Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

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__________________

(Mark One)


[X]		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended December 31, 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~~January 31, ~~2001~~2002
Common Stock ($.001 par value)		2,919,822	~~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
	Notes to Unaudited Condensed Consolidated Financial Statements for the Three Month Periods Ended December 31, 2001 and 2000.
	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 3. Default 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
INDEX TO EXHIBITS
EXHIBIT 3.3
EXHIBIT 2.1
EXHIBIT 10.69
EXHIBIT 10.8
EXHIBIT 10.72
EXHIBIT 10.73
EXHIBIT 10.74
EXHIBIT 10.75

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 Balance Sheets as of December 31, 2001 and September 30, 2001	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 Operations for the three months ended December 31, 2001 and 2000	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2001 and 2000.	5
	Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 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	910
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	1615
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	1715
Item 3.	~~Defaults~~Default Upon Senior Securities	1716
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 6.	Exhibits and Reports on Form 8-K	17
Item 6.	Exhibits and Reports on Form 8-K	18
SIGNATURE		18
SIGNATURE		19

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ~~JUNE~~DECEMBER 3031, 2001 AND SEPTEMBER 30, ~~2000~~2001 (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

ASSETS


				December 31,			September 30,
				2001			2001

				(Unaudited)
Current assets:
	Cash and cash equivalents			$	5,983		$	6,095
	Cash held for special purpose				127			400

			Total cash		6,110			6,495
	Receivables, net				31,545			31,404
	Prepaid expenses and other				1,776			2,485

			Total current assets		39,431			40,384
Property and equipment, less accumulated depreciation and amortization					13,611			14,187
Intangible assets, less accumulated amortization					18,583			18,590
Other assets					48			68

			Total assets	$	71,673		$	73,229

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt and capital lease obligations			$	2,858		$	15,151
	Accounts payable				5,611			4,757
	Accrued compensation and benefits				2,282			2,636
	Accrued liabilities				3,979			4,898

			Total current liabilities		14,730			27,442
Long-term debt and capital lease obligations, net of current portion					21,067			9,853
Minority interest in consolidated entities					658			1,003

			Total liabilities		36,455			38,298

Stockholders’ equity:
	Common stock				3			3
	Additional paid-in capital				62,678			62,672
		Retained earnings (accumulated deficit)			(23,841	)		(24,122	)

					38,840			38,553
	Less treasury stock, at cost				(3,622	)		(3,622	)

			Total stockholders’ equity		35,218			34,931

			Total liabilities and stockholders’ equity	$	71,673		$	73,229

RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ~~AND NINE MONTHS~~ ENDED ~~JUNE~~DECEMBER 3031, 2001 AND 2000 (UNAUDITED) (000’s omitted, except per share amounts)

						Three Months Ended June 30,							Nine Months Ended June 30,
					Three Months Ended December 31,
					2001	~~2001~~			2000	~~2000~~			~~2001~~			~~2000~~
Revenues:
	Cardiac information services				$	$9,299	~~9,449~~		$	$9,551	~~10,144~~		$	~~28,668~~		$	~~31,149~~
	Diagnostic imaging services					6,852	~~6,758~~			5,998	~~5,990~~			~~19,250~~			~~16,843~~
	Heart facilities and other					1,910	~~2,054~~			1,699	~~2,216~~			~~5,737~~			~~6,862~~
			Total revenues	~~Total revenues~~		18,061	~~18,261~~			17,248	~~18,350~~			~~53,655~~			~~54,854~~
Costs and expenses:
	Provision for OIG investigation expenses						—				2,000			2,000			2,000
	Operating costs					8,409				7,777
	Settlement with federal government						11,500				—			11,500			—
	Selling, general and administrative expenses					7,218				7,155
	Operating costs						8,726				7,846			24,832			22,966
	Depreciation and amortization					1,537				1,675
	Selling, general and administrative						7,445				7,947			22,149			23,698
			Total costs and expenses			17,164				16,607
	Depreciation and amortization						1,603				1,635			4,928			4,923
Operating income						897				641
				Total costs and expenses			29,274				19,428			65,409			53,587
Interest expense						496				560
Operating income (loss)							(11,013	)			(1,078	)		(11,754	)		1,267
Other expense (income), net						(73	)			(218	)
Interest expense							301				522			1,332			1,467
Minority interest						13				53
Other expense (income)							(253	)			(318	)		(734	)		(801	)
Income from continuing operations before income taxes						461				246
Minority interest							177				204			364			620
Provision for income taxes						180				95
Loss from continuing operations before income taxes (benefit)							(11,238	)			(1,486	)		(12,716	)		(19	)
Income from continuing operations						281				151
Provision for income taxes (benefit)							(1,124	)			(579	)		(1,700	)		(7	)
Discontinued operations:
Loss from continuing operations							(10,114	)			(907	)		(11,016	)		(12	)
	Loss from discontinued operations, net of tax benefit					—				(141	)
Discontinued operations:
Net income					$	281			$	10
			Income (loss) from discontinued operations, net of tax (benefit)				—				84			(192	)		969
Basic income (loss) per share:
			Loss on disposal of discontinued operations				—				(4,965	)		(19,353	)		(4,965	)
		Income from continuing operations			$	.10			$	.05
Net loss						$	(10,114	)		$	(5,788	)	$	(30,561	)	$	(4,008	)
		Loss from discontinued operations				—				(.05	)
Basic loss per share:
			Total		$	.10			$	0
		Loss from continuing operations				$	(3.47	)		$	(.31	)	$	(3.78	)	$	—
Diluted income (loss) per share:
		Loss from discontinued operations					—				(1.67	)		(6.70	)		(1.37	)
		Income from continuing operations			$	.10			$	.05
				Total		$	(3.47	)		$	(1.98	)	$	(10.48	)	$	(1.37	)
		Loss from discontinued operations				—				(.05	)
Diluted loss per share:
			Total		$	.10			$	0
		Loss from continuing operations				$	(3.47	)		$	(.31	)	$	(3.78	)	$	—
Weighted average shares outstanding:
		Loss from discontinued operations					—				(1.67	)		(6.70	)		(1.37	)
		Basic				2,919				2,917
			Total			$	(3.47	)		$	(1.98	)	$	(10.48	)	$	(1.37	)
		Diluted				2,953				2,919
Weighted average shares outstanding:
		Basic					2,918				2,916			2,917			2,915
		Diluted					2,918				2,916			2,917			2,915

RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE ~~NINE~~THREE MONTHS ENDED ~~JUNE~~DECEMBER 3031, 2001 AND 2000 (UNAUDITED) (000’s omitted)

					June 30,
					December 31,
					2001			2000
Cash flows from operating activities:
	Net loss				$	(30,561	)	$	(4,008	)
	Net income				$	281		$	10
		Adjustments to reconcile net loss to net cash provided by operating activities:
		Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization			41,~~928~~537			41,~~923~~675
			Minority interest			~~364~~13			~~620~~53
			Loss on disposal of discontinued operations			19,353			4,965
			Other, net			103			433
			Settlement with federal government			11,500			—
			Other, net			394			1,212
		Changes in operating accounts:
			Receivables, net	~~Receivables, net~~		16(141	)		~~226~~581
			Prepaid expenses and other	~~Prepaid expenses and other~~		~~(338~~709	)		(3413	)
			Accounts payable	~~Accounts payable~~		~~671~~854			~~860~~442
			Accrued liabilities and other	~~Accrued liabilities and other~~		(~~4,183~~999	)		1(2,~~045~~016	)
				Net cash provided by operating activities		2,~~144~~357			91,~~840~~591
Cash flows from investing activities:
	Capital expenditures					(~~2,192~~992	)		(~~3,402~~900	)
	Proceeds from disposal of discontinued operations					8,876			—
	Other, net					173			(18	)
	Other, net					221			169
				Net cash used in investing activities		(819	)		(918	)
				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	)
	Income distributions to limited partners					(273	)		(608	)
	Paydown of line of credit					(7,971	)		(3,180	)
	Proceeds from (pay-down of) line of credit					(918	)		(1,000	)
	Principal repayments of debt, net					(1,867	)		(1,150	)
	Proceeds from (principal repayments of) debt					(160	)		(202	)
	Other, net					25			(56	)
	Capitalized financing costs					(493	)		—
				Net cash used in financing activities		(10,922	)		(5,932	)
	Other, net					(79	)		—
Net increase (decrease) in cash and cash equivalents						(1,873	)		675
				Net cash used in financing activities		(1,923	)		(1,810	)
Cash and cash equivalents at beginning of period						8,781			6,110
Net decrease in cash and cash equivalents						(385	)		(1,137	)
Cash and cash equivalents at end of period					$	6,908		$	6,785
Cash and cash equivalents at beginning of period						6,495			8,781
Cash and cash equivalents at end of period					$	6,110		$	7,644

Notes to Unaudited Condensed Consolidated Financial Statements for the Three ~~and~~ ~~Nine~~Month ~~Months~~Periods Ended ~~June~~December 3031, 2001 and 2000.

Presentation of Unaudited Interim Condensed Consolidated Financial Statements

Information in the accompanying interim condensed consolidated ~~financials~~ financial statements and notes to the financial statements of Raytel Medical Corporation (“Raytel” or the “Company”) as of ~~June~~December 3031, 2001 and for the three month ~~and nine month~~ periods ended ~~June~~December 3031, 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~~ information considered necessary for a fair presentation have been included. Operating results for the three months ~~and nine months~~ ended ~~June~~December 3031, 2001 are not necessarily indicative of results that may be expected for the year ending September 30, ~~2001~~2002. 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~~2001 and Forms 8-K filed during the ~~nine~~ three months ended ~~June~~ December 3031, 2001.

