10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2001; or
[   ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from___________________to__________________

Commission File Number: 0-27186

RAYTEL MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 94-2787342
(I.R.S. Employer
Identification No.)

2755 Campus Drive, Suite 200, San Mateo, California 94403
(Address of principal executive offices) (Zip code)

(650) 349-0800
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]   No [   ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Shares Outstanding as of July 31, 2001
Common Stock ($.001 par value)		2,918,425

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		Notes to Unaudited Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risks
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
EXHIBIT 3.3
EXHIBIT 10.69

RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES

INDEX

		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2001 and September 30, 2000	3
	Condensed Consolidated Statements of Operations for the three months and the nine months ended June 30, 2001 and 2000	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2001 and 2000.	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	16
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 6.	Exhibits and Reports on Form 8-K	18
SIGNATURE		19

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND SEPTEMBER 30, 2000
(000’s omitted)
ASSETS

			June 30,			September 30,
			2001			2000
			(Unaudited)
Current assets:
Cash and cash equivalents			$	6,053		$	7,201
Cash held in escrow				855			1,580
Receivables, net				33,371			36,840
Prepaid expenses and other				2,545			2,597
		Total current assets		42,824			48,218
Property and equipment, less accumulated depreciation and amortization				14,803			19,651
Intangible assets, less accumulated amortization				18,996			41,672
Other				47			56
		Total assets	$	76,670		$	109,597
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt and capital lease obligations		$	16,636		$	1,067
	Accounts payable			5,929			5,258
	Accrued compensation and benefits			2,099			3,177
	Accrued liabilities			3,647			6,329
		Total current liabilities		28,311			15,831
Long-term debt and capital lease obligations, net of current portion				10,075			24,130
Minority interest in consolidated entities				1,050			1,774
		Total liabilities		39,436			41,735
Stockholders’ equity:
	Common stock			3			9
	Additional paid-in capital			62,672			62,664
	Common stock to be issued			—			69
	Retained earnings (deficit)			(21,819	)		8,742
				40,856			71,484
	Less treasury stock, at cost			(3,622	)		(3,622	)
		Total stockholders’ equity		37,234			67,862
		Total liabilities and stockholders’ equity	$	76,670		$	109,597

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RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(000’s omitted, except per share amounts)

					Three Months Ended June 30,						Nine Months Ended June 30,
					2001			2000			2001			2000
Revenues:
	Cardiac information services				$	9,449		$	10,144		$	28,668		$	31,149
	Diagnostic imaging services					6,758			5,990			19,250			16,843
	Heart facilities and other					2,054			2,216			5,737			6,862
				Total revenues		18,261			18,350			53,655			54,854
Costs and expenses:
	Provision for OIG investigation expenses					—			2,000			2,000			2,000
	Settlement with federal government					11,500			—			11,500			—
	Operating costs					8,726			7,846			24,832			22,966
	Selling, general and administrative					7,445			7,947			22,149			23,698
	Depreciation and amortization					1,603			1,635			4,928			4,923
				Total costs and expenses		29,274			19,428			65,409			53,587
Operating income (loss)						(11,013	)		(1,078	)		(11,754	)		1,267
Interest expense						301			522			1,332			1,467
Other expense (income)						(253	)		(318	)		(734	)		(801	)
Minority interest						177			204			364			620
Loss from continuing operations before income taxes (benefit)						(11,238	)		(1,486	)		(12,716	)		(19	)
Provision for income taxes (benefit)						(1,124	)		(579	)		(1,700	)		(7	)
Loss from continuing operations						(10,114	)		(907	)		(11,016	)		(12	)
Discontinued operations:
			Income (loss) from discontinued operations, net of tax (benefit)			—			84			(192	)		969
			Loss on disposal of discontinued operations			—			(4,965	)		(19,353	)		(4,965	)
Net loss					$	(10,114	)	$	(5,788	)	$	(30,561	)	$	(4,008	)
Basic loss per share:
		Loss from continuing operations			$	(3.47	)	$	(.31	)	$	(3.78	)	$	—
		Loss from discontinued operations				—			(1.67	)		(6.70	)		(1.37	)
				Total	$	(3.47	)	$	(1.98	)	$	(10.48	)	$	(1.37	)
Diluted loss per share:
		Loss from continuing operations			$	(3.47	)	$	(.31	)	$	(3.78	)	$	—
		Loss from discontinued operations				—			(1.67	)		(6.70	)		(1.37	)
			Total		$	(3.47	)	$	(1.98	)	$	(10.48	)	$	(1.37	)
Weighted average shares outstanding:
		Basic				2,918			2,916			2,917			2,915
		Diluted				2,918			2,916			2,917			2,915

4

RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(000’s omitted)

					June 30,
					2001			2000
Cash flows from operating activities:
	Net loss				$	(30,561	)	$	(4,008	)
		Adjustments to reconcile net loss to net cash provided by operating activities:
			Depreciation and amortization			4,928			4,923
			Minority interest			364			620
			Loss on disposal of discontinued operations			19,353			4,965
			Settlement with federal government			11,500			—
			Other, net			394			1,212
		Changes in operating accounts:
				Receivables, net		16			226
				Prepaid expenses and other		(338	)		(3	)
				Accounts payable		671			860
				Accrued liabilities and other		(4,183	)		1,045
				Net cash provided by operating activities		2,144			9,840
Cash flows from investing activities:
	Capital expenditures					(2,192	)		(3,402	)
	Proceeds from disposal of discontinued operations					8,876			—
	Other, net					221			169
				Net cash provided by (used in) investing activities		6,905			(3,233	)
Cash flows from financing activities:
	Income distributions to noncontrolling investors					(1,109	)		(1,546	)
	Paydown of line of credit					(7,971	)		(3,180	)
	Principal repayments of debt, net					(1,867	)		(1,150	)
	Other, net					25			(56	)
				Net cash used in financing activities		(10,922	)		(5,932	)
Net increase (decrease) in cash and cash equivalents						(1,873	)		675
Cash and cash equivalents at beginning of period						8,781			6,110
Cash and cash equivalents at end of period					$	6,908		$	6,785

5

Notes to Unaudited Condensed Consolidated Financial Statements for the Three and Nine Months Ended June 30, 2001 and 2000.

1. Presentation of Unaudited Interim Condensed Consolidated Financial Statements

     Information in the accompanying interim condensed consolidated financials statements and notes to the financial statements of Raytel Medical Corporation (“Raytel” or the “Company”) as of June 30, 2001 and for the three month and nine month periods ended June 30, 2001 and 2000 is unaudited. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended June 30, 2001 are not necessarily indicative of results that may be expected for the year ending September 30, 2001. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2000 and Forms 8-K filed during the nine months ended June 30, 2001.

2. Office of the Inspector General Investigation

     From June 2000 through June 2001, Raytel was the subject of a grand jury investigation of unspecified allegations concerning certain business practices of its trans-telephonic cardiac pacemaker monitoring business. Raytel Cardiac Services, Inc., a wholly-owned subsidiary of the Company, has reached agreement with the federal government to end the investigation into its pacemaker operations and Medicare billing practices. In return for the federal government ceasing any further investigation into its pacemaker operations and any additional potential criminal charges, the subsidiary pleaded guilty on June 25, 2001 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, the Company and Raytel Cardiac Services have reached an agreement in principle with the government to settle civil claims relating to this matter. Under the criminal and civil settlements, the subsidiary would pay a total of $11,500,000 (of which $3,500,000 and $8,000,000 is included in the current portion and long-term portion of debt, respectively, on the accompanying balance sheet at June 30, 2001) to the government over a five year period, with interest of 7% on the unpaid balance, and enter into a Corporate Integrity Agreement (the “Agreement”). Other product lines offered by the subsidiary have not been under investigation and are not affected by this Agreement. Raytel will guarantee the payment owed by its subsidiary associated with the Agreement.

     In connection with the investigation, Raytel has reviewed its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such confirmation, Raytel held Medicare reimbursement checks received since June 23, 2000 in payment of invoices for pacemaker monitoring services and established an escrow account for funds inadvertently deposited with respect to such services received since the date of the investigation. In addition, Raytel suspended billing for such services. Most of the checks have been deposited, most of the cash has been released from escrow, and new billings for services performed has commenced as most of the affected patients’ records have been reviewed and found to be in compliance with applicable Medicare requirements. The total amount of such uncashed checks and escrowed funds was approximately $855,000 as of June 30, 2001. Since Raytel recognizes revenue when patient services are provided, neither the escrow arrangement nor the deferred billing has had a direct impact on Raytel’s operating results. If the Company’s review discloses any patient billings that have not been fully compliant with Medicare requirements, any resulting billing adjustments or reversals will be charged against operating results in that current period. In addition, the Company has incurred, and expects to continue to incur, substantial legal fees and other expenses in connection with the investigation and has accrued a reserve of $4,000,000 to cover the estimated amounts of these expenses. Additional expenses, if any, will adversely affect operating results in future periods. As of June 30, 2001, the Company had incurred legal fees and other expenses of approximately $3,578,000 related to the investigation. These expenses include legal fees incurred by certain employees in connection with the on-going investigation of certain employees in accordance with the requirements of Delaware Law and the Company’s By-Laws. The investigation, and the related internal compliance review, diverted the efforts and attention of a number of Raytel’s management and administrative personnel. The impact of this diversion reduced the efficiency of Raytel’s pacemaker monitoring operations during the last week of the quarter ended June 30, 2000 and adversely affected both revenues and operating expenses for that period as well as the quarters ended September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001. Raytel expects that, while the impact of the investigation of the Company’s operations in future periods will be less significant now that the investigation of the Company has been settled, it may require time of some employees and it may continue to adversely affect operating results in future periods.

