<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File No.
October 31, 1995 0-13608
INNOSERV TECHNOLOGIES, INC.
California 95-3619990
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1611 Pomona Road, Corona, California 91720
(Address of principal executive offices)
Registrant's telephone number including area code (909) 736-4570.
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.
X
-----
YES NO
Shares of Registrant's common stock, $.01 par value,
outstanding at December 11, 1995 - 5,035,833
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INNOSERV TECHNOLOGIES, INC.
FORM 10-Q
OCTOBER 31, 1995
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Consolidated Statements of Cash Flow 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Report on Form 8K 16
Exhibit Index 18
Exhibit 10.1 Amendment No. 5 to Business Loan Agreement 19
Exhibit 10.2 Security Agreement 22
Exhibit 11.1 Computation of Per Share Earnings 27
Exhibit 27.1 Financial Data Schedules (EDGAR filing only) --
2
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INNOSERV TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
($000's)
OCTOBER 31, 1995 APRIL 30,1995
---------------- -------------
(Reclassified)
ASSETS
Current assets
Cash and cash equivalents $ 131 $ 1,827
Receivables 6,061 7,284
Inventory 10,580 9,199
Deferred income taxes 1,249 1,192
Prepaid expenses 502 532
------- -------
Total current assets 18,523 20,034
Equipment, net 5,884 6,056
Deferred income taxes 2,155 2,155
Goodwill, net 3,621 3,698
Long-term notes receivable & other assets 1,675 1,310
------- -------
$31,858 $33,253
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,637 $ 2,916
Accrued liabilities 3,747 4,258
Deferred revenues 5,736 5,521
Current portion of long-term debt 1,451 3,262
------- -------
Total current liabilities 14,571 15,957
Long-term debt 60 141
Shareholders' equity
Common stock, $.01 par value
10,000,000 shares authorized
5,035,833 shares issued and
outstanding at October 31, 1995
(5,035,833 at April 30, 1995) 51 51
Paid-in capital 17,303 17,303
Retained earnings (127) (199)
------- -------
Total shareholder's equity 17,227 17,155
------- -------
$31,858 $33,253
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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INNOSERV TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
($000's)
THREE MONTHS ENDED
---------------------------------------
OCTOBER 31, 1995 OCTOBER 28, 1994
---------------- ----------------
Revenues $11,898 $13,395
Costs and expenses
Cost of operations 9,247 11,493
Depreciation 501 646
Selling and administrative 1,807 2,126
Interest expense (income) 35 10
------- -------
Total costs and expenses 11,590 14,275
------- -------
Income (loss) before income taxes 308 (880)
Provision (benefit) for income taxes 123 (352)
------- -------
Net income (loss) $ 185 $ (528)
======= =======
PER SHARE INFORMATION:
Net income (loss) $ .04 $ (.11)
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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INNOSERV TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
($000's)
SIX MONTHS ENDED
--------------------------------------
OCTOBER 31, 1995 OCTOBER 28, 1994
---------------- ----------------
Revenues $23,866 $22,057
Costs and expenses
Cost of operations 18,713 19,216
Depreciation 986 1,137
Selling and administrative 3,963 3,616
Interest expense (income) 84 1
------- -------
Total costs and expenses 23,746 23,970
------- -------
Income (loss) before income taxes 120 (1,913)
Provision (benefit) for income taxes 49 (765)
------- -------
Net income (loss) $ 71 $(1,148)
======= =======
PER SHARE INFORMATION:
Net income (loss) $ .01 $ (.29)
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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INNOSERV TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
($000's)
SIX MONTHS ENDED
--------------------------------------
OCTOBER 31, 1995 OCTOBER 28, 1994
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 72 $(1,148)
Adjustments to reconcile net loss
to net cash flows from operations:
Depreciation and amortization 986 1,137
Deferred income taxes (57) (6)
Changes in assets and liabilities:
Receivables 1,224 (1,227)
Inventory (1,381) 314
Prepaid expenses 30 45
Accounts payable 721 (291)
Accrued liabilities (607) (896)
Other assets (327) --
Deferred revenues 217 174
------ ------
Net cash provided by operating activities 878 (1,898)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business operations -- (299)
Net book value of equipment sold 112 223
Purchase of equipment (887) (162)
------ ------
Net cash provided by (used in) investing
activities (775) (238)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from line of credit -- 2,555
Principal payments of long-term debt (1,799) (1,288)
Exercise of stock options -- 211
Payment of dividends -- (565)
------ ------
Net cash used in financing activities (1,799) 913
------ ------
Increase (decrease) in cash (1,699) (1,223)
Cash at beginning of period 1,827 1,341
------ ------
Cash at end of period $ 131 $ 118
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
6
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INNOSERV TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements included herein have been
prepared by the Company without audit, include all adjustments which are, in
the opinion of management, necessary for a fair presentation of the results
of operations for the three and six months ended October 31, 1995 and October
28, 1994, pursuant to the rules and regulations of the Securities and
Exchange Commission, and include the accounts of the Company and its
consolidated subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Any and all adjustments made are of a
normal and recurring nature in accordance with Rule 10-01(b)(8) of Regulation
S-X. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulation however, the Company believes that the disclosures in such
financial statements are adequate to make the information presented not
misleading. These condensed financial statements should be read in
conjunction with the Company's annual report on Form 10-K for the fiscal year
ended April 30, 1995, filed with the Securities and Exchange Commission. The
results of operations for the three and six months ended October 31, 1995 and
October 28, 1994, are not necessarily indicative of the results for the full
year.
