Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



---

FORM 10-Q

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x

        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the period ended December 31, 2008



o

        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 :0-50914



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BIOTEL INC.

(Exact name of registrant as specified in its charter)



Minnesota

        41-1427114(State or other jurisdiction ofincorporation or organization)

        (I.R.S. EmployerIdentification No.)




1285 Corporate Center Drive, Suite 150

Eagan, MN  55121

(Address of principal executive offices, including zip code)



(651) 286-8620

(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.

Yesx

        Noo




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.  See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated fileroAccelerated fileroNon-Accelerated fileroSmaller reporting companyx



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso

        Nox




The number of shares of registrants common stock, par value $0.01 per share, outstanding as of as of February 10, 2009, was 2,763,827.







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BIOTEL INC.INDEXPART I

        

        Page NumberItem 1:

        Financial Information

        3Consolidated Balance Sheets  December 31, 2008 and June 30, 2008

        3Consolidated Statements of Income  Three Months ended December 31, 2008 and 2007

        4Consolidated Statements of Income  Six Months ended December 31, 2008 and 2007

        5Consolidated Statements of Cash Flows

        6Consolidated Statements of Stockholders Equity

        7Notes to Consolidated Financial Statements (Unaudited)

        8Item 2:

        Managements Discussion and Analysis of Financial Condition and Results of Operations

        13Item 3:

        Qualitative and Quantitative Disclosure about Market Risk

        17Item 4:

        Controls and Procedures

        17PART IIItem 1Item 4:

        Not applicable

        17Item 5:

        Other Information

        17Item 6:

        Exhibits

        17Signatures

        

        18




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Table of Contents

Part I

Item 1:Financial Information



BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



December 31,2008Unaudited

        

        June 30,2008*ASSETSCURRENT ASSETSCash and cash equivalents

        

        $

        895,311

        

        $

        945,121Trade accounts receivable, net of allowance for doubtful accounts of $49,518 and $55,440 at December 31, 2008 and June 30, 2008, respectively

        

        

        1,748,842

        

        

        1,766,512Prepaid income taxes

        

        

        

        

        

        39,310Inventories, net

        

        

        2,164,412

        

        

        1,428,163Deferred tax asset

        

        

        244,018

        

        

        244,018Prepaid expenses

        

        

        153,282

        

        

        109,903Total Current Assets

        

        

        5,205,865

        

        

        4,533,027PROPERTY & EQUIPMENT, Net

        

        

        1,104,950

        

        

        1,092,710OTHER ASSETSGoodwill

        

        

        695,551

        

        

        695,551Other assets

        

        

        13,820

        

        

        13,820Total Other Assets

        

        

        709,371

        

        

        709,371$

        7,020,186

        

        $

        6,335,108LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESRevolving line of credit

        

        $

        

        

        $

        187,146Trade accounts payable

        

        

        680,682

        

        

        651,635Accrued payroll and related liabilities

        

        

        218,291

        

        

        237,503Deferred service contract revenue

        

        

        98,288

        

        

        133,359Other accrued expenses

        

        

        185,886

        

        

        198,540Income taxes payable

        

        

        292,554

        

        

        Total Current Liabilities

        

        

        1,475,701

        

        

        1,408,183LONG-TERM LIABILITIESDeferred taxes payable

        

        

        224,967

        

        

        224,967COMMITMENTS AND CONTINGENCIES

        

        

        

        

        

        Total Liabilities

        

        

        1,700,668

        

        

        1,633,150STOCKHOLDERS EQUITYPreferred stock, $.01 stated value; 2,000,000 shares authorized; no shares issued

        

        

        

        

        

        Common stock, $.01 stated value; 10,000,000 shares authorized; 2,763,827 shares issued

        

        

        27,638

        

        

        27,638Additional paid-in capital

        

        

        2,146,088

        

        

        2,145,594Retained earnings

        

        

        3,145,792

        

        

        2,528,726Total Stockholders Equity

        

        

        5,319,518

        

        

        4,701,958$

        7,020,186

        

        $

        6,335,108




* Derived from the 10KSB for the year ended June 30, 2008.