6

3. Line of Credit

     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 expiration date was extended to October 1, 2001. A new non-financial covenant was added which states that any civil financial settlement in excess of $1,000,000 and/or criminal charges relating to the ongoing OIG investigation would constitute an event of default.

     On March 16, 2001, the line of credit was paid down and permanently reduced to $14,900,000 in connection with the sale of Heart and Family Health Institute of Port St. Lucie, Inc. (“HFHI”).

     Consistent with the terms of the December 2000 amendment to the line of credit agreement, the available line of credit balance was further reduced by $2,500,000 on June 30, 2001 to $12,400,000. At June 30, 2001, $12,287,000 was outstanding under the line of credit.

     The Company is currently in default of certain of its new covenants in connection with its line of credit. The Company has requested a waiver from the banks. If the banks do not grant the waiver, the banks have the right to terminate the credit facility and demand payment in full of the outstanding balance. See “Part II, Item 3. — Defaults Upon Senior Securities.”

4. Discontinued Operations

     In March 2001, effective January 1, 2001, the Company completed the sale of its wholly-owned subsidiary, HFHI, to a new company organized by physicians practicing at HFHI. The Company received $8,876,000 (prior to estimated transaction costs of $565,000) in cash in this transaction. The Company has reported a $19,353,000 loss on the transaction related primarily to the write-off of unamortized intangible assets. Due to the uncertainty of the ultimate tax benefit to be realized as a result of the loss, the Company has not provided for any tax benefit that may result from this transaction.

     As a result, the Company reported the results of HFHI and the loss on disposal as a discontinued operation and the related operating results have been reported separately from continuing operations for all applicable periods presented. The related net assets of HFHI are immaterial to the financial statements and are included in the accompanying balance sheet at September 30, 2000.

     Revenues applicable to HFHI during the three months ended June 30, 2001 and 2000 were $0 and $4,354,000, respectively, and during the nine months ended June 30, 2001 and 2000 were $3,948,000 and $13,931,000, respectively. Income (loss) from discontinued operations is net of taxes (benefit) of $0, $80,000, $(123,000) and $616,000 for the three months ended June 30, 2001 and 2000 and the nine months ended June 30, 2001 and 2000, respectively.

     Effective May 2000, the Company disposed of its management of Southeast Texas Cardiology Associates II, L.L.P. (“SETCA”) and the management of Comprehensive Cardiology Consultants, a Medical Group, Inc. (“CCMG”). Effective May 31, 2000, the Company sold substantially all of the assets of Raytel Nuclear Imaging-Orange, L.P. and the Common Stock of Raytel Texas Physicians Services, Inc., which effectively terminated its management of SETCA as well as the termination of the associated heart center at Baptist Hospital. As compensation for this transaction, physicians in the practice managed by the Company agreed to terminate notes owed by the Company in the aggregate amount of approximately $2,300,000 and the existing rights to receive 122,068 shares of Raytel’s Common Stock. In addition, the Company discontinued its management of CCMG. The Company has reported a $4,965,000 loss on the disposal (net of a $3,367,000 tax benefit) related to the write-off of unamortized intangible assets created at the inception of the management agreements, accounts receivable and other assets less the amount due under the terminated notes and the fair market value of the stock that was cancelled.

     Accordingly, the results of these entities have been accounted for as a discontinued operation and the related operating results have been reported separately from continuing operations for all applicable periods presented.

     Revenues applicable to these entities during the three months ended June 30, 2000 were $758,000 and during the nine months ended June 30, 2000 were $3,189,000. Income (loss) from discontinued operations is net of taxes (benefit) of $(27,000) and $3,000 for the three months and nine months ended June 30, 2000, respectively.

5. Reverse Stock Split

     On May 9, 2001, the Board of Directors declared 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.

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6. Loss Per Share

     For the three months and the nine months ended June 30, 2001 and 2000, basic and diluted earnings per share are calculated as follows:

		Three months						Nine months
		ended June 30,						ended June 30,
(000's omitted, except per share amounts)		2001			2000			2001			2000
Basic Loss per Share:
Loss from continuing operations		$	(3.47	)	$	(.31	)	$	(3.78	)	$	—
Loss from discontinued operations			—			(1.67	)		(6.70	)		(1.37	)
	Total	$	(3.47	)	$	(1.98	)	$	(10.48	)	$	(1.37	)
Weighted average shares outstanding			2,918			2,916			2,917			2,915
Diluted Loss per Share:
Loss from continuing operations		$	(3.47	)	$	(.31	)	$	(3.78	)	$	—
Loss from discontinued operations			—			(1.67	)		(6.70	)		(1.37	)
	Total	$	(3.47	)	$	(1.98	)	$	(10.48	)	$	(1.37	)
Weighted average shares outstanding			2,918			2,916			2,917			2,915
Shares to be issued			(a	)		(a	)		(a	)		(a	)
Options			(a	)		(a	)		(a	)		(a	)
			2,918			2,916			2,917			2,915

(a) Due to the loss for the period shown, dilutives are not included in the calculation.

     Certain options and warrants to purchase shares of common stock were outstanding during the three months and the nine months ended June 30, 2001 and 2000, but were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the period. The options and warrants (all warrants expired in December 2000) outstanding and their exercise prices are as follows:

	Three months				Nine months
	ended June 30,				ended June 30,
	2001		2000		2001		2000
Options and warrants outstanding		463,677		387,671		455,087		347,196
Range of exercise prices	$	2.625-$35.625	$	9.375-$35.625	$	2.625-$35.625	$	9.375-$40.50

7. New Accounting Standards

     The Financial Accounting Standards Board issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets, in July 2001 (effective for fiscal 2002). 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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This discussion and analysis includes a number of forward-looking statements which reflect the Company’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed under “Business Environment and Future Results” and elsewhere in this Item, that could cause actual results to differ materially from historical results or those anticipated. In this Item, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Overview

     The Company generates its revenues from: cardiac information services, which includes telephonic monitoring services for cardiac pacemaker patients (“Pacing”), cardiac event detection services (“CEDS”) and Holter monitoring; diagnostic imaging services; and heart facilities.

     Following its initial public offering in December 1995, the Company entered into a series of transactions which expanded its heart facilities businesses. As a result, revenue has also been provided from: Raytel Heart Center at Granada Hills (“RHCGH”) beginning on February 1, 1996; the management of Southeast Texas Cardiology Associates II, L.L.P. (“SETCA”) beginning on September 18, 1996 and ending on May 31, 2000; the management of Comprehensive Cardiology Consultants, a Medical Group, Inc. (“CCMG”) beginning on November 1, 1996 and ending on May 31, 2000; and Cardiovascular Ventures, Inc. (“CVI”) beginning on August 15, 1997, which included the multi-specialty clinic, 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 manages, owns, and operates cardiovascular diagnostic facilities in Texas and Louisiana and owned and managed a cardiovascular diagnostic facility and a multi-specialty clinic in Florida. Total original consideration for the transaction consisted of cash and transaction costs of approximately $16,980,000 and 500,000 shares of Raytel Common Stock. During fiscal 1998, there were additional transaction costs of approximately $280,000 and an additional 46,668 shares of the Company’s Common Stock have been or were to be issued.

     Effective March 27, 1999, the Company entered into a revised agreement with RHCGH. The new agreement results in significantly lower revenues and expenses than revenues and expenses recognized under the previous agreements.

     In November 1999, the Company filed a demand for arbitration against CCMG with JAMS/Endispute, Inc. The Company provided management services to CCMG pursuant to a long-term management services agreement entered into between the parties in November 1996. The demand for arbitration asserts that Raytel is entitled to rescission, restitution and/or damages as a result of CCMG’s material breaches of the management services agreement. The Company does not expect that an adverse opinion in the arbitration will have a material adverse effect on the financial condition of the Company.

     In order to settle a dispute and avoid protracted litigation, initiated by SETCA, effective May 31, 2000, the Company’s Board of Directors approved management’s plan to sell SETCA. Effective May 31, 2000, the Company sold substantially all of the assets of Raytel Nuclear Imaging-Orange, L.P. and the Common Stock of Raytel Texas Physicians Services, Inc. in exchange for promissory notes in the aggregate amount of approximately $2,300,000 and the physicians’ agreement to cancel existing rights to receive 122,068 shares of Raytel’s Common Stock. Accordingly, the Company reported the results of operations of those discontinued entities and the loss on disposal as discontinued operations. The loss on disposal of $4,965,000, recorded at June 30, 2000, was net of an estimated tax benefit of approximately $3,367,000.

     From June 2000 through June 2001, Raytel was the subject of a grand jury investigation of unspecified allegations concerning certain business practices of its trans-telephonic cardiac pacemaker monitoring business. Raytel Cardiac Services, Inc., a wholly-owned subsidiary of the Company, has reached agreement with the federal government to end the investigation into its pacemaker operations and Medicare billing practices. In return for the federal government ceasing any further investigation into its

9

pacemaker operations and any additional potential criminal charges, the subsidiary pleaded guilty on June 25, 2001 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, the Company and Raytel Cardiac Services have reached an agreement in principle with the government to settle civil claims relating to this matter. Under the criminal and civil settlements, the subsidiary would pay a total of $11,500,000 to the government over a five year period, with interest of 7% on the unpaid balance, and enter into a Corporate Integrity Agreement. Other product lines offered by the subsidiary have not been under investigation and are not affected by this Agreement. Raytel will guarantee the payment owed by its subsidiary associated with the Agreement.

