<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
<TABLE>
<C> <S>
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED APRIL 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NUMBER 0-13608
------------------------
INNOSERV TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3619990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 WESTWAY, SUITE 530, ARLINGTON, TEXAS 76018
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (817) 468-3377
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
- ------------------------------------ ---------------------------------------
<S> <C>
Common stock, $.01 Par Value NASDAQ National Market
</TABLE>
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 25, 1996 was $7,553,907.
At July 25, 1996, the Registrant had outstanding 5,035,833 shares of its
common stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the proxy statement for
the Annual Meeting of Shareholders to be held on September 17, 1996.
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<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
InnoServ Technologies, Inc.-Registered Trademark- ("InnoServ") is a
California corporation organized in 1981. InnoServ provides comprehensive asset
management systems and services, multi-vendor maintenance and repair services
and other specialized services to radiology, cardiology, biomedical and
laboratory departments of hospitals and other healthcare providers. The
foregoing business is reported as one segment. Except where the context
otherwise requires, the term "InnoServ" and "Registrant" as used in this report
includes InnoServ Technologies, Inc. and its subsidiaries.
InnoServ operates its business primarily through its wholly-owned
subsidiaries InnoServ Technologies Maintenance Services, Inc. ("InnoServ
Maintenance") and Advanced Imaging Technologies, Inc. ("AIT") and through its
imaging operation.
Effective October 6, 1995, the name of the company was changed from MMI
Medical, Inc. to InnoServ Technologies, Inc.
INNOSERV TECHNOLOGIES MAINTENANCE SERVICES, INC.
In August 1994, InnoServ acquired (the "Acquisition") the capital stock of
MEDIQ Equipment & Maintenance Services, Inc. ("MEMS") which provided products
and services comparable to that of InnoServ's R Squared Scan Systems, Inc.
subsidiary ("R Squared"). Subsequent to the acquisition, InnoServ combined the
operations of MEMS with those of R Squared and changed the name of R Squared to
InnoServ Technologies Maintenance Services, Inc. See Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Acquisition of
MEDIQ Equipment and Maintenance Services, Inc.
InnoServ Maintenance provides maintenance, consulting and technical services
for customer operated magnetic resonance imaging ("MRI") and computed tomography
("CT") scanners and a wide array of diagnostic imaging, biomedical and
laboratory equipment on a nationwide basis. Comprehensive maintenance service
agreements covering virtually all the equipment operated by a hospital's
radiology, biomedical and laboratory departments ("Asset Management") usually
have terms of three years or more. Maintenance agreements for individual MRI and
CT scanners and X-ray tube replacement agreements typically have terms of one to
three years, with limited termination provisions, on either a fixed or volume
related basis. Maintenance services are performed at a customer's site by
InnoServ Maintenance field service engineers and equipment specialists and are
offered as a cost-effective alternative to maintenance service offered by
medical equipment manufacturers. InnoServ Maintenance personnel, through the use
of a proprietary software information system, also provide Asset Management
accounts with an array of analytical reports and consultative services in order
to help them manage their imaging, biomedical and laboratory capital equipment.
In addition to performing regular preventive maintenance services, InnoServ
Maintenance engineers are on call 24 hours a day, seven days a week, to provide
emergency maintenance of medical equipment. InnoServ Maintenance sells X-ray
tubes and spare parts for many different makes and models of MRI and CT
scanners. InnoServ Maintenance also sells used and refurbished diagnostic
imaging equipment.
In support of its field service operations, InnoServ Maintenance maintains
an extensive supply of spare parts in strategic locations across the nation.
Analysis and repair of defective parts is performed at the Arlington, Texas
facility. In addition to having the capability to repair electronic circuit
boards and systems, InnoServ Maintenance reloads X-ray tubes and rebuilds high
voltage components such as transformers.
2
<PAGE>
ADVANCED IMAGING TECHNOLOGIES, INC.
AIT distributes X-ray film and other radiological supplies and equipment in
Kansas and portions of Missouri and Oklahoma. It also distributes accessory
systems used with CT scanners and other diagnostic imaging and general X-ray
equipment. AIT also provides maintenance services for general X-ray instruments
in Kansas and portions of Missouri and Oklahoma.
IMAGING OPERATION
InnoServ owns 6 mobile CT scanners and 6 cardiac catheterization
laboratories (the "Imaging Operation") which it offers to customers under lease
agreements. Such leases are offered to customers on a full-time basis while
their in-house equipment is being installed, serviced or upgraded or to
supplement the in-house equipment during periods of heavy patient volume.
InnoServ may also provide technologists and other additional support services
pursuant to the lease. Typically, these customers execute an agreement for a
specific period ranging from one month to periods in excess of one year and are
billed monthly on a fixed rate basis regardless of the number of procedures
performed.
In June 1995, InnoServ discontinued providing mobile CT scanners under
shared service arrangements. These arrangements were for terms of up to three
years and customers were billed on a fee-for-service basis for the procedures
actually performed. During the time InnoServ's equipment and employees were at a
shared services customer location, they operated under the direction of a
licensed physician on the customer's staff. InnoServ worked closely with
physicians to tailor operating protocols. InnoServ personnel did not, however,
provide professional medical services. InnoServ's customers, rather than
InnoServ, were responsible for scheduling the number of patients on whom the
procedures were performed during scheduled service.
CUSTOMERS AND MARKETING
InnoServ markets its services to healthcare providers through a direct sales
force consisting of sales representatives and supervisory personnel. InnoServ's
strategy emphasizes its multi-vendor, multi-modality Asset Management programs,
the skill and experience of its service engineers and imaging technologists, the
quality of its equipment, the reliability and cost effectiveness of its service,
and its ability to tailor service programs to specific customer needs.
Hospitals and other healthcare providers which operate MRI and CT scanners
and other diagnostic, biomedical and laboratory equipment require regular
preventive maintenance programs and emergency repair services for their
equipment. Since the quality and reliability of patient care depends in part
upon the reliability of the equipment used, hospitals need to arrange for
regular maintenance of the equipment and contract for maintenance and repair
services with the equipment manufacturers or independent maintenance companies
such as InnoServ's subsidiaries.
When larger hospitals desire to replace, upgrade or augment their existing
CT or cardiac catheterization equipment, they may require interim rental
equipment such as that provided by InnoServ. By using such equipment for an
interim period, hospitals may continue to offer their regular services during a
major renovation.
During fiscal 1996, InnoServ provided its Asset Management, maintenance,
distribution and diagnostic services in 42 states to approximately 1,000
customers such as hospitals, health maintenance organizations, out-patient
clinics and private physician offices. No single customer accounted for more
than ten percent of InnoServ's consolidated revenues.
COMPETITION
The healthcare industry in general and the market for medical equipment
maintenance, distribution and diagnostic services in particular is highly
competitive.
With respect to its medical equipment maintenance services, InnoServ
competes with both medical equipment manufacturers, most of which have
significantly greater financial and marketing resources than InnoServ, and other
third party maintenance service companies. Certain larger hospitals also provide
in-house maintenance service on their own equipment.
3
<PAGE>
With respect to its distribution services, InnoServ competes with other
distributors, manufacturers and equipment resellers such as brokers, leasing
companies, and individual healthcare providers, many of whom have financial and
marketing resources substantially greater than those of InnoServ.
INTELLECTUAL PROPERTY
Most of InnoServ's diagnostic software products were developed by InnoServ
or its acquired businesses. Software products including certain diagnostic
software programs are licensed to InnoServ by various vendors and equipment
manufacturers, some of whom are competitors. If selected licensed software
products were no longer available, a material hardship on InnoServ could result.
Software products developed or used by InnoServ may from time to time raise
questions of infringement of patents or copyrights owned by others and not
licensed to InnoServ. No claims of such infringement have been raised. However,
if such claims are raised and it is determined that licenses under patents or
copyrights owned by others are essential, but not available, a material hardship
on InnoServ might result.
SOURCES AND AVAILABILITY OF REPAIR PARTS
Most of the mechanical, electrical and electronic parts and components used
in the performance of repair service are purchased from medical equipment
manufacturers and after-market part suppliers. InnoServ believes that materials,
components and parts of the type and in the quantities necessary for its
continued service operations are available, and in many cases alternate sources
currently exist. InnoServ procures certain X-ray tubes and other proprietary
components from sole source suppliers. In the event any sole source item becomes
unavailable from the present supplier or the supplier's time to deliver such
items is abruptly extended beyond normal, InnoServ could experience difficulty,
delay and expense in obtaining delivery from other sources and InnoServ's
ability to maintain and repair customer's equipment could be impeded.
INSURANCE
InnoServ maintains a comprehensive insurance program which covers the
replacement value of its equipment and vehicles, subject to normal deductibles,
when appropriate. Additionally, InnoServ maintains professional and general
liability, completed operations and employee health insurance coverage, subject
to normal deductibles. InnoServ believes its present insurance coverage is
adequate.
EMPLOYEES
At July 18, 1996, InnoServ had 286 employees. None of InnoServ's employees
are represented by a labor organization and InnoServ is not aware of any
activity seeking such organization. InnoServ considers its relationship with its
employees to be satisfactory.
ITEM 2. PROPERTIES.