Office of the Inspector General Investigation

From June 2000 through June 2001, Raytel was the subject of a grand ~~jury~~ jury investigation ofconducted ~~unspecified~~under ~~allegations~~the ~~concerning~~direction ~~certain business practices~~ of ~~its~~the ~~trans-telephonic~~United ~~cardiac pacemaker monitoring business. Raytel Cardiac~~States ~~Services,~~Attorney ~~Inc.,~~for athe ~~wholly-owned~~District ~~subsidiary~~ of ~~the~~Connecticut ~~Company,~~and ~~has reached agreement with~~ the ~~federal~~Office ~~government~~of ~~to end~~ the ~~investigation into its pacemaker~~Inspector ~~operations~~General ~~and~~of ~~Medicare billing practices. In return for~~ the ~~federal government~~Department ~~ceasing~~of ~~any~~Health ~~further investigation into its pacemaker operations~~ and ~~any~~ ~~additional~~Human ~~potential~~Services ~~criminal charges,~~ (the ~~subsidiary pleaded guilty on June 25, 2001 in U~~“OIG”).S. ~~District Court in Hartford Connecticut to a charge of~~The ~~obstructing~~investigation ainvolved ~~criminal~~certain ~~investigation~~business ~~arising~~practices ~~out~~ of the ~~initial investigation~~transtelephonic incardiac ~~June~~pacemaker ~~2000.~~monitoring Inbusiness ~~addition,~~conducted ~~the~~by ~~Company and~~ Raytel Cardiac Services ~~have~~, ~~reached~~Inc., ana ~~agreement~~wholly-owned insubsidiary ~~principle~~of ~~with~~ the ~~government~~Company to(“RCS”), ~~settle~~at ~~civil~~its ~~claims~~facilities ~~relating~~in toWindsor, ~~this~~Connecticut ~~matter. Under the criminal~~ and ~~civil~~New ~~settlements~~York, ~~the subsidiary~~New ~~would~~York. ~~pay~~The ainvestigation ~~total~~did ofnot involve ~~$11,500,000~~Raytel’s ~~(of~~other ~~which~~healthcare $3services,~~500,000~~ ~~and~~such ~~$8,000,000 is~~as ~~included~~RCS’ incardiac ~~the~~event detection ~~current~~services ~~portion~~or ~~and~~Raytel’s ~~long-term~~diagnostic ~~portion~~imaging ofservices ~~debt,~~or ~~respectively,~~other oncardiac-related ~~the accompanying balance sheet at June 30~~businesses, ~~2001)~~nor todid ~~the~~it ~~government~~involve ~~over~~RCS’ atranstelephonic ~~five~~pacemaker ~~year~~monitoring ~~period,~~operations ~~with~~conducted ~~interest~~at ofits 7%Haddonfield, onNew ~~the unpaid balance~~Jersey facility, ~~and~~which ~~enter~~followed ~~into~~testing ~~a Corporate~~practices ~~Integrity~~similar ~~Agreement~~to ~~(the~~those ~~“Agreement”).~~followed ~~Other~~at ~~product lines offered~~the byConnecticut ~~the subsidiary have not been under investigation~~ and ~~are~~New ~~not~~York ~~affected by this Agreement~~facilities. ~~Raytel will guarantee the payment owed by its subsidiary~~ ~~associated with the Agreement.~~

In ~~connection~~June ~~with the investigation~~2001, ~~Raytel~~RCS ~~has~~reached ~~reviewed~~an ~~its~~agreement ~~compliance~~ with ~~Medicare~~the ~~billing~~federal ~~and~~government ~~record-keeping requirements on a patient-by-patient~~to ~~basis.~~resolve ~~Pending~~the ~~such~~issues ~~confirmation,~~that ~~Raytel~~were 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~~subject of the investigation. In ~~addition,~~accordance ~~Raytel~~with ~~suspended~~that ~~billing~~agreement, ~~for~~on ~~such services. Most of the checks have been deposited~~June 25, ~~most of the cash has been released from escrow~~2001, ~~and~~RCS ~~new billings~~pled ~~for~~guilty ~~services performed has commenced as most of the affected patients’ records have been reviewed and found to be~~ in ~~compliance with applicable Medicare requirements~~U. ~~The total amount of such uncashed checks and escrowed funds was approximately $855,000 as of June 30, 2001~~S. ~~Since Raytel recognizes~~ ~~revenue~~District ~~when~~Court ~~patient~~in ~~services are provided~~Hartford, ~~neither~~Connecticut ~~the~~to ~~escrow~~a ~~arrangement~~charge ~~nor the~~of ~~deferred~~obstructing ~~billing has had~~ a criminal ~~direct~~investigation ~~impact~~arising onout ~~Raytel’s~~of ~~operating results. If~~ the ~~Company’s~~initial ~~review~~investigation ~~discloses~~in ~~any patient billings that have not been fully~~June ~~compliant~~2000. ~~with~~In ~~Medicare requirements~~addition, ~~any resulting billing adjustments or reversals will be charged against operating results~~ in ~~that~~October ~~current period. In addition~~2001, the Company ~~has incurred,~~ and ~~expects~~RCS toentered ~~continue~~into ~~to incur,~~an ~~substantial~~agreement ~~legal fees and other expenses in connection~~ with the ~~investigation and~~government ~~has accrued a reserve of $4,000,000~~ to ~~cover~~resolve ~~the~~related ~~estimated~~civil ~~amounts of these expenses~~claims. ~~Additional~~Under ~~expenses, if any, will adversely affect operating results~~the incriminal ~~future~~and ~~periods.~~civil ~~As of June 30~~settlements, ~~2001,~~RCS ~~the~~agreed ~~Company~~to ~~had~~pay ~~incurred~~a ~~legal~~total ~~fees and other expenses~~ of ~~approximately~~ $311,~~578~~500,000 ~~related~~ to the ~~investigation. These~~government ~~expenses~~over ~~include~~a ~~legal~~five ~~fees~~year ~~incurred~~period, ~~by certain employees in connection~~ with ~~the~~interest ~~on-going investigation~~ of ~~certain~~7% ~~employees~~per inannum ~~accordance with the~~on ~~requirements~~the ofunpaid ~~Delaware~~balance, ~~Law~~to ~~and~~resolve the ~~Company’s~~criminal ~~By-Laws.~~and ~~The~~civil ~~investigation,~~allegations ~~and~~relating ~~the~~to ~~related internal compliance review, diverted~~ the ~~efforts~~practices ~~and attention~~ of ~~a number of Raytel~~RCS’s ~~management~~Connecticut and ~~administrative~~New ~~personnel.~~York ~~The~~transtelephonic monitoring ~~impact~~operations ofwhich ~~this diversion~~were ~~reduced~~ the ~~efficiency~~subject of ~~Raytel’s~~the ~~pacemaker~~investigation. ~~monitoring operations~~Raytel ~~during~~guaranteed ~~the~~RCS’ ~~last~~payment ~~week~~obligations ofunder the ~~quarter~~settlement ~~ended~~agreement. ~~June 30,~~RCS also ~~2000~~entered ~~and~~into ~~adversely~~a ~~affected both~~corporate ~~revenues~~integrity ~~and~~agreement ~~operating~~under ~~expenses~~which ~~for~~it agreed that ~~period~~its asongoing ~~well~~operations aswould ~~the~~conform ~~quarters ended~~to ~~September 30,~~specified ~~2000,~~guidelines. As of December 31, ~~2000~~2001, ~~March 31~~$1, ~~2001 and June 30~~500,000 ~~2001. Raytel~~had ~~expects~~been ~~that,~~paid ~~while~~to the ~~impact~~government, ofand the ~~investigation of the Company’s~~next ~~operations~~payment ~~in future periods will be less significant now that the investigation~~ of ~~the~~$2,000,000 ~~Company~~is ~~has~~due ~~been~~in ~~settled,~~June it2002. ~~may~~RCS’ ~~require~~guilty ~~time~~plea ofdid ~~some~~not ~~employees~~adversely ~~and~~affect itits ~~may~~participation ~~continue~~in tothe ~~adversely~~Medicare ~~affect~~program ~~operating~~or ~~results~~other ~~in future~~federal ~~periods~~healthcare programs.

The Company incurred substantial legal fees and other expenses in connection with the investigation and established a reserve of $4,600,000 to cover the estimated amounts of these expenses. As of December 31, 2001, the Company had incurred legal fees and other expenses of approximately $4,358,000 related to the investigation, including legal fees incurred by certain RCS employees in connection with the investigation which were reimbursed by RCS in accordance with the requirements of Delaware Law and RCS’ By-Laws. The remaining balance of the reserve is included in “accrued liabilities” on the Company’s balance sheet. Additional expenses, if any, will adversely affect operating results in future periods.

RCS’ administrative personnel. In addition, RCS’ guilty plea entered into under its agreement with the government constituted a default under Raytel’s bank credit facility. In November 2001, Raytel entered into a new revolving line of credit arrangement and repaid all outstanding indebtedness under its bank facility. However, RCS’ guilty plea could adversely affect Raytel’s ability to obtain debt or equity financing in the future.

