Biotel (BTELE) 10-Q 2010 Q2 Quarterly report

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

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 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.

Yesx    Noo

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

Large accelerated filero    Accelerated filero    Non-Accelerated filero    Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act). Yeso    Nox

The number of shares of registrant’s common stock, par value $0.01 per share, outstanding as of as of February 1, 2010, was 2,783,827.

BIOTEL INC.

       INDEX       

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

i

Part I

Item 1:  Financial Information

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31, 2009 Unaudited		June 30, 2009 *
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,695,583	$	1,160,409
Trade 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		2,202,378
Inventories, net		1,702,764		1,878,397
Deferred tax asset		250,674		250,674
Refundable Income Taxes		154,736		—
Prepaid expenses		339,449		120,098
Total Current Assets		5,582,630		5,611,956
PROPERTY & EQUIPMENT, Net		1,014,903		1,081,314
OTHER ASSETS
Goodwill		695,551		695,551
Other assets		13,820		13,820
Total Other Assets		709,371		709,371
	$	7,306,904	$	7,402,641
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable		648,285		557,094
Accrued payroll and related liabilities		266,688		277,803
Deferred service contract revenue		80,907		93,855
Other accrued expenses		232,932		283,502
Income taxes payable		—		202,265
Total Current Liabilities		1,228,812		1,414,519
LONG-TERM LIABILITIES
Deferred taxes payable		329,183		329,183
COMMITMENTS AND CONTINGENCIES (See Note 9)
Total Liabilities		1,557,995		1,743,702
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 stated value; 2,000,000 shares authorized; no shares issued		—		—
Common stock, $.01 stated value; 10,000,000 shares authorized; 2,783,827 and 2,763,827 shares issued at December 31, 2009 and 2008, respectively		27,838		27,638
Additional paid-in capital		2,166,976		2,158,638
Retained earnings		3,554,095		3,472,663
Total 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

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

	For the three months ended December 31,
	2009			2008
SALES AND SERVICES	$	2,451,993		$	3,185,954
COST OF SALES AND SERVICES		1,418,870			1,722,510
GROSS PROFIT		1,033,123			1,463,444
OPERATING EXPENSES
Selling and administrative		850,047			599,724
Research and development		371,985			411,984
Total operating expenses		1,222,032			1,011,708
INCOME (LOSS) FROM OPERATIONS		(188,909	)		451,736
OTHER INCOME (EXPENSE)
Interest income		1,427			2,272
Interest expense		—			(25	)
Miscellaneous		437			—
Total other income		1,864			2,247
NET INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES		(187,045	)		453,983
PROVISION (CREDIT) FOR INCOME TAXES		(140,322	)		165,071
NET INCOME (LOSS)	$	(46,723	)	$	288,912
INCOME (LOSS) PER SHARE
BASIC	$	(0.02	)	$	0.10
DILUTED	$	(0.02	)	$	0.10

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

4

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

	For the six months ended December 31,
	2009			2008
SALES AND SERVICES	$	5,715,300		$	6,354,128
COST OF SALES AND SERVICES		3,385,640			3,441,555
GROSS PROFIT		2,329,660			2,912,573
OPERATING EXPENSES
Selling and administrative		1,516,412			1,182,384
Research and development		778,854			778,141
Total operating expenses		2,295,266			1,960,525
INCOME FROM OPERATIONS		34,394			952,048
OTHER INCOME (EXPENSE)
Interest income		2,851			4,496
Interest expense		—			(590	)
Miscellaneous		(13,813	)		13,000
Total other income (expense)		(10,962	)		16,906
NET INCOME BEFORE
PROVISION (CREDIT) FOR INCOME TAXES		23,432			968,954
PROVISION (CREDIT) FOR INCOME TAXES		(58,000	)		351,888
NET INCOME	$	81,432		$	617,066
INCOME PER SHARE
BASIC	$	0.03		$	0.22
DILUTED	$	0.03		$	0.22

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

5

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	For the six months ended December 31,
	2009			2008
OPERATING ACTIVITIES
Net income	$	324		$	617,066
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		191,094			174,560
Stock-based compensation		1,038			494
Decrease (increase) in allowance for doubtful accounts		315			(5,922	)
Decrease in inventory valuation allowance		22,743			22,230
Gain on disposal of property and equipment		(1,187	)		—
Changes in deferred and accrued amounts
Trade accounts receivable		762,639			23,592
Prepaid expenses		(219,351	)		(4,069	)
Inventories		152,890			(758,479	)
Trade accounts payable		91,191			29,047
Accrued 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	)		292,554
Net cash provided by operating activities		651,170			324,136
INVESTING ACTIVITIES
Purchases 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 ACTIVITIES
Net 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			945,121
CASH AND CASH EQUIVALENTS AS OF DECEMBER 31, 2009 and 2008	$	1,695,583		$	895,311
CASH PAID FOR
Interest	$	—		$	617
Income Taxes	$	279,500		$	20,000

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

6

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		Total
	Amount		Shares
Balance, June 30, 2008	$	27,638		2,763,827	$	2,145,594	$	2,528,726	$	4,701,958
Stock-based compensation		—		—		494		—		494
Net income		—		—		—		617,066		617,066
Balance, December 31, 2008	$	27,638		2,763,827	$	2,146,088	$	3,145,792	$	5,319,518
Balance, June 30, 2009	$	27,638		2,763,827	$	2,158,638	$	3,472,663	$	5,658,939
Stock-based compensation						1,038		—		1,038
Exercise of stock options		200		20,000		7,300		—		7,500
Net income		—		—		—		81,432		81,432
Balance, 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