InnoServ leases approximately 87,000 square feet of office, maintenance and
storage facilities in eighteen locations at an approximate annual cost of
$716,000. Individual lease terms extend up to 65 months with various renewal
options. InnoServ relocated its headquarters and related administrative
operations to InnoServ's facility in Arlington, Texas from Corona, California
during fiscal 1996.
While InnoServ believes that its facilities are adequate for its current and
near-term needs, to the extent InnoServ expands its activities either
geographically or with respect to the number of hospitals, clinics or group
practices to which it provides its services, InnoServ may be required to obtain
additional office, maintenance or storage facilities.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
4
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
InnoServ's common stock is traded in the NASDAQ National Market under the
symbol ISER. The ranges of high and low transaction prices for the common stock
as reported by The National Stock Market, Inc. for fiscal 1996 and 1995 are set
forth in the following table. Such quotations are prices between dealers without
retail markups, markdowns or commissions and do not represent actual
transactions.
<TABLE>
<CAPTION>
DIVIDEND
1996 HIGH LOW PAID
- -------------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
4th Quarter......................................................... $ 4 1/2 $ 3 5/8 --
3rd Quarter......................................................... $ 4 5/8 $ 2 --
2nd Quarter......................................................... $ 4 $ 2 1/2 --
1st Quarter......................................................... $ 4 1/4 $ 2 3/4 --
1995
- --------------------------------------------------------------------
4th Quarter......................................................... $ 4 $ 2 1/2 --
3rd Quarter......................................................... $ 4 3/8 $ 3 1/4 $ .04
2nd Quarter......................................................... $ 4 7/8 $ 3 3/4 $ .15
1st Quarter......................................................... $ 6 $ 4 1/4 $ .04
</TABLE>
InnoServ estimates that it had approximately 1,100 beneficial shareholders
as of July 24, 1996.
In April 1995, InnoServ's Board of Directors discontinued the payment of
dividends for an indefinite period. InnoServ's current loan agreement prohibits
the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected financial data for each of
the five years in the period ended April 30, 1996. Such data for the four year
period ended April 30, 1995, has been reclassified to reflect AIT as a
continuing operation (see Note 11 to the Notes to Consolidated Financial
Statements). The acquired operations of MEMS have been included effective August
3, 1994 (see Note 8 to the Notes to Consolidated Financial Statements). The
selected financial data presented below should be read in conjunction with the
consolidated financial statements of InnoServ and the notes thereto appearing in
Item 8 of Part II of this report and the information set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------
APRIL 30, APRIL 30, APRIL 29, APRIL 30, MAY 1,
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues............................................. $ 45,727 $ 46,366 $ 40,464 $ 45,263 $ 45,140
Net income (loss).................................... (7,189) (3,630) 1,507 2,265 (4,009)
Net income (loss) per share (a)...................... (1.43) (0.81) 0.49 0.76 (1.38)
Cash dividends per share (a)......................... $ -- $ 0.23 $ 0.16 $ 0.11 $ 0.11
Weighted average shares outstanding (a).............. 5,036 4,511 3,049 2,977 2,914
Balance Sheet Data:
Total assets......................................... $ 23,840 $ 30,506 $ 21,430 $ 22,191 $ 23,162
Working capital...................................... 1,023 4,077 6,784 5,177 5,718
Total long-term debt................................. 910 141 -- -- 3,494
Total shareholders' equity........................... $ 9,966 $ 17,155 $ 15,400 $ 14,236 $ 12,283
</TABLE>
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(a) Restated to reflect a 10% stock dividend declared March 4, 1993, and
distributed April 5, 1993.
5
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
ACQUISITION OF MEDIQ EQUIPMENT & MAINTENANCE SERVICES, INC.
On August 3, 1994, InnoServ acquired MEMS, a wholly-owned subsidiary of
MEDIQ Incorporated ("MEDIQ") in exchange for 2,006,438 shares of InnoServ'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 InnoServ's common stock were 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, InnoServ
combined the operations of its R Squared subsidiary with those of MEMS and
changed the name of R Squared to InnoServ Technologies Maintenance Services,
Inc.
DISCONTINUED OPERATION
In October 1994, InnoServ announced the adoption by InnoServ's Board of
Directors of a plan to dispose of the operations of AIT. Thereafter, InnoServ
actively marketed AIT but was unable to locate a buyer. At April 30, 1995, AIT
was classified as a discontinued operation in InnoServ's financial statements.
Concurrent with the election to dispose of AIT, InnoServ made certain changes in
the operations of AIT including closing certain offices and warehouse
facilities, reducing personnel approximately 50 percent, and raising the price
of X-ray film sold to customers, all of which resulted in improved
profitability. Additionally, as InnoServ's Asset Management program continues to
grow, AIT's capability to repair and maintain a variety of X-ray film
processors, which are serviced under Asset Management, 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, InnoServ's Board of Directors elected not to dispose of AIT. Accordingly,
InnoServ's financial statements included herein have been reclassified to
reflect AIT as a continuing operation (see Note 11 to the Notes to Consolidated
Financial Statements).
NAME CHANGE
Effective October 6, 1995, the name of the company was changed from MMI
Medical, Inc. to InnoServ Technologies, Inc.
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Consolidated revenues for fiscal 1996 were $45,727,000, a decline of
$639,000 from fiscal 1995 revenues of $46,366,000. As a result of the
acquisition of MEMS on August 3, 1994, the fiscal 1995 revenues included those
of the acquired operations for nine months. On a pro forma basis after giving
effect to the acquisition of MEMS, the fiscal 1996 revenues declined $5,215,000
as a result of the continued decline in the number and average contract amount
of CT maintenance service agreements in effect as older equipment is being
upgraded or removed from service by customers and as a result of strategic
changes at both AIT and InnoServ's Imaging Operations. Revenues for fiscal 1996
related to CT maintenance agreements declined $7,553,000 as compared to fiscal
1995 pro forma revenues. Revenues at AIT declined $1,986,000, primarily from
lower sales of equipment, 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 InnoServ's Imaging Operation decreased $1,020,000
resulting from the discontinuance of its shared services program, decreased
utilization of rental equipment and fewer rental units in the fleet. These
declines were offset by an increase in revenues from Asset Management services
for fiscal 1996 of $5,435,000 as compared to the fiscal 1995 pro forma revenues.
Cost of operations for fiscal 1996 decreased $1,307,000 as the costs in
fiscal 1995 were 89 percent of revenues, declining to 87 percent of revenues in
fiscal 1996. This decline as a percent of revenues is due primarily to the
increase in revenues for Asset Management services which have higher operating
margins than the operating margins of the declining revenues from CT maintenance
agreements.
6
<PAGE>
InnoServ's management team, under the direction of its new Chief Executive
Officer who was hired in the third quarter of fiscal 1996, have undertaken a
detailed assessment of InnoServ's internal operations, customers, competition,
and InnoServ's positioning within its marketplace. This assessment led to a
strategic focus which emphasizes Asset Management. In support of this strategy,
InnoServ adopted a plan to reorganize its operations and evaluated the
realization of its assets. The financial impact of these actions is included in
the special charges of $2,267,000 recorded in the fourth quarter of fiscal 1996.
These charges were primarily noncash related and included: charges of $1,636,000
for the writedown of certain spare parts inventory no longer required to support
InnoServ's on-going business operations, for the writedown of certain CT
scanners and other equipment held for resale to their estimated market value and
for physical inventory adjustments related to spare parts inventory; charges of
$394,000 to expense engineering development costs of certain diagnostic software
which were previously capitalized; severance costs of $154,000 resulting from
InnoServ's plan to reorganize its operations; and depreciation expense of
$83,000 as a result of lowering the estimated useful lives of certain equipment
(see Notes 7 and 9 to the Notes to Consolidated Financial Statements).
The cost of operations for fiscal 1995 also included special charges of
$2,609,000. These charges included a writedown of $671,000 as a result of
InnoServ's election to expense all items of consumable inventory individually
costing less than $100, a writedown of $426,000 in the value of certain spare
parts inventory held for the repair of certain models of CT scanners under
maintenance agreements which had become a minor part of InnoServ's future
revenues, and a writedown of MRI equipment and related leasehold improvements,
severance costs and facility closing costs associated with the relocation of the
spare parts repair operation located in Corona, California to Arlington, Texas
(see Note 9 to the Notes to Consolidated Financial Statements).
Depreciation expenses decreased $757,000, or 26 percent, from the prior year
primarily as a result of purchase accounting adjustments recorded in the fourth
quarter of fiscal 1995 associated with the Acquisition and the cost of certain
rental units operated by InnoServ's Imaging Operation becoming fully depreciated
at the end of fiscal 1995. Selling and administrative expenses increased
$730,000, or ten percent, primarily due to the inclusion of labor expenses
associated with the Acquisition for the full year in fiscal 1996 compared to
only nine months in fiscal 1995. Selling and administrative expenses in fiscal
1996 also included $313,000 in restructuring costs recorded in the third quarter
as well as other training and duplicate salary expenses for the relocation of
InnoServ's headquarters operations.
