Table of Contents   UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C.  20549   FORM 10-Q   xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the period ended December 31, 2009  oTRANSITION 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   BIOTEL INC. (Exact name of registrant as specified in its charter)  Minnesota
     41-1427114(State or other jurisdiction of
incorporation or organization)
     (I.R.S. Employer
Identification 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. YesxNoo  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 12b2 of the Exchange Act). YesoNox  The number of shares of registrants common stock, par value $0.01 per share, outstanding as of as of February 1, 2010, was 2,783,827.


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BIOTEL INC. INDEX   PART I
     
     
     Page NumberItem 1:
     Financial Information
     3Consolidated Balance Sheets  December 31, 2009 and June 30, 2009
     3Consolidated Statements of Income  Three Months ended December 31, 2009 and 2008
     4Consolidated Statements of Income  Six Months ended December 31, 2009 and 2008
     5Consolidated Statements of Cash Flows  Six months ended December 31, 2009 and 2008
     6Consolidated Statements of Stockholders Equity  Six Months ended December 31, 2009 and 2008
     7Notes to Consolidated Financial Statements (Unaudited)
     8Item 2:
     Managements Discussion and Analysis of Financial Condition and Results of Operations
     15Item 3:
     Qualitative and Quantitative Disclosure about Market Risk
     19Item 4:
     Controls and Procedures
     19PART IIItem 1 and 1A:
     Not applicable
     19Item 2:
     Unregistered Sales of Equity Securities and Use of Proceeds
     19Item 3 and 4:
     Not applicable
     20Item 5:
     Other information
     20Item 6:
     Exhibits
     20Signatures
     
     21
    i


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Table of Contents Part I Item 1:  Financial Information BIOTEL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS  December 31,2009
Unaudited
     
     June 30,2009
*ASSETSCURRENT ASSETSCash and cash equivalents
     
     $
     1,695,583
     
     $
     1,160,409Trade accounts receivable, net of allowancefor doubtful accounts of $49,280 and $48,965 at December 31, 2009 and June 30, 2009, respectively
     
     
     1,439,424
     
     
     2,202,378Inventories, net
     
     
     1,702,764
     
     
     1,878,397Deferred tax asset
     
     
     250,674
     
     
     250,674Refundable Income Taxes
     
     
     154,736
     
     
     Prepaid expenses
     
     
     339,449
     
     
     120,098Total Current Assets
     
     
     5,582,630
     
     
     5,611,956PROPERTY & EQUIPMENT, Net
     
     
     1,014,903
     
     
     1,081,314OTHER ASSETSGoodwill
     
     
     695,551
     
     
     695,551Other assets
     
     
     13,820
     
     
     13,820Total Other Assets
     
     
     709,371
     
     
     709,371$
     7,306,904
     
     $
     7,402,641LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESTrade accounts payable
     
     
     648,285
     
     
     557,094Accrued payroll and related liabilities
     
     
     266,688
     
     
     277,803Deferred service contract revenue
     
     
     80,907
     
     
     93,855Other accrued expenses
     
     
     232,932
     
     
     283,502Income taxes payable
     
     
     
     
     
     202,265Total Current Liabilities
     
     
     1,228,812
     
     
     1,414,519LONG-TERM LIABILITIESDeferred taxes payable
     
     
     329,183
     
     
     329,183COMMITMENTS AND CONTINGENCIES (See Note 9)Total Liabilities
     
     
     1,557,995
     
     
     1,743,702STOCKHOLDERS EQUITYPreferred stock, $.01 stated value; 2,000,000 shares authorized; no shares issued
     
     
     
     
     
     Common stock, $.01 stated value; 10,000,000 sharesauthorized; 2,783,827 and 2,763,827 shares issued at December 31, 2009 and 2008, respectively
     
     
     27,838
     
     
     27,638Additional paid-in capital
     
     
     2,166,976
     
     
     2,158,638Retained earnings
     
     
     3,554,095
     
     
     3,472,663Total Stockholders Equity
     
     
     5,748,909
     
     
     5,658,939$
     7,306,904
     
     $
     $ 7,402,641
  *Derived from the 10K for the year ended June 30, 2009.  See notes to consolidated financial statements which are an integral part of these statements.  3