     In connection with the investigation, Raytel has reviewed its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such confirmation, Raytel held Medicare reimbursement checks received since June 23, 2000 in payment of invoices for pacemaker monitoring services and established an escrow account for funds inadvertently deposited with respect to such services received since the date of the investigation. In addition, Raytel suspended billing for such services. Most of the checks have been deposited, most of the cash has been released from escrow, and new billings for services performed has commenced as most of the affected patients’ records have been reviewed and found to be in compliance with applicable Medicare requirements. The total amount of such uncashed checks and escrowed funds was approximately $855,000 as of June 30, 2001. Since Raytel recognizes revenue when patient services are provided, neither the escrow arrangement nor the deferred billing has had a direct impact on Raytel’s operating results. If the Company’s review discloses any patient billings that have not been fully compliant with Medicare requirements, any resulting billing adjustments or reversals will be charged against operating results in that current period. In addition, the Company has incurred, and expects to continue to incur, substantial legal fees and other expenses in connection with the investigation and has accrued a reserve of $4,000,000 to cover the estimated amounts of these expenses. Additional expenses, if any, will adversely affect operating results in future periods. As of June 30, 2001, the Company had incurred legal fees and other expenses of approximately $3,578,000 related to the investigation. These expenses include legal fees incurred by certain employees in connection with the on-going investigation of certain employees in accordance with the requirements of Delaware Law and the Company’s By-Laws. The investigation, and the related internal compliance review, diverted the efforts and attention of a number of Raytel’s management and administrative personnel. The impact of this diversion reduced the efficiency of Raytel’s pacemaker monitoring operations during the last week of the quarter ended June 30, 2000 and adversely affected both revenues and operating expenses for that period as well as the quarters ended September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001. Raytel expects that, while the impact of the investigation on the Company’s operations in future periods will be less significant now that the investigation of the Company has been settled, it may require time of some employees and it may continue to adversely affect operating results in future periods.

     In March 2001, effective January 1, 2001, the Company completed the sale of its wholly-owned subsidiary, HFHI, to a new company organized by physicians practicing at HFHI, including David Wertheimer, M.D., who had served as President of the subsidiary as well as a former officer of Raytel and a member of Raytel’s Board of Directors. Raytel received a cash purchase price of $8,311,000, net of transaction expenses, for all of the common stock of the subsidiary. Approximately $1,234,000 of the proceeds were used to pre-pay leases for equipment used at the HFHI facility, $5,100,000 was used to reduce the indebtedness under the Company’s bank credit facility and the balance was used for working capital purposes. The Company reported the results of operations of HFHI and the loss on disposal as discontinued operations 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 declared 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

     Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000.

     Revenues.  For the three months ended June 30, 2001, total revenues were $18,261,000 compared to $18,350,000 for the three months ended June 30, 2000, representing a decrease of $89,000, or .5%.

10

     Cardiac information services revenues were $9,449,000 for the three months ended June 30, 2001, compared to $10,144,000 for the three months ended June 30, 2000, a decrease of $695,000, or 6.9%. The decrease in revenues for cardiac information services was due to lower revenues from Pacing as a result of lower test volumes and lower average selling prices. Diagnostic imaging services revenue was $6,758,000 for the three months ended June 30, 2001 compared to $5,990,000 for the three months ended June 30, 2000, an increase of $768,000, or 12.8%, 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 $2,054,000 for the three months ended June 30, 2001, compared to $2,216,000 for the three months ended June 30, 2000, a decrease of $162,000, or 7.3%, due primarily to lower revenue at certain cardiovascular diagnostic facilities as a result of restructuring certain of these facilities to be in compliance with new regulations.

     Provision for OIG Investigation Expenses.  The Company provided $2,000,000 for expected expenses associated with the OIG investigation for the three months ended June 30, 2000.

     Settlement with Federal Government.  The Company has recorded a one-time charge of $11,500,000 in June 2001 related to the criminal and civil settlement among one of its subsidiaries, Raytel Cardiac Services, and the federal government.

     Operating Expenses.  Operating costs and selling, general and administrative expenses increased by $378,000, or 2.4% (excluding the provision for OIG investigation expenses and the settlement with the federal government), from $15,793,000 for the three months ended June 30, 2000 to $16,171,000 for the three months ended June 30, 2001, due primarily to increases in costs and expenses at diagnostic imaging services, partially offset by decreased costs at cardiac information services and at heart facilities and other. Included in costs at cardiac information services, for the three months ended June 30, 2001, is a non-recurring charge of $410,000 in order to upgrade certain components used in the business to be FDA compliant. Operating costs and selling, general and administrative expenses as a percentage of total revenues increased by 2.5%, from 86.1% for the three months ended June 30, 2000 to 88.6% for the three months ended June 30, 2001.

     Depreciation and Amortization.  Depreciation and amortization expense decreased by $32,000, from $1,635,000 for the three months ended June 30, 2000 to $1,603,000 for the three months ended June 30, 2001 and decreased as a percentage of revenues from 8.9% for the three months ended June 30, 2000 to 8.8% for the three months ended June 30, 2001, primarily as a result of lower revenues.

     Operating Loss.  As a result of the foregoing factors, operating loss increased by $9,935,000 from $1,078,000 for the three months ended June 30, 2000 to $11,013,000 for the three months ended June 30, 2001.

     Interest Expense.  Interest expense decreased by $221,000, or 42.3%, from $522,000 for the three months ended June 30, 2000 to $301,000 for the three months ended June 30, 2001 due primarily to lower average debt outstanding and lower interest rates.

     Other Expense (Income).  Other income decreased by $65,000 from $318,000 for the three months ended June 30, 2000 to $253,000 for the three months ended June 30, 2001.

     Minority Interest.  Minority interest decreased by $27,000, or 13.2%, from $204,000 for the three months ended June 30, 2000 to $177,000 for the three months ended June 30, 2001 due primarily to decreased income in certain cardiovascular diagnostic facilities.

     Income Tax Benefit.  The provision for income tax benefit increased by $545,000 from $579,000 for the three months ended June 30, 2000 to $1,124,000 for the three months ended June 30, 2001 as a result of decreased taxable income.

     Loss From Continuing Operations.  Loss from continuing operations increased by $9,207,000 from $907,000 for the three months ended June 30, 2000 to $10,114,000 for the three months ended June 30, 2001.

     Discontinued Operations.  Income from discontinued operations, net of tax was $84,000 for the three months ended June 30, 2000. The loss on disposal of the Practice Management Division in June 2000 was $4,965,000.

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     Net Loss.  As a result of the foregoing factors, the net loss increased by $4,326,000 from $5,788,000 for the three months ended June 30, 2000 to $10,114,000 for the three months ended June 30, 2001.

     Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30, 2000.

     Revenues.  For the nine months ended June 30, 2001, total revenues were $53,655,000 compared to $54,854,000 for the nine months ended June 30, 2000, representing a decrease of $1,199,000, or 2.2%.

     Cardiac information services revenues were $28,668,000 for the nine months ended June 30, 2001, compared to $31,149,000 for the nine months ended June 30, 2000, a decrease of $2,481,000, or 8.0%. The decrease in revenues for cardiac information services was due primarily to lower revenues from Pacing as a result of lower test volumes and lower average selling prices. Diagnostic imaging services revenue was $19,250,000 for the nine months ended June 30, 2001, compared to $16,843,000 for the nine months ended June 30, 2000, an increase of $2,407,000, or 14.3%, 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 $5,737,000 for the nine months ended June 30, 2001, compared to $6,862,000 for the nine months ended June 30, 2000, a decrease of $1,125,000, or 16.4%, due primarily to lower revenue at certain cardiovascular diagnostic facilities as a result of restructuring certain of these facilities to be in compliance with new regulations and the termination of an agreement with Baptist Hospital of Beaumont, Texas.

     Provision for OIG Investigation Expenses.  The Company provided $2,000,000 for expected expenses associated with the OIG investigation for the nine months ended June 30, 2000 and 2001, respectively.

     Settlement with Federal Government.  The Company has recorded a one-time charge of $11,500,000 in June 2001 related to the criminal and civil settlement among one of its subsidiaries, Raytel Cardiac Services, and the federal government.

     Operating Expenses.  Operating costs and selling, general and administrative expenses increased by $317,000, or .7% (excluding the provision for OIG investigation expenses and the settlement with the federal government), from $46,664,000 for the nine months ended June 30, 2000 to $46,981,000 for the nine months ended June 30, 2001, due primarily to higher expenses at diagnostic imaging services, partially offset by decreases in costs and expenses at cardiac information services and heart facilities and other. Included in costs at cardiac information services, for the nine months ended June 30, 2001, is a non-recurring charge of $410,000 in order to upgrade certain components used in the business to be FDA compliant. Operating costs and selling, general and administrative expenses as a percentage of total revenues increased from 85.1% for the nine months ended June 30, 2000 to 87.6% for the nine months ended June 30, 2001, primarily as a result of lower revenues.

     Depreciation and Amortization.  Depreciation and amortization expense increased by $5,000 from $4,923,000 for the nine months ended June 30, 2000 to $4,928,000 for the nine months ended June 30, 2001 and increased as a percentage of revenues from 9.0% for the nine months ended June 30, 2000 to 9.2% for the nine months ended June 30, 2001.

     Operating Income (Loss).  As a result of the foregoing factors, operating income decreased by $13,021,000, from income of $1,267,000 for the nine months ended June 30, 2000 to an operating loss of $11,754,000 for the nine months ended June 30, 2001.

     Interest Expense.  Interest expense decreased by $135,000, or 9.2%, from $1,467,000 for the nine months ended June 30, 2000 to $1,332,000 for the nine months ended June 30, 2001 due primarily to a decrease in the average amount of debt outstanding.