The loss before income taxes declined by $694,000 to $4,710,000 in fiscal
1996 from $5,404,000 in fiscal 1995 as a result of improved operating margins as
operating units reduced operating infrastructure costs and the shift in revenues
from CT maintenance agreements with lower operating margins to Asset Management
service agreements which have higher operating margins. The fiscal 1996 loss
before income taxes was due to the special charges recorded in the fourth
quarter of $2,267,000, restructuring costs, including the $411,000 recorded in
the third quarter, incurred throughout the year to effect the relocation of
InnoServ's headquarters and spare parts repair operations, and unfavorable
operating margins associated with the CT maintenance business. The significant
decline in revenues from CT maintenance agreements experienced in fiscal 1996
and 1995 has caused this business, in the aggregate, to become unprofitable.
Because InnoServ employs field service engineers over a wide geographic area,
the current level of revenues are not sufficient in certain locations to cover
the direct costs of providing maintenance and repair services and the
infrastructure costs to support these activities. InnoServ is implementing plans
to reorganize its service operations to more cost effectively provide the
services required by its customers and to discontinue service in selected
locations upon the expiration of the existing maintenance agreements in those
locations. InnoServ believes these actions, coupled with the strategic changes
made in the focus and operations of InnoServ, will improve InnoServ's
operations. However, InnoServ may not realize the full financial impact of these
actions until the latter part of fiscal 1997.
7
<PAGE>
In accordance with Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes," InnoServ recorded a tax provision
in fiscal 1996 of $2,479,000 as a valuation allowance to reduce its net deferred
tax asset, primarily net operating loss carryforwards, tax credits, and timing
differences associated with accrued expenses, potentially available to InnoServ
to the amount that is "more likely than not to be realized." The ultimate
realization of the deferred tax assets depends on the ability of InnoServ to
generate sufficient taxable income in the future. While InnoServ believes the
deferred tax assets will be substantially realized by future operating results,
due to the cumulative losses incurred in recent years the deferred tax assets do
not currently meet the stringent criteria for recognition under SFAS 109.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 123 ("SFAS 123"), "Accounting and Disclosure of
Stock-Based Compensation," in October 1995. This standard is effective for
InnoServ for its 1997 fiscal year. The adoption of SFAS 123 will have no effect
on InnoServ's results of operations. InnoServ will continue to account for stock
option grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and, accordingly, will recognize no
compensation expense for the stock option grants.
FISCAL 1995 COMPARED TO FISCAL 1994
Consolidated revenues increased $5,902,000 to $46,366,000 from $40,464,000
primarily as a result of additional CT, MRI and Asset Management maintenance
service revenues associated with the Acquisition. While InnoServ Maintenance
experienced an overall increase in revenues of approximately $8,300,000 from
fiscal 1994 to fiscal 1995 primarily as a result of the Acquisition, it also
continued to experience a net decline in the number of CT maintenance agreements
in effect primarily as a result of customers' older equipment being upgraded
(with attendant warranty service coverage) or removed from service.
InnoServ Maintenance substantially increased the number of Asset Management
and MRI maintenance service agreements in effect during the remainder of the
fiscal year following the Acquisition. Sales of parts and labor decreased
approximately $476,000 from the prior fiscal year resulting mainly from the loss
in CT service agreements while the sale of X-ray tubes remained unchanged from
the prior fiscal year. Revenues from the sale of equipment at InnoServ
Maintenance for fiscal 1995 declined by approximately $350,000 from the prior
fiscal year.
Revenues at InnoServ's diagnostic Imaging Operation decreased approximately
$772,000 over the prior fiscal year as a result of decreased utilization of both
CT and cardiac catheterization laboratories, a decrease in the average revenue
on a per unit basis for interim rentals as well as fewer units in the CT fleet.
AIT experienced a decline in revenues of $1,910,000 primarily due to a
decline in sales of equipment and decreased sales of consumable supplies,
primarily X-ray film and accessories.
Income before income taxes fell approximately $7,062,000 from income of
$1,658,000 in fiscal 1994 to a loss of $5,404,000 in fiscal 1995 primarily
related to the recording by InnoServ Maintenance of certain special charges
including a writedown of consumable inventory of $671,000, a writedown in the
value of certain spare parts inventory of $426,000, a writedown of MRI equipment
and related leasehold improvements of $948,000, charges for the closure of
InnoServ's California repair operations of $179,000 and $72,000 of other
charges. InnoServ Maintenance also incurred approximately $665,000 in severance
expenses associated with the elimination of certain personnel in duplicate
administrative, operational and sales functions in conjunction with the
Acquisition and the resignation of InnoServ's Chief Financial Officer and Chief
Executive Officer. (see Note 9 to the Notes to Consolidated Financial
Statements).
In addition to the foregoing, InnoServ Maintenance incurred an operating
loss related to the decline in maintenance service revenues and reduced margins
associated with lower average fees for CT maintenance agreements. Income at the
diagnostic Imaging Operation and AIT continued to decrease primarily resulting
from the reduction in revenues.
8
<PAGE>
Net interest expense increased $210,000 to an expense of $171,000 in fiscal
1995 from income of $39,000 in the prior fiscal year as a result of borrowings
on InnoServ's line of credit and the assumption of long-term debt from the
Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at April 30, 1996, totaled $941,000. The principal
source of cash for fiscal 1996 were operating activities which generated
$1,991,000 due primarily to the noncash effects of depreciation and
amortization, a reduction in inventory due to the writedowns recorded in the
fourth quarter, and the timing of cash payments on accounts payable. Also, the
deferred revenues increased $1,894,000 as a result of the growth in Asset
Management. The funds generated by operations financed $1,427,000 in purchases
of new equipment, which were composed of diagnostic and personal computer
hardware and software required to maintain customers' equipment and to improve
the productivity of InnoServ's maintenance service technicians.
InnoServ entered into a loan agreement with a bank effective December 15,
1995 to borrow up to $3,000,000. The loan agreement contains a $1,500,000 term
loan expiring January 30, 1999, and a $1,500,000 revolving line of credit for
working capital expiring August 12, 1996, of which $1,244,000 was available at
April 30, 1996. Obligations under the loan agreement are secured by a security
interest in InnoServ's accounts receivable, inventory and equipment. Interest is
payable quarterly on all obligations under the loan agreement based on varying
interest rates above the prime rate and the term loan requires quarterly
principal payments of $125,000. The interest rate at April 30, 1996 on the term
loan was 9.25 percent and was 8.75 percent on the revolving line of credit. The
loan agreement contains financial covenants including maintenance of certain
financial ratios, net worth requirements and restrictions on future borrowings
and payment of dividends. As a result of the net loss for the period, InnoServ
failed to meet certain financial covenants required under the loan agreement as
of April 30, 1996. InnoServ's bank waived these events of default through April
30, 1996 and has amended the financial covenants for the period subsequent to
the default. Discussions with the bank and other financial institutions to
extend or replace the line of credit are on-going.
InnoServ terminated its former line of credit agreement with another bank in
January 1996. The outstanding obligations of $2,000,000 were repaid principally
from the proceeds of the $1,500,000 term loan.
InnoServ does not foresee the need to make any significant capital purchases
in the next year and believes sufficient funds will be available from its
operations and line of credit to meet its working capital requirements.
CAUTIONARY STATEMENT
The statements in this Management's Discussion and Analysis and elsewhere in
this report that are forward looking are based on current expectations which
involve numerous risks and uncertainties. InnoServ's future results of
operations and financial condition may differ materially due to many factors
including InnoServ's ability to attract and retain Asset Management contracts,
InnoServ's ability to implement its reorganization plan, particularly as it
relates to the CT maintenance business, competitive and regulatory conditions in
the healthcare industry generally, and other factors, many of which are beyond
the control of InnoServ.
9
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements of InnoServ and the Report of Ernst &
Young LLP, Independent Auditors, are included herein on the pages indicated:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors........................................................ 11
Consolidated Balance Sheets at April 30, 1996 and April 30, 1995......................................... 12
Consolidated Statements of Operations for the fiscal years ended April 30, 1996, April 30, 1995 and April
29, 1994................................................................................................ 13
Consolidated Statements of Shareholders' Equity for the fiscal years ended April 30, 1996, April 30, 1995
and April 29, 1994...................................................................................... 14
Consolidated Statements of Cash Flows for the fiscal years ended April 30, 1996, April 30, 1995 and April
29, 1994................................................................................................ 15
Notes to Consolidated Financial Statements............................................................... 16
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts......................................................... 30
Schedules not filed herewith are omitted because of the absence of conditions under which they are
required or because the information called for is shown in the Consolidated Financial Statements or Notes
thereto.
</TABLE>
10
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
InnoServ Technologies, Inc.
We have audited the accompanying consolidated balance sheets of InnoServ
Technologies, Inc. as of April 30, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended April 30, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
InnoServ Technologies, Inc. at April 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended April 30, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 10 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1994.
