UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-QSB
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
__________________________________
BIOTEL INC.
(Exact name of registrant as specified in its charter)
| Minnesota | 41-1427114 | ||
| (State or other jurisdiction of | (I.R.S. Employer | ||
| incorporation or organization) | Identification No.) |
11481 Rupp Drive
Burnsville, MN 55337
(Address of principal executive offices, including zip code)
(952) 890-5135
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes o No x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
Yes o No x
The number of shares of registrant’s common stock, par value $0.01 per share, outstanding as of as of March 31, 2005, was 2,649,827.
i
| Unaudited March 31, 2005 | Audited June 30, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 40,062 | $ | 118,118 | ||||
| Trade accounts receivable, net of allowance | 1,781,526 | 1,708,040 | ||||||
| for doubtful accounts of $67,205 and $77,537 | ||||||||
| at March 31, 2005, and June 30, 2004, respectively | ||||||||
| Inventories | 1,502,683 | 1,285,171 | ||||||
| Deferred tax asset | 284,998 | 335,667 | ||||||
| Other current assets | 132,678 | 41,337 | ||||||
| Total Current Assets | 3,741,947 | 3,488,333 | ||||||
| PROPERTY, PLANT & EQUIPMENT (Net) | 661,130 | 334,092 | ||||||
| OTHER ASSETS: | ||||||||
| Goodwill | 695,551 | 695,551 | ||||||
| Other assets | 44,678 | 30,678 | ||||||
| Total Other Assets | 740,229 | 726,229 | ||||||
| $ | 5,143,306 | $ | 4,548,654 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Revolving line of credit | $ | 833,769 | $ | — | ||||
| Current portion of notes payable | 256,338 | 223,843 | ||||||
| Trade accounts payable | 391,205 | 570,598 | ||||||
| Accrued payroll and related liabilities | 204,026 | 248,323 | ||||||
| Deferred service contract revenue | 179,134 | 190,600 | ||||||
| Other current liabilities | 138,742 | 150,881 | ||||||
| Accrued Income Taxes | 234 | 99,950 | ||||||
| Total Current Liabilities | 2,003,448 | 1,484,195 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Notes payable | 496,653 | 680,017 | ||||||
| COMMITMENTS AND CONTINGENCIES (See Notes 8 and 9) | ||||||||
| Total Liabilities | 2,500,101 | 2,164,212 | ||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Common stock, $.01 stated value; 10,000,000 shares | ||||||||
| authorized; 2,649,827 and 2,576,827 shares issued, respectively | 26,498 | 25,768 | ||||||
| Additional paid-in capital | 1,941,324 | 1,912,179 | ||||||
| Retained Earnings | 675,383 | 446,495 | ||||||
| Total Stockholders' Equity | 2,643,205 | 2,384,442 | ||||||
| $ | 5,143,306 | $ | 4,548,654 | |||||
See notes to unaudited Financial Statements which are an integral part of these statements.
1
| For the three months ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
| SALES AND SERVICES | $ | 2,248,144 | $ | 2,175,739 | ||||
| COST OF SALES AND SERVICES | 1,327,656 | 1,189,187 | ||||||
| GROSS PROFIT | 920,488 | 986,552 | ||||||
| OPERATING EXPENSES | ||||||||
| Selling and administrative expenses | 628,119 | 506,401 | ||||||
| Research and development | 262,831 | 268,573 | ||||||
| Total operating expenses | 890,950 | 774,974 | ||||||
| INCOME FROM OPERATIONS | 29,538 | 211,578 | ||||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest Income | 0 | 0 | ||||||
| Interest Expense | (20,019 | ) | (54,112 | ) | ||||
| Other Expense | (50 | ) | (520 | ) | ||||
| Total other income (expense) | (20,069 | ) | (54,632 | ) | ||||
| NET INCOME BEFORE | ||||||||
| PROVISION FOR INCOME TAXES | 9,469 | 156,946 | ||||||
| PROVISION FOR INCOME TAXES | 6,485 | 2,278 | ||||||
| NET INCOME | 2,984 | 154,668 | ||||||
| RETAINED EARNINGS (DEFICIT) | ||||||||
| BEGINNING OF PERIOD | 672,399 | (241,716 | ) | |||||
| END OF PERIOD | $ | 675,383 | $ | (87,048 | ) | |||
| INCOME PER SHARE | ||||||||
| BASIC | $ | — | $ | 0.06 | ||||
| DILUTED | $ | — | $ | 0.05 | ||||
See notes to unaudited Financial Statements which are an integral part of these statements.