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Table of Contents BIOTEL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Unaudited  For the three months ended
December 31,2009
     
     2008SALES AND SERVICES
     
     $
     2,451,993
     
     $
     3,185,954COST OF SALES AND SERVICES
     
     
     1,418,870
     
     
     1,722,510GROSS PROFIT
     
     
     1,033,123
     
     
     1,463,444OPERATING EXPENSESSelling and administrative
     
     
     850,047
     
     
     599,724Research and development
     
     
     371,985
     
     
     411,984Total operating expenses
     
     
     1,222,032
     
     
     1,011,708INCOME (LOSS) FROM OPERATIONS
     
     
     (188,909
     )
     
     451,736OTHER INCOME (EXPENSE)Interest income
     
     
     1,427
     
     
     2,272Interest expense
     
     
     
     
     
     (25
     )Miscellaneous
     
     
     437
     
     
     Total other income
     
     
     1,864
     
     
     2,247NET INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES
     
     
     (187,045
     )
     
     453,983PROVISION (CREDIT) FOR INCOME TAXES
     
     
     (140,322
     )
     
     165,071NET INCOME (LOSS)
     
     $
     (46,723
     )
     $
     288,912INCOME (LOSS) PER SHAREBASIC
     
     $
     (0.02
     )
     $
     0.10DILUTED
     
     $
     (0.02
     )
     $
     0.10
   See notes to consolidated financial statements which are an integral part of these statements.  4


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Table of Contents BIOTEL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Unaudited   For the six months ended
December 31,2009
     
     2008SALES AND SERVICES
     
     $
     5,715,300
     
     $
     6,354,128COST OF SALES AND SERVICES
     
     
     3,385,640
     
     
     3,441,555GROSS PROFIT
     
     
     2,329,660
     
     
     2,912,573OPERATING EXPENSESSelling and administrative
     
     
     1,516,412
     
     
     1,182,384Research and development
     
     
     778,854
     
     
     778,141Total operating expenses
     
     
     2,295,266
     
     
     1,960,525INCOME FROM OPERATIONS
     
     
     34,394
     
     
     952,048OTHER INCOME (EXPENSE)Interest income
     
     
     2,851
     
     
     4,496Interest expense
     
     
     
     
     
     (590
     )Miscellaneous
     
     
     (13,813
     )
     
     13,000Total other income (expense)
     
     
     (10,962
     )
     
     16,906NET INCOME BEFOREPROVISION (CREDIT) FOR INCOME TAXES
     
     
     23,432
     
     
     968,954PROVISION (CREDIT) FOR INCOME TAXES
     
     
     (58,000
     )
     
     351,888NET INCOME
     
     $
     81,432
     
     $
     617,066INCOME PER SHAREBASIC
     
     $
     0.03
     
     $
     0.22DILUTED
     
     $
     0.03
     
     $
     0.22
   See notes to consolidated financial statements which are an integral part of these statements.  5


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Table of Contents BIOTEL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited  For the six months ended
December 31,2009
     
     2008OPERATING ACTIVITIESNet income
     
     $
     324
     
     $
     617,066Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
     
     
     191,094
     
     
     174,560Stock-based compensation
     
     
     1,038
     
     
     494Decrease (increase) in allowance for doubtful accounts
     
     
     315
     
     
     (5,922
     )Decrease in inventory valuation allowance
     
     
     22,743
     
     
     22,230Gain on disposal of property and equipment
     
     
     (1,187
     )
     
     Changes in deferred and accrued amountsTrade accounts receivable
     
     
     762,639
     
     
     23,592Prepaid expenses
     
     
     (219,351
     )
     
     (4,069
     )Inventories
     
     
     152,890
     
     
     (758,479
     )Trade accounts payable
     
     
     91,191
     
     
     29,047Accrued payroll and related liabilities
     
     
     (11,115
     )
     
     (19,212
     )Other accrued expenses
     
     
     (50,570
     )
     
     (12,654
     )Deferred service contract revenue
     
     
     (12,948
     )
     
     (35,071
     )Income taxes payable
     
     
     (275,893
     )
     
     292,554Net cash provided by operating activities
     
     
     651,170
     
     
     324,136INVESTING ACTIVITIESPurchases of property and equipment
     
     
     (127,996
     )
     
