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)

(Zip Code)

Large accelerated filer  o

Accelerated filer  o

Non-accelerated filer  o

Smaller reporting company  x

Page

EXPLANATORY NOTE

SIGNATURES

BIOTEL INC. AND SUBSIDIARIES FINANCIAL STATEMENTS FOR YEARS ENDED JUNE 30, 2009 AND 2008

Biotel Inc.

Date:  February 8, 2010

By

/s/ B. Steven Springrose

B. Steven Springrose, President
and Chief Executive Officer

/s/ B. Steven Springrose

February 8, 2010

B. Steven Springrose
(President, Chief Executive Officer
and a Director)

/s/ Judy E. Naus

February 8, 2010

Judy E. Naus
(Chief Financial Officer
and Chief Accounting Officer)

/s/ C. Roger Jones*

February 8, 2010

C. Roger Jones
(Director)

/s/ Stanley N. Bormann*

February 8, 2010

Stanley N. Bormann
(Director)

/s/ L. John Ankney*

February 8, 2010

L. John Ankney
(Director)

/s/ David A. Heiden*

February 8, 2010

David A. Heiden
(Director)

/s/ Spencer M. Vawter*

February 8, 2010

Spencer M. Vawter
(Director)

__________
/s/ Judy E. Naus

* By Judy E. Naus, Attorney-in-fact

PAGE

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-3

FINANCIAL STATEMENTS

Consolidated balance sheets

F-4

Consolidated statements of income

F-5

Consolidated statements of cash flows

F-6

Consolidated statements of stockholders’ equity

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-8 – F-18

June 30,

2009

2008

ASSETS

CURRENT ASSETS

Cash and cash equivalents

$

1,160,409

$

945,121

Trade accounts receivable, net of allowance for doubtful accounts of $48,965 and $55,440 at June 30, 2009 and 2008, respectively

2,202,378

1,766,512

Prepaid income taxes

—

39,310

Inventories, net

1,878,397

1,428,163

Deferred tax asset

250,674

244,018

Prepaid expenses

120,098

109,903

Total Current Assets

5,611,956

4,533,027

PROPERTY & EQUIPMENT, Net

1,081,314

1,092,710

OTHER ASSETS

Goodwill

695,551

695,551

Other assets

13,820

13,820

Total Other Assets

709,371

709,371

$

7,402,641

$

6,335,108

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES

Revolving line of credit

$

—

$

187,146

Trade accounts payable

557,094

651,635

Accrued payroll and related liabilities

277,803

237,503

Deferred service contract revenue

93,855

133,359

Other accrued expenses

283,502

198,540

Income taxes payable

202,265

—

Total Current Liabilities

1,414,519

1,408,183

LONG-TERM LIABILITIES

Deferred taxes payable

329,183

224,967

COMMITMENTS AND CONTINGENCIES (See Notes 7 and 8)

Total Liabilities

1,743,702

1,633,150

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; 2,763,827 shares issued

27,638

27,638

Additional paid-in capital

2,158,638

2,145,594

Retained earnings

3,472,663

2,528,726

Total Stockholders’ Equity

5,658,939

4,701,958

$

7,402,641

$

6,335,108

For the years ended
June 30,

2009

2008

SALES AND SERVICES

$

12,639,636

$

11,495,326

COST OF SALES AND SERVICES

7,114,810

6,396,033

GROSS PROFIT

5,524,826

5,099,293

OPERATING EXPENSES

Selling and administrative

2,585,932

2,425,094

Research and development

1,601,525

1,674,380

Total operating expenses

4,187,457

4,099,474

INCOME FROM OPERATIONS

1,337,369

999,819

OTHER INCOME (EXPENSE)

Interest income

7,298

11,173

Interest expense

(590

)

(704

)

Miscellaneous

12,471

12,425

Total other income

19,179

22,894

NET INCOME BEFORE PROVISION FOR INCOME TAXES

1,356,548

1,022,713

PROVISION FOR INCOME TAXES

412,611

356,574

NET INCOME

$

943,937

$

666,139

INCOME PER SHARE

BASIC

$

0.34

$

0.25

DILUTED

$

0.33

$

0.23

For the years ended
June 30,

2009

2008

OPERATING ACTIVITIES

Net income

$

943,937

$

666,139

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization

389,198

324,511

Stock-based compensation

13,044

49,569

Deferred income tax

97,560

181,291

Increase (decrease) in allowance for doubtful accounts

(6,475

)