     Other Expense (Income).  Other income decreased by $67,000 from $801,000 for the nine months ended June 30, 2000 to $734,000 for the nine months ended June 30, 2001.

     Minority Interest.  Minority interest decreased by $256,000, or 41.3%, from $620,000 for the nine months ended June 30, 2000 to $364,000 for the nine months ended June 30, 2001 due primarily to decreased income in certain cardiovascular diagnostic facilities.

     Income Tax Benefit.  The provision for income tax benefit increased by $1,693,000 from $7,000 for the nine months ended June 30, 2000 to $1,700,000 for the nine months ended June 30, 2001 as a result of decreased taxable income.

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     Loss From Continuing Operations.  Loss from continuing operations increased by $11,004,000 from $12,000 for the nine months ended June 30, 2000 to $11,016,000 for the nine months ended June 30, 2001.

     Discontinued Operations.  Loss from discontinued operations was $192,000 for the nine months ended June 30, 2001 compared to income from discontinued operations, net of tax, of $969,000 for the nine months ended June 30, 2000. The loss on disposal was $4,965,000 for the nine months ended June 30, 2000. The loss on disposal of HFHI was $19,353,000 for the nine months ended June 30, 2001. 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 the HFHI transaction.

     Net Loss.  As a result of the foregoing factors, net loss increased by $26,553,000 from $4,008,000 for the nine months ended June 30, 2000 to $30,561,000 for the nine months ended June 30, 2001.

Segment Information

     The Company’s reportable segments are strategic business units that offer different services. The Company has three reportable segments: cardiac information services (“Information”), diagnostic imaging services (“Imaging”) and heart facilities and other (“Facilities”). The Information segment provides remote cardiac monitoring and testing services utilizing telephonic and Internet communication technology. The Imaging segment operates a network of imaging centers throughout the United States. The Facilities segment provides diagnostic, therapeutic and patient management services primarily associated with cardiovascular disease.

     The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2000) except that the Company does not allocate all interest expense, taxes or corporate overhead to the individual segments. The Company evaluates performance based on profit or loss from operations before income taxes and unallocated amounts. The totals per the schedules below will not and should not agree to the consolidated totals. The difference is due to corporate overhead and other unallocated amounts which are reflected in the reconciliation to consolidated earnings from continuing operations before income taxes (in thousands):

		Information			Imaging			Facilities		Total
For the three months ended June 30, 2001:
	Net revenue	$	9,449		$	6,758		$	2,054	$	18,261
	Total operating expenses		20,169			5,030			1,400		26,599
	Segment contribution		(10,720	)		1,728			654		(8,338	)
	Depreciation and amortization		866			399			237		1,502
	Interest expense		—			33			28		61
	Minority interest/other expense (income)		(17	)		(134	)		88		(63	)
	Segment profit (loss)	$	(11,569	)(a)	$	1,430		$	301	$	(9,838	)
	Segment assets	$	42,456		$	15,299		$	11,356	$	69,111
	Capital expenditures	$	625		$	36		$	18	$	679

(a) Includes an $11,500,000 settlement with the federal government.

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		Information			Imaging			Facilities		Total
For the three months ended June 30, 2000:
	Net revenue	$	10,144		$	5,990		$	2,216	$	18,350
	Total operating expenses		10,959			4,366			1,408		16,733
	Segment contribution		(815	)		1,624			808		1,617
	Depreciation and amortization		767			422			361		1,550
	Interest expense		—			67			59		126
	Minority interest/other expense (income)		(178	)		(47	)		158		(67	)
	Segment profit (loss)	$	(1,404	)(a)	$	1,182		$	230	$	8
	Segment assets	$	38,953		$	15,026		$	35,198	$	89,177
	Capital expenditures	$	591		$	139		$	122	$	852

(a) Includes a $2,000,000 provision for OIG investigation expenses.

		Information			Imaging			Facilities		Total
For the nine months ended June 30, 2001:
	Net revenue	$	28,668		$	19,250		$	5,737	$	53,655
	Total operating expenses		39,229			14,284			3,988		57,501
	Segment contribution		(10,561	)		4,966			1,749		(3,846	)
	Depreciation and amortization		2,580			1,232			813		4,625
	Interest expense		—			161			90		251
	Minority interest/other expense (income)		(16	)		(173	)		109		(80	)
	Segment profit (loss)	$	(13,125	)(a)	$	3,746		$	737	$	(8,642	)
	Segment assets	$	42,456		$	15,299		$	11,356	$	69,111
	Capital expenditures	$	1,924		$	138		$	98	$	2,160

(a) Includes a $2,000,000 provision for OIG investigation expenses and an $11,500,000 settlement with the federal government.

		Information			Imaging			Facilities		Total
For the nine months ended June 30, 2000:
	Net revenue	$	31,149		$	16,843		$	6,862	$	54,854
	Total operating expenses		28,551			12,476			4,519		45,546
	Segment contribution		2,598			4,367			2,343		9,308
	Depreciation and amortization		2,269			1,255			1,146		4,670
	Interest expense		—			208			178		386
	Minority interest/other expense (income)		(193	)		(127	)		229		(91	)
	Segment profit	$	522	(a)	$	3,031		$	790	$	4,343
	Segment assets	$	38,953		$	15,026		$	35,198	$	89,177
	Capital expenditures	$	2,290		$	694		$	152	$	3,136

(a) Includes a $2,000,000 provision for OIG investigation expenses.

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		Three Months Ended June 30,						Nine Months Ended June 30,
		2001			2000			2001			2000
Segment profit (loss)		$	(9,838	)	$	8		$	(8,642	)	$	4,343
Unallocated amounts:
	Corporate general and administrative		1,072			1,060			2,980			3,118
	Corporate depreciation and amortization		101			85			303			253
	Corporate interest expense		240			396			1,081			1,081
	Corporate other expense (income)		(13	)		(47	)		(290	)		(90	)
Loss from continuing operations before income taxes		$	(11,238	)	$	(1,486	)	$	(12,716	)	$	(19	)

Business Environment and Future Results

     The Company’s future operating results may be affected by various trends in the healthcare industry as well as by a variety of other factors, some of which are beyond the Company’s control.

     The healthcare industry is undergoing significant change as third-party payors attempt to control the cost, utilization and delivery of healthcare services. Substantially all of the Company’s revenues are derived from Medicare, HMOs, commercial insurers and other third-party payors. Both government and private payment sources have instituted cost containment measures designed to limit payments made to healthcare providers by reducing reimbursement rates, limiting services covered, increasing utilization review of services, negotiating prospective or discounted contract pricing, adopting capitation strategies and seeking competitive bids. The Company’s Pacing revenue has been favorably impacted for the period January 1, 1998 to December 31, 1998 due to an increase in Medicare reimbursement rates effective on January 1, 1998. However, a slight decrease in these rates became effective on January 1, 1999, thereby having a negative effect on Pacing revenue for calendar 1999. There was a slight increase in Medicare reimbursement rates effective January 1, 2000 and again effective January 1, 2001. The Company cannot predict with any certainty whether or when additional reductions or changes in Medicare or other third-party reimbursement rates or policies will be implemented. There can be no assurance that future changes, if any, will not adversely affect the amounts or types of services that may be reimbursed to the Company, or that future reimbursement of any service offered by the Company will be sufficient to cover the costs and overhead allocated to such service.

     From time to time, Congress considers legislation to reduce Medicare and Medicaid expenditures. Future legislation of this type could have a material adverse effect on the Company’s business, financial condition and operating results. Governmental agencies promulgate regulations which mandate changes in the method of delivering services which could have a material adverse effect on the Company’s business.

     An element of the Company’s strategy is to expand, in part, through acquisitions and investments in complementary healthcare businesses. The implementation of this strategy may place significant strain on the Company’s administrative, operational and financial resources and increase demands on its systems and controls. There can be no assurances that businesses acquired by the Company, 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

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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 June 30, 2001 the Company had working capital of $14,513,000 ($30,300,000 before deducting the outstanding amount under the Company’s line of credit and the current portion of the debt related to the settlement with the federal government of $12,287,000 and $3,500,000; respectively), compared to $32,387,000 at September 30, 2000. At June 30, 2001, the Company had cash and temporary cash investments of $6,908,000.

     In connection with the settlement of the OIG investigation, the Company made an initial payment of $1,000,000 in July 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 which states any civil financial settlement in excess of $1,000,000 and/or criminal charges relating to the ongoing OIG investigation would constitute an event of default. On March 16, 2001, the line of credit was further reduced to $14,900,000 in connection with the sale of the Company’s subsidiary HFHI.

     Consistent with the terms of the December 2000 amendment to the line of credit agreement, the available line of credit balance was further reduced by $2,500,000 on June 30, 2001 to $12,400,000.

     The Company is currently negotiating with the banks to restructure the line, including the extension of maturity. The Company is also exploring alternative financing.

     The Company is currently in default of certain of its new covenants in connection with its line of credit. The Company has requested a waiver from the banks. If the banks do not grant the waiver, the banks have the right to demand payment in full of the outstanding balance. See “Part II, Item 3. — Defaults Upon Senior Securities.”