2. RECLASSIFICATIONS
The fiscal 1996 presentation includes reclassifications from that previously
presented. Such reclassifications are comprised of advance billings,
previously classified as a reduction in receivables, which are presently
classified as deferred revenues as well as the classification of the
Company's Advanced Imaging Technologies, Inc. subsidiary ("AIT") as a
continuing operation (see Note 3).
3. DISCONTINUED OPERATION
In October 1994, the Company announced the adoption by the Company's Board of
Directors of a plan to dispose of the operations of AIT. Thereafter, the
Company actively marketed AIT but was unable to locate a buyer. At October
28, 1994 and April 30, 1995, AIT was classified as a discontinued operation
in the Company's financial statements. Concurrent with the election to
dispose of AIT, the Company made certain changes in the operations of AIT,
which resulted in improved profitability. Additionally, as InnoServ's Asset
Management service program continues to grow, AIT's capability to repair and
maintain a variety of x-ray film processors which are serviced under the
Asset Management program, enables AIT to play a strategic role in support of
such growth. In the first quarter of fiscal 1996, as a result of both
improved profitability and the strategic capabilities of AIT, the Company's
Board of Directors elected not to dispose of AIT. Accordingly, AIT has been
reclassified back to continuing operations in the Company's financial
statements included with this report.
7
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INNOSERV TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
4. NET INCOME PER SHARE
Net income per share is based on the weighted average number of common and
common share equivalents during each period, as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
------------ ----------
October 31, 1995 5,035,833 5,037,538
October 28, 1994 4,951,493 3,893,973
5. INCOME TAXES
The provision (benefit) for taxes for the three and six months ended October
31, 1995 and October 28, 1994, is based on the estimated annual tax rates for
fiscal 1996 and 1995, respectively, and include the benefit of various tax
credits. The components of the provision (benefit) for taxes based on income
(loss) for the three and six months ended October 31, 1995 and October 28,
1994 are as follows ($000's):
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
OCTOBER 31, OCTOBER 28, OCTOBER 31, OCTOBER 28,
1995 1994 1995 1994
-------------------------- --------------------------
Current:
Federal $109 $ (80) $ 43 $(185)
State 45 (81) 18 (187)
Deferred:
Federal (75) (131) (29) (300)
State 44 42 17 92
-------------------------- --------------------------
$123 $(250) $ 49 $(580)
-------------------------- --------------------------
8
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INNOSERV TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
6. LONG-TERM DEBT
The Company has an agreement with a bank to provide the Company with a
$2,000,000 line of credit, $1,200,000 of which was utilized at the end of the
second quarter of fiscal 1996. Subsequent to the end of the second fiscal
quarter, the Company borrowed an additional $500,000. As part of the
Company's plan to relocate its headquarters operations to Arlington, Texas,
the Company is currently finalizing negotiations to secure an expanded credit
facility with a bank located in the Arlington area. The Company was in
compliance with all financial covenants required by such agreement at the end
of the second quarter.
7. SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest of $52,000 and $100,000 was paid in the three and six month periods
ended October 31, 1995 respectively. No income taxes were paid during the
periods.
8. NAME CHANGE
On October 6, 1995, the Company changed its name from MMI Medical, Inc. to
InnoServ Technologies, Inc.
9. INTERIM PRO FORMA FINANCIAL INFORMATION
On August 3, 1994, the Company acquired (the "Acquisition") MEDIQ Equipment
and Maintenance Services, Inc. ("MEMS"), a wholly owned subsidiary of MEDIQ
Incorporated in exchange for 2,006,438 shares of the Company's common stock
and a warrant to purchase 325,000 shares thereof at an exercise price of
$6.25 per share exercisable through August 3, 1998. An additional 20,000
shares of the Company's common stock was issued to MEDIQ in connection with a
noncompetition agreement which became effective as of the closing of the
Acquisition. The estimated aggregate purchase price, including expenses of
the Acquisition, was approximately $6,565,000. Following the Acquisition,
the Company combined the operations of its R Squared subsidiary with those of
MEMS and changed the name of R Squared to InnoServ Technologies, Inc.
("InnoServ") in September 1994.
The Acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets acquired based on their appraised
fair market values. Costs in excess of net assets acquired, related to the
Acquisition, of approximately $1,637,000 is being amortized on a
straight-line basis over 20 years. The results of operations of MEMS have
been reflected in the Consolidated Financial Statements of the Company since
the date of the Acquisition.
9
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INNOSERV TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
The following Pro Forma Consolidated Statements of Operations for the six
months ended October 28, 1994 give effect to the Acquisition as if it
occurred as of April 30, 1994. The Pro Forma Consolidated Statements of
Operations for the six months ended October 28, 1994 are unaudited, but in
the opinion of the Company include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results of
operation and financial position for the periods presented.
The historical data of the Company included in the pro forma financial
statements is as of the periods presented. The historical data of MEMS
included in Pro Forma Consolidated Statements of Operations is for the three
months ended August 2, 1994.
The Pro Forma Consolidated Statements of Operations for the six months ended
October 28, 1994 are not necessarily indicative of the results of operations
that actually would have taken place had the Acquisition been consummated as
of the date indicated, or that may be achieved in the future and should be
read in conjunction with the notes in such statements.