     (186,800
     )Proceeds from sale of property and equipment
     
     
     4,500
     
     
     Net cash used for investing activities
     
     
     (123,496
     )
     
     (186,800
     )FINANCING ACTIVITIESNet change on line of credit
     
     
     
     
     
     (187,146
     )Exercise of stock options
     
     
     7,500
     
     
     Net cash used for financing activities
     
     
     7,500
     
     
     (187,146
     )Net increase (decrease) in cash and cash equivalents
     
     
     535,174
     
     
     (49,810
     )CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2009 and 2008
     
     
     1,160,409
     
     
     945,121CASH AND CASH EQUIVALENTS AS OF DECEMBER 31, 2009 and 2008
     
     $
     1,695,583
     
     $
     895,311CASH PAID FORInterest
     
     $
     
     
     $
     617Income Taxes
     
     $
     279,500
     
     $
     20,000
   See notes to consolidated financial statements which are an integral part of these statements.  6


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Table of Contents BIOTEL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY For the six months ended December 31, 2009 and 2008 Unaudited  Common Stock
     
     Additional
Paid-In
Capital
     
     Retained
Earnings
     
     TotalAmount
     
     SharesBalance, 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
     
     $
     5,319,518Balance, June 30, 2009
     
     $
     27,638
     
     
     2,763,827
     
     $
     2,158,638
     
     $
     3,472,663
     
     $
     5,658,939Stock-based compensation
     
     
     
     
     
     
     
     
     1,038
     
     
     
     
     
     1,038Exercise of stock options
     
     
     200
     
     
     20,000
     
     
     7,300
     
     
     
     
     
     7,500Net income
     
     
     
     
     
     
     
     
     
     
     
     81,432
     
     
     81,432Balance, December 31, 2009
     
     $
     27,838
     
     
     2,783,827
     
     $
     2,166,976
     
     $
     3,554,095
     
     $
     5,748,909
     See notes to consolidated financial statements which are an integral part of these statements.  7


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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-K for the fiscal year ended June 30, 2009, filed by Biotel Inc. (the Company) on September 28, 2009.  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.  Recently Issued Accounting Standards  In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, TheFASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162, (SFAS 168).  SFAS 168 establishes theFASB Accounting Standards CodificationTM(Codification) as the source of authoritative generally accepted accounting principles (GAAP) for nongovernmental entities.  The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure.  Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content.Citing particular content in theCodification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with FASB ASC, where ASC stands forAccounting Standards Codification.Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (ASU).In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, Topic 105Generally Accepted Accounting Principles (ASU 2009-1) which includes SFAS 168 in its entirety as a transition to the ASC.  ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009. These changeswill not have an impact on the Companys financial position or results of operations but will change the referencing system for accounting standards.  NOTE 2  INVENTORIES  As of December 31, 2009 and June 30, 2009, inventories consist of the following:  December 31,
2009
     
     June 30,
2009Raw materials and supplies
     $
     1,722,210
     
     $
     1,782,903Work in process
     
     1,120
     
     
     Finished goods
     
     139,657
     
     
     235,534Evaluation units and replacements
     
     7,067
     
     
     4,5071,870,054
     
     
     2,022,944Valuation allowance
     
     (167,290
     )
     
     (144,547
     )$
     1,702,764
     
     $
     1,878,397
  8


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Table of Contents  The Company has on order a significant inventory of raw materials with long lead times that may be in excess of the amount needed due to the reduced level of sales of its wireless products as a result of the terminated merger agreement with CardioNet, Inc. (see Note 8).  In the event the Company continues to experience a reduced level of sales for its wireless products, the book value of a portion of this inventory, which could be significant, may need to be reduced due to obsolescence.  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, 2009 and June 30, 2009, the warranty reserve totaled $166,918 and $186,424, respectively.  Warranty reserve is included in Other Accrued Expenses.  The following is a reconciliation of the aggregate reserve for warranty liability as of December 31, 2009 and 2008.  December 31,
2009
     
     December 31,
2008Beginning of Period, June 30, 2009 and 2008
     $
     186,424
     
     $
     87,512Claims Paid
     
     (54,208
     )
     
     (23,786
     )Additional warranties issued and revisions in estimates of previously issued warranties
     