     The Company’s long-term capital requirements will depend on numerous factors, including the rate at which the Company develops new products and services and acquires other businesses, if any. The Company’s ability to meet its working capital and capital expenditure needs for the next twelve months is dependent upon its ability to restructure its current financing and achieve profitability.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

     The Company is exposed to market risk from interest rate fluctuations because it uses variable rate debt to finance working capital requirements. The Company does not believe that there is any material market risk exposure with respect to other financial instruments.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     Raytel Cardiac Services, Inc., or “RCS,” a wholly-owned subsidiary of Raytel, was the subject of a grand jury investigation being conducted under the direction of the United States Attorney for the District of Connecticut and the Office of the Inspector General of the U.S. Department of Health and Human Services (the “OIG”). On June 23, 2000, the OIG and other federal agents executed a search warrant for information concerning unspecified allegations of impropriety in RCS’ business practices related to Medicare-covered services. Subsequently, subpoenas were served on RCS for the production of additional documents, and RCS employees and contractors were subpoenaed to provide documents and testimony before the grand jury.

     RCS has reached agreement with the federal government to end the investigation into its pacemaker operations and Medicare billing practices. In return for the federal government ceasing any further investigation into its pacemaker operations and any additional potential criminal charges, the subsidiary pleaded guilty on June 25, 2001 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, the registrant and Raytel Cardiac Services have reached an agreement in principle with the government to settle civil claims relating to this matter. Under the criminal and civil settlements, the subsidiary would pay a total of $11.5 million to the government over a five year period and enter into a Corporate Integrity Agreement. Other product lines offered by the subsidiary have not been under investigation and are not affected by this agreement. Raytel will guarantee the payment owed by its subsidiary associated with the agreement.

     In connection with the investigation, Raytel is confirming its compliance with Medicare billing and record-keeping requirements on a patient-by-patient basis. Pending such confirmation, Raytel held Medicare reimbursement checks received subsequent to June 23, 2000 in payment of invoices for pacemaker monitoring services and established an escrow account for funds inadvertently deposited with respect to such services. In addition, Raytel suspended billing for such services. The checks are being deposited, the cash released from escrow, and additional bills sent, only after the affected patients’ records have been reviewed and found to be in compliance with applicable Medicare requirements. The total amount of such uncashed checks and escrowed funds was approximately $855,000 as of June 30, 2001.

     Raytel has internal procedures in place designed to assure compliance by Raytel and its subsidiaries with applicable laws and governmental regulations, including Medicare reimbursement laws. RCS has incurred, and expects to continue to incur, substantial legal fees and other expenses in connection with the investigation and has accrued a reserve of $4,000,000 to cover the estimated amount of these expenses. Expenses in excess of the reserve, if any, will adversely affect operating results in future periods. The investigation and the related internal review diverted, and may continue to divert, the efforts and attention of some of RCS’ management and administrative personnel.

     Raytel and its subsidiaries are parties to other litigation and claims arising out of its ongoing business operations. Raytel believes that none of these matters, either individually or in the aggregate, are likely to have a material adverse effect on its business, financial condition or operating results.

Item 3. Defaults Upon Senior Securities

     The Company is currently in default of certain of its financial covenants in connection with its $12,400,000 revolving line of credit with two banks. These covenants require the Company to maintain certain financial ratios. The Company has requested a waiver from the banks. If the banks do not grant the waiver, the banks have the right to terminate the credit facility and demand payment in full of the outstanding balance. The amount outstanding under the credit line as of June 30, 2001 was $12,287,000.

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Item 4. Submission of Matters to a Vote of Security Holders

a.	The Company’s annual meeting of stockholders was held on May 9, 2001.
b.	The following persons nominated by management were elected to serve as directors:

	Shares
Name	For		Withheld
Richard F. Bader		6,006,826		1,098,396
Allan Zinberg		6,070,373		1,034,849

	The following directors remained in office; Thomas J. Fogarty, M.D., Gene Miller and Mary M. Lampe (Ms. Lampe resigned as a director in June 2001).
c.	The following additional matters voted upon at the meeting and the results of the voting were as follows:

1. To ratify the appointment of Arthur Andersen LLP as the independent accountants of the Company for the fiscal year ending September 30, 2001.

Shares
For	Against		Abstain
7,076,922		9,500		18,800

2. To approve the amendment to the certificate of incorporation to effect a reverse split of the Company’s Outstanding Common Stock by a ratio of between one-for-two and one-for-four.

Shares
For	Against		Abstain
5,466,353		1,616,923		21,946

Item 6.    Exhibits and Reports on Form 8-K

     a.         Exhibits:

                 The following exhibit is filed as a part of this Report:

Exhibit
Number	Title
3.3	Certificate of Amendment of Certificate of Incorporation.
10.69	Plea Agreement, dated June 25, 2001, resolving the government’s criminal investigation of the Company.

     b.         Reports on Form 8-K:

On May 23, 2001, the Company filed a report on Form 8-K announcing the appointment of Frank J. Abella, Jr to its Board of Directors (Mr. Abella subsequently resigned as a director in June 2001). In addition, the Board approved the implementation of a one-for-three reverse stock split of the Company’s Outstanding Common Stock.

On June 27, 2001, the Company filed a report on Form 8-K stating that Raytel Cardiac Services, a wholly-owned subsidiary of Raytel Medical Corporation, reached an agreement with the federal government to end an investigation into its pacemaker operations and Medicare billing practices.

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RAYTEL MEDICAL CORPORATION
Dated: August 10, 2001	By:	/s/ John F. Lawler, Jr.
		John F. Lawler, Jr. Vice President and Chief Financial Officer (duly authorized officer and principal financial officer)

19

EXHIBIT INDEX

Exhibit
Number	Title
3.3	Certificate of Amendment of Certificate of Incorporation.
10.69	Plea Agreement, dated June 25, 2001, resolving the government’s criminal investigation of the Company.

