partnerships, firm, company, joint venture or other entity. The Employee 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. 11.2 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. 11.3 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 Employee concerning the Employment, the terms and conditions of the Employment, the duration of the Employment, the termination of the Employment and the compensation and benefits to be paid and provided by the Company to the Employee pursuant to the Employment. 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 -10- oral or written, concerning the Employment, the terms and conditions of the Employment, the duration of the Employment, the termination of the Employment and the compensation and benefits to be paid by the Company to the Employee pursuant to the Employment. 11.4 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 Employee. 11.5 Originals. The Agreement may be executed by the Company and by the Employee in counterparts, each of which shall be deemed an original and which together shall constitute one instrument. 11.6 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. 11.7 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. 11.8 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. 11.9 Construction. The language of this Agreement and of each and every paragraph, term and provision 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 Employee 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. -11- 11.10 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 11.10. 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 Employee shall be addressed as follows: Jason Sholder 40 Marlin Drive Whippany, N.J. 07981 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 IN WITNESS THEREOF, the Company and the Employee have each duly executed this Agreement as of the date first set forth above. RAYTEL MEDICAL CORPORATION EMPLOYEE By: /s/ RICHARD F. BADER /s/ JASON SHOLDER ------------------------ --------------------------- Richard F. Bader Jason Sholder Its: Chairman and Chief Executive Officer -12- EXHIBIT A EXCEPTIONS TO OTHER BUSINESS ACTIVITIES 1. Employee will be allowed to be a member of MAX Medical Inc's ("MAX"), Board of Directors attending up to 3 meetings per year at MAX's expense. 2. Employee may assist MAX in its funding process, so long as Employee's needs to do so are not excessive and MAX pays for all of Employee's associated travel, food and lodging expenses associated with the fund raising effort for a maximum of 3 months. 3. If Employee can persuade Raytel's Board to initiate a project to evaluate and potentially adopt Employee's Heart Transplant Rejection Assessment Monitoring concepts, Raytel and Employee will negotiate a separate, mutually acceptable Agreement for rights to the product and service. 4. If Raytel's Board decides not to pursue this project and service, the Employee will be allowed to negotiate for the rights with any third party to initiate a separate business. 5. If a separate business is initiated, Employee will be allowed to be a member of its Board of Directors and retain a major equity ownership in that business. -13- EXHIBIT B PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT The business of Raytel Medical Corporation, its subsidiaries, affiliates and joint ventures, herein after referred to as the "Company", involves valuable, confidential, and proprietary data and information of various kinds. Such data and information, called "Trade Secrets" concerns: - - The names of Company customers and the nature of the Company's relationships with such customers (e.g., types and amounts of products acquired from the Company); - - The Company's various computer systems and programs; - - Techniques, development, improvements, inventions and processes that are, or may be produced in the course of the Company's operations; and - - Any other information not generally known concerning the Company or its operations, products, suppliers, markets, sales, costs, profits, customer needs and lists; or other information acquired, disclosed or made known to employees or agents while in the employ of the Company, which, if used or disclosed, could adversely affect the Company's business or give competitors and advantage. Since is would harm or Company if any of our Trade Secrets were known to our competitors, as a condition of employment you agree that: - - You will not, during or after your employment with the Company, use any Trade Secrets for your benefit, or disclose to any person, business, or corporation any Trade Secrets without the prior written consent of the Company. - - You will fully and completely disclose to the Company any inventions, ideas, works or authorship, and other Trade Secrets made, developed, and/or conceived by you alone or jointly with others, arising out of, or relating to employment at the Company. All such inventions, ideas, works of authorship, copyrights, and other Trade Secrets shall be the sole property of the Company except as provided below in Appendix A. The employee agrees to execute and deliver to the Company such assignments, documents, agreements, or instruments which the Company may -14- require from time to time to evidence its ownership of the results and proceeds of the employee's creations. - - You shall avoid discussing any matter of a confidential nature, or which constitutes a Trade Secret, with any competitor or its employees. This includes discussions regarding customers, pricing and policies. The employee is reminded that any such discussions may cause the Company and the employees personally, to have violated anti-trust laws, including the Sherman and Clayton Acts, Sanctions of up to three years imprisonment and fines up to $100,000 have been imposed