3

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Table of Contents

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited



For the three months endedDecember 31,2008

        

        2007SALES AND SERVICES

        

        $

        3,185,954

        

        $

        2,859,069COST OF SALES AND SERVICES

        

        

        1,722,510

        

        

        1,581,432GROSS PROFIT

        

        

        1,463,444

        

        

        1,277,637OPERATING EXPENSESSelling and administrative

        

        

        599,724

        

        

        618,255Research and development

        

        

        411,984

        

        

        343,753Total operating expenses

        

        

        1,011,708

        

        

        962,008INCOME FROM OPERATIONS

        

        

        451,736

        

        

        315,629OTHER INCOME (EXPENSE)Interest income

        

        

        2,272

        

        

        4,187Interest expense

        

        

        (25

        )

        

        (187

        )Miscellaneous

        

        

        

        

        

        951Total other income (expense)

        

        

        2,247

        

        

        4,951NET INCOME BEFOREPROVISION FOR INCOME TAXES

        

        

        453,983

        

        

        320,580PROVISION FOR INCOME TAXES

        

        

        165,071

        

        

        114,571NET INCOME

        

        $

        288,912

        

        $

        206,009INCOME PER SHAREBASIC

        

        $

        0.10

        

        $

        0.08DILUTED

        

        $

        0.10

        

        $

        0.07






4

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Table of Contents

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited



For the six months endedDecember 31,2008

        

        2007SALES AND SERVICES

        

        $

        6,354,128

        

        $

        5,609,848COST OF SALES AND SERVICES

        

        

        3,441,555

        

        

        3,077,175GROSS PROFIT

        

        

        2,912,573

        

        

        2,532,673OPERATING EXPENSESSelling and administrative

        

        

        1,182,384

        

        

        1,202,636Research and development

        

        

        778,141

        

        

        753,009Total operating expenses

        

        

        1,960,525

        

        

        1,955,645INCOME FROM OPERATIONS

        

        

        952,048

        

        

        577,028OTHER INCOME (EXPENSE)Interest income

        

        

        4,496

        

        

        8,465Interest expense

        

        

        (590

        )

        

        (285

        )Miscellaneous

        

        

        13,000

        

        

        1,888Total other income (expense)

        

        

        16,906

        

        

        10,068NET INCOME BEFOREPROVISION FOR INCOME TAXES

        

        

        968,954

        

        

        587,096PROVISION FOR INCOME TAXES

        

        

        351,888

        

        

        211,190NET INCOME

        

        $

        617,066

        

        $

        375,906INCOME PER SHAREBASIC

        

        $

        0.22

        

        $

        0.14DILUTED

        

        $

        0.22

        

        $

        0.13




5

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Table of Contents

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited



For the six months endedDecember 31,2008

        

        2007OPERATING ACTIVITIESNet income

        

        $

        617,066

        

        $

        375,906Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization

        

        

        174,560

        

        

        130,384Stock-based compensation

        

        

        494

        

        

        24,785Increase (decrease) in allowance for doubtful accounts

        

        

        (5,922

        )

        

        7,570Increase (decrease) in inventory valuation allowance

        

        

        22,230

        

        

        (3,924

        )Changes in deferred and accrued amountsTrade accounts receivable

        

        

        23,592

        

        

        (129,057

        )Prepaid expenses

        

        

        (4,069

        )

        

        4,670Inventories

        

        

        (758,479

        )

        

        (339,480

        )Trade accounts payable

        

        

        29,047

        

        

        (5,545

        )Accrued payroll and related liabilities

        

        

        (19,212

        )

        

        (32,581

        )Other accrued expenses

        

        

        (12,654

        )

        

        (8,111

        )Deferred service contract revenue

        

        

        (35,071

        )

        

        (35,515

        )Income taxes payable

        

        

        292,554

        

        

        19,105Net cash provided by operating activities

        

        

        324,136

        

        

        8,207INVESTING ACTIVITIESPurchases of property and equipment

        

        

        (186,800

        )

        

        (249,960

        )Net cash used for investing activities

        

        

        (186,800

        )

        

        (249,960

        )FINANCING ACTIVITIESNet change on line of credit

        

        

        (187,146

        )

        

        Net cash used for financing activities

        

        

        (187,146

        )

        

        Net change in cash and cash equivalents

        

        

        (49,810

        )

        

        (241,753

        )CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2008 and 2007

        

        

        945,121

        

        

        508,314CASH AND CASH EQUIVALENTS AS OF DECEMBER 31, 2008 and 2007

        

        $

        895,311

        

        $

        266,561CASH PAID FORInterest Expense

        