/s/ ERNST & YOUNG LLP
Fort Worth, Texas
July 24, 1996
11
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
ASSETS 1996 1995
--------- ---------
<S> <C> <C>
Current assets
Cash and cash equivalents.............................................. $ 941 $ 1,827
Receivables............................................................ 5,238 4,537
Inventory.............................................................. 7,458 9,199
Prepaid expenses....................................................... 350 532
Deferred income taxes.................................................. -- 1,192
--------- ---------
Total current assets................................................. 13,987 17,287
Equipment, net........................................................... 6,186 6,784
Deferred income taxes.................................................... -- 2,155
Goodwill, net............................................................ 3,544 3,698
Other assets............................................................. 123 582
--------- ---------
$ 23,840 $ 30,506
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................................ $ 862 $ 3,262
Accounts payable....................................................... 4,613 3,215
Accrued liabilities.................................................... 3,090 4,228
Deferred revenues...................................................... 4,399 2,505
--------- ---------
Total current liabilities............................................ 12,964 13,210
Long-term debt........................................................... 910 141
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value: 5,000,000 shares authorized; no shares
issued................................................................ -- --
Common stock, $.01 par value: 10,000,000 shares authorized; 5,035,833
issued................................................................ 51 51
Paid-in capital........................................................ 17,303 17,303
Accumulated deficit.................................................... (7,388) (199)
--------- ---------
Total shareholders' equity........................................... 9,966 17,155
--------- ---------
$ 23,840 $ 30,506
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED APRIL 30, 1996, APRIL 30, 1995 AND APRIL 29, 1994 1996 1995 1994
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues....................................................................... $ 45,727 $ 46,366 $ 40,464
Costs and expenses:
Cost of operations........................................................... 39,812 41,063 31,426
Depreciation................................................................. 2,096 2,909 1,843
Selling and administrative................................................... 8,357 7,627 5,576
Interest expense (income), net............................................... 172 171 (39)
--------- --------- ---------
Total costs and expenses................................................... 50,437 51,770 38,806
Income (loss) before income taxes and cumulative effect of change in
accounting.................................................................... (4,710) (5,404) 1,658
Provision (benefit) for income taxes........................................... 2,479 (1,774) 656
--------- --------- ---------
Income (loss) before cumulative effect of change in accounting................. (7,189) (3,630) 1,002
Cumulative effect of change in accounting for income taxes..................... -- -- 505
--------- --------- ---------
Net income (loss).............................................................. $ (7,189) $ (3,630) $ 1,507
--------- --------- ---------
--------- --------- ---------
Per share information:
Income (loss) before cumulative effect of change in accounting............... $ (1.43) $ (0.81) $ 0.32
Cumulative effect of change in accounting for income taxes................... -- -- 0.17
--------- --------- ---------
Net income (loss)............................................................ $ (1.43) $ (0.81) $ 0.49
--------- --------- ---------
--------- --------- ---------
Weighted average shares outstanding............................................ 5,036 4,511 3,049
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
($.01 PAR VALUE) ADDITIONAL RETAINED
FOR THE YEARS ENDED APRIL 30, 1996, ------------------------ PAID-IN EARNINGS
APRIL 30, 1995 AND APRIL 29, 1994 SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
- ------------------------------------------------------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1993................................ 2,917,496 $ 29 $ 11,045 $ 3,162 $ 14,236
Net income........................................... -- -- -- 1,507 1,507
Cash dividends ($.16 per share)...................... -- -- -- (471) (471)
Exercise of stock options............................ 33,999 1 127 -- 128
----------- ----- ----------- --------- ---------
Balance, April 29, 1994................................ 2,951,495 $ 30 $ 11,172 $ 4,198 $ 15,400
Net loss............................................. -- -- -- (3,630) (3,630)
Acquisition of MEMS.................................. 2,026,438 20 5,914 -- 5,934
Cash dividends ($.23 per share)...................... -- -- -- (767) (767)
Exercise of stock options............................ 57,900 1 217 -- 218
----------- ----- ----------- --------- ---------
Balance, April 30, 1995................................ 5,035,833 $ 51 $ 17,303 $ (199) $ 17,155
Net loss............................................. -- -- -- (7,189) (7,189)
----------- ----- ----------- --------- ---------
Balance, April 30, 1996................................ 5,035,833 $ 51 $ 17,303 $ (7,388) $ 9,966
----------- ----- ----------- --------- ---------
----------- ----- ----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED APRIL 30, 1996, APRIL 30, 1995 AND APRIL 29, 1994 1996 1995 1994
- -------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Cash flows from:
Operations --
Net income (loss)............................................................... $ (7,189) $ (3,630) $ 1,507
Adjustments to reconcile net income (loss) to net cash flows from operations:
Depreciation and amortization................................................. 2,096 2,909 1,843
Loss (gain) on disposal of equipment.......................................... (98) 681 --
Provision for deferred income taxes........................................... 3,347 (1,839) 217
Cumulative effect of change in accounting..................................... -- -- (505)
Changes in assets and liabilities:
Receivables................................................................. (701) 1,062 1,005
Inventory................................................................... 1,741 1,774 (632)
Prepaid expenses............................................................ 182 163 (25)
Accounts payable............................................................ 1,398 399 (433)
Accrued liabilities......................................................... (1,138) (561) (855)
Deferred revenues........................................................... 1,894 (155) 27
Other assets................................................................ 459 (205) (438)
--------- --------- ---------
Net cash provided by operations................................................. 1,991 598 1,711
Investments and acquisitions --
Acquisition of business operations............................................ -- (346) (159)
Sale of equipment............................................................. 180 234 348
Purchase of equipment......................................................... (1,427) (844) (1,301)
--------- --------- ---------
Net cash used for investments and acquisitions.................................. (1,247) (956) (1,112)
Financing activities --
Increase (decrease) in borrowings from line of credit......................... (2,649) 2,905 --
Proceeds from the issuance of long-term debt.................................. 1,500 -- --
Payments on long-term debt.................................................... (125) -- --
Payments under capital lease obligations...................................... (356) (1,512) --
Exercise of stock options..................................................... -- 218 128
Payment of dividends.......................................................... -- (767) (471)
--------- --------- ---------
Net cash provided by (used for) financing activities............................ (1,630) 844 (343)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ (886) 486 256
Cash and cash equivalents at beginning of period................................ 1,827 1,341 1,085
--------- --------- ---------
Cash and cash equivalents at end of period...................................... $ 941 $ 1,827 $ 1,341
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
1. DESCRIPTION OF BUSINESS
InnoServ provides comprehensive asset management systems and services and
multi-vendor maintenance and repair services for healthcare facilities, offers
mobile computed tomography and cardiac catheterization units for lease and
distributes radiology supplies and equipment on a nationwide basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of InnoServ and
its subsidiaries, all of which are wholly-owned. All significant intercompany
accounts and transactions have been eliminated. In April 1995, InnoServ changed
its fiscal year end to April 30. Previously, InnoServ's fiscal year ended on the
Friday nearest the end of April. As a result, the year ended April 30, 1995,
consisted of 52 weeks and two days.
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the fiscal 1996 presentation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS
Cash equivalents include highly liquid investments with an original maturity
of three months or less.
RECEIVABLES
Receivables are stated net of an allowance for doubtful accounts of
$1,015,000 and $1,429,000 at April 30, 1996 and 1995, respectively.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising InnoServ's customer base.
InnoServ reviews a potential customer's credit history before extending credit.
InnoServ establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
INVENTORY
Equipment held for resale, X-ray tubes, film and other radiological supplies
are carried at the lower of cost or market value. Spare parts relating to
maintenance services are carried at average cost and expensed when sold. Spare
parts inventory is amortized over the estimated useful lives of the parts which
range from seven to ten years. Spare parts inventory is stated at cost net of
such accumulated amortization and allowances of $4,611,000 and $3,460,000 at
April 30, 1996 and 1995,
16
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respectively. The estimated useful lives and carrying value of spare parts
inventory are evaluated based upon historical usage and the type and duration of
the maintenance contracts in effect. Inventory at April 30, 1996 and 1995
consisted of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1996 1995
----------- -----------
<S> <C> <C>
Spare parts and supplies, net............................................ $ 5,580 $ 6,676
Inventory held for resale................................................ 1,878 2,523
----------- -----------
$ 7,458 $ 9,199
----------- -----------
----------- -----------
</TABLE>
EQUIPMENT
Equipment is stated at cost less accumulated depreciation. Depreciation is
provided using the straight-line method over estimated useful lives ranging from
three to ten years. Maintenance and repairs are charged against income and
betterments are capitalized. Equipment at April 30, 1996 and 1995 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1996 1995
---------- ----------
<S> <C> <C>
Cost................................................................. $ 28,090 $ 29,219
Less accumulated depreciation........................................ (21,904) (22,435)
---------- ----------
$ 6,186 $ 6,784
---------- ----------
---------- ----------
</TABLE>
INCOME TAXES
Deferred tax assets and liabilities are recognized for the anticipated
future tax effects of differences between their carrying amounts for financial
reporting purposes and the amounts used for income tax purposes. Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" was adopted
as of May 1, 1993 (see Note 10).
GOODWILL
Cost of approximately $4,445,000 in excess of the net assets acquired in
purchase transactions is being amortized using the straight-line method over
periods ranging from 20 to 40 years. Related accumulated amortization at April
30, 1996 and 1995 was $901,000 and $747,000, respectively.
OTHER ASSETS
Other assets consist of the long-term portion of notes receivable.