     34,702
     
     
     25,606End of Period, September 30, 2009 and 2008
     $
     166,918
     
     $
     89,332
  NOTE 4  STOCK-BASED COMPENSATION  The Company accounts for compensation cost under its stock option plan in accordance with the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC).  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, 2009 and 2008, Biotel Inc. had 191,000 and 196,000 outstanding options, respectively.  Currently, option prices range from $.625 to $2.05 per share with a weighted average remaining contract life of 3.70 years.  During the three months ended December 31, 2009, 20,000 options were exercised; and during the three months ended December 31, 2008, no options were exercised.  During the six months ended December 31, 2009, 20,000 options were exercised; and during the six months ended December 31, 2008, 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 optionplan is as follows:  Outstanding
     
     ExercisableNumber
of Shares
     
     Weighted
Average
Exercise
Price
     
     Number
of Shares
     
     Weighted
Average
Exercise
PriceBalance 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
     
     $
     1.5490Balance at June 30, 2009
     
     211,000
     
     $
     1.6391
     
     
     198,500
     
     $
     1.6171Exercised
     
     (20,000
     )
     $
     0.3750Balance at December 31, 2009
     
     191,000
     
     $
     1.7715
     
     
     183,500
     
     $
     1.7617
  The total intrinsic value of options exercised during the six months ended December 31, 2009 was $16,500.  The total intrinsic value of options outstanding and exercisable at December 31, 2009 was $20,700 and $20,700, respectively, which was calculated using the closing stock price as of December 31, 2009 less the exercise price of in-the-money options.  NOTE 5  INCOME TAXES  The components of the provision (credit)for income taxes are as follows for the three months ended December 31, 2009 and 2008:   2009
     
     2008Current provision (credit) for taxes
     
     $
     (75,322
     )
     $
     165,071Research and development tax credits
     
     
     (65,000
     )
     
     Total provision (credit)
     
     $
     (140,322
     )
     $
     165,071
   A reconciliation of income tax provision (credit) at the statutory rate to the Companys effective rate is as follows:  2009
     
     2008Computed at the federal statutory rate
     
     
     -34.0%
     
     
     34.0%State income taxes
     
     
     -3.3%
     
     
     3.3%Research and development tax credits
     
     
     -34.8%
     
     
     Other
     
     
     -2.9%
     
     
     -0.9%-75.0%
     
     
     36.4%
   10


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Table of Contents  The components of the provision (credit)for income taxes are as follows for the six months ended December 31, 2009 and 2008:  2009
     
     2008Current provision for taxes
     
     $
     7,000
     
     $
     351,888Research and development tax credits
     
     
     (65,000
     )
     
     Total provision (credit)
     
     $
     (58,000
     )
     $
     351,888
   A reconciliation of income tax provision (credit)at the statutory rate to the Companys effective rate is as follows:  2009
     
     2008Computed at the federal statutory rate
     
     
     34.0%
     
     
     34.0%State income taxes
     
     
     3.3%
     
     
     3.3%Research and development tax credits
     
     
     -277.4%
     
     
     Other
     
     
     -7.4%
     
     
     -1.0%-247.5%
     
     
     36.3%
  NOTE 6   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, 2009 were 2,767,523 and 2,812,335, respectively, and for the three months ended December 31, 2008 were 2,763,827 and 2,827,060, 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, 2009 were 2,765,675 and 2,838,109, respectively, and for the six months ended December 31, 2008 were 2,763,827 and 2,842,840, respectively.   NOTE 7  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 FASB ASC 280-10.  11


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Table of Contents  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.  Three months ended December 31, 2009OEM Medical 
Sales & Services
     
     Direct Medical
Equipment Sales
     
     Corporate
     
     TotalsDomestic revenues
     
     $
     2,059,323
     
     $
     113,157
     
     $
     
     
     $
     2,172,480International revenues
     
     
     243,977
     
     
     35,536
     
     
     
     
     
     279,513Revenues from external customers
     
     
     2,303,300
     
     
     148,693
     
     
     
     
     
     2,451,993Income tax expense
     
     
     (45,166
     )
     
     7,455
     
     
     (102,611
     )
     
     (140,322
     )Depreciation and amortization
     
     
     92,262
     
     
     