        $

        617

        

        $

        233Income Taxes

        

        $

        20,000

        

        $

        189,630




6

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Table of Contents

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

For the six months ended December 31, 2008 and 2007



Common Stock

        

        AdditionalPaid-InCapital

        

        RetainedEarnings

        

        TotalAmount

        

        SharesBalance, June 30, 2007

        

        $

        26,738

        

        2,673,827

        

        $

        2,043,175

        

        $

        1,862,587

        

        $

        3,932,500Stock-based compensation

        

        

        

        

        

        

        

        24,785

        

        

        

        

        

        24,785Net income

        

        

        

        

        

        

        

        

        

        

        375,906

        

        

        375,906Balance, December 31, 2007

        

        $

        26,738

        

        2,673,827

        

        $

        2,067,960

        

        $

        2,238,493

        

        $

        4,333,191Balance, June 30, 2008

        

        $

        27,638

        

        2,763,827

        

        $

        2,145,594

        

        $

        2,528,726

        

        $

        4,701,958Stock-based compensation

        

        

        

        

        

        

        

        494

        

        

        

        

        

        494Net income

        

        

        

        

        

        

        

        

        

        

        617,066

        

        

        617,066Balance, December 31, 2008

        

        $

        27,638

        

        2,763,827

        

        $

        2,146,088

        

        $

        3,145,792

        

        $

        5,319,518




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Table of Contents

BIOTEL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



NOTE 1  BASIS OF PRESENTATION



The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations.  The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-KSB for the fiscal year ended June 30, 2008, filed by Biotel Inc. (the Company) on September 29, 2008.



The information furnished reflects, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of its financial results for the interim periods presented.  Interim results are subject to year end adjustments and audit by independent certified public accountants.



NOTE 2  INVENTORIES



As of December 31, 2008 and June 30, 2008, inventories consist of the following:



December 31,2008

        

        June 30,2008Raw materials and supplies

        

        $

        2,078,426

        

        $

        1,374,588Finished goods

        

        

        293,983

        

        

        229,169Evaluation units and replacements

        

        

        2,233

        

        

        12,4062,374,642

        

        

        1,616,163Valuation allowance

        

        

        (210,230

        )

        

        (188,000

        )$

        2,164,412

        

        $

        1,428,163




NOTE 3  WARRANTY RESERVE



Biotel provides warranties against defects in materials and workmanship in our products.  Warranty periods for our products range from 90 days to two years.  The Companys warranties require it to repair or replace defective products during the warranty period at no cost to the customer.  The Company records a liability for estimated costs that may be incurred under its warranties based on recorded sales.  Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed our expectations.  The Company periodically assesses the adequacy of its recorded liability and adjusts the balance as necessary.  At  December 31, 2008 and June 30, 2008, the warranty reserve totaled $89,332 and $87,512, respectively.  At December 31, 2007 and June 30, 2007, the warranty reserve totaled $89,353 and $75,906, respectively.  Warranty
reserve is included in Other Accrued Expenses.  The following is a reconciliation of the aggregate warranty liability as of December 31, 2008 and 2007.



8

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December 31,2008

        

        December 31,2007Beginning of Period, June 30, 2008 and 2007

        

        $

        87,512

        

        $

        75,906Claims Paid

        

        

        (23,786

        )

        

        (52,672

        )Additional warranties issued and revisions in estimates of previously issued warranties

        

        

        25,606

        

        

        66,119End of Period, December 31, 2008 and 2007

        

        $

        89,332

        

        $

        89,353




NOTE 4  STOCK-BASED COMPENSATION



On July 1, 2006, the Company adopted the fair value recognition provision of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123(R),Accounting for Stock-Based Compensation, to account for compensation costs under its stock option plan.  The Company previously utilized the intrinsic value method under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees (as amended)(APB 25).  Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for the Companys stock options because the option exercise price in its plan equals the market price on the date of grant.  Prior to July 1, 2006, the Company only disclosed the pro forma effects on net income
and earnings per share as if the fair value recognition provisions of SFAS No. 123(R) had been utilized.



In adopting SFAS No. 123(R),
the Company elected to use the modified prospective method to account for the
transition from the intrinsic value method to the fair value recognition method.
Under the modified prospective method, compensation cost is recognized from the
adoption date forward for all new stock options granted and for any outstanding
unvested awards as if the fair value method had been applied to those awards as
of the date of grant.