2
| For the nine months ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
| SALES AND SERVICES | $ | 7,335,596 | $ | 6,601,528 | ||||
| COST OF SALES AND SERVICES | 4,129,671 | 3,577,484 | ||||||
| GROSS PROFIT | 3,205,925 | 3,024,044 | ||||||
| OPERATING EXPENSES | ||||||||
| Selling and administrative expenses | 2,031,428 | 1,507,391 | ||||||
| Research and development | 771,296 | 792,530 | ||||||
| Total operating expenses | 2,802,724 | 2,299,921 | ||||||
| INCOME FROM OPERATIONS | 403,201 | 724,123 | ||||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest Income | 0 | 2,644 | ||||||
| Interest Expense | (50,005 | ) | (104,904 | ) | ||||
| Other Expense | (155 | ) | (573 | ) | ||||
| Total other income (expense) | (50,160 | ) | (102,833 | ) | ||||
| NET INCOME BEFORE | ||||||||
| PROVISION FOR INCOME TAXES | 353,041 | 621,290 | ||||||
| PROVISION FOR INCOME TAXES | 124,153 | 9,715 | ||||||
| NET INCOME | 228,888 | 611,575 | ||||||
| RETAINED EARNINGS (DEFICIT) | ||||||||
| BEGINNING OF PERIOD | 446,495 | (698,623 | ) | |||||
| END OF PERIOD | $ | 675,383 | $ | (87,048 | ) | |||
| INCOME PER SHARE | ||||||||
| BASIC | $ | 0.09 | $ | 0.24 | ||||
| DILUTED | $ | 0.08 | $ | 0.22 | ||||
See notes to unaudited Financial Statements which are an integral part of these statements.
3
| For the nine months ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income | $ | 228,888 | $ | 611,575 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities | ||||||||
| Depreciation and amortization | 165,449 | 113,015 | ||||||
| Deferred Income Tax | 50,669 | — | ||||||
| Increase(decrease) in allowance for doubtful accounts | (10,332 | ) | 23,615 | |||||
| Increase(decrease) of inventory valuation allowance | 15,046 | 58,546 | ||||||
| Net book value on disposal of fixed assets | — | 1,673 | ||||||
| Expenses paid through issuance of stock | — | 8,250 | ||||||
| Changes in deferred and accrued amounts | ||||||||
| Trade accounts receivable | (63,154 | ) | (308,803 | ) | ||||
| Life insurance proceeds receivable | — | 500,000 | ||||||
| Prepaid expenses | (91,341 | ) | 30,614 | |||||
| Inventories | (232,558 | ) | (268,687 | ) | ||||
| Other assets | (14,000 | ) | 44,543 | |||||
| Trade accounts payable | (179,393 | ) | 4,799 | |||||
| Accrued payroll and related liabilities | (44,297 | ) | (63,460 | ) | ||||
| Other accrued expenses | (12,139 | ) | (22,397 | ) | ||||
| Deferred service contract revenue | (11,466 | ) | (47,574 | ) | ||||
| Income taxes payable | (99,716 | ) | (13,954 | ) | ||||
| Net cash provided by (used for) operating activities | (298,344 | ) | 671,755 | |||||
| INVESTING ACTIVITIES | ||||||||
| Purchases of property and equipment | (492,487 | ) | (86,783 | ) | ||||
| Net cash used for investing activities | (492,487 | ) | (86,783 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from issuance of common stock | 29,875 | — | ||||||
| Net change on line of credit | 833,769 | 310,533 | ||||||
| Proceeds from new debt | — | 890,000 | ||||||
| Payments of long-term debt | (150,869 | ) | (1,626,364 | ) | ||||
| Net cash provided for (used for) financing activities | 712,775 | (425,831 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | (78,056 | ) | 159,141 | |||||
| CASH AND CASH EQUIVALENTS AS OF JUNE 30 | 118,118 | 2,487 | ||||||
| CASH AND CASH EQUIVALENTS AS OF MARCH 31 | $ | 40,062 | $ | 161,628 | ||||
See notes to unaudited Financial Statements which are an integral part of these statements.