10
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INNOSERV TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
SIX MONTHS ENDED OCTOBER 28, 1994
(IN $000'S, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------
PRO FORMA CONSOLIDATED
INNOSERV MEMS(1) ADJUSTMENTS TOTAL
----------------------------------------------
Revenues $22,057 $4,576 $26,633
Costs and expenses
Costs of operations 19,216 4,023 (606)(2) 22,633
Depreciation and amortization 1,137 360 (201)(3) 1,296
Selling and administrative 3,616 494 (166)(4) 3,944
Interest expense (income), net 1 54 -- 55
----------------------------------------------
Total costs and expenses 23,970 4,931 (973) 27,928
----------------------------------------------
Loss before taxes (1,913) (355) 973 (1,295)
Benefit for income taxes (765) (101) 348(5) (518)
----------------------------------------------
Net loss $(1,148) $ (254) $ 625 $(777)
==============================================
Net loss per share $(.29) N/A $(.18)
==============================================
- -----------------------------------------
NOTES:
(1) Historical data of MEMS is for the three months ended August 2, 1994.
(2) Reflects the elimination of certain duplicate positions, resulting in a
reduction in cost of operations of approximately $482,000 in salaries and
benefits for the period. Amortization of the spare parts inventory over a
seven year period, consistent with that of InnoServ, is expected to result in
reduced amortization expenses of $495,000, annually.
(3) As a result of purchase accounting adjustments, depreciation and
amortization expense will change. Depreciating the new basis over a five
year period will result in a reduction to such expense of $922,000 annually.
Amortization of the additional goodwill and covenant not to compete will
result in increased amortization expense of $117,000 annually.
(4) Reflects the elimination of certain duplicate positions, resulting in a
reduction in selling and administrative expense of approximately $166,000 in
salaries and benefits for the period.
(5) Consolidated provision for income taxes is calculated at 40%.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
ACQUISITION OF MEDIQ EQUIPMENT & MAINTENANCE SERVICES, INC.
On August 3, 1994, the Company acquired (the "Acquisition") MEDIQ Equipment
and Maintenance Services, Inc. ("MEMS"), a wholly owned subsidiary of MEDIQ
Incorporated in exchange for 2,006,438 shares of the Company's common stock
and a warrant to purchase 325,000 shares thereof at an exercise price of
$6.25 per share exercisable through August 3, 1998. An additional 20,000
shares of the Company's common stock was issued to MEDIQ in connection with a
noncompetition agreement which became effective as of the closing of the
Acquisition. The estimated aggregate purchase price, including expenses of
the Acquisition, was approximately $6,565,000. Following the Acquisition,
the Company combined the operations of its R Squared subsidiary with those of
MEMS and changed the name of R Squared to InnoServ Technologies, Inc.
("InnoServ") in September 1994.
DISCONTINUED OPERATION
In October 1994, the Company announced the adoption by the Company's Board of
Directors of a plan to dispose of the operations of AIT. Thereafter, the
Company actively marketed AIT but was unable to locate a buyer. At October
28, 1994 and April 30, 1995, AIT was classified as a discontinued operation
in the Company's financial statements. Concurrent with the election to
dispose of AIT, the Company made certain changes in the operations of AIT,
which resulted in improved profitability. Additionally, as InnoServ's Asset
Management service program continues to grow, AIT's capability to repair and
maintain a variety of x-ray film processors which are serviced under the
Asset Management program, enables AIT to play a strategic role in support of
such growth. In the first quarter of fiscal 1996, as a result of both
improved profitability and the strategic capabilities of AIT, the Company's
Board of Directors elected not to dispose of AIT. Accordingly, AIT has been
reclassified back to continuing operations in the Company's financial
statements included with this report (see Note 3 to the Notes to Condensed
Consolidated Financial Statements).
NAME CHANGE
Effective October 6, 1995, the Company changed its name from MMI Medical,
Inc. to InnoServ Technologies, Inc.
12
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RESULTS OF OPERATIONS
SECOND QUARTER FISCAL 1996 COMPARED TO SECOND QUARTER FISCAL 1995
Consolidated revenues decreased approximately $1,500,000 to $11,898,000 from
$13,395,000 as a result of strategic changes at both AIT and the Company's
diagnostic imaging operation, as well as the continued declines in the number
of Computed Tomography ("CT") maintenance agreements in effect. Revenues at
AIT declined approximately $550,000, primarily from lower sales of x-ray
film, chemistry and related accessories, as a result of AIT's planned exit
from the traditionally low-margin institutional x-ray film market. Revenues
at the Company's diagnostic imaging operation declined approximately $450,000
resulting from the discontinuance of its fee-for-service operations,
decreased utilization of rental equipment and fewer rental units in the
fleet. Revenues from the Company's Multi-Vendor Asset Management Service
Program ("Asset Management") increased approximately $1.2 million or 84% and
MRI maintenance agreements increased approximately $275,000 or 37% in the
second quarter of fiscal 1996 compared to the same period in the prior fiscal
year. Additionally, the Company recorded a net decrease of approximately
$475,000 in revenues from the sale of equipment and an increase in the sale
of labor, parts and x-ray tubes of approximately $550,000 compared to the
same period in the prior fiscal year.
During the second quarter, the Company was selected by Intermountain Health
Care, Inc. ("IHC") in Salt Lake City, Utah to provide all of IHC's
twenty-four (24) hospitals with the Company's Asset Management service
program for an initial term of five years. Partial implementation of this
program commenced October 1, 1995 with complete implementation expected on
January 1, 1996. The Company also entered into agreements with two group
purchasing organizations to provide member hospitals with access to the
Company's various radiology maintenance service programs and with a provider
of telemedicine products to provide installation, warranty and after-warranty
service. Subsequent to the end of the current quarter, the Company was
awarded a five-year contract to provide biomedical and laboratory repair
services to Children's Hospital, Columbus, Ohio.