on those who violate such laws. - - Upon termination of employment or at any time during employment, the Company may request that you promptly return to the Company all memoranda, notes, records, reports, technical manuals, and other documents (and all copies thereof) in your possession, custody, or control relating to Trade Secrets, all of which written materials and other media are and remain the sole property of the Company. Every employee agrees to comply with rules, regulations, policies and procedures of the Company faithfully and to the best of his/her abilities. The employee understands that breach of any covenant contained herein may constitute substantial and irreparable harm to the Company and the Company may seek injunctive relief and other relief which it deems necessary and appropriate under the circumstances to protect its rights, and the employee shall pay all reasonable attorney fees, costs, and expenses incurred by the Company in the enforcement of any such actions. I Jason Sholder received and read a copy of this Trade Secrets and Confidential Information Policy statement, understand all of its terms, and agree to be bound by the provisions. /s/ JASON SHOLDER Dated: 5/24/00 - --------------------------- ----------------------- Jason Sholder -15- APPENDIX A 1. Employee has submitted provisional patent applications to the US Patent Office for a personal emergency response system and has provided a license to MAX for products that incorporate these patent concepts. A full patent application and additional patents are contemplated for this product. Raytel understands that all prior and future patent applications made by Employee dealing with personal emergency response systems are the property of Employee and Raytel will have no right, title or interest in these patents. 2. Employee has, for over 15 years, developed concepts, prepared a business plan to form a transplant rejection assessment company (AlloCare, Inc.) and has submitted patent applications for an Implantable Heart Transplant Rejection Assessment Monitor/transtelephonic patient rejection evaluation service. Employee has been in the process of obtaining agreements from many different manufacturers for a supply of pacemakers on an OEM basis which, with a change in software, can be used as Implantable Rejection Assessment Monitors. Employee wishes to interest Raytel in this business concept. To this end: 3. Employee has submitted provisional patent applications to the US Patent Office for a Heart Transplant Rejection Assessment Monitor and a Congestive Heart Failure Monitor. A full patent application and additional patents are contemplated. 4. Raytel understands that all prior and future patent applications made by Employee dealing with Transplant Rejection Assessment Monitors and Congestive Heart Failure Monitors are the property of Employee and Raytel has, at this time, no right, title or interest in these patents or products. -16- EXHIBIT C INDEMNITY AGREEMENT This Indemnity Agreement, dated as of May 23, 2000, is made by and between Raytel Medical Corporation, a Delaware corporation (the "Company"), and Jason Sholder (the "Indemnitee") RECITALS A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors, officers or agents of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors, officers and other agents. B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors, officers and agents with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take. C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so enormous (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of directors, officers and other agents. D. The Company believes that it is unfair for its directors, officers and agents and the directors, officers and agents of its subsidiaries to assume the risk of huge judgments and other expenses which may occur in cases in which the director, officer or agent received no personal profit and in cases where the director, officer or agent was not culpable. E. The Company recognizes that the issues in controversy in litigation against a director, officer or agent of a corporation such as the Company or its subsidiaries are often related to the knowledge, motives and intent of such director, officer or agent, that he is usually the only witness with knowledge of the essential facts and exculpating -17- circumstances regarding such matters, and that the long period of time which usually elapses before the trial or other disposition of such litigation often extends beyond the time that the director, officer or agent can reasonably recall such matters; and may extend beyond the normal time for retirement for such director, officer or agent with the result that he, after retirement or in the event of his death, his spouse, heirs, executors or administrators, may be faced with limited ability and undue hardship in maintaining an adequate defense, which may discourage such a director, officer or agent from serving in that position. F. Based upon their experience as business managers, the Board of Directors of the Company (the "Board") has concluded that, to retain and attract talented and experienced individuals to serve as directors, officers and agents of the Company and its subsidiaries and to encourage such individuals to take the business risks necessary for the success of the Company and its subsidiaries, it is necessary for the Company to contractually indemnify its directors, officers and agents and the directors, officers and agents of its subsidiaries, and to assume for itself maximum liability for expenses and damages in connection with claims against such directors, officers and agents in connection with their service to the Company and its subsidiaries, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its