     
     
     4,921
     
     
     97,183Segment profit (loss)
     
     
     (99,043
     )
     
     12,555
     
     
     39,765
     
     
     (46,723
     )Goodwill
     
     
     695,551
     
     
     
     
     
     
     
     
     695,551Total segment assets
     
     
     4,887,399
     
     
     62,847
     
     
     2,356,658
     
     
     7,306,904Purchase of property and equipment
     
     
     67,960
     
     
     
     
     
     
     
     
     67,960Three months ended December 31, 2008OEM Medical 
Sales & Services
     
     Direct Medical
Equipment 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
     
     
     
     
     
     
     
     
     76,999
    12


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Table of Contents  Six months ended December 31, 2009OEM Medical 
Sales & Services
     
     Direct Medical
Equipment Sales
     
     Corporate
     
     TotalsDomestic revenues
     
     $
     5,010,499
     
     $
     220,402
     
     $
     
     
     $
     5,230,901International revenues
     
     
     421,914
     
     
     62,485
     
     
     
     
     
     484,399Revenues from external customers
     
     
     5,432,413
     
     
     282,887
     
     
     
     
     
     5,715,300Intersegment revenues
     
     
     
     
     
     
     
     
     
     
     
     Interest expense
     
     
     
     
     
     
     
     
     
     
     
     Income tax expense
     
     
     71,450
     
     
     15,416
     
     
     (144,866
     )
     
     (58,000
     )Depreciation and amortization
     
     
     181,252
     
     
     
     
     
     9,842
     
     
     191,094Segment profit (loss)
     
     
     97,757
     
     
     25,936
     
     
     (42,261
     )
     
     81,432Goodwill
     
     
     695,551
     
     
     
     
     
     
     
     
     695,551Total segment assets
     
     
     4,887,399
     
     
     62,847
     
     
     2,356,658
     
     
     7,306,904Purchase of property and equipment
     
     
     127,146
     
     
     
     
     
     850
     
     
     127,996Six months ended December 31, 2008OEM Medical 
Sales & Services
     
     Direct Medical
Equipment 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
     
     
     186,800
  NOTE 8  LEGAL PROCEEDINGS  On April 2, 2009, Biotel Inc. entered into a Merger Agreement with CardioNet, Inc., pursuant to which CardioNet, Inc. was to acquire Biotel Inc.s outstanding securities for $4.82 per share.  In a letter dated July 14, 2009, CardioNet, Inc., advised Biotel Inc. that it was terminating the Merger Agreement due to Biotel Inc.s breach of a covenant to withdraw and terminate a business relationship with another company.  On July 15, 2009, CardioNet, Inc. notified Biotel Inc. that Biotel Inc. owed CardioNet, Inc. $1.4 million for a termination fee and expenses as a result of CardioNets termination of the Merger Agreement.  Biotel Inc. believes CardioNet, Inc.s termination of the Merger Agreement was without merit.  On July 16, 2009, Biotel Inc. commenced a lawsuit in Hennepin County District Court, State of Minnesota, claiming CardioNet, Inc. breached and improperly terminated the Merger Agreement.  Biotel Inc. is seeking specific performance and damages.  On August 3, 2009, the case was removed to the United States District Court, District of Minnesota.  On September 4, 2009, CardioNet, Inc. submitted an answer and counterclaim denying Biotel Inc.s claims and asserting a counterclaim for the $1.4 million CardioNet, Inc. claims it is owed as a result of its termination of the Merger Agreement.  In accordance with FASB ASC 450-20-25, no accrual has been recorded in the financial statements as the Company is not able to determine the result of the litigation. Legal expense associated with this lawsuit is expensed as incurred.  13