Cost of operations decreased approximately $2,250,000, from 86% to 78% of
revenue, from the same period in the prior fiscal year resulting primarily
from a decrease in the cost of parts, supplies and materials related to the
provision of CT maintenance services and cost of x-ray film, chemistry and
related accessories sold at AIT. Additionally, in the second quarter of
fiscal 1995, the Company experienced higher than normal expenses for x-ray
tubes as a result of higher utilization and a non-recurring supplier problem.
Depreciation costs decreased from the prior year approximately 24% primarily
as a result of purchase accounting adjustments associated with the
Acquisition. Selling and Administrative expenses decreased approximately 15%
from the second quarter of fiscal 1995 as a result of decreases in salary,
bad debt expense and occupancy costs from elimination of duplicate
administrative personnel, improved collection of accounts receivable and
lower facility expense for the Company's Arlington, Texas facility,
respectively.
Income (loss) before income taxes increased approximately $1,190,000 from a
loss of $880,000 in fiscal 1995 to income of $308,000 in fiscal 1996 as a
result of decreased operating, selling and administrative costs and the
associated improvement in margins as all operating units reduced operating
infrastructure costs. Additionally, cost reductions and price increases
improved margins at
13
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AIT producing an operating profit in the current quarter of fiscal 1996
compared with an operating loss in the prior fiscal year.
Interest expense increased to $49,000 in the first quarter of fiscal 1995
from income of $9,000 in the same period of the prior year as a result of the
assumption of long-term debt associated with the Acquisition and borrowings
from the Company's line of credit. The effective tax rate remained at 40%
and the provision (benefit) for income taxes increased $475,000 from a
benefit of $352,000 in the second quarter of fiscal 1995 to an expense of
$123,000 in the second quarter of fiscal 1996 as a result of the Company's
return to profitability.
SIX MONTHS FISCAL 1996 COMPARED TO SIX MONTHS FISCAL 1995
The net increase in consolidated revenues of approximately $1,810,000 to
$23,866,000 from $22,057,000 resulted from primarily from the Acquisition.
Revenues from Asset Management service agreements increased approximately
$3,470,000 and Magnetic Resonance Imaging ("MRI") maintenance agreements
added approximately $930,000 in revenues, while the Company concurrently
experienced a net decrease in revenues from CT maintenance service agreements
of approximately $1,480,000. Revenues at the Company's diagnostic imaging
operation decreased approximately $380,000 due to the discontinuance of its
fee-for-service operations, decreased utilization of rental equipment and
fewer rental units in the fleet. Revenues at AIT declined approximately
$850,000 resulting primarily from lower sales of x-ray film, chemistry and
related accessories to institutional customers.
On a pro forma basis (see Note 9 to the Notes to Condensed Consolidated
Financial Statements), consolidated revenues decreased approximately
$2,770,000 resulting primarily from a substantial decline in the number of CT
maintenance agreements in effect in the first six months of fiscal 1996
compared to the total of such agreements in effect for R Squared and MEMS
combined in the first six months of fiscal 1995. The Company continues to
experience a decline in the number of such agreements in effect and expects
this trend to continue primarily as a result of customer's older CT equipment
being upgraded or removed from service and not replaced. Asset Management
revenues increased on a pro forma basis by approximately $2,100,000 or 76%
and revenues from MRI maintenance agreements increased approximately
$4,450,000 or 31%.
Cost of operations decreased approximately $500,000, falling from 87% of
revenue in the second quarter of fiscal 1995 to 78% in the same period of
fiscal 1996. This decline resulted primarily from a decrease in the cost of
maintenance expense at the diagnostic imaging operation and reduced expenses
for x-ray film, chemistry and related accessories sold at AIT (directly
associated with the decline in revenue from the sale of such items).
Depreciation costs decreased from the prior year approximately 24% primarily
as a result of certain rental units operated by the imaging operations
becoming fully depreciated at the end of fiscal 1995 as well as certain
purchase accounting adjustments associated with the Acquisition. Selling and
Administrative expenses increased approximately 10% from the first six months
of fiscal 1995 primarily associated with the Acquisition, which resulted in
the inclusion of labor expense for the full six months in 1996 compared to
only three months in fiscal 1995. On a pro forma basis, Selling and
Administrative expenses remained constant from the same period in the prior
fiscal year.
14
<PAGE>
Income (loss) before income taxes increased approximately $2,030,000 from a
loss of $1,913,000 in the first six months of fiscal 1995 to income of
$120,000 in the same period in fiscal 1996 as a result of improved margins as
all operating units reduced operating infrastructure costs. Cost reductions
and price increases substantially improved margins at AIT producing an
operating profit in the first six months of fiscal 1996 compared with an
operating loss in the prior fiscal year. Operating margins also improved at
the diagnostic imaging operation as a result of reduced expenses noted above
and the elimination of the infrastructure associated with the fee-for-service
mobile CT operations.