LONG-TERM ASSETS
InnoServ evaluates the carrying value of long-term assets, including
goodwill and other intangible assets, based upon future anticipated undiscounted
cash flows and recognizes an impairment when it is probable that such estimated
future cash flows will be less than the carrying value of the asset.
REVENUES
Generally, revenues are recognized when services are rendered or when parts,
supplies and equipment are shipped. Revenues from the sale of major items of
equipment are recognized when the customer accepts the equipment. Such
acceptance is generally conditioned upon successful installation of the
equipment on the customer's premises. Revenues under lease agreements are
recognized ratably over the term of the lease.
17
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amounts invoiced in advance of the provision of service under maintenance
contracts are not included in receivables if payment had not been received as of
the balance sheet date. Such amounts are classified as deferred revenues if
payment was received as of the balance sheet date.
RESTRUCTURING
Termination benefits provided to involuntarily terminated employees and
costs directly associated with a plan to exit an activity (exit costs) are
recognized as restructuring expense upon management's commitment to a formal
plan of restructuring. Exit costs are those unrelated to the generation of
revenues which will be incurred after the exit plan's commitment date, and
either are incremental to the costs incurred prior to the commitment date or
will be incurred under a contractual obligation that existed prior to the
commitment date and will continue after the exit plan is completed with no
economic benefit. Expenses that benefit on-going operations, but are necessary
to accomplish the restructuring plan, are charged to expense when an obligation
has been incurred.
INTEREST EXPENSE (INCOME), NET
Interest expense is net of interest income of $22,000, $99,000, and $53,000
for the years ended April 30, 1996, April 30, 1995 and April 29, 1994,
respectively.
STOCK BASED COMPENSATION
InnoServ grants stock options for a fixed number of shares to employees with
grant prices equal to the fair market value of the shares at the date of grant.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 123 ("SFAS 123"), "Accounting and Disclosure of
Stock-Based Compensation," in October 1995. This standard is effective for
InnoServ for its 1997 fiscal year and adoption of SFAS 123 will have no effect
on the results of operations. InnoServ will continue to account for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and, accordingly, will recognize no
compensation expense for the stock option grants.
INCOME PER SHARE
Income per share amounts are computed based upon the weighted average shares
of common stock and common stock equivalents outstanding during each period.
Outstanding stock options are included as common stock equivalents using the
treasury stock method. If the computation of fully diluted income per share is
anti-dilutive on net income, only primary income per share is presented.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest and income taxes paid in the years ended April 30, 1996, April 30,
1995 and April 29, 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest.............................................................. $ 209 $ 225 $ 53
Income taxes.......................................................... $ 20 $ -- $ --
</TABLE>
In August 1994, InnoServ acquired (the "Acquisition") MEDIQ Equipment and
Maintenance Services, Inc. ("MEMS"), a wholly-owned subsidiary of MEDIQ
Incorporated ("MEDIQ"), in exchange for 2,006,438 shares of InnoServ's common
stock and a warrant to purchase 325,000 shares of InnoServ's common stock. The
fair value of net assets acquired in the Acquisition less liabilities assumed or
incurred was $4,928,000. The appraised fair value of the common stock and the
warrant issued by InnoServ in the Acquisition was $5,900,000 plus other costs
associated with the Acquisition of $665,000. Cash acquired amounted to $173,000.
18
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
4. INDEBTEDNESS
Indebtedness at April 30, 1996 and 1995 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1996 1995
----------- ---------
<S> <C> <C>
Bank term loan expiring January 30, 1999, prime rate plus 1% (9.25% at
April 30, 1996), principal and interest payable quarterly, secured..... $ 1,375 $ --
Bank revolving line of credit expiring August 12, 1996, prime rate plus
0.50% (8.75% at April 30, 1996), interest payable quarterly, secured... 256 --
Bank line of credit terminated January 1996, prime rate (9% at April 30,
1995), interest payable monthly, unsecured............................. -- 2,905
9.56% capital lease, maturing December 1997, secured by equipment....... 83 126
10.90% capital lease, maturing September 1996, secured by equipment..... 36 114
12.05% capital lease, maturing May 1996, secured by equipment........... 22 258
----------- ---------
1,772 3,403
Less amount classified as current....................................... (862) (3,262)
----------- ---------
Total long-term debt.................................................... $ 910 $ 141
----------- ---------
----------- ---------
</TABLE>
InnoServ entered into a loan agreement with a bank effective December 15,
1995 to borrow up to $3,000,000. The loan agreement contains a $1,500,000 term
loan expiring January 30, 1999, and a $1,500,000 revolving line of credit for
working capital expiring August 12, 1996, of which $1,244,000 was available at
April 30, 1996. Obligations under the loan agreement are secured by a security
interest in InnoServ's accounts receivable, inventory and equipment. Interest is
payable quarterly on all obligations under the loan agreement based on varying
interest rates above the prime rate and the term loan requires quarterly
principal payments of $125,000. The interest rate at April 30, 1996 on the term
loan was 9.25 percent and was 8.75 percent on the revolving line of credit. The
weighted average interest rate in effect on all short-term borrowings for the
year ended April 30, 1996, was 8.80 percent. The loan agreement contains
financial covenants including maintenance of certain financial ratios, net worth
requirements and restrictions on future borrowings and payment of dividends. As
a result of the net loss for the period, InnoServ failed to meet certain
financial covenants required under the loan agreement as of April 30, 1996.
InnoServ's bank waived these events of default through April 30, 1996 and have
amended the financial covenants for the period subsequent to the default.
Discussions with the bank and other financial institutions to extend or replace
the line of credit are on-going.
InnoServ terminated its former line of credit agreement with another bank in
January 1996. The outstanding obligations of $2,000,000 were repaid principally
from the proceeds of the $1,500,000 term loan.
19
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
4. INDEBTEDNESS (CONTINUED)
Annual principal payments on long-term debt are required as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR
ENDING
- ------------------------------------------------------------------------------------
<S> <C>
1997................................................................................ $ 606
1998................................................................................ 535
1999................................................................................ 375
---------
$ 1,516
---------
---------
</TABLE>
5. STOCK OPTIONS
InnoServ has incentive plans which provide for the granting of stock options
to key employees to purchase common stock at a purchase price of not less than
fair market value, as defined by such plans, on the date of the grant. In
September 1988 InnoServ adopted a stock option plan for nonemployee directors to
purchase common stock at a purchase price of not less than the fair market
value, as defined by the plan, on the date of the grant. The options granted
under the plans are exercisable in three equal installments and expire over
periods ranging from five to ten years after the grant date. The changes in
stock options outstanding for the years ended April 30, 1996, April 30, 1995 and
April 29, 1994 were as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
---------- ---------------
<S> <C> <C>
Outstanding at May 1, 1993...................................... 380,236 $2.95 to 8.58
Granted....................................................... 96,500 5.25 to 5.75
Canceled...................................................... (28,864) 3.86 to 8.58
Exercised..................................................... (33,999) 3.18 to 3.98
---------- ---------------
Outstanding at April 29, 1994................................... 413,873 $2.95 to 8.58
Granted....................................................... 68,000 4.00 to 4.50
Canceled...................................................... (96,139) 3.18 to 7.73
Exercised..................................................... (57,900) 2.83 to 3.86
---------- ---------------
Outstanding at April 30, 1995................................... 327,834 $2.95 to 5.75
Granted....................................................... 373,000 3.38 to 4.13
Canceled...................................................... (266,934) 2.95 to 5.75
---------- ---------------
Outstanding at April 30, 1996................................... 433,900 $2.95 to 5.25
---------- ---------------
Options exercisable at April 30, 1996........................... 44,500 $2.95 to 5.25
---------- ---------------
</TABLE>
At April 30, 1996, there were 279,573 shares of common stock available for
future grant.
6. RETIREMENT PLAN
InnoServ sponsors a voluntary retirement benefit plan (the "Plan") under the
provisions of Section 401(k) of the Internal Revenue Code. The Plan is available
to all employees of InnoServ who have completed three months of continuous
service and are age twenty-one or older. Employee contributions are based on a
percentage of pre-tax compensation as elected by the employee to a
20
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
6. RETIREMENT PLAN (CONTINUED)
maximum of 15 percent. InnoServ contributes an amount equal to 25 percent of the
employee's pre-tax contributions limited to a maximum matching of $500 annually.
InnoServ's costs related to the Plan for the years ended April 30, 1996, April
30, 1995 and April 29, 1994 were $85,000, $117,000 and $50,000, respectively.
7. RESTRUCTURING
In the fourth quarter of fiscal 1996, InnoServ adopted a plan to reorganize
its operations in order to strategically focus on its comprehensive asset
management services business ("Asset Management"). As a result of this
reorganization, InnoServ recorded restructuring charges in the fourth quarter of
fiscal 1996 of $154,000 for employee termination benefits for 25 employees. As
of April 30, 1996, $2,000 of this amount had been paid to one employee. The
reorganization is expected to be completed by the end of the second quarter of
fiscal 1997.