In connection with the civil settlement agreement, neither the Company nor RCS admitted liability for the government’s allegations, and the settlement agreement did not release the Company or RCS from any future claims arising out of their other business operations, including RCS’ transtelephonic pacemaker operations conducted at its New Jersey facility. In December 2001, RCS submitted claims which would result in reimbursements totaling approximately $1,500,000 for transtelephonic monitoring services performed at the New Jersey facility between June 2000 and January 2001 which had not complied in all respects with certain technical requirements of Medicare’s policy guidelines relating to the duration of testing sessions. These claims are currently pending with RCS’ Medicare carrier. By letter dated December 28, 2001, the Department of Health and Human Services advised RCS that it could not instruct the carrier to pay claims for services that did not comply with these guidelines. In January 2002, the carrier advised RCS that it would require additional information to adjudicate the claims. RCS is in the process of providing additional information to the carrier. RCS believes that its testing procedures were clinically adequate and intends to appeal any adverse decision of the carrier with respect to these claims. Since January 2001, tests performed at the New Jersey facility have complied with the policy guidelines in question.

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~~ 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 for repayment was extended to October 1, 2001. A new non-financial covenant was added under which ~~states that~~ any civil financial settlement in excess of $1,000,000 ~~and/~~or any criminal charges relating to the ongoing OIG investigation would constitute an event of default. On March 16, 2001, the line of credit was further reduced to $14,900,000 in connection with the sale of the Company’s HFHI subsidiary. Consistent with the terms of the December 2000 amendments to the line of credit agreement, the line of credit was further reduced by $2,500,000 on June 30, 2001 to $12,400,000. RCS’ guilty plea, entered into under its settlement with the federal government, constituted a default under the line of credit agreement. See Note 2. In October and November 2001, the interest rate under the line of credit was increased to 400 basis points over the bank’s prime rate.

OnIn ~~March 16,~~November 2001, the ~~line~~Company ofentered into a new two-year revolving credit ~~was~~facility ~~paid~~with ~~down~~Healthcare ~~and~~Business ~~permanently~~Credit Corporation under which it ~~reduced~~may borrow up to $1415,~~900~~000,000. inLoans ~~connection~~under ~~with~~ the ~~sale~~facility bear interest at prime plus 1% per annum and are secured by accounts receivable, inventories, capital equipment and other assets of ~~Heart~~Raytel and ~~Family~~certain ~~Health~~of its ~~Institute~~subsidiaries and affiliated entities. The Company’s access to the line of ~~Port~~credit Stis subject to certain financial and other covenants and conditions. Raytel used the initial proceeds of the new facility to repay ~~Lucie~~outstanding indebtedness of approximately $12,300,000 ~~Inc~~under the credit line that matured on October 1, 2001. ~~(“HFHI”)~~At December 31, 2001, there was approximately $11,369,000 outstanding under the line of credit which was classified as long-term debt on the Company’s balance sheet.

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.”

Discontinued Operations

In March 2001, effective January 1, 2001, the Company completed the ~~sale~~ sale of its wholly-owned subsidiary, Heart and Family Health Institute (“HFHI”), to a new company organized by physicians practicing at HFHI. The Company received a cash purchase price of $8,~~876~~311,000, ~~(prior~~net toof ~~estimated~~ transaction expenses, ~~costs~~for ofall ~~$565,000)~~the incommon ~~cash~~stock inof ~~this~~the ~~transaction~~subsidiary. 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~~ did not ~~provided~~ provide 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.

AsRevenues aattributable ~~result,~~to ~~the~~HFHI ~~Company~~during ~~reported~~ the ~~results~~three ofmonths ~~HFHI~~ended ~~and the loss on~~December ~~disposal~~31, as2001 aand ~~discontinued~~2000 ~~operation~~were $0 and ~~the~~$3,948,000, ~~related~~respectively. ~~operating~~The ~~results~~loss ~~have~~from ~~been~~discontinued ~~reported~~operations ~~separately~~of ~~from~~$141,000 ~~continuing~~for ~~operations~~the ~~for~~three ~~all~~months ~~applicable~~ended ~~periods~~December 31, ~~presented.~~2000 ~~The~~was ~~related~~attributable ~~net assets of HFHI are immaterial~~ to ~~the~~HFH1 ~~financial statements~~ and ~~are~~was ~~included~~net inof ~~the~~a ~~accompanying~~tax ~~balance~~benefit ~~sheet~~of ~~at September 30~~$90, ~~2000~~000.

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.

65. ~~Loss~~Reverse ~~Per~~Stock ~~Share~~ Split

~~For~~On May 9, 2001, the Board of Directors effected a one-for-three reverse ~~months~~split ~~and~~of the ~~nine~~Company’s ~~months~~common ~~ended~~stock. ~~June 30,~~The ~~2001~~accompanying ~~and 2000,~~condensed ~~basic~~consolidated ~~and~~financial ~~diluted~~statements ~~earnings~~reflect ~~per~~such ~~share~~reverse ~~are~~stock ~~calculated~~split asfor ~~follows:~~all periods presented.

		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

Net Income Per Share

~~(a)~~ For ~~Due~~the tothree ~~the~~months ~~loss~~ended ~~for~~December 31, ~~the~~2001 ~~period~~and ~~shown~~2000, ~~dilutives~~basic ~~are~~and diluted ~~not~~earnings ~~included~~per inshare ~~the~~are ~~calculation.~~calculated as follows:

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
		ended December 31,

		2001		2000

(000’s omitted, except per share amounts)

Basic Income (Loss) per Share:
Income from continuing operations		$	.10	$	.05
Loss from discontinued operations			—		(.05	)

	Total	$	.10	$	.00

Weighted average shares outstanding			2,919		2,917

Diluted Income (Loss) per Share:
Income from continuing operations		$	.10	$	.05
Loss from discontinued operations			—		(.05	)

	Total	$	.10	$	.00

Weighted average shares outstanding			2,919		2,917
Shares to be issued			—		2
Dilutive effect of options			34		—

			2,953		2,919

	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

Additional options to purchase shares of common stock were outstanding during the three months ended December 31, 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. These additional outstanding options and their exercise prices are as follows:

7. New Accounting Standards


	Three months
	ended December 31,

	2001		2000

Options outstanding		313,855		435,615
Range of exercise prices	$	6.375-$35.625	$	4.26-$35.625

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.

~~Item 2~~7. ~~Management’s~~New ~~Discussion~~Accounting ~~and Analysis of Financial Condition and Results of Operations~~ Standards

~~This~~The ~~discussion~~Financial ~~and~~Accounting ~~analysis~~Standards ~~includes~~Board aissued ~~number~~Statement ~~of forward-looking~~No. 141, ~~statements~~Business ~~which~~Combinations, ~~reflect~~and ~~the~~Statement ~~Company’s~~No. 142, ~~current~~Goodwill ~~views~~and ~~with~~Other ~~respect~~Intangible Assets, toin ~~future events~~July ~~and~~2001 ~~financial~~(effective ~~performance.~~for ~~These~~fiscal ~~forward-looking~~2003). ~~statements~~Statement ~~are~~No. 141 ~~subject~~will tonot ~~certain~~have ~~risks~~an ~~and~~effect ~~uncertainties,~~on ~~including~~the ~~those~~Company’s ~~discussed~~results ~~under “Business Environment~~ and ~~Future~~the ~~Results”~~Company ~~and~~is ~~elsewhere~~currently assessing inwhat ~~this Item~~effect, ~~that~~if ~~could~~any, ~~cause actual~~Statement ~~results~~No. 142 towill ~~differ~~have ~~materially~~on ~~from~~its ~~historical~~ results ~~or those anticipated~~. In ~~this~~August ~~Item~~2001, ~~the~~(effective ~~words~~for ~~“anticipates,”~~fiscal ~~“believes,”~~2003) ~~“expects~~Statement No. 144,” Accounting ~~“intends,”~~for ~~“future”~~the ~~and~~Impairment ~~similar~~or ~~expressions~~Disposal ~~identify~~of ~~forward~~Long-~~looking statements.~~Lived ~~Readers~~Assets, ~~are~~was ~~cautioned~~issued. ~~not~~The Company tois ~~place~~currently ~~undue~~assessing ~~reliance~~what oneffect, ~~these forward-looking~~if ~~statements~~any, ~~which~~Statement ~~speak~~No. 144 ~~only~~will have ason ofits ~~the date hereof~~results.

~~Overview~~ 8. Merger Agreement

~~The~~On February 8, 2002, the Company ~~generates~~announced ~~its~~that ~~revenues~~it ~~from~~had signed a definitive merger agreement pursuant to which SHL TeleMedicine Ltd. (SWX: SHLTN ~~cardiac~~or ~~information~~“SHL”), a developer and marketer of telemedicine devices and provider of telemedicine services, will acquire Raytel. According to the ~~which~~terms ~~includes~~of ~~telephonic~~the ~~monitoring~~agreement, ~~services~~by February 22, 2002, a subsidiary of SHL will begin a tender offer for ~~cardiac~~all ~~pacemaker~~of ~~patients~~Raytel’s outstanding shares at a price of ~~(“Pacing”)~~$10.25 per share in cash. Following the completion of the tender offer, the ~~cardiac~~SHL ~~event~~subsidiary ~~detection~~will ~~services~~be ~~(“CEDS”)~~merged ~~and~~into ~~Holter~~Raytel ~~monitoring;~~in a transaction in which any ~~diagnostic~~Raytel ~~imaging~~shares ~~services;~~not ~~and~~tendered ~~heart~~will ~~facilities~~be converted into the right to receive the same per share cash price paid in the tender offer. The transaction is not conditioned upon financing but is subject to the satisfaction or waiver of customary closing conditions.