4
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 Biotel Inc. (the “Company”) December 31, 2004, Form 10-SB filed on October 14, 2004, which included the audited financial statements for the year ended June 30, 2004.
The information furnished reflects, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial results for the interim period presented. Interim results are subject to year end adjustments and audit by independent certified public accountants.
NOTE 2 – INVENTORIES
As of March 31, 2005 and June 30, 2004, inventories consist of the following:
| March 31, 2005 | June 30, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Raw materials and supplies | $ | 1,256,368 | $ | 1,089,151 | ||||
| Work in process | 94,768 | 141,732 | ||||||
| Finished Goods | 421,168 | 298,088 | ||||||
| Evaluation units and replacements | 11,047 | 21,822 | ||||||
| 1,783,351 | 1,550,793 | |||||||
| Valuation Allowance | (280,668 | ) | (265,622 | ) | ||||
| $ | 1,502,683 | $ | 1,285,171 | |||||
NOTE 3 – WARRANTY RESERVE
The Company offers warranties of up to a year to its customers depending on the specific product sold. 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 historical amounts. The Company periodically assesses the adequacy of its recorded liability and adjusts the balance as necessary. At March 31, 2005 and June 30, 2004, the warranty reserve totaled $64,381 and $98,316, respectively, and this amount is included in Other Liabilities. The following is a reconciliation of the aggregate warranty liability as of March 31, 2005:
| Balance, June 30, 2004 | $ | 98,316 | |||
| Claims Paid | (76,096 | ) | |||
| Additional warranties issued and revisions in | |||||
| estimates of previously issued warranties | 42,161 | ||||
| Balance, March 31, 2005 | $ | 64,381 | |||
5
NOTE 4 – STOCK OPTIONS
Biotel Inc. adopted an incentive compensation plan for board designated personnel on November 15, 2001, by amending the “Biosensor Corporation 1999 Incentive Compensation Plan.” 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 March 31, 2005 and 2004, Biotel Inc. had 446,000 and 332,000 outstanding options, respectively. Currently option prices range from $.375 to $2.00 per share with a weighted average remaining contract life of 4.01 years. There were 6,000 options exercised during the three months ended March 31, 2005 and 22,000 options were exercised during the three months ended March 31, 2004. Option vesting and expiration is determined by the Board of Directors at the time they are awarded. No options may be awarded with an expiration greater than 10 years.
A summary of the activity under the Company’s plan is as follows:
| Outstanding | Exercisable | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares Available | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | ||||||||||||||
| Balance at June 30, 2003 | 396,000 | 254,000 | $ | 0.3870 | 164,334 | $ | 0.4591 | |||||||||||
| Granted | (96,000 | ) | 96,000 | |||||||||||||||
| Balance at September 30, 2003 | 300,000 | 350,000 | $ | 0.5190 | 221,334 | $ | 0.4580 | |||||||||||
| Granted | (25,000 | ) | 25,000 | |||||||||||||||
| Balance at December 31, 2003 | 275,000 | 375,000 | $ | 0.5810 | 256,334 | $ | 0.4970 | |||||||||||
| Exercised | 22,000 | (22,000 | ) | |||||||||||||||
| Expired | 21,000 | (21,000 | ) | |||||||||||||||
| Balance at March 31, 2004 | 318,000 | 332,000 | $ | 0.6081 | 246,000 | $ | 0.5259 | |||||||||||
| Balance at June 30, 2004 | 324,000 | 326,000 | $ | 0.6125 | 224,000 | $ | 0.5329 | |||||||||||
| Granted | (205,000 | ) | 205,000 | |||||||||||||||
| Balance at September 30, 2004 | 119,000 | 531,000 | $ | 1.1500 | 312,250 | $ | 0.8070 | |||||||||||
| Exercised | 67,000 | (67,000 | ) | |||||||||||||||
| Expired | 12,000 | (12,000 | ) | |||||||||||||||
| Balance at December 31, 2004 | 198,000 | 452,000 | $ | 1.2800 | 246,250 | $ | 0.9420 | |||||||||||
| Exercised | 6,000 | (6,000 | ) | |||||||||||||||
| Balance at March 31, 2005 | 204,000 | 446,000 | $ | 1.2864 | 240,250 | $ | 0.9501 | |||||||||||
6
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 March 31, 2005 was 2,648,960 and 2,949,240, respectively, and for the three months ended March 31, 2004, was 2,554,827 and 2,829,967, respectively. The weighted average number of shares used in the computation of basic and diluted income per common share for the nine months ended March 31, 2005 was 2,609,889 and 2,861,710, respectively, and for the nine months ended March 31, 2004 was 2,558,448 and 2,726,877, respectively.
