Biotel (BTELE) 10QSB 2006 Q1 Quarterly report (small business)

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

For the period ended September 30, 2005

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

For the transition period from _________ to _________

Commission File Number: 0-50914

__________________________________

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  x      No  o

Indicate by check mark whether the registrant is shell company (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 September 30, 2005, was 2,649,827.

Transitional Small Business Disclosure Format (check one):
Yes  o     No  x

BIOTEL INC.
INDEX
____________________________________

			Page Number
PART I
	Item 1:	Financial Information
		Consolidated Balance Sheets – September 30, 2005 and June 30, 2005	1
		Consolidated Statements of Income – Three Months Ended September 30, 2005 and 2004	2
		Consolidated Statements of Cash Flows	3
		Notes to Consolidated Financial Statements (Unaudited)	4
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
	Item 3:	Controls and Procedures	11
PART II
	Item 1:	Legal Proceedings	11
	Item 6:	Exhibits	11
	Signatures		12

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Part I

Item 1:    Financial Information

BIOTEL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	September 30, 2005 Unaudited		June 30, 2005 Audited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	22,398	$	17,045
Trade accounts receivable, net of allowance		1,558,685		2,131,894
for doubtful accounts of $74,312 and $70,205
at September 30, 2005 and June 30, 2005, respectively
Inventories, net		1,652,918		1,468,439
Deferred tax asset		363,717		363,717
Other current assets		172,847		105,593
Total Current Assets		3,770,565		4,086,688
PROPERTY, PLANT & EQUIPMENT (Net)		626,888		651,355
OTHER ASSETS:
Goodwill		695,551		695,551
Other assets		38,971		40,971
Total Other Assets		734,522		736,522
	$	5,131,975	$	5,474,565
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving line of credit	$	149,022	$	572,012
Current portion of notes payable		211,218		252,645
Trade accounts payable		648,716		658,040
Accrued payroll and related liabilities		152,413		192,871
Deferred service contract revenue		167,267		187,023
Other accrued expenses		279,971		212,426
Accrued income taxes		49,267		90,662
Total Current Liabilities		1,657,874		2,165,679
LONG-TERM LIABILITIES:
Notes payable		442,055		450,435
Total Liabilities		2,099,929		2,616,114
STOCKHOLDERS’ EQUITY:
Common stock, $.01 stated value; 10,000,000 shares
authorized; 2,649,827 shares issued		26,498		26,498
Additional paid-in capital		1,941,324		1,941,324
Retained earnings		1,064,224		890,629
Total Stockholders' Equity		3,032,046		2,858,451
	$	5,131,975	$	5,474,565

See notes to consolidated financial statements
which are an integral part of these financial statements.

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BIOTEL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited

	For the three months ended September 30,
	2005		2004
SALES AND SERVICES	$	2,526,736	$	2,491,219
COST OF SALES AND SERVICES		1,490,907		1,361,548
GROSS PROFIT		1,035,829		1,129,671
OPERATING EXPENSES
Selling and administrative expenses		523,997		666,931
Research and development		221,157		252,222
Total operating expenses		745,154		919,153
INCOME FROM OPERATIONS		290,675		210,518
OTHER EXPENSE
Interest expense		17,977		13,545
Other expense		0		50
Total other expense		17,977		13,595
NET INCOME BEFORE
PROVISION FOR INCOME TAXES		272,698		196,923
PROVISION FOR INCOME TAXES		99,103		63,534
NET INCOME		173,595		133,389
RETAINED EARNINGS
BEGINNING OF PERIOD		890,629		446,495
END OF PERIOD	$	1,064,224	$	579,884
INCOME PER SHARE
BASIC	$	0.07	$	0.05
DILUTED	$	0.06	$	0.05

See notes to consolidated financial statements
which are an integral part of these financial statements.

2

BIOTEL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

Unaudited

	For the three months ended September 30,
	2005			2004
OPERATING ACTIVITIES
Net income	$	173,595		$	133,389
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization		60,199			49,979
Deferred Income Tax		—			25,534
Increase in allowance for doubtful accounts		4,107			3,000
Increase in inventory valuation allowance		8,790			15,434
Net book value on disposal of fixed assets		—			—
Changes in deferred and accrued amounts
Trade accounts receivable		569,102			(183,969	)
Prepaid expenses		(67,129	)		(69,263	)
Inventories		(193,269	)		(97,367	)
Other assets		(125	)		(18,000	)
Trade accounts payable		(9,324	)		11,737
Accrued payroll and related liabilities		(40,458	)		(60,100	)
Other accrued expenses		67,545			13,435
Deferred service contract revenue		(19,756	)		(5,662	)
Income taxes payable		(41,395	)		(8,002	)
Net cash provided by (used for) operating activities		511,882			(189,855	)
INVESTING ACTIVITIES
Purchases of property and equipment		(33,732	)		(236,046	)
Net cash used for investing activities		(33,732	)		(236,046	)
FINANCING ACTIVITIES
Net change on line of credit		(422,990	)		381,020
Payments of long-term debt		(49,807	)		(50,543	)
Net cash provided for (used for) financing activities		(472,797	)		330,477
Net increase (decrease) in cash and cash equivalents		5,353			(95,424	)
CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2005 and 2004		17,045			118,118
CASH AND CASH EQUIVALENTS AS OF SEPTEMBER 30, 2005 and 2004	$	22,398		$	22,694