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

~~pacemaker operations and any additional potential criminal charges, the subsidiary pleaded guilty on June~~Item ~~25, 2001 in U~~2.S. ~~District~~Management’s ~~Court~~Discussion inand ~~Hartford Connecticut~~Analysis ~~to a charge~~ of ~~obstructing~~Financial aCondition ~~criminal investigation arising out of the initial investigation in June 2000. In addition, the Company~~ and ~~Raytel Cardiac~~Results ~~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~~Operations ~~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.

InThis ~~connection~~discussion ~~with the investigation, Raytel has reviewed its compliance with Medicare billing~~ and ~~record-keeping~~analysis ~~requirements~~includes on a ~~patient-by-patient basis.~~number ~~Pending such confirmation, Raytel held Medicare reimbursement checks received since June 23, 2000 in payment~~ of ~~invoices for pacemaker monitoring~~forward-looking ~~services~~statements ~~and~~which ~~established~~reflect anmanagement’s ~~escrow~~current ~~account~~views ~~for funds inadvertently deposited~~ with respect to ~~such services received since the date of the investigation. In~~future ~~addition,~~events ~~Raytel~~and ~~suspended~~financial ~~billing for such services~~performance. ~~Most~~These offorward-looking ~~the~~statements ~~checks have~~are ~~been~~subject ~~deposited,~~to ~~most~~certain ofrisks ~~the~~and ~~cash has been released from escrow~~uncertainties, ~~and~~including ~~new billings~~those ~~for~~discussed ~~services performed has commenced as most of the affected patients’~~under ~~records~~“Business ~~have~~Environment ~~been reviewed~~ and ~~found~~Future toResults” ~~be in compliance with applicable Medicare requirements. The total amount of such uncashed checks~~ and ~~escrowed funds~~elsewhere ~~was~~in ~~approximately~~this ~~$855~~Item,~~000~~ ~~as of June 30, 2001. Since Raytel recognizes~~that ~~revenue~~could ~~when~~cause ~~patient~~actual ~~services~~results ~~are~~to ~~provided,~~differ ~~neither~~materially ~~the~~from ~~escrow~~historical ~~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~~those ~~will be charged against operating results in that current period~~anticipated. In ~~addition,~~ ~~the~~this ~~Company has incurred~~Item, ~~and expects to continue to incur, substantial legal fees and other expenses in connection with~~ the ~~investigation and~~words ~~has accrued a reserve of $4~~“anticipates,~~000,000~~” ~~to cover the estimated amounts of these~~“believes,” ~~expenses. Additional expenses~~“expects,” ~~if any~~“intends,” ~~will~~“future” ~~adversely~~and ~~affect~~similar ~~operating~~expressions ~~results~~identify inforward-looking ~~future periods~~statements. AsReaders ofare ~~June 30,~~cautioned ~~2001,~~not ~~the Company had incurred legal fees and other expenses of approximately $3,578,000 related~~ to ~~the~~place ~~investigation.~~undue ~~These~~reliance ~~expenses include legal fees incurred by certain employees in connection with the~~ on~~-going~~ ~~investigation~~these ~~of certain employees in accordance with the requirements of Delaware Law and the Company’s By~~forward-~~Laws.~~looking ~~The investigation~~statements, ~~and the~~which ~~related~~speak ~~internal~~only 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~~date 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 periodshereof.

~~In March 2001, effective January 1, 2001, the Company completed the sale~~Overview ~~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.

OnWe ~~May 9,~~generate ~~2001,~~our ~~the~~revenues ~~Board~~from ofcardiac ~~Directors~~information ~~declared~~services a(which includes ~~one-~~telephonic monitoring services for~~-three~~ ~~reverse~~cardiac pacemaker patients ~~split~~(“Pacing”), ofcardiac ~~the~~event ~~Company’s~~detection ~~Common~~services ~~Stock.~~(“CEDS”) ~~The~~and ~~accompanying~~Holter monitoring), ~~consolidated~~from ~~financial~~diagnostic ~~statements~~imaging ~~reflect~~services ~~such~~and ~~reverse~~from facilities providing ~~stock~~diagnostic, ~~split~~therapeutic ~~for~~and ~~all~~patient ~~periods~~management services primarily ~~presented~~associated with cardiovascular disease.

~~Results~~ From June 2000 through June 2001, Raytel was the subject of ~~Operations~~a grand jury investigation conducted under the direction of the United States Attorney for the District of Connecticut and the Office of the Inspector General of the Department of Health and Human Services (the “OIG”). The investigation involved certain business practices of the transtelephonic cardiac pacemaker monitoring business conducted by Raytel Cardiac Services, Inc., our wholly-owned subsidiary (“RCS”), at its facilities in Windsor, Connecticut and New York, New York. The investigation did not involve our other healthcare services, such as RCS’ cardiac event detection services or Raytel’s diagnostic imaging services or other cardiac-related businesses, nor did it involve RCS’ transtelephonic pacemaker monitoring operations conducted at its Haddonfield, New Jersey facility, which followed testing practices similar to those followed at the Connecticut and New York facilities.

~~Three~~In ~~Months~~June ~~Ended~~2001, RCS reached an agreement with the federal government to resolve the issues that were the subject of the investigation. In accordance with that agreement, on June 3025, 2001, ~~Compared~~RCS pled guilty in U.S. District Court in Hartford, Connecticut to ~~Three~~a ~~Months~~charge ~~Ended~~of obstructing a criminal investigation arising out of the initial investigation in June 2000. In addition, in October 2001, Raytel and RCS entered into an agreement with the government to resolve related civil claims. Under the criminal and civil settlements, RCS agreed to pay a total of $11,500,000 to the government over a five year period, with interest of 7% per annum on the unpaid balance, to resolve the criminal and civil allegations relating to the practices of RCS’ Connecticut and New York transtelephonic monitoring operations which were the subject of the investigation. Raytel guaranteed RCS’ payment obligations under the settlement agreement. RCS also entered into a corporate integrity agreement under which it agreed that its ongoing operations would conform to specified guidelines. As of December 3031, 2001, $1,500,000 had been paid to the government, and the next ~~2000~~payment of $2,000,000 is due in June 2002. RCS’ guilty plea did not adversely affect its participation in the Medicare program or other federal healthcare programs.

~~Revenues. For~~We ~~the~~incurred ~~three~~substantial ~~months~~legal ~~ended~~fees ~~June 30,~~and ~~2001,~~other ~~total~~expenses ~~revenues~~in ~~were~~connection ~~$18,261,000~~with ~~compared~~the toinvestigation and established a reserve of $184,~~350~~600,000 ~~for~~to cover the estimated ~~three~~amounts ~~months~~of ~~ended~~these ~~June~~expenses. As of December 3031, ~~2000~~2001, we had ~~representing~~incurred alegal ~~decrease~~fees and other expenses of approximately $894,358,000 related to the investigation, orincluding legal fees incurred by certain RCS employees in connection with the investigation which were reimbursed by RCS in accordance with the requirements of Delaware Law and RCS’ By-Laws.5% The remaining balance of the reserve is included in “accrued liabilities” on our balance sheet. Additional expenses, if any, will adversely affect our operating results in future periods.

In addition to these direct expenses, the investigation, the related internal compliance review, and settlement negotiations with the government diverted the efforts and attention of a number of our management and administrative personnel. The impact of this diversion reduced the efficiency of RCS’ pacemaker monitoring operations during the last week of the quarter ended June 30, 2000 and adversely affected both revenues and operating expenses for that period as well as the quarter ended September 30, 2000 and throughout the fiscal year ended September 30, 2001. Although the investigation has now been concluded, implementation of the corporate integrity agreement continues to require the time and attention of Raytel and RCS management and a number of RCS’ administrative personnel. In addition, RCS’ guilty plea entered into under its agreement with the government constituted a default under Raytel’s bank credit facility. In November 2001, Raytel entered into a new revolving line of credit arrangement and repaid all outstanding indebtedness under its bank facility. However, RCS’ guilty plea could adversely affect our ability to obtain debt or equity financing in the future.