In the third quarter of fiscal 1996, InnoServ relocated its headquarters
from Corona, California to Arlington, Texas. As a result of the relocation,
InnoServ recorded restructuring charges of $411,000 in the quarter of which
$98,000 were included in cost of operations and $313,000 were included in
selling and administrative expenses. The major components of these charges, the
amounts paid to date, adjustments to the liability and the remaining payments at
April 30, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNTS
PAID AS OF ADJUSTMENTS
TOTAL APRIL 30, TO THE PAYMENTS
CHARGES 1996 LIABILITY REMAINING
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Employee termination benefits................. $ 115 $ (104) $ -- $ 11
Employee relocation........................... 169 (149) (5) 15
Employee training............................. 67 (67) -- --
Office equipment relocation................... 30 (30) -- --
Facility closing costs........................ 30 (7) (23) --
----- ----------- --- ---
$ 411 $ (357) $ (28) $ 26
----- ----------- --- ---
----- ----------- --- ---
</TABLE>
The termination benefits relate to 12 employees, all of whom were terminated
as of April 30, 1996.
8. ACQUISITION OF MEDIQ EQUIPMENT & MAINTENANCE SERVICES, INC.
On August 3, 1994, InnoServ acquired MEMS, a wholly-owned subsidiary of
MEDIQ, in exchange for 2,006,438 shares of InnoServ'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 InnoServ's
common stock were issued to MEDIQ in connection with a noncompetition agreement
which became effective as of the closing of the Acquisition. The aggregate
purchase price, including expenses of the Acquisition, was approximately
$6,565,000. Following the Acquisition, InnoServ combined the operations of its R
Squared subsidiary with those of MEMS and changed the name of R Squared to
InnoServ Technologies Maintenance Services, Inc.
Prior to the Acquisition, MEMS was a national independent service
organization specializing in providing repair and maintenance services and sale
of replacement parts for computed tomography ("CT") scanners, nuclear medicine
equipment and magnetic resonance imaging ("MRI") systems to
21
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
8. ACQUISITION OF MEDIQ EQUIPMENT & MAINTENANCE SERVICES, INC. (CONTINUED)
hospitals, outpatient imaging centers and physician groups. MEMS also offered a
multi-vendor asset management program which provided comprehensive on-site
management for the maintenance and repair of all diagnostic imaging equipment at
hospitals. The transaction was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets acquired based on their appraised
fair values. The excess of the purchase price over the fair values of the net
assets acquired was $1,637,000 and is being amortized on a straight-line basis
over 20 years.
The accounts of MEMS are included in InnoServ's consolidated financial
statements and, accordingly, the Consolidated Statement of Operations for the
year ended April 30, 1995 includes the operating results of MEMS beginning
August 3, 1994. The following unaudited Pro Forma Consolidated Statements of
Operations for fiscal 1995 and 1994 give effect to the Acquisition as if such
transaction had occurred as of April 30, 1994 and May 1, 1993, respectively, and
in the opinion of InnoServ include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for the periods presented.
The historical data of InnoServ included in the Pro Forma Consolidated
Statements of Operations is for the periods presented. The historical data of
MEMS included in the Pro Forma Consolidated Statements of Operations for the
years ended April 30, 1995 and April 29, 1994 are for the three months ended
August 2, 1994 and the year ended April 30, 1994, respectively.
The Pro Forma Consolidated Statements of Operations for fiscal 1995 and 1994
are not necessarily indicative of the results of operations that actually would
have taken place had the Acquisition been consummated as of the dates indicated,
or that may be achieved in the future, and should be read in conjunction with
the notes to such statements.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1995
---------------------------------------------
PRO FORMA PRO FORMA
INNOSERV MEMS (1) ADJUSTMENTS TOTAL
-------- -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................ $ 46,366 $4,576 $ -- $50,942
Costs and expenses:
Cost of operations.................... 41,063 4,023 (606)(2) 44,480
Depreciation and amortization......... 2,909 360 (201)(3) 3,068
Selling and administrative............ 7,627 494 (166)(4) 7,955
Interest expense, net................. 171 54 -- 225
-------- -------- ----------- ---------
Total costs and expenses............ 51,770 4,931 (973) 55,728
Loss before income taxes................ (5,404) (355) 973 (4,786)
Benefit for income taxes................ (1,774) (101) (39)(5) (1,914)
-------- -------- ----------- ---------
Net loss................................ $ (3,630) $ (254) $ 1,012 $(2,872)
-------- -------- ----------- ---------
-------- -------- ----------- ---------
Net loss per share...................... $ (0.81) $ (0.57)
-------- ---------
-------- ---------
</TABLE>
- ------------------------
NOTES:
(1) Historical data of MEMS is for the three months ended August 2, 1994.
22
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
8. ACQUISITION OF MEDIQ EQUIPMENT & MAINTENANCE SERVICES, INC. (CONTINUED)
(2) Reflects the elimination of certain duplicate positions, reducing salaries
and benefits included in cost of operations approximately $482,000 for the
period. Amortization of the spare parts inventory over a seven year period,
consistent with that of InnoServ, would reduce amortization expenses
$495,000, annually, or $124,000 for the period presented.
(3) Depreciation and amortization expenses changed as a result of purchase
accounting adjustments. Depreciating the new basis over a five year period
would reduce such expenses $922,000, annually, or $230,000 for the period
presented. Amortization of the additional goodwill and covenant not to
compete would increase such expenses $117,000, annually, or $29,000 for the
period presented.
(4) Reflects the elimination of certain duplicate positions, reducing salaries
and benefits included in selling and administrative expenses approximately
$166,000 for the period.
(5) The consolidated benefit for income taxes is calculated at 40%.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1994
---------------------------------------------
PRO FORMA PRO FORMA
INNOSERV MEMS ADJUSTMENTS TOTAL
-------- -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................ $ 40,464 $ 18,359 $ -- $58,823
Costs and expenses:
Cost of operations.................... 31,426 15,022 (2,210)(1) 44,238
Depreciation and amortization......... 1,843 1,445 (805)(2) 2,483
Selling and administrative............ 5,576 2,347 (525)(3) 7,398
Interest expense (income), net........ (39) 239 -- 200
-------- -------- ----------- ---------
Total costs and expenses............ 38,806 19,053 (3,540) 54,319
Income (loss) before income taxes and
cumulative effect of change in
accounting............................. 1,658 (694) 3,540 4,504
Provision (benefit) for income taxes.... 656 (230) 1,376(4) 1,802
-------- -------- ----------- ---------
Income (loss) before cumulative effect
of change in accounting................ $ 1,002 $ (464) $ 2,164 $ 2,702
-------- -------- ----------- ---------
-------- -------- ----------- ---------
Income (loss) per share before
cumulative effect of change in
accounting............................. $ 0.32 $ 0.53
-------- ---------
-------- ---------
</TABLE>
- ------------------------
NOTES:
(1) Reflects the elimination of certain duplicate positions, reducing salaries
and benefits included in cost of operations approximately $1,715,000 for the
period. Amortization of the spare parts inventory over a seven year period,
consistent with that of InnoServ, would reduce amortization expenses
$495,000.
23
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
8. ACQUISITION OF MEDIQ EQUIPMENT & MAINTENANCE SERVICES, INC. (CONTINUED)
(2) Depreciation and amortization expenses changed as a result of purchase
accounting adjustments. Depreciating the new basis over a five year period
would reduce such expenses $922,000. Amortization of the additional goodwill
and covenant not to compete would increase such expenses $117,000.
(3) Reflects the elimination of certain duplicate positions, reducing salaries
and benefits included in selling and administrative expenses approximately
$525,000 for the period.
(4) The consolidated provision for income taxes is calculated at 40%.
9. SPECIAL CHARGES
InnoServ's management team, under the direction of its new Chief Executive
Officer who was hired in the third quarter of fiscal 1996, have undertaken a
detailed assessment of InnoServ's internal operations, customers, competition,
and InnoServ's positioning within its marketplace. This assessment led to a
strategic focus which emphasizes Asset Management. In support of this strategy,
InnoServ adopted a plan to reorganize its operations and evaluated the
realization of its assets. The financial impact of these actions is included in
the special charges of approximately $2,267,000 recorded in the fourth quarter
of fiscal 1996. These charges were classified as cost of operations and
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Inventory:
Writedown for impairment of inventory (1)......................................... $ 1,003
Writedown of equipment held for resale (2)........................................ 292
Writedown for physical inventory of spare parts................................... 192
Other............................................................................. 149
---------
1,636
Capitalized development costs expensed (3).......................................... 394
Severance arrangements (4).......................................................... 154
Equipment accumulated depreciation (5).............................................. 83
---------
$ 2,267
---------
---------
</TABLE>
- ------------------------
NOTES:
(1) Represents the unamortized balance of spare parts inventory no longer
required to support InnoServ's on-going business.
(2) Certain CT scanners and other equipment held for resale were written down to
their estimated market value.
(3) Engineering development costs of certain diagnostic software which were
previously capitalized have been charged to expense.
(4) Relates to severance amounts estimated to be paid to employees as a result
of InnoServ's plan to reorganize its operations to strategically focus on
its Asset Management business (See Note 7).
24
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
9. SPECIAL CHARGES (CONTINUED)
(5) Represents accelerated depreciation as a result of lowering the estimated
useful lives of certain equipment.