NOTE 6 – OPERATIONS AND INDUSTRY SEGMENTS
The Company reports on two segments of business: OEM Medical Equipment Sales 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.
| Three months ended March 31, 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| OEM Medical Equipment Sales | Direct Medical Equipment Sales | Corporate | Totals | |||||||||||
| Domestic Revenues | $ | 1,906,031 | $ | 238,647 | $ | 2,144,678 | ||||||||
| International Revenues | 79,207 | 24,259 | 103,466 | |||||||||||
| Revenues from external customers | 1,985,238 | 262,906 | 2,248,144 | |||||||||||
| Intersegment revenues | 67,688 | (67,688 | ) | 0 | ||||||||||
| Interest expense | 1,041 | — | 18,978 | 20,019 | ||||||||||
| Depreciation | 56,411 | 3,924 | 1,803 | 62,138 | ||||||||||
| Segment profit | 2,911 | (25,361 | ) | 25,434 | 2,984 | |||||||||
| Goodwill | 695,551 | — | — | 695,551 | ||||||||||
| Total segment assets | 4,355,871 | 300,967 | 486,468 | 5,143,306 | ||||||||||
| Purchase of property and equipment | 97,330 | 1,501 | 20,927 | 119,758 | ||||||||||
| Three months ended March 31, 2004 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| OEM Medical Equipment Sales | Direct Medical Equipment Sales | Corporate | Totals | |||||||||||
| Domestic Revenues | $ | 1,555,007 | $ | 466,846 | $ | 2,021,853 | ||||||||
| International Revenues | 115,833 | 38,053 | 153,886 | |||||||||||
| Revenues from external customers | 1,670,840 | 504,899 | 2,175,739 | |||||||||||
| Intersegment revenues | 109,051 | (109,051 | ) | 0 | ||||||||||
| Interest expense | 1,828 | — | 52,284 | 54,112 | ||||||||||
| Depreciation | 30,333 | 8,064 | 60 | 38,457 | ||||||||||
| Segment profit | 142,507 | 59,461 | (47,304 | ) | 154,664 | |||||||||
| Goodwill | 695,551 | — | — | 695,551 | ||||||||||
| Total segment assets | 3,385,560 | 487,932 | 302,062 | 4,175,554 | ||||||||||
| Purchase of property and equipment | 33,723 | — | — | 33,723 | ||||||||||
7
| Nine months ended March 31, 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| OEM Medical Equipment Sales | Direct Medical Equipment Sales | Corporate | Totals | |||||||||||
| Domestic Revenues | 5,964,032 | 949,558 | 6,913,590 | |||||||||||
| International Revenues | 356,994 | 65,012 | 422,006 | |||||||||||
| Revenues from external customers | 6,321,026 | 1,014,570 | 0 | 7,335,596 | ||||||||||
| Intersegment revenues | 206,233 | (206,233 | ) | 0 | ||||||||||
| Interest expense | 3,216 | 0 | 46,789 | 50,005 | ||||||||||
| Depreciation | 150,446 | 13,080 | 1,923 | 165,449 | ||||||||||
| Segment Profit | 263,977 | (21,331 | ) | (13,758 | ) | 228,888 | ||||||||
| Goodwill | 695,551 | 695,551 | ||||||||||||
| Total segment assets | 4,355,871 | 300,967 | 486,468 | 5,143,306 | ||||||||||
| Purchase of property and equipment | 398,655 | 1,501 | 92,331 | 492,487 | ||||||||||
| Nine months ended March 31, 2004 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| OEM Medical Equipment Sales | Direct Medical Equipment Sales | Corporate | Totals | |||||||||||
| Domestic Revenues | 4,861,335 | 1,279,907 | 6,141,242 | |||||||||||
| International Revenues | 349,002 | 111,284 | 460,286 | |||||||||||
| Revenues from external customers | 5,210,337 | 1,391,191 | 0 | 6,601,528 | ||||||||||
| Intersegment revenues | 235,726 | (235,726 | ) | 0 | ||||||||||
| Interest expense | 12,519 | 0 | 92,385 | 104,904 | ||||||||||
| Depreciation | 88,726 | 24,150 | 139 | 113,015 | ||||||||||
| Segment Profit | 489,384 | 180,434 | (58,243 | ) | 611,575 | |||||||||
| Goodwill | 695,551 | 695,551 | ||||||||||||
| Total segment assets | 3,385,560 | 487,932 | 302,062 | 4,175,554 | ||||||||||
| Purchase of property and equipment | 85,556 | 511 | 716 | 86,783 | ||||||||||
8
NOTE 7 – ASSET PURCHASE
Biotel Inc. purchased substantially all of the assets of Agility Centralized Research Services, LLC (Agility), effective July 1, 2004. Management believes this investment will allow the Company to vertically integrate into the growing industry of contract research. Agility, founded in November, 2003, provides 24 hour/7 days per week electrocardiogram (ECG) data collection and management services supporting cardiac safety and therapeutic evaluation within the clinical trials of medical corporations. Agility also supplies ECG contract research services to pharmaceutical companies, contract research organizations and academic research organizations. During each of the quarters ending December 31 and September 30, 2004, the Company paid $30,000 in contingent payments relating to this asset purchase. These payments are included in selling, general and administrative expenses for the nine months ending March 31, 2005. Had the operations of Agility been included in results for the quarter and nine months ended March 31, 2004, proforma revenues, net income and earnings per share would have been as follows:
| Three months ended March 31, 2004 | Nine months ended March 31, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Revenues | $ | 2,175,739 | $ | 6,601,528 | ||||
| Net income | $ | 126,004 | $ | 559,959 | ||||
| Earnings per share | ||||||||
| Basic | 0.05 | 0.22 | ||||||
| Diluted | 0.04 | 0.21 | ||||||
9
Statements included or incorporated by reference in this Quarterly Report on Form 10-QSB 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, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company cautions readers that forward looking statements, including without limitation those relating to the Company’s 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.
The consolidated financial statements of Biotel include the accounts of Biotel Inc. and its wholly-owned subsidiaries (collectively, “Biotel”). 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. 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 limit. 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 follows the policy of charging 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 or declining-balance methods over estimated useful lives of three to 10 years for equipment, three to five years for automobiles and two to 31 years for leasehold improvements.
For the year ended June 30, 2002, Biotel adopted SFAS No. 142,Goodwill and Other Intangible Assets. Goodwill arose from the acquisition of Braemar, which was acquired during a previous accounting period. Goodwill is deemed to have an indefinite useful life and will no longer be amortized but will be subject to impairment tests performed at least annually. During fiscal 2004 and 2003, Biotel performed the required impairment tests of goodwill and determined the recorded goodwill had not been impaired.
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.
Biotel warrants its products against defects in material and workmanship for 90 days for electromagnetic and ultrasound probes and one year for all other manufactured equipment. 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.
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 future profitability of Biotel.
10
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.
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 four operating subsidiaries located within the United States, Biotel supplies an array of products and services to provide for the research, development, testing, and manufacturing needs of its customers.
Three Biotel business units, Braemar, Inc., Carolina Medical, Inc. and newly purchased Agility Centralized Research Services, Inc. (“Agility”), 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 three subsidiaries form a base of products and services which Biotel believes are attractive to medical device and pharmaceutical companies, allowing accelerated and improved research, development, testing and manufacturing operations for its customers.
Advanced Biosensor Inc., the fourth business unit, represents a vertical integration of Biotel cardiology products, selling diagnostic cardiology software and systems to hospitals and clinic end users, and incorporating Holter recorder devices provided by Braemar.
Three Months Ended March 31, 2005 and 2004
Biotel’s net revenues for the fiscal quarter ended March 31, 2005, were $2,248,000, 3.3% above net revenues of $2,176,000 for the quarter ended March 31, 2004.The increase was primarily due to increases in sales to OEM customers. In the quarters ended March 31, 2005 and 2004, 40% and 27%, respectively, of the Company’s revenues were derived from two customers. The loss of any one or more of these customers would have an immediate significant adverse effect on our financial results.
Gross profit margin was $920,000 for the quarter ended March 31, 2005, 6.7% below the gross profit margin of $987,000 in the corresponding period of 2004. Gross profit margin was marginally affected by increases in the cost of sales and services, which rose to $1,328,000 (59.1% of sales) in the third quarter of fiscal 2005 versus $1,189,000 (54.7% of sales) in the third quarter of fiscal 2004. Expenditures for start-up operations at Agility are primarily responsible for the higher costs experienced in the quarter ended March 31, 2005.