Options to purchase shares of the Companys common stock are granted at a price not less than 100% of the fair market value of the common stock, as determined by the Board of Directors using the best available market data, on the date the options are granted.  As of December 31, 2008 and 2007, Biotel Inc. had 196,000 and 301,000 outstanding options, respectively.  Currently option prices range from $.375 to $2.01 per share with a weighted average remaining contract life of 1.48 years.  During the three months ended December 31, 2008 and 2007, no options were exercised.  During the six months ended December 31, 2008 and 2007, no options were exercised.  Option vesting and expiration is determined by the Board of Directors at the time the options are awarded.  No options may be awarded with an expiration greater than 10 years.



9

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Table of Contents

A summary of the activity under the Companys plan is as follows:



Outstanding

        

        ExercisableNumberof Shares

        

        WeightedAverageExercisePrice

        

        Numberof Shares

        

        WeightedAverageExercisePriceBalance at June 30, 2007

        

        301,000

        

        $

        1.2899

        

        254,500

        

        $

        1.2583Balance at December 31, 2007

        

        301,000

        

        $

        1.2899

        

        293,500

        

        $

        1.2773Balance at June 30, 2008

        

        211,000

        

        $

        1.5853

        

        203,500

        

        $

        1.5780Granted

        

        10,000

        

        $

        2.0100Expired

        

        (25,000

        )

        $

        1.8200Balance at December 31, 2008

        

        196,000

        

        $

        1.5770

        

        183,500

        

        $

        1.5490




The total intrinsic value of options exercised during the three and six months ended December 31, 2008 was $0.  The total intrinsic value of options outstanding and exercisable at December 31, 2008 was $92,700 and $91,925, respectively, which was calculated using the closing stock price as of December 31, 2008 less the exercise price of in-the-money options.



NOTE 5  EARNINGS PER SHARE OF COMMON STOCK



The weighted average number of shares used in the computation of basic and diluted income per common share for the three months ended December 31, 2008 were 2,763,827 and 2,827,060, respectively, and for the three months ended December 31, 2007 were 2,673,827 and 2,854,249, respectively.  The weighted average number of shares used in the computation of basic and diluted income per common share for the six months ended December 31, 2008 were 2,763,827 and 2,842,840, respectively, and for the six months ended December 31, 2007 were 2,673,827 and 2,858,582, respectively.



NOTE 6  OPERATIONS AND INDUSTRY SEGMENTS



The Company reports on two segments of business:  OEM Medical Sales & Service and Direct Medical Equipment Sales.  The industry segment information corresponds with the Companys different customer and product types and therefore complies with the requirements of SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information.



In calculating segment information, certain corporate operating expenses incurred for the benefit of all segments are included on an allocated basis.  The corporate profit amount includes non-allocable general corporate expenses, interest expense and other income.



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Table of Contents

Three months ended December 31, 2008OEM MedicalSales & Services

        

        Direct MedicalEquipment Sales

        

        Corporate

        

        TotalsDomestic revenues

        

        $

        2,585,468

        

        $

        146,268

        

        $

        

        

        $

        2,731,736International revenues

        

        

        403,443

        

        

        50,775

        

        

        

        

        

        454,218Revenues from external customers

        

        

        2,988,911

        

        

        197,043

        

        

        

        

        

        3,185,954Intersegment revenues

        

        

        17,821

        

        

        (17,821

        )

        

        

        

        

        Interest expense

        

        

        

        

        

        

        

        

        25

        

        

        25Income tax expense

        

        

        143,117

        

        

        18,741

        

        

        3,213

        

        

        165,071Depreciation and amortization

        

        

        81,141

        

        

        1,586

        

        

        5,787

        

        

        88,514Segment profit

        

        

        251,173

        

        

        31,501

        

        

        6,238

        

        

        288,912Goodwill

        

        

        695,551

        

        

        

        

        

        

        

        

        695,551Total segment assets

        

        

        5,708,138

        

        

        67,079

        

        

        1,244,969

        

        

        7,020,186Purchase of property and equipment

        

        

        76,999

        

        

        

        

        

        

        

        

        76,999Three months ended December 31, 2007OEM MedicalSales & Services

        

        Direct MedicalEquipment Sales

        

        Corporate

        

        TotalsDomestic revenues

        

        $

        2,252,775

        

        $

        176,562

        