20 EX-3.3 3 f74763ex3-3.txt EXHIBIT 3.3 1 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION RAYTEL MEDICAL CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: 1. At a meeting of the Board of Directors of said corporation on May 18, 2001, the following resolutions were duly adopted: RESOLVED: That the Certificate of Incorporation of the Company shall be amended, effective as of 8:30 a.m. Eastern Daylight Time on Wednesday, May 23, 2001, to effect a one-for-three reverse stock split; RESOLVED FURTHER: That to effect such one-for-three reverse stock split, paragraph (A) of Article IV of the Certificate of Incorporation of the Company shall be amended to read as follows: "(A) The Corporation is authorized to issue two classes of shares, designated as "Common Stock" and "Preferred Stock," respectively. The number of shares of Common Stock authorized to be issued is 20,000,000 shares, $.001 par value per share, and the number of shares of Preferred Stock authorized to be issued is 2,000,000 shares, $.001 par value per share. Upon the filing of this Certificate of Amendment of Certificate of Incorporation, each three issued and outstanding shares of the Corporation's Common Stock shall be converted into one share of Common Stock, with any resulting fractional share to be converted into the right to receive a cash payment in an amount equal to the value of such fractional share based on the closing price of such Common Stock on the Nasdaq SmallCap Market on May 23, 2001." 2. The foregoing amendment has been approved by the stockholders of the Corporation at a duly held meeting of stockholders. 3. Said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, RAYTEL MEDICAL CORPORATION has caused this certificate to be signed by its Chairman and Chief Executive Officer this 21st day of May, 2001. RAYTEL MEDICAL CORPORATION By:__________________________________ EX-10.69 4 f74763ex10-69.txt EXHIBIT 10.69 1 EXHIBIT 10.69 U.S. Department of Justice United States Attorney District of Connecticut June 25, 2001 Via Facsimile (203) 977-7301 Stanley A. Twardy, Jr., Esq. Andrew P. Gaillard, Esq. Day, Berry & Howard LLP One Canterbury Green Stamford, CT 06901-2047 Re: U.S. v. Raytel Cardiac Services, Inc. Dear Mr. Twardy and Mr. Gaillard: This letter confirms the plea agreement entered into between your client, Raytel Cardiac Services, Inc. ("Raytel" or the "defendant"), and the United States Attorney's Office for the District of Connecticut (the "Government") concerning the referenced criminal matter. I. The Plea and Offense The defendant agrees to waive its right to be indicted and to plead guilty to a one-count information charging it with obstruction of a criminal investigation, in violation of Title 18 U.S.C. Section 1518. It is understood that to be guilty of this offense the following essential elements of the offense must be satisfied: (1) The defendant willfully obstructed, misled, delayed or attempted to obstruct, mislead, or delay communication of information or records, as described in the information; (2) relating to a violation of Federal health care offense; (3) to a criminal investigator. 2 -2- Stanley A. Twardy, Jr., Esq. Andrew P. Gaillard, Esq. June 25, 2001 II. The Penalties This offense carries a maximum penalty of 5 years imprisonment and a fine. The defendant also is subject to the alternative fine provision of 18 U.S.C. Section 3571. Under this section, the maximum fine that may be imposed on the defendant is the greatest of the following amounts: (1) twice the gross gain to the defendant resulting from the offense; and (2) twice the gross loss resulting from the offense; or (3) $500,000. In addition, the defendant is obligated by 18 U.S.C. Section 3013 to pay a special assessment of $400.00 on each count of conviction. The defendant agrees to pay the special assessment to the Clerk of the court on the day of sentencing. Finally, unless otherwise ordered, should the Court impose a fine of more than $2,500 as part of the sentence, interest will be charged on the unpaid balance of a fine amount not paid within 15 days after the judgment date. 18 U.S.C. Section 3612(f). Other penalties and fines may be assessed on the unpaid balance of a fine pursuant to 18 U.S.C. Sections 3571 (h), (I) and Section 3612(g). III. Sentence Agreement The Government and the defendant have agreed, pursuant to Federal Rule of Criminal Procedure 11(e)(1)(C), that the following sentence is an appropriate disposition of this case: A. Fine In light of the defendant's financial condition, the parties agree that restitution and a separate but related civil settlement, as set forth below, is appropriate in lieu of a criminal fine in this matter. B. Restitution The defendant agrees to make restitution in the amount of $5,000,000.00 ($5 Million Dollars) to the United States, the victim of its criminal conduct. RAYTEL will pay restitution in the amount of $5,000,000.00 as follows: $1 Million within thirty (30) days of the plea; $1.5 Million on or before June 30, 2002; $1.5 Million on or before June 30, 2003; and the remaining $1 Million on or before June 30, 2004. 3 -3- Stanley A. Twardy, Jr., Esq. Andrew P. Gaillard, Esq. June 25, 2001 The defendant understands that if it fails to make such agreed-upon restitution that the Government may seek to void this agreement. The order of restitution shall be a condition of probation or supervised release. Failure to pay restitution may also result in the defendant's re-sentencing to any sentence which might originally have been imposed by the Court. See 18 U.S.C. Section 3614. The Government notes that, contemporaneous with this plea, the defendant has negotiated and will enter into a separate civil settlement regarding false claims in the amount of $11,500,000.00 ($11.5 Million Dollars), with credit allowed for $5,000,000.00 to be ordered and paid as restitution in this case. As part of the Civil Settlement, the defendant will enter into a Corporate Integrity Agreement to ensure future compliance. C. Probation The defendant will be on probation for a period of three years from the date of sentencing. IV. Sentencing Guidelines As noted above, the parties have reached agreement as to an appropriate sentence to be imposed. A. Applicability The defendant understands that the Sentencing Reform Act of 1984 and the Sentencing Guidelines apply in this case. The defendant understands that the Court is required to consider any applicable Sentencing Guidelines but may depart from those Guidelines under some circumstances. The defendant expressly understands that the Sentencing Guideline determinations will be made by the Court, based upon input from the defendant and the Government. The defendant further understands that it may withdraw its guilty plea if its sentence or the Guideline application is other than the parties have agreed and set forth herein. B. Information to the Court It is expressly understood that the Government will discuss the facts of this case with the United States Probation Office 4 -4- Stanley A. Twardy, Jr., Esq. Andrew P. Gaillard, Esq. June 25, 2001 and will provide the Probation Officer with access to its file, with the exception of grand jury material. V. Corporate Authorization The defendant will provide to the Office of the United States Attorney and to the Court written evidence, in the form of a notarized resolution of the Board of directors with a notary seal, documenting that the defendant is authorized to waive its right to indictment, to plead guilty to the Information in this case, and to enter into and comply with all provisions of this agreement. The resolution shall further certify that Jason Sholder, President of Raytel Cardiac Services, Inc., is authorized to take these actions, and that all corporate formalities required for such authorization, including approval by the defendant's directors, have been observed. The defendant agrees that Jason Sholder shall appear on behalf of the defendant to waive indictment, to enter a plea of guilty, and to receive the imposition of sentence by the Court. VI. Cooperation with Law Enforcement The defendant agrees to cooperate truthfully and completely with the United States in its investigation of possible violations of federal and state law and in any trial or other proceedings arising out of the investigation of the defendant and any of its present and former officers and employees. A. General Obligations The defendant agrees to cooperate with the Government's continuing investigation of individuals and understands and agrees its cooperation obligations will require it to do the following: 1) provide access to original documents and records, including electronically stored records; 2) provide access to defendant's experts and consultants (other than legal counsel as set forth in Section B below) and copies of their records, reports and documents as retained and prepared prior to June 23, 2000; 5 -5- Stanley A. Twardy, Jr., Esq. Andrew P. Gaillard, Esq. June 25, 2001 3) upon the Government's request, after reasonable notice, arrange for and provide access to defendant's business premises, including technical equipment, to obtain and/or review documents, records or other evidence necessary to the Government's ongoing investigation and/or prosecution of individuals; 4) permit and encourage the defendant's directors, officers and employees to cooperate fully and truthfully with the United States and to disclose all information with respect to their activities and those of others relating to violations of federal criminal laws. B. Attorney-Client and Work Product Privileges The defendant agrees to further cooperate with the Government's continuing investigation by waiving the attorney-client, work product and other privileges relating to documents and/or evidence, all for the period prior to June 23, 2000, pertaining to the defendant's pacemaker testing business as called for in the "Custodian of Records" subpoenas served upon the defendant in this matter, as well as other written or verbal requests for records and/or evidence made to date in lieu of subpoena. The defendant agrees to further cooperate with the Government's continuing investigation by waiving the attorney-client, work product and other privileges, relating to documents and/or evidence, not previously subpoenaed or requested by the Government, all for the period prior to June 23, 2000, in the following areas: 1) documents and/or evidence regarding Medicare Audits relating or applicable to the pacemaker testing business, and the anti-kickback laws and/or regulations; 2) documents and/or evidence regarding asset purchase agreements relating or applicable to the pacemaker testing business, and the anti-kickback laws and/or regulations; 3) documents and/or evidence regarding internal audits relating or applicable to the pacemaker testing business, and the anti-kickback laws and/or regulations; 4) documents and/or evidence regarding compliance with Medicare regulations relating or applicable to the pacemaker testing business, and the anti-kickback laws and/or regulations; and 5) documents and/or evidence relating to payments of commissions to sales representatives relating or 6 -6- Stanley A. Twardy, Jr., Esq. Andrew P. Gaillard, Esq. June 25, 2001 applicable to the pacemaker testing business, and the anti-kickback laws and/or regulations. If an individual raises an assertion of the advice of counsel defense in reliance upon documents and/or evidence not covered above, the defendant will not object to the individual employee's disclosure of or the Government's inquiry into such evidence, and upon reasonable notice (in writing) of the individual's or the Government's intention, the defendant will waive the privilege. The parties acknowledge and agree that by entering into this agreement and waiver of privileges, the defendant does not and will not waive its attorney-client, work product, or other privileges with respect to other documents. C. Notifications If the defendant complies with all the terms of this agreement, the United States will, upon request of the defendant, advise the Court and any federal, state or local government agency, including licensing agencies or authorities, of the nature and extent of any cooperation provided by the defendant. VII. Waiver of Rights A. Waiver of Right to Indictment The defendant understands that it has the right to have the facts of this case presented to a federal grand jury, consisting of between sixteen and twenty-three citizens, twelve of whom would have to find probable cause to believe that it committed the offense set forth in the information before an indictment could be returned. The defendant expressly acknowledges that it is waiving its right to be indicted knowingly and intelligently. B. Waiver of Trial Rights and Consequences of Plea The defendant understands that it has the right to be represented by an attorney at every stage of the proceeding and, if necessary, one will be appointed to represent it. The defendant understands that it has the right to plead not guilty or to persist in that plea if it has already been 7 -7- Stanley A. Twardy, Jr., Esq. Andrew P. Gaillard, Esq. June 25, 2001 made, the right to be tried by a jury with the assistance of counsel, the right to confront and cross-examine the witnesses against it, the right not to be compelled to incriminate itself, and the right to compulsory process for the attendance of witnesses to testify in its defense. The defendant understands that by pleading guilty it waives and gives up those rights and that if the plea of guilty is accepted by the Court, there will not be a further trial of any kind. The defendant understands that if it pleads guilty, the Court may ask its authorized representative questions about each offense to which it pleads guilty, and if he answers those questions falsely under oath, on the record, and in the presence of counsel, his answers may later be used against him in a prosecution for perjury or making false statements. VIII. Waiver of Statute of Limitations The defendant understands and agrees that should the conviction following defendant's plea of guilty pursuant to this plea agreement be vacated for any reason, then any prosecution that is not time-barred by the applicable statute of limitations on the date of the signing of this plea agreement (including any indictment or counts the government has agreed to dismiss at sentencing pursuant to this plea agreement) may be commenced or reinstated against defendant, notwithstanding the expiration of the statute of limitations between the signing of this plea agreement and the commencement or reinstatement of such prosecution. The defendant agrees to waive all defenses based on the statute of limitations with respect to any prosecution that is not time-barred on the date the plea agreement is signed. IX. Acknowledgment of Guilt; Voluntariness of Plea The defendant acknowledges that it is entering into this agreement and is pleading guilty freely and voluntarily because it is guilty. The defendant further acknowledges that it is entering into this agreement without reliance upon any discussions between the Government and it (other than those described in the plea agreement letter), without promise of benefit of any kind (other than the concessions contained in the plea agreement letter), and without threats, force, intimidation, or coercion of any kind. The defendant further acknowledges its understanding of the nature of the offense to 8 -8- Stanley A. Twardy, Jr., Esq. Andrew P. Gaillard, Esq. June 25, 2001 which it is pleading guilty, including the penalties provided by law. The defendant also acknowledges its complete satisfaction with the representation and advice received from its undersigned attorney. The defendant and its undersigned counsel are unaware of any conflict of interest concerning counsel's representation of the defendant in the case. Finally, the defendant acknowledges that the undersigned representative is authorized and empowered to act in this matter on behalf of the defendant corporation. X. Scope of Agreement The defendant acknowledges and understands that this agreement is limited to the undersigned parties and cannot bind any other federal authority, or any state or local authority. The defendant acknowledges that no representations have been made to it with respect to any civil or administrative consequences that may result from this plea of guilty because such matters are solely within the province and discretion of the specific administrative or governmental entity involved. Finally, the defendant understands and acknowledges that this agreement has been reached without regard to any civil tax matters that may be pending or which may arise involving it. XI. Collateral Consequences The defendant further understands that it will be adjudicated guilty of the offense to which it has pleaded guilty and may thereby be deprived of certain federal benefits and rights. The defendant understands that the Government reserves the right to notify any state or federal agency by whom it is licensed, or with whom it does business, of the fact of its conviction. XII. Satisfaction of Federal Criminal Liability; Breach The defendant's guilty plea, if accepted by the Court, will satisfy the federal criminal liability of the defendant for all violations of the federal health care and related laws now known to this office and the Office of Inspector General of the Department of Health and Human Services ("HHS-OIG") that could be brought in the District of Connecticut. The defendant understands that if, before sentencing, it violates any term or condition of this agreement, engages in any 9 -9- Stanley A. Twardy, Jr., Esq. Andrew P. Gaillard, Esq. June 25, 2001 criminal activity, the Government may void all or part of this agreement. XIII. Other Promises The defendant acknowledges that no other promises, agreements, or conditions have been entered into other than those set forth in this plea agreement, and none will be entered into unless set forth in writing, signed by all the parties. This letter shall be presented to the Court, in open court, and filed in this case. Very truly yours, JOHN A. DANAHER, III UNITED STATES ATTORNEY MARIA A. KAHN ASSISTANT UNITED STATES ATTORNEY I certify that I have been authorized by formal action of the Board of Directors of Raytel Cardiac Services, Inc. to act on behalf of the defendant, I have read this plea agreement letter and its attachment(s), have had ample time to discuss this agreement with counsel and fully understand and accept its terms. /s/ Jason Sholder 6/25/2001 - ----------------------------------- --------- RAYTEL CARDIAC SERVICES, INC. Date The Defendant, by Jason Sholder, President of Raytel Cardiac Services, Inc. I have thoroughly read, reviewed and explained this plea agreement to my client, Raytel Cardiac Services, Inc., which, acting here through its President, advises me that it understands and accepts its terms. /s/ Stanley A. Twardy, Jr. 6/25/01 - ----------------------------------- ------- Stanley A. Twardy, Jr., Esq. Date Andrew P. Gaillard, Esq. Attorneys for the Defendant -----END PRIVACY-ENHANCED MESSAGE-----