19,733

Decrease in inventory valuation allowance

(43,453

)

(188,973

)

Loss (gain) on disposal of property and equipment

529

(10,137

)

Changes in deferred and accrued amounts

Trade accounts receivable

(429,391

)

180,170

Prepaid income taxes

39,310

(39,310

)

Prepaid expenses

(10,195

)

74,246

Inventories

(406,781

)

(116,931

)

Other assets

—

(1,420

)

Trade accounts payable

(94,541

)

(26,459

)

Accrued payroll and related liabilities

40,300

(6,263

)

Other accrued expenses

84,962

(78,948

)

Deferred service contract revenue

(39,504

)

(44,610

)

Income taxes payable

202,265

(83,940

)

Net cash provided by operating activities

780,765

898,668

INVESTING ACTIVITIES

Purchases of property and equipment

(379,945

)

(716,387

)

Proceeds from sale of property and equipment

1,614

13,630

Net cash used for investing activities

(378,331

)

(702,757

)

FINANCING ACTIVITIES

Proceeds from issuance of common stock

—

53,750

Net change on line of credit

(187,146

)

187,146

Net cash provided by (used for) financing activities

(187,146

)

240,896

Net increase in cash and cash equivalents

215,288

436,807

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

945,121

508,314

CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2009 and 2008

$

1,160,409

$

945,121

CASH PAID FOR

Interest

$

621

$

675

Income Taxes

$

73,475

$

263,740

Additional
Paid-In
Capital

Retained
Earnings

Total

Common Stock

Amount

Shares

Balance, June 30, 2007

$

26,738

2,673,827

$

2,043,175

$

1,862,587

$

3,932,500

Exercise of stock options

900

90,000

52,850

—

53,750

Stock-based compensation

—

—

49,569

—

49,569

Net income

—

—

—

666,139

666,139

Balance, June 30, 2008

27,638

2,763,827

2,145,594

2,528,726

4,701,958

Stock-based compensation

—

—

13,044

—

13,044

Net income

—

—

—

943,937

943,937

Balance, June 30, 2009

$

27,638

2,763,827

$

2,158,638

$

3,472,663

$

5,658,939

Principles of consolidation

The consolidated financial statements include the accounts of Biotel Inc. and its wholly owned subsidiaries (collectively, the Company). Significant intercompany accounts and transactions are eliminated in consolidation.

Management estimates

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

Concentrations of credit risk

At times the Company maintains bank deposits in excess of the federally insured limit. Management monitors the soundness of these financial institutions and feels the Company’s risk is negligible.

The Company 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. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

Advertising and marketing

The Company follows the policy of charging the costs of advertising, except for costs associated with direct response advertising, to operating expenses as incurred. Advertising expenses totaled approximately $11,000 in each of the years ended June 30, 2009 and 2008.

Inventories

Inventories are valued at the lower of cost (using the average and first-in first-out cost methods) or market. Company management periodically reviews inventory for specific future usage, and estimates of impairment of individual inventory items are recorded as a reserve to reduce inventories to the lower of cost or market.

Property and equipment

Property, equipment and leasehold improvements are recorded at cost. Depreciation is calculated using the straight-line methods 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 related leases. Maintenance and repairs which do not improve or extend the useful lives of assets are charged to expense as incurred.

Goodwill

The Company accounts for the purchase price in excess of tangible assets (Goodwill) in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The goodwill arose from the acquisition of Braemar, Inc. Goodwill is deemed to have an indefinite useful life and is subject to impairment tests performed at least annually. During 2009 and 2008, such tests of goodwill determined the recorded goodwill had not been impaired.

Service contracts

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. At June 30, 2009 and 2008, current liabilities include service contract revenue deferrals of approximately $94,000 and $133,000, respectively.