~~Cardiac~~In ~~information~~connection ~~services~~with ~~revenues were $9,449,000 for~~ the ~~three~~civil ~~months ended~~settlement ~~June 30~~agreement, ~~2001,~~neither ~~compared~~Raytel tonor RCS ~~$10,144,000~~admitted liability for the ~~three~~government’s ~~months~~allegations, ~~ended~~and ~~June~~the settlement ~~30,~~agreement ~~2000,~~did anot ~~decrease~~release ofRaytel ~~$695,000,~~ or ~~6.9%.~~RCS ~~The~~from ~~decrease~~any infuture ~~revenues~~claims ~~for~~arising out ~~cardiac~~of ~~information~~their ~~services~~other ~~was~~business ~~due~~operations, toincluding ~~lower~~RCS’ ~~revenues~~transtelephonic pacemaker ~~from~~operations ~~Pacing~~conducted asat aits ~~result of~~New ~~lower~~Jersey ~~test~~facility. ~~volumes~~In ~~and~~December 2001, ~~lower~~RCS ~~average~~submitted ~~selling~~claims ~~prices.~~which ~~Diagnostic~~would ~~imaging services~~result ~~revenue~~in ~~was~~reimbursements totaling approximately $61,~~758~~500,000 for transtelephonic monitoring services performed at the ~~three~~New ~~months~~Jersey ~~ended~~facility between June ~~30,~~ 2000 and January 2001 which had not ~~compared~~complied toin ~~$5,990,000~~all ~~for~~respects ~~the~~with ~~three~~certain ~~months~~technical ~~ended~~requirements ~~June 30,~~of ~~2000,~~Medicare’s policy anguidelines ~~increase~~relating to the duration of testing sessions. These ~~$768,000,~~claims orare 12currently pending with RCS’ Medicare carrier.8% By letter dated December 28, ~~due~~2001, ~~primarily~~the toDepartment ~~increases~~of inHealth ~~revenue~~and atHuman ~~certain~~Services ~~centers~~advised RCS ~~and~~that ~~the~~it ~~imaging~~could ~~network~~not ~~due~~instruct the carrier to anpay ~~increase~~claims infor ~~patient~~services ~~volumes.~~that ~~Heart~~did ~~facilities~~not ~~and~~comply ~~other~~with ~~revenues~~these ~~were~~guidelines. ~~$2,054,000~~In ~~for~~January 2002, the ~~three~~carrier ~~months~~advised ~~ended June~~RCS ~~30,~~that ~~2001,~~it ~~compared~~would torequire ~~$2,216,000~~additional ~~for~~information ~~the~~to ~~three~~adjudicate ~~months~~the ~~ended~~claims. ~~June 30,~~RCS is ~~2000,~~in ~~a decrease~~the process of ~~$162,000,~~providing oradditional 7information to the carrier.~~3%,~~ ~~due~~RCS believes ~~primarily~~that toits ~~lower~~testing ~~revenue~~procedures atwere ~~certain cardiovascular~~clinically ~~diagnostic~~adequate ~~facilities~~and asintends to aappeal ~~result~~any adverse decision of ~~restructuring~~the ~~certain~~carrier ~~of these~~with ~~facilities~~respect to bethese inclaims. Since ~~compliance~~January 2001, tests performed at the New Jersey facility have complied with ~~new~~the ~~regulations~~policy guidelines in question.

~~Provision~~In ~~for~~March ~~OIG~~2001, ~~Investigation~~effective ~~Expenses~~January 1, 2001, we completed the sale of our wholly-owned subsidiary, HFHI, to a new company organized by physicians practicing at HFHI, including David Wertheimer, M. ~~The~~D., ~~Company~~who ~~provided~~had served as President of the subsidiary as well as an officer of Raytel and a member of Raytel’s Board of Directors. We received a cash purchase price of $28,311,000, 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 ~~expected~~equipment ~~expenses~~used ~~associated~~at ~~with~~the HFHI facility, $5,100,000 was used to reduce the ~~OIG~~indebtedness ~~investigation~~under our bank credit facility and the balance was used for working capital purposes. We 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, we have not provided for any tax benefit that may result from this transaction. Revenues attributable to HFH1 in the three months ended December 31, 2001 and 2000 were $0 and $3,948,000 respectively. The loss from discontinued operations of $141,000 for the three months ended ~~June~~December 3031, 2000 was attributable to HFHI and was net of a tax benefit of $90,000.

~~Settlement~~On ~~with~~February 8, ~~Federal~~2002, ~~Government. The~~we ~~Company~~announced ~~has~~that ~~recorded~~we had signed a ~~one-time~~definitive ~~charge~~merger agreement pursuant to which SHL TeleMedicine Ltd. (SWX: SHLTN or “SHL”), a developer and marketer of ~~$11~~telemedicine devices and provider of telemedicine services,~~500,000~~ inwill ~~June~~acquire ~~2001~~Raytel. ~~related~~According to the ~~criminal~~terms ~~and~~of ~~civil~~the agreement, ~~settlement~~by February 22, 2002, a subsidiary of SHL will begin a tender ~~among~~offer ~~one~~for all of ~~its~~Raytel’s ~~subsidiaries~~outstanding shares at a price of $10.25 per share in cash. Following the completion of the tender offer, the SHL subsidiary will be merged into Raytel ~~Cardiac~~in ~~Services,~~a ~~and~~transaction in which any Raytel shares not tendered will be converted into the ~~federal~~right to receive the same per share ~~government~~cash price paid in the tender offer. The transaction is not conditioned upon financing but is subject to the satisfaction of or waiver of customary closing conditions.

~~Operating~~Results 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~~Operations ~~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~~Three ~~and~~Months ~~Amortization. Depreciation~~Ended ~~and amortization expense decreased by $32,000, from $1,635,000 for the three months ended June~~December 3031, ~~2000 to $1,603,000 for the three months ended June 30,~~ 2001 ~~and~~Compared ~~decreased~~to asThree ~~a percentage~~Months ~~of revenues from 8.9% for the three months ended June~~Ended December 3031, 2000 ~~to 8~~.~~8% for the three months ended June 30, 2001, primarily as a result of lower~~ ~~revenues.~~

~~Operating Loss~~Revenues. As aFor ~~result~~the ofthree ~~the~~months ~~foregoing~~ended ~~factors~~December 31, ~~operating~~2001, ~~loss~~total revenues ~~increased~~were by $918,~~935~~061,000 ~~from~~compared to $117,~~078~~248,000 for the three months ended ~~June 30,~~December ~~2000~~31, ~~to $11~~2000,~~013,000~~ ~~for~~representing ~~the~~an ~~three~~increase ~~months~~of ~~ended June 30~~$813,000, ~~2001~~or 4.7%.

~~Interest~~Cardiac ~~Expense. Interest~~information ~~expense~~services ~~decreased~~revenues bywere $~~221~~9,299,000 for the three months ended December 31, 2001, compared to $9,551,000 for the three months ended December 31, 2000, a decrease of $252,000, or 422.36%. The decrease in revenues for cardiac information services was due primarily to lower revenues from Pacing operations as a result of lower test volumes and lower average selling prices and, to a lesser extent, lower revenues from Holter monitoring due to lower test volumes. Diagnostic imaging services revenues were $~~522~~6,852,000 for the three months ended ~~June~~December 3031, ~~2000~~2001, compared to $~~301~~5,998,000 for the three months ended ~~June~~December 3031, ~~2001~~2000, an increase of $854,000, or 14.2%, due primarily to ~~lower~~increases ~~average~~in ~~debt~~revenue ~~outstanding~~at certain centers and the imaging network resulting from increases in patient ~~lower~~volumes. ~~interest~~Heart ~~rates~~facilities and other revenues were $1,910,000 for the three months ended December 31, 2001, compared to $1,699,000 for the three months ended December 31, 2000, an increase of $211,000, or 12.4%, due primarily to higher revenues at certain cardiovascular diagnostic facilities.

~~Other~~Operating ~~Expense (Income)~~Expenses. ~~Other~~ ~~income~~Operating ~~decreased~~costs and selling, general and administrative expenses increased by $65695,000, or 4.7%, from $~~318~~14,932,000 for the three months ended ~~June~~December 3031, 2000 to $~~253~~15,627,000 for the three months ended ~~June~~ December 3031, 2001., due primarily to higher expenses related to diagnostic imaging services, partially offset

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.

~~Net~~by ~~Loss. As~~decreases ain ~~result~~costs ofand ~~the~~expenses ~~foregoing~~related ~~factors~~to cardiac information services. Operating costs and selling, ~~the~~general ~~net~~and ~~loss~~administrative ~~increased~~expenses as a percentage of total revenues decreased by $4 .1%,~~326,000~~ from ~~$5,788,000~~86.6% for the three months ended ~~June~~December 3031, 2000 to ~~$10,114,000~~ 86.5% for the three months ended ~~June~~ December 3031, 2001.

~~Nine~~Depreciation ~~Months~~and ~~Ended~~Amortization. ~~June 30~~Depreciation and amortization expense decreased by $138,000, ~~2001~~or ~~Compared~~8.2%, from $1,675,000 for the three months ended December 31, 2000 to ~~Nine~~$1,537,000 ~~Months~~for ~~Ended~~the ~~June~~three months ended December 3031, 2001 and decreased as a percentage of revenues from 9.7% for the three months ended December 31, 2000 to 8.5% for the three months ended December 31, 2001 as a result of higher revenues and lower expense.

~~Revenues~~Operating Income. ~~For~~ ~~the~~As ~~nine~~a ~~months~~result ~~ended~~of ~~June 30,~~the ~~2001~~foregoing factors, ~~total~~operating income ~~revenues~~increased ~~were~~ by $53256,~~655,~~000, ~~compared~~or to39.9%, from $54641,~~854,~~000 for the ~~nine~~three months ended ~~June~~December 3031, 2000~~, representing~~ ato ~~decrease of~~ $1897,~~199,~~000, orfor 2the three months ended December 31, 2001.~~2%.~~

~~Cardiac~~Interest ~~information~~Expense. ~~services~~Interest ~~revenues~~expense ~~were~~decreased ~~$28,668,000~~by ~~for the nine months ended June 30, 2001, compared to~~ $3164,~~149,~~000 ~~for the nine months ended June 30~~, ~~2000,~~ ~~a decrease of $2,481,000,~~ or 811.04%~~. 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~~ $19560,~~250,~~000 for the ~~nine~~three months ended ~~June~~December 3031, ~~2001,~~ ~~compared~~2000 to $16496,~~843,~~000 for the ~~nine~~three months ended ~~June~~December 3031, ~~2000,~~2001 ~~an increase of $2,407,000, or 14.3%,~~ due primarily to ~~increases~~a indecrease ~~revenue at certain centers and the imaging network due to an increase~~ in ~~patient volumes.~~the ~~Heart~~average ~~facilities~~amount ~~and~~of ~~other~~debt ~~revenues~~outstanding ~~were $5~~and,~~737,000~~ ~~for the nine months ended June 30, 2001, compared~~ to ~~$6,862,000~~a ~~for~~lesser ~~the nine months ended June 30~~extent, ~~2000,~~ a ~~decrease~~decline ofin interest $1rates,~~125,000,~~ orpartially ~~16.4%,~~offset ~~due~~by ~~primarily~~the toamortization ~~lower revenue at certain cardiovascular diagnostic facilities as a result~~ of ~~restructuring~~deferred ~~certain of~~costs ~~these~~related ~~facilities~~ to beour ~~in compliance with~~ new ~~regulations~~credit ~~and the termination of an agreement with Baptist Hospital of Beaumont, Texas~~facility.