EX-3.3

   1
                                                                     EXHIBIT 3.3

                            CERTIFICATE OF AMENDMENT
                                       OF
                          CERTIFICATE OF INCORPORATION

        RAYTEL MEDICAL CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, does
hereby certify as follows:

1. At a meeting of the Board of Directors of said corporation on May 18, 2001,
the following resolutions were duly adopted:

RESOLVED: That the Certificate of Incorporation of the Company shall be amended,
effective as of 8:30 a.m. Eastern Daylight Time on Wednesday, May 23, 2001, to
effect a one-for-three reverse stock split;

RESOLVED FURTHER: That to effect such one-for-three reverse stock split,
paragraph (A) of Article IV of the Certificate of Incorporation of the Company
shall be amended to read as follows:

               "(A) The Corporation is authorized to issue two classes of
shares, designated as "Common Stock" and "Preferred Stock," respectively. The
number of shares of Common Stock authorized to be issued is 20,000,000 shares,
$.001 par value per share, and the number of shares of Preferred Stock
authorized to be issued is 2,000,000 shares, $.001 par value per share. Upon the
filing of this Certificate of Amendment of Certificate of Incorporation, each
three issued and outstanding shares of the Corporation's Common Stock shall be
converted into one share of Common Stock, with any resulting fractional share to
be converted into the right to receive a cash payment in an amount equal to the
value of such fractional share based on the closing price of such Common Stock
on the Nasdaq SmallCap Market on May 23, 2001."

2. The foregoing amendment has been approved by the stockholders of the
Corporation at a duly held meeting of stockholders.

3. Said amendment was duly adopted in accordance with the provisions of Section
242 of the General Corporation Law of the State of Delaware.

        IN WITNESS WHEREOF, RAYTEL MEDICAL CORPORATION has caused this
certificate to be signed by its Chairman and Chief Executive Officer this 21st
day of May, 2001.


                                          RAYTEL MEDICAL CORPORATION



                                          By:__________________________________

EX-10.69

   1

                                                                   EXHIBIT 10.69


                                                      U.S. Department of Justice
                                                          United States Attorney
                                                         District of Connecticut



                                                                   June 25, 2001



Via Facsimile (203) 977-7301

Stanley A. Twardy, Jr., Esq.
Andrew P. Gaillard, Esq.
Day, Berry & Howard LLP
One Canterbury Green
Stamford, CT  06901-2047

        Re:    U.S. v. Raytel Cardiac Services, Inc.

Dear Mr. Twardy and Mr. Gaillard:

        This letter confirms the plea agreement entered into between your
client, Raytel Cardiac Services, Inc. ("Raytel" or the "defendant"), and the
United States Attorney's Office for the District of Connecticut (the
"Government") concerning the referenced criminal matter.

I.      The Plea and Offense

        The defendant agrees to waive its right to be indicted and to plead
guilty to a one-count information charging it with obstruction of a criminal
investigation, in violation of Title 18 U.S.C. Section 1518. It is understood
that to be guilty of this offense the following essential elements of the
offense must be satisfied:

        (1)     The defendant willfully obstructed, misled, delayed or attempted
                to obstruct, mislead, or delay communication of information or
                records, as described in the information;

        (2)     relating to a violation of Federal health care offense;

        (3)     to a criminal investigator.



   2

                                      -2-
                                                    Stanley A. Twardy, Jr., Esq.
                                                        Andrew P. Gaillard, Esq.
                                                                   June 25, 2001



II.     The Penalties

        This offense carries a maximum penalty of 5 years imprisonment and a
fine. The defendant also is subject to the alternative fine provision of 18
U.S.C. Section 3571. Under this section, the maximum fine that may be imposed on
the defendant is the greatest of the following amounts: (1) twice the gross gain
to the defendant resulting from the offense; and (2) twice the gross loss
resulting from the offense; or (3) $500,000.

        In addition, the defendant is obligated by 18 U.S.C. Section 3013 to pay
a special assessment of $400.00 on each count of conviction. The defendant
agrees to pay the special assessment to the Clerk of the court on the day of
sentencing.

        Finally, unless otherwise ordered, should the Court impose a fine of
more than $2,500 as part of the sentence, interest will be charged on the unpaid
balance of a fine amount not paid within 15 days after the judgment date. 18
U.S.C. Section 3612(f). Other penalties and fines may be assessed on the unpaid
balance of a fine pursuant to 18 U.S.C. Sections 3571 (h), (I) and Section
3612(g).

III.    Sentence Agreement

        The Government and the defendant have agreed, pursuant to Federal Rule
of Criminal Procedure 11(e)(1)(C), that the following sentence is an appropriate
disposition of this case:

A.      Fine

        In light of the defendant's financial condition, the parties agree that
restitution and a separate but related civil settlement, as set forth below, is
appropriate in lieu of a criminal fine in this matter.

B.      Restitution

        The defendant agrees to make restitution in the amount of $5,000,000.00
($5 Million Dollars) to the United States, the victim of its criminal conduct.
RAYTEL will pay restitution in the amount of $5,000,000.00 as follows: $1
Million within thirty (30) days of the plea; $1.5 Million on or before June 30,
2002; $1.5 Million on or before June 30, 2003; and the remaining $1 Million on
or before June 30, 2004.


   3

                                      -3-
                                                    Stanley A. Twardy, Jr., Esq.
                                                        Andrew P. Gaillard, Esq.
                                                                   June 25, 2001


        The defendant understands that if it fails to make such agreed-upon
restitution that the Government may seek to void this agreement. The order of
restitution shall be a condition of probation or supervised release. Failure to
pay restitution may also result in the defendant's re-sentencing to any sentence
which might originally have been imposed by the Court. See 18 U.S.C. Section
3614.

        The Government notes that, contemporaneous with this plea, the defendant
has negotiated and will enter into a separate civil settlement regarding false
claims in the amount of $11,500,000.00 ($11.5 Million Dollars), with credit
allowed for $5,000,000.00 to be ordered and paid as restitution in this case. As
part of the Civil Settlement, the defendant will enter into a Corporate
Integrity Agreement to ensure future compliance.

C.      Probation

        The defendant will be on probation for a period of three years from the
date of sentencing.

IV.     Sentencing Guidelines

        As noted above, the parties have reached agreement as to an appropriate
sentence to be imposed.

                A.      Applicability

        The defendant understands that the Sentencing Reform Act of 1984 and the
Sentencing Guidelines apply in this case. The defendant understands that the
Court is required to consider any applicable Sentencing Guidelines but may
depart from those Guidelines under some circumstances. The defendant expressly
understands that the Sentencing Guideline determinations will be made by the
Court, based upon input from the defendant and the Government. The defendant
further understands that it may withdraw its guilty plea if its sentence or the
Guideline application is other than the parties have agreed and set forth
herein.

                B.      Information to the Court

        It is expressly understood that the Government will discuss the facts of
this case with the United States Probation Office


   4

                                      -4-
                                                    Stanley A. Twardy, Jr., Esq.
                                                        Andrew P. Gaillard, Esq.
                                                                   June 25, 2001


and will provide the Probation Officer with access to its file, with the
exception of grand jury material.

V.      Corporate Authorization

        The defendant will provide to the Office of the United States Attorney
and to the Court written evidence, in the form of a notarized resolution of the
Board of directors with a notary seal, documenting that the defendant is
authorized to waive its right to indictment, to plead guilty to the Information
in this case, and to enter into and comply with all provisions of this
agreement. The resolution shall further certify that Jason Sholder, President of
Raytel Cardiac Services, Inc., is authorized to take these actions, and that all
corporate formalities required for such authorization, including approval by the
defendant's directors, have been observed.