        $

        

        

        $

        2,429,337International revenues

        

        

        352,706

        

        

        77,026

        

        

        

        

        

        429,732Revenues from external customers

        

        

        2,605,481

        

        

        253,588

        

        

        

        

        

        2,859,069Intersegment revenues

        

        

        54,013

        

        

        (54,013

        )

        

        

        

        

        Interest expense

        

        

        

        

        

        

        

        

        187

        

        

        187Income tax expense

        

        

        80,172

        

        

        21,769

        

        

        12,630

        

        

        114,571Depreciation and amortization

        

        

        59,359

        

        

        2,063

        

        

        5,372

        

        

        66,794Segment profit

        

        

        139,309

        

        

        42,182

        

        

        24,518

        

        

        206,009Goodwill

        

        

        695,551

        

        

        

        

        

        

        

        

        695,551Total segment assets

        

        

        4,992,062

        

        

        159,520

        

        

        580,219

        

        

        5,731,801Purchase of property and equipment

        

        

        160,753

        

        

        

        

        

        8,544

        

        

        169,297




11

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Table of Contents

Six months ended December 31, 2008OEM MedicalSales & Services

        

        Direct MedicalEquipment Sales

        

        Corporate

        

        TotalsDomestic revenues

        

        $

        5,227,048

        

        $

        311,477

        

        $

        

        

        $

        5,538,525International revenues

        

        

        769,933

        

        

        45,670

        

        

        

        

        

        815,603Revenues from external customers

        

        

        5,996,981

        

        

        357,147

        

        

        

        

        

        6,354,128Intersegment revenues

        

        

        45,555

        

        

        (45,555

        )

        

        

        

        

        Interest expense

        

        

        

        

        

        

        

        

        590

        

        

        590Income tax expense

        

        

        314,578

        

        

        35,502

        

        

        1,808

        

        

        351,888Depreciation and amortization

        

        

        159,570

        

        

        3,524

        

        

        11,466

        

        

        174,560Segment profit

        

        

        552,793

        

        

        60,762

        

        

        3,511

        

        

        617,066Goodwill

        

        

        695,551

        

        

        

        

        

        

        

        

        695,551Total segment assets

        

        

        5,708,138

        

        

        67,079

        

        

        1,244,969

        

        

        7,020,186Purchase of property and equipment

        

        

        181,667

        

        

        

        

        

        5,133

        

        

        186,800Six months ended December 31, 2007OEM MedicalSales & Services

        

        Direct MedicalEquipment Sales

        

        Corporate

        

        TotalsDomestic revenues

        

        $

        4,533,852

        

        $

        331,027

        

        $

        

        

        $

        4,864,879International revenues

        

        

        631,545

        

        

        113,424

        

        

        

        

        

        744,969Revenues from external customers

        

        

        5,165,397

        

        

        444,451

        

        

        

        

        

        5,609,848Intersegment revenues

        

        

        88,456

        

        

        (88,456

        )

        

        

        

        

        Interest expense

        

        

        

        

        

        

        

        

        285

        

        

        285Income tax expense

        

        

        142,583

        

        

        39,955

        

        

        28,652

        

        

        211,190Depreciation and amortization

        

        

        115,508

        

        

        4,127

        

        

        10,749

        

        

        130,384Segment profit

        

        

        242,844

        

        

        77,441

        

        

        55,621

        

        

        375,906Goodwill

        

        

        695,551

        

        

        

        

        

        

        

        

        695,551Total segment assets

        

        

        4,992,062

        

        

        159,520

        

        

        580,219

        

        

        5,731,801Purchase of property and equipment

        

        

        241,416

        

        

        

        

        

        8,544

        

        

        249,960




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Item 2:Managements Discussion
and Analysis of Financial Condition and Results of Operations



Cautionary Statement



Statements included or incorporated by reference in this Quarterly Report on Form 10-Q which are not historical in nature are identified as forward looking statements for the purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended.  Biotel cautions readers that forward looking statements, including, without limitation, those relating to our future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements.  The risks and uncertainties include, but are not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, new product development and market acceptance, the regulatory
and trade environment and other risks indicated in filings with the Securities and Exchange Commission.



Critical Accounting Policies



The consolidated financial statements of Biotel include the accounts of Biotel Inc. and its wholly-owned subsidiaries, Braemar, Inc. and Agility Centralized Research Services, Inc.  (collectively, Biotel), which are all located in the United States.  Significant intercompany accounts and transactions are eliminated in consolidation.