Selling, general and administrative expenses increased to $628,000 (27.9% of sales) for the quarter ended March 31, 2005, compared to $506,000 (23.3% of sales) for the quarter ended March 31, 2004. Increases in expenditures associated with the costs of acquisition, operation and integration of Agility, legal costs associated with SEC filings, and expenses related to increased sales volume were primarily responsible for the increases in selling, general and administrative expenses. Selling expenses include salaries, commissions, benefits, travel expenses, and other selling expenses.
Research and development expenditures for the third quarter of fiscal 2005 were $263,000, 2.2% lower than the $269,000 in the same period of fiscal 2004. Biotel was asked by customers to provide increasing levels of custom engineering for projects funded in the third quarter of fiscal 2005. Biotel engineering, management, and administrative staff is used when non-recurring engineering (“NRE”) services are sold to customers, and the engineering component of this activity is reported in cost of goods sold. NRE service charges are paid by Biotel customers for work performed to develop new custom devices for customers. NRE charges are common in the industry and are non-recurring to the customer upon
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project completion, typically upon commencement of manufacturing and regular delivery of the product(s). Biotel has a history of NRE revenues from period to period, as it is regularly engaged in new custom development activity. Biotel contracts with customers for NRE services and tracks development engineering costs, time, and labor content spent on such projects. The cost of NRE development activity is recorded against cost of goods sold. In the three months ended March 31, 2005, research and development expenditures plus NRE costs were $274,000, versus $346,000 for the three months ended March 31, 2004.
Interest expense decreased to $20,000 for the quarter ended March 31, 2005, compared to interest expense of $54,000 for the quarter ended March 31, 2004. Interest expenditures decreased correspondingly to the reduction in long term debt and lower interest rates as a result of restructuring of long term debt in March 2004.
Net earnings for the fiscal quarter ended March 31, 2005, and March 31, 2004, were $3,000 and $155,000, respectively. Net earnings for the quarter ended March 31, 2005, were lower than the quarter ended March 31, 2004 decreased as a result of planned Agility start-up costs and expenses, operating losses from sales to clinics and hospitals, and legal expenses related to SEC filings.
Nine Months Ended March 31, 2005 and 2004
Biotel’s net revenues for the nine months ended March 31, 2005, were $7,336,000, 11.1% above net revenues of $6,602,000 for the nine months ended March 31, 2004. Sales to medical corporations increased 21.3% to $6,321,000 for the nine months ended March 31, 2005 compared to $5,210,000 for the corresponding period in 2004. In the nine months ended March 31, 2005 and 2004, 39% and 35%, respectively of the Company’s revenue was derived from two customers. The loss of any one or more of these customers would have an immediate significant adverse effect on our financial results.
Management believes that Biotel’s growth in revenues is dependent upon the success it has in maintaining and expanding its relationships with customers. Biotel believes there is opportunity for its revenues to rise in the next twelve months on the basis of customer relationships and discussions regarding new product opportunities. We can offer no assurance that such business activity will materialize.
Gross profit margin increased to $3,206,000 for the first three quarters of fiscal year 2005, compared to $3,024,000 in the same period of fiscal year 2004. The increased gross profit margin was a result of increases in sales revenues and their effects on gross profit. Start-up costs at Agility negatively affected the gross margin percentage, resulting in a gross margin percentage of 43.7% for the nine months ended March 31, 2005, versus 45.8% for the nine months ended March 31, 2004.
Selling, general and administrative expenses increased to $2,031,000 (27.7% of sales) for the nine months ended March 31, 2005, compared to $1,507,000 (22.8% of sales) for the nine months ended March 31, 2004. Increases in expenditures associated with the increased sales volume and costs related to development and administration of Agility were primarily responsible for the increases in selling, general and administrative expenses. These include salaries, commissions, benefits, travel expenses, and other selling, general and administrative expenses, including $60,000 related to contractual obligations paid to Agility for meeting performance milestones.