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Table of Contents  On September 29, 2009, Braemar, Inc., a Biotel subsidiary, was served in connection with a lawsuit brought by LifeWatch Services, Inc. and Card Guard Scientific Survival, Ltd., against Braemar in the United States District Court for the Northern District of Illinois naming Braemar, a customer of Braemar and an unrelated company as defendants, claiming that Braemars ER920W Wireless Cardiac Event Monitor product and a similar product Braemar sold to the customer named in the action infringe two of LifeWatchs patents.  The action seeks an injunction against Braemar and its customer and damages for the alleged infringement, including treble damages for willful infringement of one of the patents.  Braemar has agreed to indemnify its customer for any losses the customer may incur based on the alleged infringement.  Braemar does not believe its products infringe either of the patents and intends to vigorously defend the litigation on behalf of itself and its customer.  At this time, it is not possible to determine the likelihood or amount of liability, if any, on the part of Braemar or its customer.  In accordance with FASB ASC 450-20-25, no accrual has been recorded in the financial statements as Biotel is not able to determine the result of the litigation. Legal expense associated with this lawsuit is expensed as incurred.   NOTE 9  COMMITMENTS AND CONTINGENCIES  Carolina Medical, Inc., a subsidiary of the Company that was dissolved in November, 2006, was the subject of environmental oversight by the North Carolina Division of Environmental and Natural Resources (DENR) in Surry County, North Carolina, involving alleged ground water contamination coming from property that had been previously owned/or leased by Carolina Medical, Inc.  In June, 2006, Carolina Medical entered into a Termination of Lease, Release, Hold Harmless and Indemnification Agreement with the landlord, King Investment Partners, related to any environmental matters or potential environmental matters at the King Investment Partners property located in King, North Carolina.  In the Agreement, King Investment Partners acknowledged full and complete satisfaction of any and all past, present or future claims and causes of action, including any environmental claims related to the property, and agreed to indemnify the Company for any environmental claims related to the property.  In order to protect the Company from any claim with respect to the property that may exceed the landlords ability to indemnify the Company, Biotel has obtained insurance to cover any liability for environmental claims that the Company may have relating to the property up to a maximum of $10 million during the ten-year period ending in 2019.  The annual cost of the insurance is $16,000.  Biotel Inc. maintains product liability insurance covering its subsidiaries.  There are no known product liability claims, and management presently believes that there is no material risk of loss from product liability claims.  NOTE 10  SUBSEQUENT EVENTS  These financial statements have not been updated for subsequent events occurring after February 12, 2010, which is the date these financial statements were available to be issued.    14


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Table of Contents  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. The Company has on order a significant inventory of raw materials with long lead times that may be in excess of the amount needed due to the reduced level of sales of its wireless products as a result of the terminated merger agreement with CardioNet, Inc. (see Overview below and Part I. Item 1.  Note 8 of Notes to Consolidated Financial Statements).  In the event the Company continues to experience a reduced level of sales for its wireless products, the book value of a portion of this inventory, which could be significant, may need to be reduced due to obsolescence.  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 2009 and 2008, Biotel performed the required impairment tests of goodwill and determined the recorded goodwill had not been impaired.  15


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Table of Contents  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.  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.  Following the announcement of Biotels planned merger with CardioNet, Inc. (see Part I. Item 1. Note 8 of Notes to Consolidated Financial Statements), many of our customers made other plans for the purchase of wireless products they had intended to purchase from us.  We expect that many of these customers will not purchase their future requirements for wireless products from us notwithstanding the termination of the merger agreement.  We will market Fusion and ER920W devices to regional scanning services.  While Biotel is hopeful for a strong market for its Fusion MCT and ER920W wireless devices, the prospective regional customers presently have a minimal market share in this business sector.  Regional scanning services do not have the purchasing power of national scanning services, but they maintain strong relationships with their end users.  Because of the patchwork of reimbursement pricing among Medicare local carriers, some regional customers may prefer ER920W wireless event recorders while others prefer Fusion products.  Following a strong fiscal year 2009 selling ER920W devices to a major customer, Biotel is expecting diminished wireless sales activity in the current fiscal year.  Furthermore, Medicare has recently announced that event recorder reimbursement will diminish 7% and Holter reimbursement will diminish 16% in 2010.  This may place downward pressure on pricing and sales of our traditional non-wireless product lines.  Agilitys business has diminished due to fewer contracted atrial fibrillation clinical trials, the principal source of Agilitys revenues.  Agility is incurring operating losses but has won new arrhythmia clinical research business projected to begin in June, 2010.  16