Interest expense increased to $84,000 in the first quarter of fiscal 1995
from expense of $1,000 in the same period of the prior year as a result of
the assumption of long-term debt associated with the Acquisition and
borrowings from the Company's line of credit. The effective tax rate
remained at 40% and the provision for income taxes increased $814,000 from a
benefit of $765,000 in the first six months of fiscal 1995 to an expense of
$49,000 in fiscal 1996 as a result of the Company's return to profitability.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1995, the Company had net working capital of $3,952,000, a
decrease of $125,000 from April 30, 1995. The Company has a $2,000,000
revolving line of credit with a bank, of which $1,200,000 was utilized at
October 31, 1995. The Company was in compliance with all financial covenants
required by such agreement at the end of the second quarter. Subsequent to
the end of the second fiscal quarter, the Company borrowed an additional
$500,000. As part of the Company's plan to relocate its headquarters
operations to Arlington, Texas, the Company expects to finalize negotiations
to secure an expanded credit facility with a bank located in the Arlington
area.
The Company believes that internally generated funds and its existing credit
facility will provide sufficient capital resources to finance operations,
fund planned capital expenditures and make interest payments on outstanding
borrowings in both the short and long term.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on September 15, 1995. Items
voted on at the annual meeting were as follows:
1. To elect directors to hold office until the 1996 Annual Meeting of
Shareholders and until their successors are elected and qualified. The
following directors were elected:
VOTES CAST
------------------------
DIRECTOR FOR WITHHELD
- -------- --------- --------
Dudley A. Rauch 4,457,500 41,092
Samuel Salen, M.D. 4,460,305 38,287
Bernard J. Korman 4,459,699 38,893
Michael M. Sachs 4,460,774 37,848
Michael F. Sandler 4,459,699 38,893
David A. Wegmann 4,462,505 36,087
2. Approval of the Amendment to the Company's Articles of Incorporation
to change the Company's name from "MMI Medical, Inc." to "InnoServ
Technologies, Inc.":
For: 4,382,333 Against: 98,190 Abstain: 18,069 Broker non-votes: 0
ITEM 5. OTHER INFORMATION.
(a) Effective October 6, 1995, the Company changed its name from MMI Medical,
Inc. to InnoServ Technologies, Inc.
(b) On December 14, 1995, the Company announced the appointment of Michael G.
Puls as President and Chief Executive Officer of the Company. The Company
expects Mr. Puls to assume his duties prior to the end of December 1995.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
(a) Exhibit Index is included herewith at page 18.
(b) Report on Form 8-K. None
16
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: December 15, 1995
INNOSERV TECHNOLOGIES, INC.
By: /s/ Samuel Salen, M.D.
-----------------------------------
Samuel Salen, M.D.
President and Chief Executive Officer
17
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EXHIBIT INDEX
Exhibit PAGE
- ------- ----
10.1 Amendment No. 5 to Business Loan Agreement 19
10.2 Security Agreement 22
11.1 Computation of Per Share Earnings 27
27.1 Financial Data Schedules (EDGAR filing only) --
18
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Bank of America Amendment to Documents
- -----------------------------------------------------------------------------
AMENDMENT NO. 5 TO BUSINESS LOAN AGREEMENT
This Amendment No. 5 (the "Amendment") dated as of --------------, 1995 is
between Bank of America National Trust and Savings Association (the "Bank")
and MMI Medical, Inc. (the "Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of October 1, 1993, as previously amended (the "Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
2.1 In subparagraph (a) of Paragraph 1.1 of the Agreement, the amount "Two
Million Dollars ($2,000,000)" is substituted for the amount "Five Million
Dollars ($5,000,000)."
2.2 Subparagraph (a) of Paragraph 1.3 of the Agreement is amended and
restated in its entirety to read as follows:
"(a) Unless the Borrower elects an optional interest rate as described
below, the interest rate is the Bank's Reference Rate plus 1.00 percentage
point."
2.3 Paragraph 2.2 of the Agreement is amended and restated in its entirety
to read as follows:
"2.2 Expenses.
(a) The Borrower agrees to immediately repay the Bank for expenses that
include, but are not limited to, filing, recording and search fees, appraisal
fees, title report fees, and documentation fees.
(b) The Borrower agrees to reimburse the Bank for any expenses it incurs in
the preparation of this Agreement and any agreement or instrument required by
this Agreement. Expenses include, but are not limited to, reasonable
attorney's fees, including any allocated costs of the Bank's in-house counsel.
(c) The Borrower agrees to reimburse the Bank for the cost of periodic
audits and appraisals of the personal property collateral securing this
Agreement, at such intervals as the Bank may reasonably require. The audits
and appraisals may be performed by employees of the Bank or by independent
appraisers."
2.4 The first paragraph of Article 4 is amended in its entirety to read as
follows:
"The Bank must receive the following items, in form and content acceptable to
the Bank, before it is required to extend any credit to the Borrower under
this Agreement."
<PAGE>
2.5 New paragraphs 4.2, 4.3, 4.4 and 4.5 are added to Article 4 of the
Agreement to read as follows"
"4.2 Security Agreements. Signed original security agreement,
assignments, financing statements and fixture filings (together with
collateral in which the Bank requires a possessory security interest), which
the Bank requires.
4.3 Evidence of Priority. Evidence that security interests and liens
in favor of the Bank are valid, enforceable, and prior to all others' rights
and interests, except those the Bank consents to in writing.
4.4 Insurance. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
4.5 Other Items. Any other items that the Bank reasonably requires."
2.6 A new Paragraph 5.14 is added to the Agreement to read as follows:
"5.14 Collateral. All collateral required in this Agreement is owned
by the grantor of the security interest free of any title defects or any
liens or interests of others."
2.7 Paragraph 6.11 of the Agreement is amended in its entirety to read as
follows:
"6.11 Dividends. Not to declare or pay any dividends on any of its
shares except dividends payable in capital stock of the Borrower, and not to
purchase, redeem or otherwise acquire for value any of its shares, or create
any sinking fund in relation thereto."