Fiscal 1995 results included special charges of approximately $2,961,000
which were classified as follows (in thousands):
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Charges included in cost of operations:
Writedown of consumable inventory (1)............................................. $ 671
Writedown for impairment of inventory (2)......................................... 426
Writedown for impairment of MRI equipment and related leasehold
improvements (3)................................................................. 948
Severance arrangements (3)........................................................ 385
Closure of California repair operations (3)....................................... 179
---------
2,609
Charges included in selling and administrative expenses:
Severance arrangements (4)........................................................ 280
Other............................................................................. 72
---------
352
---------
$ 2,961
---------
---------
</TABLE>
- ------------------------
NOTES:
(1) In the fourth quarter of fiscal 1995, InnoServ elected to simplify its
accounting by expensing all items of consumable inventory individually
costing less than $100.
(2) Relates primarily to spare parts held for the repair of certain models of CT
scanners under maintenance agreements which had become a minor part of
InnoServ's future revenues.
(3) In the fourth quarter of fiscal 1995, InnoServ made a decision to move its
spare parts repair operation located in Corona, California to Arlington,
Texas.
(4) Relates primarily to severance amounts payable to InnoServ's former
President and Chief Executive Officer as a result of his separation from the
employment of InnoServ on March 13, 1995.
10. INCOME TAXES
Effective May 1, 1993, InnoServ changed its method of accounting for income
taxes from the deferred method to the liability method as required by Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes," ("SFAS
109"). As permitted under the standard, prior years' financial statements have
not been restated. The cumulative effect of adopting SFAS 109 as of May 1, 1993
was to increase net income in that year by $505,000.
25
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
10. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes for the years ended April 30, 1996,
April 30, 1995 and April 29, 1994 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal....................................................... $ (868) $ -- $ 341
State......................................................... -- 65 98
--------- --------- ---------
(868) 65 439
Deferred:
Federal....................................................... 2,983 (1,597) 187
State......................................................... 364 (242) 30
--------- --------- ---------
3,347 (1,839) 217
--------- --------- ---------
$ 2,479 $ (1,774) $ 656
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the net deferred tax asset at April 30, 1996 and 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................................... $ 2,429 $ 1,713
Tax credits.......................................................... 1,400 566
Accrued expenses..................................................... 428 960
Allowance for doubtful accounts...................................... 383 537
Inventory............................................................ 361 1,074
Deferred compensation................................................ 311 135
Other................................................................ 29 18
--------- ---------
Gross deferred tax asset........................................... 5,341 5,003
Valuation allowance for deferred tax asset........................... (5,031) (1,214)
--------- ---------
Total deferred tax asset........................................... 310 3,789
Deferred tax liabilities:
Equipment............................................................ (310) (442)
--------- ---------
Net deferred tax asset............................................. $ -- $ 3,347
--------- ---------
--------- ---------
Classified as:
Net current asset.................................................... $ -- $ 1,192
Net noncurrent asset................................................. -- 2,155
--------- ---------
Net deferred tax asset............................................. $ -- $ 3,347
--------- ---------
--------- ---------
</TABLE>
26
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
10. INCOME TAXES (CONTINUED)
In accordance with SFAS 109, InnoServ recorded a tax provision in fiscal
1996 of $2,479,000 as a valuation allowance to reduce its net deferred tax asset
potentially available to InnoServ to the amount that is "more likely than not to
be realized." The ultimate realization of the deferred tax assets depends on the
ability of InnoServ to generate sufficient taxable income in the future. While
InnoServ believes the deferred tax assets will be substantially realized by
future operating results, due to the cumulative losses incurred in recent years
the deferred tax assets do not currently meet the stringent criteria for
recognition under SFAS 109.
The net change in the valuation allowance from fiscal 1995 was $3,817,000.
Approximately $1,214,000 of the recorded valuation allowance of $5,031,000
relates to deferred tax assets resulting from the acquisition of MEMS (see Note
8). To the extent realized, any tax benefit related to the valuation allowance
arising from the Acquisition will be applied to reduce costs in excess of net
assets acquired.
The following is a reconciliation of income tax computed at the U.S. federal
statutory tax rates to the rates utilized to compute the provision (benefit) for
income taxes for the years ended April 30, 1996, April 30, 1995 and April 29,
1994:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Tax at U.S. statutory rates................................... (34.0)% (34.0)% 34.0%
State income taxes net of federal tax benefit................. (3.8) (3.9) 5.2
Losses with no tax benefit.................................... 31.4 2.4 0.4
Valuation allowance........................................... 57.2 -- --
Other......................................................... 1.8 2.7 --
----- ----- -----
52.6% (32.8)% 39.6%
----- ----- -----
----- ----- -----
</TABLE>
For federal income tax purposes, InnoServ has approximately $1,200,000 of
investment tax credit carryforwards which expire between 2000 through 2002.
InnoServ also has an alternative minimum tax credit carryforward of
approximately $200,000 for federal income tax purposes. InnoServ has net
operating loss carryforwards for federal income tax purposes of $6,320,000 for
the year ended April 30, 1996 which will expire in 2011.
11. DISCONTINUED OPERATIONS
In October 1994, InnoServ announced the adoption by InnoServ's Board of
Directors of a plan to dispose of the operations of Advanced Imaging
Technologies, Inc. ("AIT"). Thereafter, InnoServ actively marketed AIT but was
unable to locate a buyer. At April 30, 1995, AIT was classified as a
discontinued operation in InnoServ's financial statements. Concurrent with the
election to dispose of AIT, InnoServ made certain changes in the operations of
AIT including closing certain offices and warehouse facilities, reducing
personnel approximately 50 percent, and raising the price of X-ray film sold to
customers, all of 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, InnoServ's Board
of Directors elected not to dispose of AIT. Accordingly, InnoServ's financial
statements included herein have been reclassified to reflect AIT as a continuing
operation.
27
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
11. DISCONTINUED OPERATIONS (CONTINUED)
The summarized results of operations of AIT for the years ended April 30,
1995 and April 29, 1994 were (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Revenues...................................................... $ 8,172 $ 10,082
Loss before income taxes...................................... (401) (130)
Benefit for income taxes...................................... (141) (52)
--------- ---------
Net loss.................................................... $ (260) $ (78)
--------- ---------
--------- ---------
</TABLE>
The net assets of AIT as of April 30, 1995 were (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
1995
-----------
<S> <C>
Current assets............................................................ $ 1,544
Current liabilities....................................................... (527)
Equipment (net)........................................................... 114
-----------
Total net assets........................................................ $ 1,131
-----------
-----------
</TABLE>
A loss on the disposition of AIT was not expected and, therefore, no loss
provision was recorded.
12. CAPITAL AND OPERATING LEASES
InnoServ acquired certain equipment leases with third parties associated
with the Acquisition. InnoServ also leases real properties under operating
leases expiring on various dates through September 2001. Some of the leases
contain renewal options. All real property leases require the payment by
InnoServ of property taxes, maintenance, insurance and other incidental
expenses. Rent expense for the years ended April 30, 1996, April 30, 1995 and
April 29, 1994 was approximately $779,000, $834,000 and $552,000, respectively.
Future minimum rental payments, including interest thereon, under these
capital and noncancelable operating leases with third parties at April 30, 1996
were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR CAPITAL OPERATING
ENDING LEASES LEASES TOTAL
- ----------------------------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
1997................................................. $ 114 $ 656 $ 770
1998................................................. 37 609 646
1999................................................. -- 571 571
2000................................................. -- 528 528
2001 and thereafter.................................. -- 748 748
----- ----------- ---------
$ 151 $ 3,112 $ 3,263
----- ----------- ---------
----- ----------- ---------
</TABLE>
28
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
12. CAPITAL AND OPERATING LEASES (CONTINUED)
Equipment includes the following assets held under capital leases at April
30, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1996 1995
----------- -----------
<S> <C> <C>
Cost........................................................... $ 414 $ 483
Less accumulated depreciation.................................. (378) (177)
----------- -----------
$ 36 $ 306
----------- -----------
----------- -----------
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
InnoServ is involved in various legal actions, claims and proceedings of a
nature considered normal to the conduct of its business. InnoServ believes,
after reviewing such matters and consulting with counsel, that any liability
which may ultimately be incurred with respect to these matters is not expected
to have a material effect on either InnoServ's financial condition or results of
operations.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited summarized financial data by quarter for the years ended April 30,
1996 and 1995 were as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues........................................................... $ 11,968 $ 11,898 $ 11,062 $ 10,799
Operating profit (loss)............................................ 2,502 2,651 1,799 (1,037)
Income (loss) before income taxes.................................. (188) 308 (902) (3,928)
Net income (loss).................................................. (113) 185 (540) (6,721)
Net income (loss) per share........................................ (0.02) 0.04 (0.11) (1.33)
Cash dividends per share........................................... $ -- $ -- $ -- $ --
Weighted average shares outstanding................................ 5,039 5,036 5,037 5,036
1995
- -------------------------------------------------------------------
Revenues........................................................... $ 8,662 $ 13,395 $ 12,343 $ 11,966
Operating profit (loss)............................................ 940 1,902 2,768 (307)
Income (loss) before income taxes.................................. (1,033) (880) 199 (3,690)
Net income (loss).................................................. (620) (528) 121 (2,603)
Net income (loss) per share........................................ (0.20) (0.10) 0.02 (0.52)
Cash dividends per share........................................... $ 0.04 $ 0.15 $ 0.04 $ --
Weighted average shares outstanding................................ 3,041 5,148 5,058 5,059
</TABLE>
Income (loss) before income taxes in the fourth quarter of fiscal 1996 and
1995 included special charges aggregating $2,267,000 and $2,961,000,
respectively, as described in Note 9.