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Table of Contents  Results of Operations  Three Months ended December 31, 2009  Biotels net revenues for the three months ended December 31, 2009, were $2,452,000, 23.0% less than net revenues of $3,186,000 for the three months ended December 31, 2008.  This decrease was primarily the result of significantly diminished sales of Braemars ER920W wireless event recorder following announcement of Biotels planned merger with CardioNet, Inc. and the subsequent termination of that agreement by CardioNet.  (See Part I, Item 1. Note 8 of Notes to Consolidated Financial Statements.)  Gross profit was $1,033,000 for the quarter ended December 31, 2009,  29.4% less than the gross profit of $1,463,000 for the second quarter of fiscal year 2009.  Gross profit decreased as a result of the decrease in revenue.  Gross profit margin declined to 42.1% for the three months ended December 31, 2009 compared to 45.9% for the three months ended December 31, 2008, as a result of the change in product mix due to the decline in sales of Braemars ER9W wireless event recorder.  Cost of sales and service decreased to $1,419,000 (57.9% of sales) for the three months ended December 31, 2009, compared to $1,723,000 (54.1% of sales) for the second quarter of fiscal year 2009.  The decrease in cost of sales and service was a result of the lower sales volume and product mix in the second quarter of fiscal 2010.  Cost of sales and service as a percentage of revenue increased, primarily due to lower sales volume.  Selling, general and administrative expenses of $850,000 (34.7% of sales) for the three months ended December 31, 2009 increased from $600,000 (18.8% of sales) for the three months ended December 31, 2008.  Selling, general and administrative expenses were higher in the second quarter of fiscal 2010 primarily because of legal expense incurred as a result of activities surrounding the merger agreement between Biotel and CardioNet, Inc. signed on April 2, 2009, and subsequently terminated by CardioNet.  We expect the higher level of legal expenses to continue for the next several quarters.  In view of current business projections, we have made non-personnel expense cuts and reduced personnel by seven employees.  These combined reductions have a projected annual savings of $750,000.  Selling expenses include salaries, commissions, benefits, travel expenses and other selling expenses.  Research and development expenditures for the second quarter of fiscal year 2010 were $372,000, a decrease of 9.7% compared to $412,000 in the second quarter of fiscal year 2009.  Research and development expenses in the second quarter of fiscal year 2010 included expenditures for development of new wireless products addressing MCT patient procedures.  MCT procedures allow patients to be remotely monitored with alarms for up to 30 days, carry higher reimbursement in the United States and are believed to provide a higher diagnostic yield than traditional telephone event monitoring approaches.  Biotel expects research and development investment in fiscal 2010 to be comparable to prior year levels as the Company addresses developing markets in Holter, event recording and wireless arrhythmia management.  No interest expense was incurred in the three-month period ended December 31, 2009, and interest expense of $25 was posted in the three-month period ended December 31, 2008.  A net loss of <$47,000> was posted for the second quarter of fiscal year 2010, versus net earnings of $289,000 in the second quarter of fiscal year 2009.  The decrease in net earnings was primarily the result of reduced revenues, as well as legal expenses incurred in the second quarter of fiscal 2010.  We expect to continue incur a significant level of legal expenses during the next twelve months and have elected to expense those fees as incurred.  Six Months ended December 31, 2009  Biotels net revenues for the six months ended December 31, 2009, were $5,715,000, 10.1% less than net revenues of $6,354,000 for the six months ended December 31, 2008.  This decrease was primarily the result of significantly diminished sales of Braemars ER920W wireless event recorder following announcement of Biotels planned merger with CardioNet, Inc. and the subsequent termination of that agreement by CardioNet.  17