~~Provision~~Other ~~for~~Expense ~~OIG~~(Income). ~~Investigation~~Other ~~Expenses. The~~income ~~Company~~decreased ~~provided~~by $2145,000 from $218,000 for ~~expected~~the ~~expenses~~three ~~associated~~months ~~with~~ended ~~the~~December 31, ~~OIG~~2000 ~~investigation~~to $73,000 for the three ~~nine~~ months ended ~~June~~December 3031, ~~2000 and~~ 2001~~, respectively~~.

~~Settlement~~Minority ~~with Federal Government~~Interest. ~~The~~ ~~Company~~Minority ~~has~~interest ~~recorded~~decreased aby ~~one-time charge~~$40,000 of from $1153,~~500,~~000 infor ~~June~~the ~~2001~~three ~~related~~months toended ~~the~~December 31, ~~criminal~~2000 ~~and~~to ~~civil~~$13,000 ~~settlement~~for the ~~among~~three ~~one~~months ofended ~~its subsidiaries~~December 31, ~~Raytel~~2001 ~~Cardiac~~due ~~Services,~~primarily ~~and~~to ~~the~~decreased ~~federal~~income in ~~government~~certain cardiovascular diagnostic facilities.

~~Operating~~Income ~~Expenses~~Taxes. ~~Operating~~ ~~costs~~The ~~and~~provision ~~selling,~~for ~~general~~income ~~and administrative~~taxes ~~expenses~~ increased by $~~317~~85,000~~, or .7% (excluding the provision~~ ~~for OIG investigation expenses and the settlement with the federal government),~~ from $4695,~~664,~~000 for the ~~nine~~three months ended ~~June~~December 3031, 2000 to $46180,~~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~~three months ended ~~June~~December 3031, 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 aresult ~~percentage~~ of ~~total revenues~~ increased ~~from 85.1%~~taxable ~~for the nine months ended June 30, 2000 to 87~~income.6% ~~for~~There ~~the~~was ~~nine~~no ~~months~~change ~~ended~~in ~~June 30,~~our ~~2001,~~effective ~~primarily~~tax asrate abetween ~~result~~the ~~of lower revenues~~two periods.

~~Depreciation~~Loss ~~and~~From ~~Amortization~~Discontinued Operations. ~~Depreciation~~ ~~and~~Loss ~~amortization expense increased by $5,000~~ from ~~$4,923,000~~discontinued ~~for the nine months ended June 30, 2000 to~~operations was $4141,~~928,~~000 ~~for the nine months ended June 30~~, ~~2001~~net ~~and increased as a percentage~~ of ~~revenues~~tax ~~from~~benefit, ~~9.0%~~ for the ~~nine~~three months ended ~~June~~December 3031, ~~2000 to~~ 92000.~~2% for the nine months ended June 30, 2001.~~

~~Operating~~Net Income ~~(Loss)~~. As a result of the foregoing factors, ~~operating~~ net income increased ~~decreased~~ by $13271,~~021,~~000, from ~~income of~~ $110,~~267,~~000 for the ~~nine~~three months ended ~~June~~December 3031, 2000 to ~~an operating loss of~~ $11281,~~754,~~000 for the ~~nine~~three months ended ~~June~~December 3031, 2001.

~~Interest~~Segment ~~Expense. Interest expense decreased by $135,000, or 9.2%, from~~Information ~~$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~~Our ~~Expense~~reportable segments are strategic business units that offer different services. We have three reportable segments: Cardiac Information Services (~~Income~~“Information”). ; Diagnostic Imaging Services (“Imaging”); and Heart Facilities and Other ~~income~~(“Facilities”). ~~decreased~~The byInformation ~~$67~~segment provides Pacing,~~000~~ ~~from~~CEDS ~~$801,000~~and Holter monitoring services utilizing telephonic and ~~for~~Internet ~~the~~communication ~~nine~~technology. ~~months~~The ~~ended~~Imaging ~~June 30,~~segment ~~2000~~operates toa ~~$734,000~~network of ~~for~~diagnostic imaging centers throughout the ~~nine~~United ~~months~~States. ~~ended~~The Facilities ~~June 30~~segment provides diagnostic, ~~2001~~therapeutic and patient management services primarily associated with cardiovascular disease.

~~Minority~~The ~~Interest. Minority~~accounting ~~interest~~policies ~~decreased~~of bythe ~~$256,000,~~segments orare ~~41.3%,~~the ~~from~~same as those ~~$620,000~~described ~~for~~in the ~~nine~~summary ~~months~~of ~~ended~~significant ~~June 30,~~accounting ~~2000~~policies (see Note 2 to the ~~$364,000~~consolidated financial statements included in our Annual Report on Form 10-K for the ~~nine months~~year ended ~~June~~September 30, 2001) ~~due~~except ~~primarily~~that we do not allocate all interest expense, taxes or corporate overhead to ~~decreased~~the individual segments. We evaluate performance based on profit or loss from operations before income intaxes ~~certain~~and unallocated amounts. The totals per the schedules ~~cardiovascular~~below ~~diagnostic~~will ~~facilities~~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 before income taxes and discontinued operations (in thousands):

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.

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.


		Information		Imaging			Facilities			Total

	For the three months ended December 31, 2001:
Net revenue		$	9,299	$	6,852		$	1,910		$	18,061
Total operating expenses			8,100		5,358			1,395			14,853

Segment contribution			1,199		1,494			515			3,208
Depreciation and amortization			853		413			211			1,477
Interest expense			—		32			25			57
Minority interest/other expense (income), net			—		(95	)		(114	)		(209	)

Segment profit		$	346	$	1,144		$	393		$	1,883

Segment assets		$	41,524	$	15,271		$	9,610		$	66,405

Capital expenditures		$	309	$	657		$	26		$	992

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.


		Information		Imaging		Facilities			Total

	For the three months ended December 31, 2000:
Net revenue		$	9,551	$	5,998	$	1,699		$	17,248
Total operating expenses			8,413		4,399		1,239			14,051

Segment contribution			1,138		1,599		460			3,197
Depreciation and amortization			849		428		297			1,574
Interest expense			—		61		31			92
Minority interest/other expense (income), net			6		1		(20	)		(13	)

Segment profit		$	283	$	1,109	$	152		$	1,544

Segment assets		$	43,785	$	14,516	$	32,606		$	90,907

Capital expenditures		$	743	$	44	$	82		$	869

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.


		Three Months Ended December 31,

		2001		2000

Segment profit		$	1,883	$	1,544
Unallocated amounts:
	Corporate general and administrative expenses		774		881
	Corporate depreciation and amortization		60		101
	Corporate interest expense		439		468
	Corporate other expense (income), net		149		(152	)

Income from continuing operations before income taxes		$	461	$	246

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.

		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

Business Environment and Future Results

~~(a)~~ Our ~~Includes~~future operating results may be affected by various trends in the healthcare industry as well as by a $2variety of other factors,~~000,000~~ ~~provision~~some ~~for~~of ~~OIG~~which are ~~investigation~~beyond ~~expenses~~our control.

		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

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 our revenues are derived from Medicare, HMOs, commercial insurers and other third-party payors. Both government and private payment sources have instituted cost containment measures designed to limit payments made to healthcare providers by reducing reimbursement rates, limiting services covered, increasing utilization review of services, negotiating prospective or discounted contract pricing, adopting capitation strategies and seeking competitive bids. Revenue from the our Pacing operations during the last three fiscal years has been impacted by Medicare reimbursement changes. Reimbursement rate reductions applicable to our Pacing procedures became effective on January 1, 1999 and had a negative effect on Pacing revenue for calendar year 1999. There was a slight increase in Medicare reimbursement rates effective January 1, 2000 and again effective January 1, 2001; however, there was a decrease effective January 1, 2002. We 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 us, or that future reimbursement of any service that we offer will be sufficient to cover the costs and overhead allocated to such service.

~~(a)~~ From ~~Includes~~time ato $2time,~~000,000~~ ~~provision~~Congress ~~for~~considers ~~OIG~~legislation ~~investigation~~to ~~expenses~~reduce Medicare and anMedicaid ~~$11~~expenditures. Future legislation of this type could have a material adverse effect on our business,~~500,000~~ ~~settlement~~financial ~~with~~condition and operating results. Governmental agencies promulgate regulations which mandate changes in the ~~federal~~method ~~government~~of delivering services which could have a material adverse effect on our business.

		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

An element of our strategy is to expand, in part, through acquisitions and investments in complementary healthcare businesses. The implementation of this strategy may place significant strain on our administrative, operational and financial resources and increase demands on our systems and controls. There can be no assurances that businesses which we may acquire, in the future will be integrated successfully and profitably into our operations, that suitable acquisitions or investment opportunities will be identified, or that any such transactions can be consummated.

~~(a)~~ Providers ~~Includes~~of ahealthcare $2services are subject to numerous federal,~~000,000~~ state ~~provision~~and ~~for~~local ~~OIG~~laws ~~investigation~~and ~~expenses~~regulations that govern various aspects of their business. There can be no assurance that we will be able to obtain regulatory approvals that may be required to expand or services or that new laws or regulations will not be enacted or adopted that will have a material adverse effect on our business, financial condition or operating results.