Warranty reserve

The Company offers warranties of up to two years 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 June 30, 2009 and 2008, the warranty reserve totaled $186,424 and $87,512, respectively, and this amount is included in Other Accrued Expenses. The following is a reconciliation of the aggregate warranty liability as of June 30, 2009 and 2008:

2009

2008

Balance, beginning of year

$

87,512

$

75,906

Claims paid

(94,343

)

(98,299

)

Additional warranties issued and revisions in estimates of previously issued warranties

193,255

109,905

Balance, end of year

$

186,424

$

87,512

Revenue recognition

Revenues from medical equipment and software sales are recognized at date of shipment when title passes to the customer. There are no customer acceptance provisions, and the right to return exists only in cases of damaged product or non-compliance with customer specifications. Revenues for services provided by the Company are recognized as these services are provided.

The Company’s revenue recognition complies with the accounting and disclosure requirements of Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101.

Net income per common share

Net income per common share amounts are calculated under the provisions of SFAS No. 128, Earnings per Share. SFAS No. 128 requires the Company to report both basic net income per share, which is based on the weighted-average number of common shares outstanding, and diluted net income per share, which is based on the weighted-average number of common shares outstanding plus all potential dilutive shares outstanding. Potential dilutive shares consist of the stock options outstanding.

Stock options plans

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

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

Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. For the options issued, the following significant assumptions were used: risk-free interest rates based on date of issuance of 1.55% to 4.41%, no expected dividends, a volatility factor of 20.62 to 229.35, an expected life of the options of 5-10 years (amortized over the vesting period) and expected vesting of the options at 100%.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of Biotel Inc.’s options.

Research and Development

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 the Company.

Income taxes

Income taxes are provided for the tax effects of transactions reported in the consolidated 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 the 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 management expects is more likely than not to be realized.

In 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an Interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. FIN 48 was effective for fiscal years beginning after December 15, 2006. Accordingly, the Company adopted FIN 48 effective July 1, 2007. The adoption of FIN 48 did not have any impact on the Company’s consolidated financial position.

Cash and cash equivalents

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

Recently issued accounting standards

The following recently issued accounting pronouncements may affect future financial reporting of Biotel Inc.:

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification 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 for Accounting Standards Codification. SFAS 168, (FASB ASC 105-10-05, 10, 15, 65, 70) is effective for interim and annual periods ending after September 15, 2009.

SFAS 167 (not yet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”) was issued in June 2009. The standard amends FIN 46(R) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessments of whether a company is the primary beneficiary are also required by the standard. SFAS 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions that were available under FIN 46(R). SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effective date. The Company does not believe the adoption of SFAS 167 will have a material impact on its financial position, results of operations or cash flows.

Recently issued accounting standards (continued)

SFAS 165 (FASB ASC 855-10-05, 15, 25, 45, 50, 55), “Subsequent Events,” (“SFAS 165”) was issued in May 2009 and provides guidance on when a subsequent event should be recognized in the financial statements. Subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is the date the financial statements were issued or the date the financial statements were available to be issued. For non-recognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, should be disclosed. The standard is effective for interim or annual periods ending after June 15, 2009 (see Note 15).

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

2009

2008

Raw materials and supplies

$  

1,782,903

$  

1,374,588

Finished goods

235,534

229,169

Evaluation units and replacements

4,507

12,406

2,022,944

1,616,163

Valuation allowance

(144,547

)

(188,000

)

$

1,878,397

$

1,428,163

2009

2008

Machinery and equipment

$  

3,402,351

$  

3,030,258

Furniture and fixtures

34,791

34,791

Leasehold improvements

47,857

47,857

3,484,999

3,112,906

Accumulated depreciation

(2,403,685

)

(2,020,196

)

$

1,081,314

$

1,092,710

2010

$

169,980

2011

167,804

2012

18,902

$

356,686

Outstanding

Exercisable

Number
of Shares

Weighted
Average
Exercise
Price

Number
of Shares

Weighted
Average
Exercise
Price

Balance at June 30, 2007

301,000

$

1.2600

254,500

$

1.2230

Exercised

(90,000

)

0.5972

Balance at June 30, 2008

211,000

$

1.3635

203,500

$

1.5214

Granted

145,000

2.0472

Expired

(25,000

)

1.8200

Cancelled

(120,000

)

2.0000

Balance at June 30, 2009

211,000

$

1.6391

198,500

$

1.6171

2009

2008

Current provision for taxes

$

315,051

$

175,283

Change in deferred tax asset

97,560

195,350

Decrease in valuation allowance

—