subsidiaries and the Company's stockholders. G. Section 145 of the General Corporation Law of Delaware, under which the Company is organized ("Section 145"), empowers the Company to indemnify its directors, officers, employees and agents by agreement and to indemnify persons who serve, at the request of the Company, as the directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by Section 145 is not exclusive. H. The Company desires and has requested the Indemnitee to serve or continue to serve as a director, officer or agent of the Company and/or one or more subsidiaries of the Company free from undue concern for claims for damages arising out of or related to such services to the Company and/or one or more subsidiaries of the Company. I. Indemnitee is willing to serve, or to continue to serve, the Company and/or one or more subsidiaries of the Company, provided that he is furnished the indemnity provided for herein. -18- AGREEMENT NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. (a) Agent. For the purposes of this Agreement, "agent" of the Company means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary of the Company, or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or a subsidiary of the Company, or was a director, officer, employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation. (b) Expenses. For purposes of this Agreement, "expenses" include all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements, other out-of-pocket costs and reasonable compensation for time spent by the Indemnitee for which he is not otherwise compensated by the Company or any third party) actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement or Section 145 or otherwise; provided, however, that "expenses" shall not include any judgments, fines, ERISA excise taxes or penalties, or amounts paid in settlement of a proceeding. (c) Proceeding. For the purposes of this Agreement, "proceeding" means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, or investigative. (d) Subsidiary. For purposes of this Agreement, "subsidiary" means any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more other subsidiaries, or by one or more other subsidiaries. -19- 2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to serve as agent of the Company, at its will (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an agent of the Company, so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing; provided, however, that nothing contained in this Agreement is intended to create any right to continued employment by the Indemnitee. 3. Liability Insurance. (a) Maintenance of D&O Insurance. The Company hereby covenants and agrees that, so long as the Indemnitee shall continue to serve as an agent of the Company and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that the Indemnitee was an agent of the Company, the Company, subject to Section 3(c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) Rights and Benefits. In all policies of D&O Insurance, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if the Indemnitee is a director; or of the Company's officers, if the Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if the Indemnitee is not a director or officer but is a key employee. (c) Limitation on Required Maintenance of D&O Insurance. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 4. Mandatory Indemnification. Subject to Section 9 below, the Company shall indemnify the Indemnitee as follows: (a) Successful Defense. To the extent the Indemnitee has been successful on the merits or otherwise in defense of any proceedings (including, without limitation, an action by or in the right of the Company) to which the Indemnitee was a -20- party by reason of the fact that he is or was an Agent of the Company at any time, against all expenses of any type whatsoever actually and reasonably incurred by him in connection with the investigation, defense or appeal of such proceeding. (b) Third Party Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. (c) Derivative Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by or the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against any amounts paid in settlement of any such proceeding and all expenses actually and reasonably incurred by him in connection with the investigation, defense, settlement, or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders. The Company shall indemnify the Indemnitee against judgments, fines, and ERISA excise taxes and penalties to the same extent and subject to the same conditions as described in the immediately preceding sentence. Notwithstanding the foregoing, no indemnification under this subsection 4(c) shall be made in respect to any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction unless and only to the extent that the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the court shall deem proper. (d) Actions where Indemnitee is Deceased. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, and if prior to, during the pendency of, or -21- after completion of such proceeding Indemnitee becomes decreased, the Company shall indemnify the Indemnitee's heirs, executors and administrators against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred to the extent Indemnitee would have been entitled to indemnification pursuant to Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive. (e) Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) for which payment is actually made to Indemnitee under a valid and collectible insurance policy of D&O Insurance, or under a valid and enforceable indemnity clause, by-law or agreement. 5. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a proceeding, but not entitled, however, to indemnification for all of the total amount hereof, the Company shall nevertheless indemnify the Indemnitee for such total amount except as to the portion hereof to which the Indemnitee is not entitled. 6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the Company shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall be determined ultimately that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee within twenty (20) days following delivery of a written request therefor by the Indemnitee to the Company. 7. Notice and Other Indemnification Procedures. (a) Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought -22- from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. (b) If, at the time of the receipt of a notice of the commencement of a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (c) In the event the Company shall be obligated to pay the expenses of any proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that (i) the Indemnitee shall have the right to employ his counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense of (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board, (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the General Corporation Law of Delaware or (iv) the proceeding is brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145. -23- (b) Lack of Good Faith. To indemnify the Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (c) Unauthorized Settlements. To indemnify the Indemnitee under this Agreement for any amounts paid in settlement of a proceeding unless the Company consents to such settlement, which consent shall not be unreasonably withheld. 9. Non-exclusivity. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provision of law, the Company's Certificate of Incorporation or Bylaws, the vote of the Company's stockholders or disinterested directors, other agreements, or otherwise, both as to action in his official capacity and to action in another capacity while occupying his position as agent of the Company, and the Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee. 10. Enforcement. Any right to indemnification or advances granted by this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Indemnitee, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under this Agreement (other than an action brought to enforce a claim for expenses pursuant to Section 6 hereof, provided that the required undertaking has been tendered to the Company) that Indemnitee is not entitled to indemnification because of the limitations set forth in Sections 4 and 8 hereof. Neither the failure of the Corporation (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Indemnitee is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its stockholders) that such indemnification is improper, shall be a defense to the action or create a presumption that Indemnitee is not entitled to indemnification under this Agreement or otherwise. -24- 11. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 12. Survival of Rights. (a) All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an agent of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein. (b) The Company shall require any successor to the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 13. Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent permitted by law including those circumstances in which indemnification would otherwise be discretionary. 14. Severability. If any provision of provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 13 hereof. -25- 15. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing wavier. 16. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 17. Governing Law. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. 18. Consent to Jurisdiction. The Company and the Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware. The parties hereto have entered into this Indemnity Agreement effective as of the date first above written. COMPANY: INDEMNITEE: RAYTEL MEDICAL CORPORATION By: /s/ RICHARD F. BADER /s/ JASON SHOLDER --------------------------------------- ----------------------------- Richard F. Bader Jason Sholder Title: Chairman and Chief Executive Officer -26- EXHIBIT D AGREEMENT AND COVENANT NOT TO COMPETE This Agreement and Covenant Not to Compete is attached as Exhibit D to the Employment Agreement between Raytel Medical Corporation ("Employer") and Jason Sholder ("Employee") dated May 23, 2000. Employee expressly covenants with the Employer as follows: (a) During the Term of the Employment (as defined in the Employment Agreement), if the Employee shall, for any reason other than permanent retirement from the regular full-time employment, permanently or temporarily leave the employ of the Employer, Employee hereby agrees, unconditionally, that he shall not in any manner whatsoever, directly or indirectly, as partner, employee, agent, principal, independent contractor, consultant, owner, or in any other capacity whatsoever establish, maintain, manage or occupy any office or premises for, and/or seek or become employed in a business or entity that is engaged in the same or similar business as that engaged in by the Employer, for a period of not less than two (2) years (the "Restricted Period") after termination of employment, within the United States (the "Restricted Area"). (b) The Employer and the Employee agree that it is impossible to determine with any reasonable accuracy the amount of damages Employer would incur upon breach of this provision. Accordingly, in the event Employee breaches this provision, the Employee does hereby unconditionally covenant and agree with the Employer that the Employee shall pay, forthwith, the sum of Three Hundred Thousand Dollars ($300,000) as liquidated damages (the "Liquidated Damages") to the Employer upon written notice and demand, and in