2.8 Paragraph 6.19 of the Agreement is amended in its entirety to read as
follows:
"6.19 Insurance.
(a) Insurance Covering Collateral. To maintain all risk property damage
insurance policies covering the tangible property comprising the collateral.
Each insurance policy must be in an amount reasonably acceptable to the Bank.
The insurance must be issued by an insurance company reasonably acceptable to
the Bank and must include a lender's loss payable endorsement in favor of the
Bank in a form reasonably acceptable to the Bank.
(b) General Business Insurance. To maintain insurance as is usual for the
business it is in.
(c) Evidence of Insurance. Upon the request of the Bank, to deliver to the
Bank a copy of each insurance policy or, if permitted by the Bank, a
certificate of insurance listing all insurance in force."
2.9 A new paragraph 6.22 is added to the Agreement to read as follows:
"6.22 Perfections of Liens. To help the Bank perfect and protect its
security interests and liens, and reimburse it for related costs it incurs to
protect its security interests and liens."
2.10 A new Paragraph 7.14 of the Agreement is added to the Agreement to read
as follows:
"7.14 Lien Priority. The Bank fails to have an enforceable first lien
(except for any prior liens to which the Bank has consented in writing) on or
security interest in any property given as security for this loan."
2.11 A new Article 9 is added to the Agreement to read as follows:
<PAGE>
"9. COLLATERAL
9.1 Personal Property. The Borrower's obligations to the Bank under
this Agreement will be secured by personal property the Borrower now owns or
will own in the future as listed below. The collateral is further defined in
security agreement executed by the Borrower. In addition, all personal
property collateral securing this Agreement shall also secure all other
present and future obligations of the Borrower to the Bank (excluding any
consumer credit covered by the federal Truth in Lending law, unless the
Borrower has otherwise agreed in writing). All personal property collateral
securing any other present or future obligations of the Borrower to the Bank
shall also secure this Agreement.
(a) Machinery, equipment, and fixtures.
(b) Inventory.
(c) Receivables."
3. Conditions. This Amendment will be effective when the Bank receives the
following items, in form and content acceptable to the Bank:
3.1 An executed Corporate Resolution to Obtain Credit signed Samuel Salen
and James P. Butler in the amount of Two Million Dollars ($2,000,000).
3.2 An executed Security Agreement (Receivables, Inventory and Equipment)
signed by Samuel Salen and James P. Butler.
3.3 An executed Financing Statement (UCC-1) signed by Samuel Salen and James
P. Butler
4. Effect of Amendment. Except as provided in this Amendment, all of the
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
Bank of America MMI Medical, Inc.
National Trust and Savings Association
/s/ Helen C. Wilson /s/ Samuel Salen
- ----------------------------------- -----------------------------------
By: Helen C. Wilson, Vice President By: Samuel Salen, President and
Chief Executive Officer
/s/ James P. Butler
-----------------------------------
By: James P. Butler, Assistant
Secretary, Treasurer and Chief
Financial Officer
<PAGE>
Bank of America Security Agreement
(Receivables, Inventory and Equipment)
- ---------------------------------------------------------------------------
1. THE SECURITY. The undersigned MMI Medical, Inc. ("Borrower") hereby
assigns and grants to Bank of America National Trust and Savings Association
("Bank") a security interest in the following described property
("Collateral"):
A. All of the following, whether now owned or hereafter acquired by
Borrower: accounts, contract rights, chattel paper, instruments, deposit
accounts and general intangibles.
B. All inventory now owned or hereafter acquired by Borrower.
C. All machinery, furniture, fixtures and other equipment of every type now
owned or hereafter acquired by Borrower (including, but not limited to, the
equipment described in the attached Equipment Description, if any).
D. All negotiable and nonnegotiable documents of title now owned or
hereafter acquired by Borrower covering any of the above-described property.
E. All rights under contracts of insurance now owned or hereafter acquired
by Borrower covering any of the above-described property.
F. All proceeds, product, rents and profits now owned or hereafter acquired
by Borrower of any of the above-described property.
G. All books and records now owned or hereafter acquired by Borrower
pertaining to any of the above-described property, including but not limited
to any computer-readable memory and any computer hardware or software
necessary to process such memory ("Books and Records").
2. THE INDEBTEDNESS. The Collateral secures and will secure all
Indebtedness of Borrower to Bank. For the purposes of this Agreement,
"Indebtedness" means all loans and advances made by Bank to Borrower and all
other obligations and liabilities of Borrower to Bank, whether now existing
or hereafter incurred or created, whether voluntary or involuntary, whether
due or not due, whether absolute or contingent, or whether incurred directly
or acquired by Bank by assignment or otherwise. Unless Borrower shall have
otherwise agreed in writing, Indebtedness, for the purposes of this
Agreement, shall not include "consumer credit" subject to the disclosure
requirements of the Federal Truth in Lending Act or any regulations
promulgated thereunder.
3. BORROWER'S COVENANTS. Borrower covenants and warrants that unless
compliance is waived by Bank in writing:
A. Borrower will properly preserve the Collateral; defend the Collateral
against any adverse claims and demands; and keep accurate Books and Records.
B. Borrower has notified Bank in writing of, and will notify Bank in writing
prior to any change in, the locations of (i) Borrower's place of business or
Borrower's chief executive office if Borrower has more than one place of
business, and (ii) any Collateral, including the Books and Records.