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Table of Contents  Gross profit was $2,330,000 for the six months ended December 31, 2009,  20.0% less than the gross profit of $2,913,000 for the second quarter of fiscal year 2009.  Gross profit decreased as a result of the decrease in revenue.  Gross profit margin declined to 40.8% for the six months ended December 31, 2009 compared to 45.8% for the six months ended December 31, 2008, as a result of the change in product mix with the decreased sales of Braemars wireless event recorder.  Cost of sales and service decreased to $3,386,000 (59.2% of sales) for the six months ended December 31, 2009, compared to $3,442,000 (54.2% of sales) for the first half of fiscal year 2009.  The decrease in cost of sales and service was a result of the lower sales volume and product mix in the first six months of fiscal 2010.  Cost of sales and service as a percentage of revenue increased, primarily due to lower sales volume.  Selling, general and administrative expenses of $1,516,000 (26.5% of sales) for the six months ended December 31, 2009 increased from $1,182,000 (18.6% of sales) for the six months ended December 31, 2008.  Selling, general and administrative expenses were higher in the first half of fiscal 2010 primarily because of legal expense incurred as a result of activities surrounding the merger agreement between Biotel and CardioNet, Inc. signed on April 2, 2009, and subsequently terminated by CardioNet.  Research and development expenditures for the first half of fiscal year 2010 were $779,000, compared to $778,000 in the first half of fiscal year 2009.  Research and development expenses in fiscal year 2010 include expenditures for development of new wireless products addressing MCT patient procedures.  No interest expense was incurred in the six-month period ended December 31, 2009, and interest expense of $590 was posted in the six-month period ended December 31, 2008.  Net earnings for the first half of fiscal year 2010 were $81,000, versus net earnings of $617,000 in the first half of fiscal year 2009.  The decrease in net earnings was primarily the result of reduced revenues, as well as legal expenses incurred in the first half of fiscal 2010.  We expect to continue incur a significant level of legal expenses during the next twelve months.  Off-Balance Sheet Arrangements  Biotel does not have any off-balance sheet financing arrangements.  Liquidity and Capital Resources  Working capital increased to $4,354,000 at December 31, 2009, compared to $4,197,000 at June 30, 2009.  The increase in working capital is largely the result of the reduction in income taxes payable at December 31, 2009.  Cash and cash equivalents were $1,696,000 at December 31, 2009, compared to $1,160,000 at June 30, 2009.  The ratio of current assets to current liabilities (current ratio) was 4.54 to one at December 31, 2009 and 3.97 to one at June 30, 2009.  Accounts receivable decreased to $1,439,000 at December 31, 2009, versus $2,202,000 at June 30, 2009, as a result of diminished revenues in the first half of fiscal 2010.  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.  18


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Table of Contents  During the first halfof fiscal year 2010, $128,000 was used for capital expenditures, compared with $187,000 in the first half of fiscal year 2009. 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 decreased to $1,703,000 as of December 31, 2009 versus $1,878,000 as of June 30, 2009.  The level of inventory decreased as less material was purchased due to an anticipated decline in sales over the next several months as a result of the terminated merger agreement. Biotels subsidiaries manage inventories to provide safety stock and product flow for customers while controlling the amount of inventory.  Current liabilities decreased to $1,229,000 at December 31, 2009, compared to $1,415,000 on June 30, 2009, primarily as a result of the decrease in income taxes payable.  Biotel has long term liabilities consisting of deferred taxes payable totaling $329,000.  Biotel has no long term debt.  As of December 31, 2009, stockholders equity had increased to $5,749,000 from $5,659,000 at June 30, 2009.  The increase in stockholders equity was primarily due to the Companys profitability.  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, 2009, 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 six months of fiscal 2010 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.  Item 1A.  Risk Factors.Not applicable.  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.  During the second quarter of fiscal year 2010, two directors of the Company each purchased 10,000 shares of our common stock upon exercise of stock options with an exercise price of $0.375 per share.  The shares were sold without registration under the Securities Act of 1933 in reliance upon Section 4(2) of the Act.  The shares are restricted shares and cannot be sold except in accordance with Rule 144.  The proceeds were used for general working capital purposes.  Item 3.  Defaults Upon Senior Securities.Not applicable.  19


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Table of Contents  Item 4.  Submission of Matters to a Vote of Security Holders.Not applicable.  Item 5.  Other Information.  On December 7, 2009, the position of Executive Vice President, Sales, Marketing and Business Development, held by Harold A. Strandquist, was eliminated as a part of the Companys expense reduction necessitated by reduced revenue following CardioNets termination of the merger agreement between Biotel and CardioNet, Inc. signed on April 2, 2009.  (See Part I, Item 1. Note 8 of Notes to Consolidated Financial Statements.)  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.
         20


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Table of Contents  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, 2010
     By:
     /s/ B. Steven SpringroseIts: Chief Executive Officer and PresidentDate:  February 12, 2010
     By :
     /s/ Judy E. NausIts: Chief Financial Officer
         21


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