any event within three (3) days of the receipt of said notice by the Employee. (c) In the event Employee refuses to pay said sum or unreasonably delays the payment of same, the Employer shall have the unqualified option to sue and recover from Employee the aforesaid sum together with its reasonable attorney's fees and/or obtain an injunction against the Employee to enforce the medical practice prohibitions of this covenant, together with Employer's reasonable attorney's fees. It is the express intent and purpose of this provision that the Employee shall in no way compete with the Employer in every particular as set forth herein. Notwithstanding the above, the Employer, in lieu of accepting the Liquidated Damages, shall, have the right of injunctive -27- relief. Such injunction may, in the discretion of the court, be granted without bond being required. If injunctive relief for any reason whatsoever is not available, then the Liquidated Damages, shall be paid as set forth above. (d) The Employee further acknowledges that the use of specific customer lists and referring physician lists, or direct solicitation of existing patients or referring physicians shall be presumed to be an irreparable injury to the Employer and may be specifically enjoined. (e) In the event Employer brings a legal action or other proceedings against Employee for enforcement of any provision of this Agreement, the calculation of the non-compete period shall not include the period of time commencing with the filing of legal action or other proceeding to enforce the provision or provisions of this Agreement through the date of final judgment or final resolution, including all appeals, if any, of such legal action. The existence of any claim or cause of action by Employee against the Employer predicated on this Employment Agreement shall not constitute a defense to the enforcement by the Employer of this covenant not to compete. (f) Employee acknowledges that Employer has legitimate business interests to justify the restrictions placed on him under this Agreement, including without limitation: (1) Employee possesses or will possess confidential business or professional information pertaining to Employer and its business, the use of which by Employee outside of his employment relationship with Employer could cause substantial harm to Employer and its business; (2) Employer has or will have substantial relationships with existing or prospective customers and referring physicians who utilize the services of Employer and the management and staff employed by Employer, which relationships could be substantially disrupted if Employee were to compete with Employer in the Restricted Area during the Restricted Period; and (3) Employer has created substantial goodwill in connection with the conduct of its business under its trade name within the Restricted Area, which goodwill could be substantially diluted if Employee were to compete with Employer in the Restricted Area during the Restricted Period. -28- (g) Employee further acknowledges that the restrictions on his activity as contained in this Agreement are legitimate and reasonable, as to distance and monetary amount, are required for the Employer's reasonable protection, and are a material inducement to the Employer to enter into the Employment Agreement to which this Agreement and Covenant not to Compete is attached as an exhibit. Notwithstanding anything contained herein to the contrary, the provisions contained in this Agreement shall survive the expiration and term of the Employment Agreement. (h) Employee agrees that Employer may assign this Agreement to an entity that acquires or succeeds to the interests of Employer, and in such event, the Employer's assignee or successor is expressly authorized to enforce the provisions of this Agreement and Covenant not to Compete. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day and year first above-written. JASON SHOLDER RAYTEL MEDICAL CORPORATION (The "Employee") (The "Employer") /s/ JASON SHOLDER By: /s/ RICHARD F. BADER - ------------------------------ ------------------------------------- Jason Sholder Richard F. Bader Its: Chairman and Chief Executive Officer -29- EXHIBIT E BOARD RESOLUTION TO THE 1990 STOCK OPTION PLAN -30- EX-21.1 5 f78124a1ex21-1.txt EXHIBIT 21.1 EXHIBIT 21.1 RAYTEL MEDICAL CORPORATION Federal EIN: 94-2787342 For the fiscal year ended September 30, 2001 The following subsidiaries of Raytel Medical Corporation have an a mailing address of 7 Waterside Crossing, Windsor, Connecticut 06095: Raytel Cardiac Services Raytel Imaging Holdings, Inc. Raytel Imaging Network, Inc. Cardiovascular Ventures, Inc. MRI Diagnostic Partners I, L.P. MRI Building Partners, L.P. San Luis Obispo Medical Imaging Center, L.P. Cardiovascular Ventures of East New Orleans, Inc. Heart Center of East New Orleans, L.P. Cardiovascular Ventures of Alexandria, Inc. Heart Center of Central Louisiana, L.P. Cardiovascular Ventures of Texas, Inc. Dallas Outpatient Cardiovascular Center, L.P. Fort Worth Cardiac Laboratory, Inc. Heart Center of Fort Worth, Inc. Raytel Nuclear Imaging of West Houston, Inc. Raytel Nuclear Imaging of Fort Worth, Inc. The following subsidiaries of Raytel Medical Corporation have a mailing address of 2755 Campus Drive, Suite 200, San Mateo, California 94403: Raytel Granada Hills, Inc. Raytel California Physician Services, Inc. EX-23.1 6 f78124a1ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated November 29, 2001. It should be noted that we have not audited any financial statements of the company subsequent to September 30, 2001 or performed any audit procedures subsequent to the date of our report. /s/ ARTHUR ANDERSEN LLP Hartford, Connecticut December 21, 2001 -----END PRIVACY-ENHANCED MESSAGE-----