C. Borrower will notify Bank in writing prior to any change in Borrower's
name, identity or business structure.
<PAGE>
D. Borrower will maintain and keep in force insurance covering Collateral
designated by Bank against fire and extended coverages. Such insurance shall
require losses to be paid on a replacement cost basis (except with respect to
mobile CT scanners and cardiac cath labs), be issued by insurance companies
acceptable to Bank and include a loss payable endorsement in favor of Bank in
a form acceptable to Bank.
E. Borrower has not granted and will not grant any security interest in any
of the Collateral except to Bank, and will keep the Collateral free of all
liens, claims, security interests and encumbrances of any kind or nature
except the security interest of Bank.
F. Borrower will not sell, lease, agree to sell or lease, or otherwise
dispose of, or remove from Borrower's place of business (i) any inventory
except in the ordinary course of business as heretofore conducted by
Borrower, or (ii) any other Collateral except with the prior written consent
of Bank.
G. Borrower will promptly notify Bank in writing of any event which affects
the value of the Collateral, the ability of Borrower or Bank to dispose of
the Collateral, or the rights and remedies of Bank in relation thereto,
including, but not limited to, the levy of any legal process against any
Collateral and the adoption of any marketing order, arrangement or procedure
affecting the Collateral, whether governmental or otherwise.
H. If any Collateral is or becomes the subject of any registration
certificate or negotiable document of title, including any warehouse receipt
or bill of lading, Borrower shall immediately deliver such document to Bank.
I. Borrower will not attach any Collateral to any real property or fixture
in a manner which might cause such Collateral to become a part thereof unless
Borrower first obtains the written consent of any owner, holder of any lien
on the real property or fixture, or other person having an interest in such
property to the removal by Bank of the Collateral from such real property, or
fixture. Such written consent shall be in form and substance acceptable to
Bank and shall provide that Bank has no liability to such owner, holder of
any lien, or any other person.
J. Until Bank exercises its rights to make collection, Borrower will
diligently collect all Collateral.
4. ADDITIONAL OPTIONAL REQUIREMENTS. Borrower agrees that Bank may at its
option at any time, whether or not Borrower is in default:
A. Require Borrower to segregate all collections and proceeds of the
Collateral so that they are capable of identification and deliver daily such
collections and proceeds to Bank in kind.
B. Require Borrower to deliver to Bank (i) copies of or extracts from the
Books and Records, and (ii) information on any contracts or other matters
affecting the Collateral.
C. Examine the Collateral, including the Books and Records, and make copies
of or extracts from the Books and Records, and for such purposes enter at
any reasonable time upon the property where any Collateral or any Books and
Records are located.
D. Require Borrower to deliver to Bank any instruments or chattel paper.
E. Require Borrower to obtain Bank's prior written consent to any sale,
lease, agreement to sell or lease, or other disposition of any inventory.
F. Notify any account debtors, any buyers of the Collateral, or any other
persons of Bank's interest in the Collateral.
<PAGE>
G. Require Borrower to direct all account debtors to forward all payments
and proceeds of the Collateral to a post office box under Bank's exclusive
control.
H. Demand and collect any payments and proceeds of the Collateral. In
connection therewith Borrower irrevocably authorizes Bank to endorse or sign
Borrower's name on all checks, drafts, collections, receipts and other
documents, and to take possession of and open the mail addressed to Borrower
and remove therefrom any payments and proceeds of the Collateral.
5. DEFAULTS. Any one or more of the following shall be a default hereunder:
A. Borrower fails to pay any Indebtedness when due.
B. Borrower breaches any term, provision, warranty or representation under
this Agreement, or under any other obligation of Borrower to Bank.
C. Any custodian, receiver or trustee is appointed to take possession,
custody or control of all or a substantial portion of the property of
Borrower or of any guarantor of any Indebtedness.
D. Borrower or any guarantor of any Indebtedness becomes insolvent, or is
generally not paying or admits in writing its inability to pay its debts as
they become due, fails in business, makes a general assignment for the
benefit of creditors, dies or commences any case, proceeding or other action
under any bankruptcy or other law for the relief of, or relating to, debtors.
E. Any case, proceeding or other action is commenced against Borrower or any
guarantor of any Indebtedness under any bankruptcy or other law for the
relief of, or relating to, debtors.
F. Any involuntary lien of any kind or character attaches to any Collateral.
G. Any financial statements, certificates, schedules or other information
now or hereafter furnished by Borrower to Bank proves false or incorrect in
any material respect.
6. BANK'S REMEDIES AFTER DEFAULT. In the event of any default Bank may do
any one or more of the following:
A. Declare any Indebtedness immediately due and payable, without notice or
demand.
B. Enforce the security interest given hereunder pursuant to the Uniform
Commercial Code and any other applicable law.
C. Enforce the security interest of Bank in any deposit account of Borrower
maintained with Bank by applying such account to the Indebtedness.
D. Require Borrower to assemble the Collateral, including the Books and
Records, and make them available to Bank at a place designated by Bank.
E. Enter upon the property where any Collateral, including any Books and
Records, are located and take possession of such Collateral and such Books
and Records, and use such property (including any buildings and facilities)
and any of Borrower's equipment, if Bank deems such use necessary or
advisable in order to take possession of, hold, preserve, process, assemble,
prepare for sale or lease, market for sale or lease, sell or lease, or
otherwise dispose of, any Collateral.
<PAGE>
F. Grant extensions and compromise or settle claims with respect to the
Collateral for less than face value, all without prior notice to Borrower.