The healthcare businesses in which we are engaged are highly competitive. We expect competition to increase as a result of ongoing consolidations and cost-containment pressures, among other factors.

The trading price of our common stock is subject to wide fluctuations in response to quarterly variations in our operating results, shortfalls in such operating results from levels forecasted by securities analysts and other events or factors. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations that have particularly affected the market prices of companies in the healthcare service industries and that have often been unrelated to the operating performance of the affected companies. Announcements of changes in reimbursement policies of third-party payors, legislative or regulatory developments, economic news and other external factors may have a significant impact on the market price of healthcare stocks.

Liquidity and Capital Resources

At December 31, 2001, we had working capital of $24,701,000, compared to $12,942,000 at September 30, 2001, which reflected the balance outstanding under our former line of credit as a current liability. At December 31, 2001, we had cash and cash equivalents of $6,110,000.

We batch-bill 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 our

		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	)

second and third fiscal quarters, with the collection of these receivables occurring primarily during the subsequent fourth fiscal quarter.

~~Business~~ On ~~Environment~~December 15, 2000, our line of credit agreement with two banks was amended to reduce the line of credit to $20,000,000 and ~~Future~~to ~~Results~~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 our option, and the date for repayment was extended to October 1, 2001. A new non-financial covenant was added under which any civil financial settlement in excess of $1,000,000 or any criminal charges relating to the then-pending 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 our HFHI subsidiary. Consistent with the terms of the December 2000 amendments to the line of credit agreement, the line of credit was further reduced by $2,500,000 on June 30, 2001 to $12,400,000. RCS’ guilty plea, entered into under its settlement with the federal government, constituted a default under the line of credit agreement. In October and November 2001, the interest rate under the line of credit was increased to 400 basis points over the bank’s prime rate.

~~The~~In ~~Company’s~~November ~~future~~2001, ~~operating~~we ~~results~~entered into a new two-year revolving credit facility with Healthcare Business Credit Corporation under which we may borrow up to $15,000,000. Loans under the facility bear interest at prime plus 1% per annum and will be ~~affected~~secured by ~~various~~accounts ~~trends~~receivable, inventories, incapital equipment and other assets of Raytel and certain of its subsidiaries and affiliated entities. We used the ~~healthcare~~initial ~~industry~~proceeds asof ~~well~~the new asfacility byto arepay ~~variety~~outstanding indebtedness of ~~other~~approximately ~~factors~~$12,287,000 under ~~some~~the ofcredit line that matured on October 1, 2001. At December 31, ~~which~~2001, ~~are~~there ~~beyond~~was approximately $11,369,000 outstanding under the ~~Company’s~~new ~~control~~credit facility. The facility matures on November 30, 2003 and, therefore, indebtedness outstanding under the line as of December 31, 2001 was classified as a long-term liability on our balance sheet.

~~The~~Our ~~healthcare industry is undergoing significant change as third~~long-~~party payors~~term ~~attempt~~capital torequirements ~~control~~will ~~the~~depend ~~cost,~~on ~~utilization~~numerous ~~and delivery of healthcare~~factors, ~~services.~~including ~~Substantially all of~~ the ~~Company’s~~rate ~~revenues~~at ~~are~~which ~~derived~~we ~~from Medicare,~~develop ~~HMOs,~~new ~~commercial~~products ~~insurers~~ and ~~other~~services ~~third-party payors. Both government~~ and ~~private payment sources have instituted cost containment~~ ~~measures~~acquires ~~designed~~other ~~to limit payments made to healthcare providers by reducing reimbursement rates~~businesses, ~~limiting~~if ~~services covered, increasing utilization review of services, negotiating prospective or discounted contract pricing, adopting capitation strategies and seeking competitive bids~~any. ~~The~~Our ~~Company’s~~ability ~~Pacing revenue has been favorably impacted for the period January 1, 1998~~ to ~~December 31,~~meet ~~1998~~our ~~due~~working ~~to an increase in Medicare reimbursement rates effective on~~capital ~~January 1,~~and ~~1998.~~capital ~~However,~~expenditure aneeds ~~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~~next ortwelve ~~types~~months ofis ~~services~~dependent ~~that may be reimbursed to~~upon ~~the~~our ~~Company,~~ability ~~or that future reimbursement of any service offered by the Company will be sufficient~~ to ~~cover~~sustain ~~the costs and overhead allocated to such service~~profitability.

~~From~~We ~~time~~may torequire ~~time~~additional capital if, ~~Congress~~for ~~considers~~example, ~~legislation~~we were to experience ~~reduce~~operating ~~Medicare~~losses ~~and Medicaid~~or ~~expenditures~~if we were to pursue one or more business acquisitions. ~~Future~~We ~~legislation~~cannot ofbe ~~this~~certain ~~type~~that ~~could~~additional ~~have~~financing awill ~~material~~be ~~adverse~~available ~~effect~~when onrequired, ~~the~~or ~~Company~~at all. RCS’s ~~business,~~guilty ~~financial~~plea ~~condition~~pursuant ~~and~~to ~~operating~~the ~~results.~~settlement ~~Governmental~~agreement ~~agencies~~entered ~~promulgate~~into ~~regulations~~with ~~which~~the ~~mandate~~federal ~~changes~~government in ~~the~~ ~~method~~2001 ofcould adversely ~~delivering~~affect ~~services~~our ~~which~~ability ~~could~~to ~~have~~obtain adebt ~~material~~or ~~adverse~~equity ~~effect~~financing ~~on the~~in ~~Company’s business~~the future.

~~An element of the Company’s strategy is to expand, in part, through acquisitions and investments in complementary healthcare businesses~~Item 3. ~~The implementation~~Quantitative ~~of this strategy may place significant strain on the Company’s administrative, operational~~ and ~~financial~~Qualitative ~~resources~~Disclosures ~~and~~about ~~increase~~Market ~~demands on its~~Risks ~~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~~We ofdo ~~healthcare~~not ~~services~~hold ~~are~~any ~~subject~~marketable toequity ~~numerous federal~~securities, ~~state and~~foreign ~~local~~currencies ~~laws~~or derivative ~~and~~financing ~~regulations~~instruments ~~that~~in ~~govern~~its ~~various~~investment ~~aspects~~portfolio. ofWe ~~their~~are ~~business.~~is ~~There~~exposed ~~can~~to bemarket norisk ~~assurance~~from ~~that~~interest ~~the~~rate ~~Company~~fluctuations ~~will~~because beit ~~able to obtain regulatory~~uses ~~approvals~~variable ~~that~~rate ~~may~~debt ~~be required~~ to ~~expand~~finance ~~its~~working ~~services~~capital orrequirements. ~~that~~We ~~new~~are ~~laws or~~does ~~regulations will~~ not bebelieve ~~enacted or adopted~~ that ~~will~~there ~~have~~is aany material ~~adverse~~market ~~effect~~risk onexposure ~~the Company’s~~with ~~business,~~respect to other financial ~~condition~~instruments orthat ~~operating~~would ~~results~~require disclosure under this Item.

~~The~~PART ~~healthcare businesses in which the Company is engaged are highly competitive~~II. ~~The~~OTHER ~~Company expects competition to increase as a result of~~INFORMATION ~~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 factorsItem 1. InLegal ~~addition, the stock market~~Proceedings ~~has, from time to~~

From June 2000 through June 2001, Raytel was the subject of a grand jury investigation conducted under the direction of the United States Attorney for the District of Connecticut and the Office of the Inspector General of the Department of Health and Human Services (the “OIG”). The investigation involved certain business practices of the transtelephonic cardiac pacemaker monitoring business conducted by Raytel Cardiac Services, Inc., our wholly-owned subsidiary (“RCS”), at its facilities in Windsor, Connecticut and New York, New York. The investigation did not involve our other healthcare services, such as RCS’ cardiac event detection services or Raytel’s diagnostic imaging services or other cardiac-related businesses, nor did it involve RCS’ transtelephonic pacemaker monitoring operations conducted at its Haddonfield, New Jersey facility, which followed testing practices similar to those followed at the Connecticut and New York facilities.

In June 2001, RCS reached an agreement with the federal government to resolve the issues that were the subject of the investigation. In accordance with that agreement, on June 25, 2001, RCS pled guilty in U.S. District Court in Hartford, Connecticut to a charge of obstructing a criminal investigation arising out of the initial

~~time~~investigation in June 2000. In addition, ~~experienced~~in ~~extreme~~October ~~price~~2001, Raytel and RCS ~~volume~~entered ~~fluctuations~~into ~~that~~an ~~have~~agreement ~~particularly~~with the government to resolve the related ~~affected~~civil claims. Under the ~~market~~criminal ~~prices~~and civil settlements, RCS agreed to pay a total of ~~companies~~$11,500,000 into the ~~healthcare~~government ~~service~~over ~~industries~~a five year period, with ~~and~~interest ~~that~~of ~~have~~7% ~~often~~per ~~been~~annum ~~unrelated~~on the unpaid balance, to resolve the ~~operating~~criminal ~~performance~~and civil allegations relating to the practices of RCS’ Connecticut and New York transtelephonic monitoring operations which were the ~~affected~~subject of the ~~companies~~investigation. ~~Announcements~~Raytel ofguaranteed ~~changes~~RCS’ inpayment ~~reimbursement~~obligations ~~policies~~under the settlement agreement. RCS also entered into a corporate integrity agreement under which it agreed that its ongoing operations would conform to specified guidelines. As of ~~third-party~~December 31, 2001, $1,500,000 had been paid ~~payors~~to the government, ~~legislative~~and orthe ~~regulatory~~next ~~developments~~payment of $2,000,000 ~~economic~~is ~~news~~due ~~and~~in ~~other~~June 2002. ~~external~~RCS’ ~~factors~~guilty ~~may~~plea ~~have~~did anot ~~significant~~adversely ~~impact~~affect onits ~~the~~participation ~~market~~in ~~price~~the ofMedicare program or other federal healthcare ~~stocks~~programs.