Research and development expenditures for the first nine months of fiscal 2005 were $771,000, a decrease of 2.7% compared to $793,000 in the first nine months of fiscal 2004. As in the three months ended March 31, 2005 reported above, Biotel recorded non-recurring engineering (“NRE”) services sold to customers, and the engineering component of this activity is reported in cost of goods sold. Research and development plus NRE charges for the nine months at March 31, 2005 were $853,000 versus research and development plus NRE charges of $994,000 for the nine months at March 31, 2004.
Interest expense decreased to $50,000 for the nine months ended March 31, 2005, compared to interest expense of $105,000 for the nine months ended March 31, 2004. Interest expenditures decreased correspondingly to the reduction in long-term debt and lower interest rates. At March 31, 2005, the outstanding balance of the term loan was $753,000, compared to $936,000 on March 31, 2004.
Net earnings for the nine months ended March 31, 2005, and March 31, 2004, were $229,000 and $612,000, respectively. The reduction in net earnings for the nine months ended March 31, 2005, was primarily due to a provision for income taxes of $124,000 for the nine months ended March 31, 2005, versus $10,000 for the nine months ended March 31, 2004, the planned Agility start-up costs and expenses, decrease in earnings from sales to clinics and hospitals, and legal expenses related to SEC filings.
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Biotel does not have any off-balance sheet financing arrangements.
Working capital decreased to $1,738,000 at March 31, 2005, compared to $2,004,000 at June 30, 2004. Working capital was negatively impacted by a credit line balance of $834,000 on March 31, 2005, compared to a balance of zero on June 30, 2004.
Cash and cash equivalents were $40,000 at March 31, 2005, a decrease of $78,000 from the balance of $118,000 at June 30, 2004. During the nine-month period ended March 31, 2005, Biotel experienced a decrease in cash primarily as a result of increased accounts receivable and inventories, as well as increased expenditures for capital equipment related to the purchase of Agility Centralized Research Services. The ratio of current assets to current liabilities (“current ratio”) decreased to 1.9 for the period ended March 31, 2005 from 2.4 for the period ended June 30, 2004.
Accounts receivable increased to $1,781,000 at March 31, 2005, versus $1,708,000 at June 30, 2004. The increase in accounts receivable was related to increasing sales activity and longer payment cycles of two major customers. 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 nine months ended March 31, 2005, $492,000 of capital equipment was purchased versus $87,000 in the nine months ended March 31, 2004. Equipment purchases in connection with the acquisition of Agility were responsible for the increase. 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 $1,503,000 for the period ended March 31, 2005, compared to $1,285,000 for the period ended June 30, 2004. Inventory increases are due in part to increasing revenues and to new product introductions. Biotel’s subsidiaries manage inventories to provide safety stock and product flow for customers while controlling the amount of inventory.
Current liabilities increased to $2,003,000 at March 31, 2005, compared to $1,484,000 at June 30, 2004. The increase was primarily due to the increase of $834,000 in the balance of the revolving line of credit.
Long term liabilities were reduced to $497,000 at March 31, 2005, compared to $680,000 at June 30, 2004, a reduction of approximately $183,000 as a result of payments on notes outstanding.
As of March 31, 2005, stockholders’ equity had increased to $2,643,000, an 11% increase from $2,384,000 at June 30, 2004.. The increase in stockholder’s equity was principally as a result of the increase in retained earnings.
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, including principal payments required under present debt instruments. There is no assurance that Biotel will be successful in obtaining additional working capital if more is required. Biotel believes it will be able to finance operations at its Agility subsidiary over the next 12 months using cash generated from Biotel operations and Biotel credit facilities.
(a) As of March 31, 2005 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 President and Chief Financial Officer concluded that the registrant’s disclosure controls and procedures were effective.
(b) Changes in internal controls. There were no significant changes in Biotel’s internal controls 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.
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Item 1. Legal Proceedings. Not applicable.
During the quarter ended March 31, 2005, the registrant issued common shares upon the exercise of a stock option. The option was exercised on January 13, 2005 for 6,000 common shares. The issuance was exempted from registration under the Securities Act of 1933, as amended, in reliance upon Section 4(2) as a transaction by the registrant not involving a public offering. The registrant intends to use the $3,750 of proceeds from the exercise of the option for general working capital purposes.
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. Not applicable.
| 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. |
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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: May 13, 2005 | By: | /s/ B. Steven Springrose | |||
| Chief Executive Officer and President | |||||
Date: May 13, 2005 | By: | /s/ Judy E. Naus | |||
| Chief Financial Officer | |||||
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