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 Codification^TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162,” (“SFAS 168”).  SFAS 168 establishes theFASB Accounting Standards Codification^TM(“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) f or 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 changes will not have an impact on the Company’s fi nancial 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, 2009
Raw materials and supplies	$	1,722,210		$	1,782,903
Work in process		1,120			—
Finished goods		139,657			235,534
Evaluation units and replacements		7,067			4,507
		1,870,054			2,022,944
Valuation allowance		(167,290	)		(144,547	)
	$	1,702,764		$	1,878,397

8

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 Note8).  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, 2008
Beginning of Period, June 30, 2009 and 2008	$	186,424		$	87,512
Claims Paid		(54,208	)		(23,786	)
Additional warranties issued and revisions in estimates of previously issued warranties		34,702			25,606
End 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

A summary of the activity under the Company’soptionplan is as follows:

	Outstanding				Exercisable
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Balance at June 30, 2008	211,000		$	1.5853		203,500	$	1.5780
Granted	10,000		$	2.0100
Expired	(25,000	)	$	1.8200
Balance at December 31, 2008	196,000		$	1.5770		183,500	$	1.5490
Balance at June 30, 2009	211,000		$	1.6391		198,500	$	1.6171
Exercised	(20,000	)	$	0.3750
Balance 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			2008
Current provision (credit) for taxes	$	(75,322	)	$	165,071
Research 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		2008
Computed 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

The components of the provision(credit)for income taxes are as follows for the six months ended December 31, 2009 and 2008:

	2009			2008
Current provision for taxes	$	7,000		$	351,888
Research and development tax credits		(65,000	)		—
Total provision(credit)	$	(58,000	)	$	351,888

A reconciliation of income taxprovision (credit)at the statutory rate to the Company’s effective rate is as follows:

	2009		2008
Computed 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

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, 2009
	OEM Medical Sales & Services			Direct Medical Equipment Sales			Corporate			Totals
Domestic revenues	$	2,059,323		$	113,157		$	—		$	2,172,480
International revenues		243,977			35,536			—			279,513
Revenues from external customers		2,303,300			148,693			—			2,451,993
Income tax expense		(45,166	)		7,455			(102,611	)		(140,322	)
Depreciation and amortization		92,262			—			4,921			97,183
Segment profit (loss)		(99,043	)		12,555			39,765			(46,723	)
Goodwill		695,551			—			—			695,551
Total segment assets		4,887,399			62,847			2,356,658			7,306,904
Purchase of property and equipment		67,960			—			—			67,960
	Three months ended December 31, 2008
	OEM Medical Sales & Services			Direct Medical Equipment Sales			Corporate			Totals
Domestic revenues	$	2,585,468		$	146,268		$	—		$	2,731,736
International revenues		403,443			50,775			—			454,218
Revenues from external customers		2,988,911			197,043			—			3,185,954
Intersegment revenues		17,821			(17,821	)		—			—
Interest expense		—			—			25			25
Income tax expense		143,117			18,741			3,213			165,071
Depreciation and amortization		81,141			1,586			5,787			88,514
Segment profit		251,173			31,501			6,238			288,912
Goodwill		695,551			—			—			695,551
Total segment assets		5,708,138			67,079			1,244,969			7,020,186
Purchase of property and equipment		76,999			—			—			76,999

12

	Six months ended December 31, 2009
	OEM Medical Sales & Services		Direct Medical Equipment Sales			Corporate			Totals
Domestic revenues	$	5,010,499	$	220,402		$	—		$	5,230,901
International revenues		421,914		62,485			—			484,399
Revenues from external customers		5,432,413		282,887			—			5,715,300
Intersegment revenues		—		—			—			—
Interest expense		—		—			—			—
Income tax expense		71,450		15,416			(144,866	)		(58,000	)
Depreciation and amortization		181,252		—			9,842			191,094
Segment profit (loss)		97,757		25,936			(42,261	)		81,432
Goodwill		695,551		—			—			695,551
Total segment assets		4,887,399		62,847			2,356,658			7,306,904
Purchase of property and equipment		127,146		—			850			127,996
	Six months ended December 31, 2008
	OEM Medical Sales & Services		Direct Medical Equipment Sales			Corporate			Totals
Domestic revenues	$	5,227,048	$	311,477		$	—		$	5,538,525
International revenues		769,933		45,670			—			815,603
Revenues from external customers		5,996,981		357,147			—			6,354,128
Intersegment revenues		45,555		(45,555	)		—			—
Interest expense		—		—			590			590
Income tax expense		314,578		35,502			1,808			351,888
Depreciation and amortization		159,570		3,524			11,466			174,560
Segment profit		552,793		60,762			3,511			617,066
Goodwill		695,551		—			—			695,551
Total segment assets		5,708,138		67,079			1,244,969			7,020,186
Purchase 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 o f 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

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 a ction, 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.

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

Cautionary Statement

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

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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 mainta in 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.

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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, com missions, 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.

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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.

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During thefirst 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.

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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.

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Signatures

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

	Biotel Inc.
Date:  February 12, 2010	By:	/s/ B. Steven Springrose
		Its: Chief Executive Officer and President
Date:  February 12, 2010	By :	/s/ Judy E. Naus
		Its: Chief Financial Officer

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