~~Liquidity~~ We incurred substantial legal fees and ~~Capital~~other ~~Resources~~expenses in connection with the investigation and established a reserve of $4,600,000 to cover the estimated amounts of these expenses. As of December 31, 2001, we had incurred legal fees and other expenses of approximately $4,358,000 related to the investigation, including legal fees incurred by certain RCS employees in connection with the investigation which were reimbursed by RCS in accordance with the requirements of Delaware Law and RCS’ By-Laws. The remaining balance of the reserve is included in “accrued liabilities” on our balance sheet. Additional expenses, if any, will adversely affect our operating results in future periods.

AtIn ~~June 30,~~addition ~~2001~~to ~~the~~these ~~Company~~direct ~~had~~expenses, ~~working~~the ~~capital~~investigation, ofthe ~~$14,513,000~~related ~~($30~~internal compliance review,~~300,000~~ ~~before~~and ~~deducting~~settlement ~~the~~negotiations ~~outstanding~~with ~~amount~~the ~~under~~government diverted the ~~Company’s~~efforts ~~line~~ and attention of ~~credit~~a number of our management and administrative ~~the~~personnel. ~~current~~The ~~portion~~impact of this diversion reduced the efficiency ~~debt~~of ~~related~~RCS’ topacemaker ~~the~~monitoring ~~settlement~~operations ~~with~~ during the ~~federal~~last ~~government~~week of the ~~$12~~quarter ended June 30,~~287,000~~ 2000 and ~~$3,500,000;~~adversely ~~respectively),~~affected ~~compared~~both revenues and tooperating ~~$32,387,000~~expenses atfor that period as well as the quarter ended September 30, 2000. Atand ~~June~~throughout the fiscal year ended September 30, 2001. Although the investigation has now been concluded, implementation of the ~~Company~~corporate integrity ~~had~~agreement ~~cash~~continues to require the time and attention of Raytel and ~~temporary~~RCS ~~cash~~management ~~investments~~and a number of $6RCS’ administrative personnel. In addition,~~908~~ RCS’ guilty plea entered into under its agreement with the government constituted a default under Raytel’s bank credit facility. In November 2001,~~000~~ Raytel entered into a new revolving line of credit arrangement and repaid all outstanding indebtedness under its bank facility. However, RCS’ guilty plea could adversely affect our ability to obtain debt or equity financing in the future.

In connection with the civil settlement ofagreement, neither Raytel nor RCS admitted liability for the ~~OIG~~government’s ~~investigation~~allegations, and the ~~Company~~settlement ~~made~~agreement andid ~~initial~~not ~~payment~~release Raytel or RCS from any future claims arising out of their other business operations, including RCS’ transtelephonic pacemaker operations conducted at its New Jersey facility. In December 2001, RCS submitted claims which would result in reimbursements totaling approximately $1,~~000~~500,000 for transtelephonic monitoring services performed at the New Jersey facility between June 2000 and January 2001 which had not complied in ~~July~~all respects with certain technical requirements of Medicare’s policy guidelines relating to the duration of testing sessions. These claims are currently pending with RCS’ Medicare carrier. By letter dated December 28, 2001, the Department of Health and Human Services advised RCS that it could not instruct the carrier to pay claims for services that did not comply with these guidelines. In January 2002, the carrier advised RCS that it would require additional information to adjudicate the claims. RCS is in the process of providing additional information to the carrier. RCS believes that its testing procedures were clinically adequate and intends to appeal any adverse decision of the carrier with respect to these claims. Since January 2001, tests performed at the New Jersey facility have complied with the policy guidelines in question.

~~The~~We ~~Company~~are ~~batch-bills~~from ~~Medicare~~time ~~insurance~~to ~~carriers~~time ~~for~~a ~~most~~party ~~cardiac testing~~to ~~services~~various ~~performed~~other ~~during~~claims ~~the~~and ~~first~~disputes associated ~~few~~with ~~months~~various aspects of ~~each~~our ~~calendar~~ongoing ~~year~~business operations. In ~~This~~management’s ~~practice~~opinion, ~~results~~none inof athese ~~temporary~~other ~~build-up~~claims ofor ~~accounts~~disputes ~~receivable~~are ~~during the~~expected, ~~Company’s~~either ~~second~~individually ~~and~~or ~~third~~in ~~fiscal~~the ~~quarters~~aggregate, ~~with~~to ~~the~~have ~~collection~~a ofmaterial ~~these~~adverse effect ~~receivables~~on ~~occurring~~our ~~primarily~~financial ~~during~~position ~~the~~or ~~subsequent~~results ~~fourth~~of ~~fiscal quarter~~operations.

~~On December~~Item ~~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~~3. ~~The~~Default ~~interest~~Upon ~~rate~~Senior ~~was changed~~Securities ~~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~~At October 1, 2001, we had an outstanding principal balance of approximately $12,300,000 under our bank line of credit which matured on that date. RCS’ guilty plea, entered into under its settlement with the federal ~~terms~~government described in Part II, Item 1 of ~~the~~this ~~December~~report, ~~2000~~constituted a ~~amendment~~default tounder the line of credit agreement. In November 2001, ~~the~~we ~~available~~entered into a new revolving line of credit ~~balance~~arrangement ~~was~~and ~~further~~repaid ~~reduced~~all byoutstanding ~~$2,500,000~~indebtedness onunder ~~June 30,~~the ~~2001~~original tobank ~~$12,400,000~~facility.

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.

~~PART II~~Item 6. ~~OTHER~~Exhibits ~~INFORMATION~~and Reports on Form 8-K

~~Item 1~~a. ~~Legal~~Exhibits: ~~Proceedings~~ The following exhibit is filed as a part of this Report:

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.


Exhibit
Number		Title

	2.1	Agreement and Plan of Merger, dated as of February 7, 2002, among the Registrant, SHL TeleMedicine Ltd. and SHL TeleMedicine Acquisition Corp.

	10.8	Amended and Restated Employment Agreement, dated February 6, 2002, between the Registrant and Richard F. Bader.

	10.72	Loan and Security Agreement, dated November 15, 2001 (the “HBCC Loan Agreement”), among the Registrant, certain subsidiaries of the Registrant and Healthcare Business Credit Corporation (“HBCC”), including form of Revolving Credit Note.

	10.73	Form of Imaging Center Security Agreement, dated November 15, 2001, entered into among HBCC, the Imaging Center Affiliates (as defined in the HBCC Loan Agreement) and the Imaging Center PCs (as defined in the HBCC Loan Agreement)

	10.74	Key Management Retention Agreement, dated December 5, 2001, between the Registrant and John F. Lawler, Jr.

	10.75	Key Management Retention Agreement, dated February 6, 2002, between the Registrant and Swapan Sen.

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.

	b.		Reports on Form 8-K:

			On October 1, 2001, we filed a report on Form 8-K disclosing, under Item 5, a preliminary proposal to acquire Raytel submitted by a stockholder group that included Raytel’s Chief Executive Officer.

			On December 18, 2001, we filed a report on Form 8-K disclosing, under Item 5, a revised proposal to acquire Raytel submitted by an expanded stockholder group and also announcing that we had received additional confidential expressions of interest in such an acquisition.

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.

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:

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.

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.
Dated: February 19, 2002	By:	/s/ John F. Lawler, Jr.
		John F. Lawler, Jr. Vice President and Chief Financial Officer (duly authorized officer and principal financial officer)

1918

~~EXHIBIT~~ INDEX TO EXHIBITS

~~Exhibit~~	Exhibit
~~Number~~	~~Title~~Number		Title
3.3	Certificate of Amendment of Certificate of Incorporation.
		2.1	Agreement and Plan of Merger, dated as of February 7, 2002, among the Registrant, SHL TeleMedicine Ltd. and SHL TeleMedicine Acquisition Corp.
10.69	Plea Agreement, dated June 25, 2001, resolving the government’s criminal investigation of the Company.
		10.8	Amended and Restated Employment Agreement, dated February 6, 2002, between the Registrant and Richard F. Bader.
		10.72	Loan and Security Agreement, dated November 15, 2001 (the “HBCC Loan Agreement”), among the Registrant, certain subsidiaries of the Registrant and Healthcare Business Credit Corporation (“HBCC”), including form of Revolving Credit Note.
		10.73	Form of Imaging Center Security Agreement, dated November 15, 2001, entered into among HBCC, the Imaging Center Affiliates (as defined in the HBCC Loan Agreement) and the Imaging Center PCs (as defined in the HBCC Loan Agreement)
		10.74	Key Management Retention Agreement, dated December 5, 2001, between the Registrant and John F. Lawler, Jr.
		10.75	Key Management Retention Agreement, dated February 6, 2002, between the Registrant and Swapan Sen.

2019

Certificate of Amendment of Certificate of Incorporation.

Plea Agreement, dated June 25, 2001, resolving the government’s criminal investigation of the Company.

Filing Compare · RAYTEL MEDICAL CORP