See notes to consolidated financial statements
which are an integral part of these financial statements.

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BIOTEL INC. AND SUBSIDIARIES
NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 – BASIS OF PRESENTATION

        The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-KSB for the fiscal year ended June 30, 2005, filed by Biotel Inc. (the “Company”) on September 28, 2005.

        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 September 30, 2005 and June 30, 2005, inventories consist of the following:

	September 30, 2005			June 30, 2005
Raw materials and supplies	$	1,644,314		$	1,332,661
Work in process		6,899			67,243
Finished Goods		323,451			376,630
Evaluation units and replacements		17,031			21,892
		1,991,695			1,798,426
Valuation Allowance		(338,777	)		(329,987	)
	$	1,652,918		$	1,468,439

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 September 30, 2005 and June 30, 2005, the warranty reserve totaled $87,708 and $79,062, respectively, and this amount is included in Other Liabilities. The following is a reconciliation of the aggregate warranty liability as of September 30, 2005:

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NOTE 3 – WARRANTY RESERVE (Continued)

Balance, June 30, 2005	$	79,062
Claims Paid		(25,561	)
Additional warranties issued and revisions in
estimates of previously issued warranties		34,207
Balance, September 30, 2005	$	87,708

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 September 30, 2005 and 2004, Biotel Inc. had 354,000 and 525,000 outstanding options, respectively. Currently option prices range from $.375 to $2.00 per share with a weighted average remaining contract life of 3.71 years. No options were exercised during the three months ended September 30, 2005 and 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, 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
Balance at June 30, 2005		296,000			354,000	$	1.1379		185,750	$	0.9040
Balance at September 30, 2005		296,000			354,000	$	1.2641		274,500	$	1.1181

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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 September 30, 2005 was 2,649,827 and 2,924,327, respectively, and for the three months ended September 30, 2004, was 2,576,827 and 2,842,982, 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.

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	Three months ended September 30, 2005
	OEM Medical Equipment Sales		Direct Medical Equipment Sales			Corporate			Totals
Domestic Revenues	$	2,257,662	$	209,140					$	2,466,802
International Revenues		46,994		12,940						59,934
Revenues from external customers		2,304,656		222,080						2,526,736
Intersegment revenues		47,154		(47,154	)					0
Interest expense		1,040		—			16,937			17,977
Income tax expense		68,164		31,462			(523	)		99,103
Depreciation and Amortization		53,602		1,224			5,373			60,199
Segment profit		126,342		61,022			(13,770	)		173,595
Goodwill		695,551		—			—			695,551
Total segment assets		4,380,995		245,079			505,901			5,131,975
Purchase of property and equipment		33,732		—			—			33,732
	Three months ended September 30, 2004
	OEM Medical Equipment Sales		Direct Medical Equipment Sales			Corporate			Totals
Domestic Revenues	$	2,002,160	$	344,852					$	2,347,012
International Revenues		123,152		21,055						144,207
Revenues from external customers		2,125,312		365,907						2,491,219
Intersegment revenues		70,050		(70,050	)					0
Interest expense		1,136		—			12,409			13,545
Income tax expense		64,137		5,152			(5,755	)		63,534
Depreciation and Amortization		44,687		5,232			60			49,979
Segment profit		135,899		8,660			(11,170	)		133,389
Goodwill		695,551		—			—			695,551
Total segment assets		4,277,247		361,873			324,798			4,963,918
Purchase of property and equipment		236,046		—			—			236,046

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Item 2:    Management’s Discussionand Analysis of Financial Condition and Results of Operations

Cautionary Statement

        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. 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 (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 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 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 2005 and 2004, 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.

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        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.

        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 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 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 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, sells maintenance services, Holter recorders manufactured by Braemar, diagnostic Holter software provided by others and Holter supplies to hospitals and clinics.