Management uses estimates and assumptions in preparing financial statements, including those assumed in computing the allowance for doubtful receivable accounts, inventory valuation allowances and warranty reserves and deferred income tax valuation allowances.  Those estimates and assumptions may affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and reported revenues and expenses.  Actual results may vary from these estimates.



At times Biotel maintains bank deposits in excess of federally insured limits.  Management monitors the soundness of these financial institutions and believes Biotels risk is negligible.



Biotel sells its products to customers on credit in the ordinary course of business.  A customers credit history is reviewed and must meet certain standards before credit is extended.  Biotel establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.



Biotel charges the costs of advertising, except for costs associated with direct response advertising, to operating expenses as incurred.  The costs of direct response advertising are capitalized and amortized over the period during which future benefits are expected to be received.



Inventories are valued at lower of cost (using the average and first-in first-out cost methods) or market.



Property, equipment and leasehold improvements are recorded at cost.  Depreciation is calculated using the straight-line method over estimated useful lives of three to five years for equipment, seven years for furniture and fixtures and two to five years for leasehold improvements, which represents the terms of the original leases.



Goodwill is accounted for in accordance with SFAS No. 142,Goodwill and Other Intangible Assets.  Goodwill is deemed to have an indefinite useful life and is not amortized but is subject to impairment tests performed at least annually.  During fiscal 2008 and 2007, Biotel performed the required impairment tests of goodwill and determined our recorded goodwill had not been impaired.



We routinely warrant our recorders against defects in material and workmanship for one year.  Supplies, accessories and repairs typically carry no warranty to 90-days warranty, depending on the item.  An accrual is provided for estimated future claims.  Such accruals are based on historical experience and managements estimate of the level of future claims.



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Revenues from product sales are recognized at date of shipment.



Amounts billed to customers for service contracts are recognized as income over the term of the agreements, and the associated costs are recognized as incurred.



Research and development costs are charged to operations as incurred.  These costs are for proprietary research and development activities that are expected to contribute to the Companys future profitability.



Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes.  Deferred taxes relate primarily to differences between financial and income tax reporting for the basis of inventory, accounts receivable, property and equipment, and accrued liabilities.  The deferred tax accounts represent future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled.  Deferred taxes may also be recognized for operating losses that are available to offset future taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.



Biotel considers all highly liquid short term investments purchased with an original maturity of three months or less to be cash equivalents.



Overview



Biotel has been implementing a strategy to expand its base of operations among medical companies who seek to outsource strategic items provided by various Biotel companies.  From its operating subsidiaries, Biotel supplies an array of products and services to provide for the research, development, testing, and manufacturing needs of its customers.



Biotel subsidiaries, Braemar, Inc. and Agility Centralized Research Services, Inc., sell medical devices, technology and research services to medical companies.  They design, manufacture, and test 24- and 48-hour Holter recorders, 30-day ECG event recorders, tissue extraction components and flow control devices; provide 24/7 clinical ECG research services and internet technologies; complete FDA, CE and other regulatory testing; and develop, test and manufacture other custom medical devices.  These subsidiaries form a base of products and services which we believe are attractive to medical device and pharmaceutical companies, allowing accelerated and improved research, development, testing and manufacturing operations for our customers.



Biotel subsidiary, Braemar, Inc., through its Columbia, South Carolina facility which was formerly Advanced Biosensor, sells maintenance services, Holter recorders and event recorders manufactured by Braemar, diagnostic Holter software provided by others and Holter supplies to hospitals and clinics.



These subsidiaries have experienced improvements in their business activity as a result of marketing efforts to acquire new customers and to expand relationships among current customers.



Results of Operations



Three Months ended December 31, 2008



Biotels net revenues for the three months ended December 31, 2008, were $3,186,000, 11.4% more than net revenues of $2,859,000 for the three months ended December 31, 2007.  This increase was the result of  continued strong sales of medical devices and research services during the second quarter of fiscal 2009.  Medical device sales included shipments of the Braemar DL900 advanced Holter monitor and Braemar ER920W wireless event recorder which were introduced in the second half of fiscal 2008.  Sales of the Braemar ER920W wireless arrhythmia monitor continued to be strong in the second quarter as a major customer continued to order significant quantities of stocking units for inventory and product launch.  We expect sales to this customer to continue into the third quarter but to slow significantly in the second half of the year.