G. Use or transfer any of Borrower's rights and interests in any
Intellectual Property now owned or hereafter acquired by Borrower, if Bank
deems such use or transfer necessary or advisable in order to take possession
of, hold, preserve, process, assemble, prepare for sale or lease, market for
sale or lease, sell or lease, or otherwise dispose of, any Collateral.
Borrower agrees that any such use or transfer shall be without any additional
consideration to Borrower. As used in this paragraph, "Intellectual
Property" includes, but is not limited to, all trade secrets, computer
software, service marks, trademarks, trade names, trade styles, copyrights,
patents, applications for any of the foregoing, customer lists, working
drawings, instructional manuals, and rights in processes for technical
manufacturing, packaging and labeling, in which Borrower has any right or
interest, whether by ownership, license, contract or otherwise.
H. Have a receiver appointed by any court of competent jurisdiction to take
possession of the Collateral.
I. Take such measures as Bank may deem necessary or advisable to take
possession of, hold, preserve, process, assemble, insure, prepare for sale or
lease, market for sale or lease, sell or lease, or otherwise dispose of, any
Collateral, and Borrower hereby irrevocably constitutes and appoints Bank as
Borrower's attorney-in-fact to perform all acts and execute all documents in
connection therewith.
7. MISCELLANEOUS.
A. Any waiver, express or implied, of any provision hereunder and any delay
or failure by Bank to enforce any provision shall not preclude Bank from
enforcing any such provision thereafter.
B. Borrower shall, at the request of Bank, execute such other agreements,
documents, instruments, or financing statements in connection with this
Agreement as Bank may reasonably deem necessary.
C. All notes, security agreements, subordination agreements and other
documents executed by Borrower or furnished to Bank in connection with this
Agreement must be in form and substance satisfactory to Bank.
D. This Agreement shall be governed by and construed according to the laws
of the State of California, to the jurisdiction of which the parties hereto
submit.
E. All rights and remedies herein provided are cumulative and not exclusive
of any rights or remedies otherwise provided by law. Any single or partial
exercise of any right or remedy shall not preclude the further exercise
thereof or the exercise of any other right or remedy.
F. All terms not defined herein are used as set forth in the Uniform
Commercial Code.
G. In the event of any action by the Bank to enforce this Agreement or to
protect the security interest of Bank in the Collateral, or to take
possession of, hold, preserve, process, assemble, insure, prepare for sale or
lease, market for sale or lease, sell or lease, or otherwise dispose of, any
Collateral, Borrower agrees to pay immediately the costs and expenses
thereof, together with reasonable attorney's fees and allocated costs for
in-house legal services.
H. Any Borrower who is married agrees that such Borrower's separate property
shall be liable for payment of the Indebtedness if such Borrower is
personally liable for the Indebtedness.
<PAGE>
Date:----------------------, 1995
Bank of America Borrower
National Trust and Savings Association MMI Medical, Inc.
/s/ Helen C. Wilson /s/ Samuel Salen
- ----------------------------------- -------------------------------
By: Helen C. Wilson, Vice President By: Samuel Salen, President and
Chief Executive Officer
/s/ James P. Butler
-------------------------------
By: James P. Butler, Assistant Secretary, Treasurer
and Chief Financial Officer
<PAGE>
EXHIBIT 11.1 - COMPUTATION OF PER SHARE EARNINGS
($000's, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------------------
OCTOBER 31, OCTOBER 28, OCTOBER 31, OCTOBER 28,
1995 1994 1995 1994
------------------------ ------------------------
<S> <C> <C> <C> <C>
PRIMARY
Average Shares Outstanding 5,036 4,951 5,038 3,894
Net effect of dilutive stock options,
based upon the treasury stock
method using average market price -- -- -- --
------------------------ ------------------------
Total 5,036 4,951 5,038 3,894
======================== ========================
Net income (loss) $ 185 $ (528) $ 71 $(1,148)
======================== ========================
Per share amount $ 0.04 $(0.11) $ .01 $ (0.29)
======================== ========================
FULLY DILUTED
Average Shares Outstanding 5,036 4,951 5,038 3,894
Net effect of dilutive stock options,
based upon the treasury stock
method using average market price -- -- -- --
------------------------ ------------------------
Total 5,036 4,951 5,038 3,894
======================== ========================
Net income (loss) $ 185 $ (528) $ 71 $(1,148)
======================== ========================
Per share amount $ 0.04 $(0.11) $ .01 $ (0.29)
======================== ========================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THOSE FINANCIAL STATEMENTS CONTAINED IN FORM 10-Q FOR THE PERIOD ENDED
OCTOBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> OCT-31-1995
<CASH> 131
<SECURITIES> 0
<RECEIVABLES> 7,508
<ALLOWANCES> (1,447)
<INVENTORY> 10,580
<CURRENT-ASSETS> 18,523
<PP&E> 28,585
<DEPRECIATION> (22,701)
<TOTAL-ASSETS> 31,858
<CURRENT-LIABILITIES> 14,571
<BONDS> 0
<COMMON> 51
0
0
<OTHER-SE> 17,303
<TOTAL-LIABILITY-AND-EQUITY> 17,227
<SALES> 2,935
<TOTAL-REVENUES> 23,866
<CGS> 2,115
<TOTAL-COSTS> 19,402
<OTHER-EXPENSES> 4,260
<LOSS-PROVISION> 18
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> 120
<INCOME-TAX> 49
<INCOME-CONTINUING> 71
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