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

Results of Operations

        Biotel’s net revenues for the fiscal quarter ended September 30, 2005, increased to $2,527,000, 1.4% above net revenues of $2,491,000 for the quarter ended September 30, 2004. The increase was primarily due to increases in sales to OEM customers. In the quarters ended September 30, 2005 and 2004, 34.2% and 35.6%, 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 $1,036,000 for the quarter ended September 30, 2005, 8.3% below the gross profit margin of $1,130,000 in the corresponding period of fiscal 2005. Gross profit margin was marginally affected by increases in the cost of sales and services, which rose to $1,491,000 (59.1% of sales) in the first quarter of fiscal 2006 versus $1,362,000 (54.7% of sales) in the first quarter of fiscal 2005.

        Selling, general and administrative expenses decreased to $524,000 (20.7% of sales) for the quarter ended September 30, 2005, compared to $667,000 (26.8% of sales) for the quarter ended September 30, 2004. Biotel has streamlined its management operations, resulting in decreases in selling, general and administrative expenditures. These reductions relate to the elimination of executive and sales management positions and the Company’s decision to terminate sales of its Holter software as had been previously distributed by Advanced Biosensor.

        Research and development expenditures for the three months ended September 30, 2005, were $221,000, 12.3% lower than the $252,000 expense in the three months ended September 30, 2004. Despite the first quarter decrease in research and development expenditures versus the prior fiscal year, Biotel is planning a substantial increase in research and development effort during fiscal year 2006.

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        Interest expense increased to $18,000 for the quarter ended September 30, 2005, compared to interest expense of $14,000 for the quarter ended September 30, 2004. The increase in interest expense was due to increasing interest rates and a higher average balance on the revolving line of credit during the first quarter of fiscal 2006.

        Net earnings for the fiscal quarter ended September 30, 2005 were up 30.8% to $174,000 versus $133,000, in the first quarter ended September 30, 2004. Net earnings for the quarter ended September 30, 2005 increased primarily as a result of reductions in expenses as described above.

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

        Working capital increased to $2,113,000 at September 30, 2005, compared to $1,921,000 at June 30, 2005. Working capital was improved by a reduction in the credit line balance to $149,000 on September 30, 2005, compared to a balance of $572,000 on June 30, 2005.

        Cash and cash equivalents were $22,000 at September 30, 2005, a slight increase of $5,000 from the balance of $17,000 at June 30, 2005. The ratio of current assets to current liabilities (“current ratio”) increased to 2.3 for the period ended September 30, 2005 from 1.9 for the period ended June 30, 2005.

        Accounts receivable decreased to $1,559,000 at September 30, 2005, compared to $2,132,000 at June 30, 2005, as a result of strong collections made in the quarter ended September 30, 2005.

        During the three months ended September 30, 2005, $34,000 of capital equipment was purchased versus $236,000 in the three months ended September 30, 2004. Equipment purchases in connection with the acquisition of Agility were responsible for the higher level of purchases in the first quarter of fiscal 2005. 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 $1,653,000 for the period ended September 30, 2005, compared to $1,468,000 for the period ended June 30, 2005. 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 decreased to $1,658,000 at September 30, 2005, compared to $2,166,000 at June 30, 2005. The decrease was primarily due to the decrease of $423,000 in the balance of the revolving line of credit.

        Long term liabilities were reduced to $442,000 at September 30, 2005, compared to $450,000 at June 30, 2005. In addition to payments of existing long term debt, the net effects of the reclassification of portions of long term debt and short term debt reduced long term liabilities by $8,000.

        As of September 30, 2005, stockholders’ equity had increased to $3,032,000, an increase of 6.1% from $2,858,000 at June 30, 2005. The increase in stockholders’ equity was principally the 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.

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Item 3:    Controls and Procedures

(a)    As of September 30, 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.

Part II

Item 1.    Legal Proceedings.   The litigation involving Biotel and Carroll L. Turner, the former president of two of Biotel’s wholly-owned subsidiaries, Advanced Biosensor, Inc. and Carolina Medical, Inc., has been settled. The matter, reported by Biotel in its June 6, 2005 Report on Form 8-K, was dismissed from Minnesota State District Court with prejudice on October 27, 2005. Biotel paid $25,000 to resolve the litigation, which amount included $21,000 of accrued vacation pay owed to Mr. Turner.

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

Item 3.    Defaults Upon Senior Securities.   Not applicable.

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

Item 5.    Other Information.   Not applicable.

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.

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Signatures

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

	BIOTEL INC.
Date:   November 10, 2005	By:		/s/   B. Steven Springrose
		Its:   Chief Executive Officer and President
Date:   November 10, 2005	By:		/s/   Judy E. Naus
		Its:   Chief Financial Officer

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