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Gross profit was $1,463,000 for the quarter ended December 31, 2008, 14.5% greater than the gross profit of $1,278,000 for the second quarter of fiscal year 2008.  Gross profit increased as a result of the increase in revenue for the second quarter of fiscal 2009.  Gross profit margin improved to 45.9% for the three months ended December 31, 2008 compared to 44.7% for the three months ended December 31, 2007.  Cost of sales and service increased to $1,723,000 (54.1% of sales) for the three months ended December 31, 2008, compared to $1,581,000 (55.3% of sales) for the second quarter of fiscal year 2008.  The increase in cost of sales and service was a result of the increase in sales for the second quarter of fiscal 2009.  Cost of sales and service as a percentage of revenue decreased, primarily due to product mix.



Selling, general and administrative expenses of $600,000 (18.8% of sales) for the three months ended December 31, 2008 decreased from $618,000 (21.6% of sales) for the three months ended December 31, 2007.  Selling, general and administrative expenses were lower in the second quarter of fiscal 2009 as a result of the decrease in legal expenses.  The decrease in selling, general and administrative expenses as a percentage of revenue was primarily due to the increase in revenue in the second quarter of fiscal 2009 versus the second quarter of fiscal 2008.  Selling expenses include salaries, commissions, benefits, travel expenses and other selling expenses.



Research and development expenditures for the second quarter of fiscal year 2009 were $412,000, an increase of 19.9% compared to $344,000 in the second quarter of fiscal year 2008.  Research and development expenses in the second quarter of fiscal year 2009 included expenditures for development of products to be released in the second half of fiscal year 2009.  Biotel expects research and development investment in fiscal 2009 to be comparable to prior year levels as the Company addresses developing markets in Holter, event recording and wireless arrhythmia management.



Interest expense decreased to $25 for the three-month period ended December 31, 2008, compared to interest expense of $187 for the three months ended December 31, 2007.



Net earnings of $289,000 were posted for the second quarter of fiscal year 2009, versus net earnings of $206,000 in the second quarter of fiscal year 2008.  The increase in net earnings was primarily the result of the increase in sales during the second quarter of fiscal year 2009.



Six Months ended December 31, 2008



Biotels net revenues for the six months ended December 31, 2008, were $6,354,000, 13.3% more than net revenues of $5,610,000 for the six months ended December 31, 2007.  This increase was the result of strong sales of medical devices and research services during the first half of fiscal 2009.  Medical device sales included shipments of the Braemar DL900 advanced Holter monitor and Braemar ER920W wireless event recorder which were introduced in the second half of fiscal 2008.  Sales of the Braemar ER920W wireless arrhythmia monitor were strong in the first half of fiscal year 2009 as a major customer ordered significant quantities of stocking units for inventory and product launch.  We expect sales to this customer to continue into the third quarter but to slow significantly in the second half of the year.



Gross profit was $2,913,000 for the six months ended December 31, 2008, 15.1% greater than the gross profit of $2,533,000 for the first half of fiscal year 2008.  Gross profit increased as a result of the increase in revenue for the first half of fiscal 2009.  Gross profit margin improved to 45.8% for the six months ended December 31, 2008 compared to 45.2% for the six months ended December 31, 2007.  Improvement in gross profit margin was primarily the result of increased sales volume and control of fixed costs.  Cost of sales and service increased to $3,442,000 (54.2% of sales) for the six months ended December 31, 2008, compared to $3,077,000 (54.8% of sales) for the first half of fiscal year 2008.  The increase in cost of sales and service was a result of the increase in sales for the first half of fiscal 2009.



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Selling, general and administrative expenses of $1,182,000 (18.6% of sales) for the six months ended December 31, 2008 decreased from $1,203,000 (21.4% of sales) for the six months ended December 31, 2007. Selling, general and administrative expenses were lower in the first half of fiscal 2009 as a result of the decrease in legal expenses.  The decrease in selling, general and administrative expenses as a percentage of revenue was primarily due to the increase in revenue in the second quarter of fiscal 2009 versus the second quarter of fiscal 2008.  Selling expenses include salaries, commissions, benefits, travel expenses and other selling expenses.