        The defendant agrees that Jason Sholder shall appear on behalf of the
defendant to waive indictment, to enter a plea of guilty, and to receive the
imposition of sentence by the Court.

VI.     Cooperation with Law Enforcement

        The defendant agrees to cooperate truthfully and completely with the
United States in its investigation of possible violations of federal and state
law and in any trial or other proceedings arising out of the investigation of
the defendant and any of its present and former officers and employees.

        A.      General Obligations

        The defendant agrees to cooperate with the Government's continuing
investigation of individuals and understands and agrees its cooperation
obligations will require it to do the following:

        1)      provide access to original documents and records, including
                electronically stored records;

        2)      provide access to defendant's experts and consultants (other
                than legal counsel as set forth in Section B below) and copies
                of their records, reports and documents as retained and prepared
                prior to June 23, 2000;


   5

                                      -5-
                                                    Stanley A. Twardy, Jr., Esq.
                                                        Andrew P. Gaillard, Esq.
                                                                   June 25, 2001


        3)      upon the Government's request, after reasonable notice, arrange
                for and provide access to defendant's business premises,
                including technical equipment, to obtain and/or review
                documents, records or other evidence necessary to the
                Government's ongoing investigation and/or prosecution of
                individuals;

        4)      permit and encourage the defendant's directors, officers and
                employees to cooperate fully and truthfully with the United
                States and to disclose all information with respect to their
                activities and those of others relating to violations of federal
                criminal laws.

        B.      Attorney-Client and Work Product Privileges

        The defendant agrees to further cooperate with the Government's
continuing investigation by waiving the attorney-client, work product and other
privileges relating to documents and/or evidence, all for the period prior to
June 23, 2000, pertaining to the defendant's pacemaker testing business as
called for in the "Custodian of Records" subpoenas served upon the defendant in
this matter, as well as other written or verbal requests for records and/or
evidence made to date in lieu of subpoena.

        The defendant agrees to further cooperate with the Government's
continuing investigation by waiving the attorney-client, work product and other
privileges, relating to documents and/or evidence, not previously subpoenaed or
requested by the Government, all for the period prior to June 23, 2000, in the
following areas: 1) documents and/or evidence regarding Medicare Audits relating
or applicable to the pacemaker testing business, and the anti-kickback laws
and/or regulations; 2) documents and/or evidence regarding asset purchase
agreements relating or applicable to the pacemaker testing business, and the
anti-kickback laws and/or regulations; 3) documents and/or evidence regarding
internal audits relating or applicable to the pacemaker testing business, and
the anti-kickback laws and/or regulations; 4) documents and/or evidence
regarding compliance with Medicare regulations relating or applicable to the
pacemaker testing business, and the anti-kickback laws and/or regulations; and
5) documents and/or evidence relating to payments of commissions to sales
representatives relating or


   6

                                      -6-
                                                    Stanley A. Twardy, Jr., Esq.
                                                        Andrew P. Gaillard, Esq.
                                                                   June 25, 2001


applicable to the pacemaker testing business, and the anti-kickback laws and/or
regulations.

        If an individual raises an assertion of the advice of counsel defense in
reliance upon documents and/or evidence not covered above, the defendant will
not object to the individual employee's disclosure of or the Government's
inquiry into such evidence, and upon reasonable notice (in writing) of the
individual's or the Government's intention, the defendant will waive the
privilege.

        The parties acknowledge and agree that by entering into this agreement
and waiver of privileges, the defendant does not and will not waive its
attorney-client, work product, or other privileges with respect to other
documents.

        C.      Notifications

        If the defendant complies with all the terms of this agreement, the
United States will, upon request of the defendant, advise the Court and any
federal, state or local government agency, including licensing agencies or
authorities, of the nature and extent of any cooperation provided by the
defendant.

VII.    Waiver of Rights

        A.      Waiver of Right to Indictment

        The defendant understands that it has the right to have the facts of
this case presented to a federal grand jury, consisting of between sixteen and
twenty-three citizens, twelve of whom would have to find probable cause to
believe that it committed the offense set forth in the information before an
indictment could be returned. The defendant expressly acknowledges that it is
waiving its right to be indicted knowingly and intelligently.

        B.      Waiver of Trial Rights and Consequences of Plea

        The defendant understands that it has the right to be represented by an
attorney at every stage of the proceeding and, if necessary, one will be
appointed to represent it.

        The defendant understands that it has the right to plead not guilty or
to persist in that plea if it has already been


   7

                                      -7-
                                                    Stanley A. Twardy, Jr., Esq.
                                                        Andrew P. Gaillard, Esq.
                                                                   June 25, 2001


made, the right to be tried by a jury with the assistance of counsel, the right
to confront and cross-examine the witnesses against it, the right not to be
compelled to incriminate itself, and the right to compulsory process for the
attendance of witnesses to testify in its defense. The defendant understands
that by pleading guilty it waives and gives up those rights and that if the plea
of guilty is accepted by the Court, there will not be a further trial of any
kind.

        The defendant understands that if it pleads guilty, the Court may ask
its authorized representative questions about each offense to which it pleads
guilty, and if he answers those questions falsely under oath, on the record, and
in the presence of counsel, his answers may later be used against him in a
prosecution for perjury or making false statements.

VIII.   Waiver of Statute of Limitations

        The defendant understands and agrees that should the conviction
following defendant's plea of guilty pursuant to this plea agreement be vacated
for any reason, then any prosecution that is not time-barred by the applicable
statute of limitations on the date of the signing of this plea agreement
(including any indictment or counts the government has agreed to dismiss at
sentencing pursuant to this plea agreement) may be commenced or reinstated
against defendant, notwithstanding the expiration of the statute of limitations
between the signing of this plea agreement and the commencement or reinstatement
of such prosecution. The defendant agrees to waive all defenses based on the
statute of limitations with respect to any prosecution that is not time-barred
on the date the plea agreement is signed.

IX.     Acknowledgment of Guilt; Voluntariness of Plea

        The defendant acknowledges that it is entering into this agreement and
is pleading guilty freely and voluntarily because it is guilty. The defendant
further acknowledges that it is entering into this agreement without reliance
upon any discussions between the Government and it (other than those described
in the plea agreement letter), without promise of benefit of any kind (other
than the concessions contained in the plea agreement letter), and without
threats, force, intimidation, or coercion of any kind. The defendant further
acknowledges its understanding of the nature of the offense to


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                                                    Stanley A. Twardy, Jr., Esq.
                                                        Andrew P. Gaillard, Esq.
                                                                   June 25, 2001


which it is pleading guilty, including the penalties provided by law. The
defendant also acknowledges its complete satisfaction with the representation
and advice received from its undersigned attorney. The defendant and its
undersigned counsel are unaware of any conflict of interest concerning counsel's
representation of the defendant in the case. Finally, the defendant acknowledges
that the undersigned representative is authorized and empowered to act in this
matter on behalf of the defendant corporation.

X.      Scope of Agreement

        The defendant acknowledges and understands that this agreement is
limited to the undersigned parties and cannot bind any other federal authority,
or any state or local authority. The defendant acknowledges that no
representations have been made to it with respect to any civil or administrative
consequences that may result from this plea of guilty because such matters are
solely within the province and discretion of the specific administrative or
governmental entity involved. Finally, the defendant understands and
acknowledges that this agreement has been reached without regard to any civil
tax matters that may be pending or which may arise involving it.

XI.     Collateral Consequences

        The defendant further understands that it will be adjudicated guilty of
the offense to which it has pleaded guilty and may thereby be deprived of
certain federal benefits and rights. The defendant understands that the
Government reserves the right to notify any state or federal agency by whom it
is licensed, or with whom it does business, of the fact of its conviction.

XII.    Satisfaction of Federal Criminal Liability; Breach

        The defendant's guilty plea, if accepted by the Court, will satisfy the
federal criminal liability of the defendant for all violations of the federal
health care and related laws now known to this office and the Office of
Inspector General of the Department of Health and Human Services ("HHS-OIG")
that could be brought in the District of Connecticut.

        The defendant understands that if, before sentencing, it violates any
term or condition of this agreement, engages in any


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                                                    Stanley A. Twardy, Jr., Esq.
                                                        Andrew P. Gaillard, Esq.
                                                                   June 25, 2001


criminal activity, the Government may void all or part of this agreement.

XIII.   Other Promises

        The defendant acknowledges that no other promises, agreements, or
conditions have been entered into other than those set forth in this plea
agreement, and none will be entered into unless set forth in writing, signed by
all the parties.

        This letter shall be presented to the Court, in open court, and filed in
this case.

                                         Very truly yours,

                                         JOHN A. DANAHER, III
                                         UNITED STATES ATTORNEY


                                         MARIA A. KAHN
                                         ASSISTANT UNITED STATES ATTORNEY


        I certify that I have been authorized by formal action of the Board of
Directors of Raytel Cardiac Services, Inc. to act on behalf of the defendant, I
have read this plea agreement letter and its attachment(s), have had ample time
to discuss this agreement with counsel and fully understand and accept its
terms.

/s/ Jason Sholder                                              6/25/2001
- -----------------------------------                            ---------
RAYTEL CARDIAC SERVICES, INC.                                    Date
The Defendant, by Jason Sholder,
President of Raytel Cardiac
Services, Inc.

        I have thoroughly read, reviewed and explained this plea agreement to my
client, Raytel Cardiac Services, Inc., which, acting here through its President,
advises me that it understands and accepts its terms.

/s/ Stanley A. Twardy, Jr.                                     6/25/01
- -----------------------------------                            -------
Stanley A. Twardy, Jr., Esq.                                     Date
Andrew P. Gaillard, Esq.
Attorneys for the Defendant