Research and development expenditures for the first half of fiscal year 2009 were $778,000, an increase of 3.3% compared to $753,000 in the first half of fiscal year 2008.  Biotel expects research and development investment in fiscal 2009 to be comparable to prior year levels as the Company addresses developing markets in Holter, event recording and wireless arrhythmia management.



Interest expense increased to $590 for the six-month period ended December 31, 2008, compared to interest expense of $285 for the six months ended December 31, 2007.



Net earnings of $617,000 were posted for the first half of fiscal year 2009, versus net earnings of $376,000 in the first half of fiscal year 2008.  The increase in net earnings was primarily the result of the increase in sales during the first half of fiscal year 2009.



Off-Balance Sheet Arrangements



Biotel does not have any off-balance sheet financing arrangements.



Liquidity and Capital Resources



Working capital increased to $3,730,000 at December 31, 2008, compared to $3,125,000 at June 30, 2008.  The increase in working capital is largely the result of the Companys continued profitability.



Cash and cash equivalents were $895,000 at December 31, 2008, compared to $945,000 at June 30, 2008.  The decrease in cash was primarily the result of payment of the revolving line of credit, as well as increases in inventory in the first half of fiscal 2009.  The ratio of current assets to current liabilities (current ratio) was 3.53 to one at December 31, 2008 and 3.22 to one at June 30, 2008.



Accounts receivable decreased to $1,749,000 at December 31, 2008, versus $1,767,000 at June 30, 2008, as a result of strong collections in the month of December, 2008.  To the extent that credit terms are extended to customers, Biotels cash position is diminished and debt may be required to supplement cash flows.  Accordingly, Biotel attempts to make timely collections from its customers in accordance with credit terms, extend credit only to credit worthy customers with a strong payment history, and to keep credit terms as short as is practicable.



During the second quarter of fiscal year 2009, $77,000 was used for capital expenditures, compared with $169,000 in the second quarter of fiscal year 2008.  Biotel primarily invests in molds, tooling and fixtures for custom components used in its product lines.  Levels of capital investment are expected to vary from year to year.



Inventory increased to $2,164,000 as of December 31, 2008 versus $1,428,000 as of June 30, 2008.  This increase is due to purchase of materials for January sales and new products to be released within the next several months.  Biotels subsidiaries manage inventories to provide safety stock and product flow for customers while controlling the amount of inventory.



Current liabilities increased to $1,476,000 at December 31, 2008, compared to $1,408,000 on June 30, 2008.  The increase is primarily due to the increase in accrued income taxes.



Biotel has long term liabilities consisting of deferred taxes payable totaling $225,000.  Biotel has no long term debt.



As of December 31, 2008, stockholders equity had increased to $5,320,000 from $4,702,000 at June 30, 2008.  The increase in stockholders equity was a result of the Companys continued profitability.



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Management believes that present cash balances, internally generated funds and its credit line should provide sufficient working capital to meet present and projected needs for the coming 12 months.  There is no assurance that Biotel will be successful in obtaining additional working capital if more is required.



Item 3:Qualitative and Quantitative Disclosure about Market Risk



Not applicable.



Item 4:Controls and Procedures



(a)          As of December 31, 2008, an evaluation was performed by Biotels Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934).  Based upon, and as  of the date of, that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the registrants disclosure controls and procedures were effective.



(b)Changes in internal controls.  There were no changes in the first half of fiscal 2009 in Biotels internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation.  There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.



Part II



Item 1.Legal Proceedings.Not applicable.




Item 1A.Risk Factors.Not applicable.




Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.Not applicable.




Item 3.Defaults Upon Senior Securities.Not applicable.




Item 4.Submission of Matters to a Vote of Security Holders.Not applicable.




Item 5.Other Information.On February 12, 2009, Biotel issued a news release containing its financial results for the period ending December 31, 2008.  The news release is attached as Exhibit 99.1.



Item 6.Exhibits



Listing of Exhibits:

31.1

        Certification of Chief Executive Officer.


31.2

        Certification of Chief Financial Officer.


32.1

        Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


99.1

        Biotel Inc. news release dated February 12, 2009, containing the Companys financial results for the period ending December 31, 2008.




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Signatures



In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Biotel Inc.Date:  February 12, 2009

        By:

        /s/ B. Steven SpringroseIts:  Chief Executive Officer and PresidentDate:  February 12, 2009

        By:

        /s/ Judy E. NausIts:  Chief Financial Officer




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