29
<PAGE>
INNOSERV TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF CHARGED TO DEDUCTIONS/ END OF
DESCRIPTION PERIOD COST WRITE OFFS PERIOD
- ------------------------------------------------------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Allowance for
Doubtful Accounts
April 29, 1994.............................................. $ 1,070 $ 372 $ (600) $ 842
April 30, 1995.............................................. 842 961(1) (374) 1,429
April 30, 1996.............................................. $ 1,429 $ (89) $ (325) $ 1,015
Allowance for
Inventory Amortization
April 29, 1994.............................................. $ 4,030 $ 365 $ (19) $ 4,376
April 30, 1995.............................................. 4,376 584 (1,500) 3,460
April 30, 1996.............................................. $ 3,460 $ 1,299 $ (148) $ 4,611
</TABLE>
- ------------------------
(1) Includes an additional allowance of $539,000 from the MEMS Acquisition.
30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item will be included in the registrant's
definitive Proxy Statement for InnoServ's Annual Meeting of Shareholders
scheduled for September 17, 1996, which will be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be included in the registrant's
definitive Proxy Statement for InnoServ's Annual Meeting of Shareholders
scheduled for September 17, 1996, which will be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be included in the registrant's
definitive Proxy Statement for InnoServ's Annual Meeting of Shareholders
scheduled for September 17, 1996, which will be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be included in the registrant's
definitive Proxy Statement for InnoServ's Annual Meeting of Shareholders
scheduled for September 17, 1996, which will be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Financial Statement Schedule:
The financial statements and schedule listed in the "Index to Consolidated
Financial Statements and Financial Statement Schedule" included in Item 8 of
Part II of this report, commencing at page 10, are filed as part of this report.
(b) Reports on Form 8-K:
During the three months ended April 30, 1996, no reports were filed by
Registrant on Form 8-K.
(c) Exhibits:
The information required by this portion of Item 14 is set forth in the
Index to Exhibits beginning on page 33.
31
<PAGE>
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby appoints
each of Michael G. Puls and Thomas E. Hoefert as attorney-in-fact, each with
full power to act alone, to execute in the name and on behalf of the Registrant
and any such person, individually and in each capacity stated below, one or more
amendments to this report, which amendments may make such changes in this report
as any of said attorneys-in-fact deems appropriate, and to file each such
amendment to this report together with all exhibits thereto and any and all
documents in connection therewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INNOSERV TECHNOLOGIES, INC.
(Registrant)
Date: July 25, 1996 By: /s/ THOMAS HOEFERT
-----------------------------------
Thomas E. Hoefert
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ----------------------------------- ------------------------- ----------------
/s/ DUDLEY RAUCH
- ----------------------------------- Chairman of the Board of July 25, 1996
Dudley A. Rauch Directors
/s/ SAMUEL SALEN Vice Chairman and
- ----------------------------------- Secretary of the Board July 25, 1996
Samuel Salen, M.D. of Directors
/s/ MICHAEL G. PULS President and Chief
- ----------------------------------- Executive Officer, July 25, 1996
Michael G. Puls Director
/s/ THOMAS HOEFERT
- ----------------------------------- Vice President and Chief July 25, 1996
Thomas E. Hoefert Financial Officer
/s/ BERNARD KORMAN
- ----------------------------------- Director July 25, 1996
Bernard J. Korman
/s/ MICHAEL M. SACHS
- ----------------------------------- Director July 25, 1996
Michael M. Sachs
/s/ MICHAEL SANDLER
- ----------------------------------- Director July 25, 1996
Michael F. Sandler
/s/ DAVID A. WEGMANN
- ----------------------------------- Director July 25, 1996
David A. Wegmann
32
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement of Merger and Plan of Reorganization dated May 18, 1994, among Registrant, MMI
Acquisition Subsidiary, Inc., MEDIQ Incorporated and MEDIQ Equipment and Maintenance Services,
Inc. (6).
3.1 Articles of Incorporation of the Registrant, as amended prior to September 14, 1988 (1).
3.2 Certificate of Amendment of Articles of Incorporation of the Registrant dated September 14, 1988
(4).
3.3 Certificate of Amendment of Articles of Incorporation of the Registrant dated September 26, 1995.
3.4 Certificate of Determination of Preferences of Series A Preferred Stock of the Registrant (1).
3.5 Certificate of Amendment to Certificate of Determination of Preferences (4).
3.6 Bylaws of the Registrant, as amended (1).
4.1 Registration Agreement dated as of April 29, 1983 by and among the Registrant and certain investors
(1).
9.1 Voting Agreement dated as of April 29, 1983 between Dudley A. Rauch and certain investors (1).
10.1 1982 Incentive Stock Option Plan (1).
10.2 Service agreement with Drs. Moehring, Salen & Botvin, a medical corporation (1).
10.3 Program License Agreements for Diagnostic Software Package dated as of September 5, 1981, February
12, 1982, April 8, 1982, August 19, 1982, October 25, 1982, February 3, 1983, April 16, 1983, June
16, 1983, August 8, 1983, September 23, 1983, December 21, 1983, April 16, 1984 and May 16, 1984
by and between General Electric Company and the Registrant (1).
10.4 Amended and Restated Credit Agreement dated as of March 31, 1993 by and between Bank of America and
the Registrant and related Exhibits (5).
10.5 Employee Stock Purchase Plan (2).
10.6 Stock Purchase Agreement dated as of July 17, 1985 among Registrant and the shareholders of R
Squared Scan Systems, Inc. (2).
10.7 1988 Nonemployee Director Stock Plan (3).
10.8 Form of Agreement of Indemnification between Registrant and Alan Margulis, Donald Moehring, M.D.,
Dudley A. Rauch, Michael Sachs, Samuel Salen, M.D., and David Wegmann as Directors and Ian
MacSween, Alan D. Margulis, Christopher J. Purcell and Dudley A. Rauch as officers (4).
10.9 Employment Agreement and Amendment between Registrant and Alan Margulis (5).
10.10 Form of Warrant Agreement between Registrant and MEDIQ Incorporated (6).
10.11 Form of Noncompetition Agreement by and between Registrant, MEDIQ Equipment and Maintenance
Services, Inc. and MEDIQ Incorporated (6).
10.12 Form of Standstill Agreement of Registrant (6).
10.13 Employment Agreement between MEDIQ Equipment and Maintenance Services, Inc. and J. Thomas Owings
and Registrant (6).
10.14 Form of Voting Agreement of MEDIQ Incorporated and certain shareholders of Registrant (6).
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------
<C> <S>
10.15 Form of Piggy-back Registration Rights Agreement by and between MEDIQ Incorporated and Registrant
(6).
10.16 Separation Agreement dated March 13, 1995 between Alan D. Margulis and Registrant (7).
10.17 Amendment No. 5 to Business Loan Agreement dated as of September 20, 1995 by and between Registrant
and Bank of America National Trust and Savings Association (8).
10.18 Security Agreement dated as of September 20, 1995 by and between Registrant and Bank of America
National Trust and Savings Association (8).
10.19 Loan Agreement dated as of December 15, 1995 by and between Registrant and Overton Bank & Trust,
N.A. (9).
10.20 Term Loan Agreement dated as of January 12, 1996 in the principal amount of $1,500,000 payable by
Registrant to Overton Bank & Trust, N.A. (9).
10.21 Security Agreement dated as of January 12, 1996 by and between Registrant and Overton Bank & Trust,
N.A. (9).
10.22 Revolving Credit Agreement dated as of January 12, 1996 in the principal amount of $1,500,000
payable by Registrant to Overton Bank & Trust, N.A. (9).
10.23 Security Agreement dated as of January 12, 1996 by and between Registrant and Overton Bank & Trust,
N.A. (9).
10.24 Letter Agreement dated July 25, 1996 amending the Loan Agreement dated as of December 15, 1995 by
and between Registrant and Overton Bank & Trust, N.A.
10.25 Letter Agreement of Employment dated December 8, 1995 between Registrant and Michael G. Puls.
10.26 Letter Agreement of Employment dated January 3, 1996 between Registrant and Thomas E. Hoefert.
10.27 Indemnity Agreement dated as of January 25, 1996 by and between Registrant and Michael G. Puls (9).
10.28 Indemnity Agreement dated as of January 25, 1996 by and between Registrant and Thomas E. Hoefert
(9).
11.1 Computation of Per Share Earnings.
21 Subsidiaries.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Previously filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (No. 2-91168) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended May 2, 1986.
(3) Previously filed as an exhibit to the Registrant's Proxy materials dated
August 22, 1988.
(4) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended April 28, 1989.
(5) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended April 30, 1993.
34
<PAGE>
(6) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended April 29, 1994.
(7) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended April 30, 1995.
(8) Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the period ended October 31, 1995.
(9) Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the period ended January 31, 1996.
35
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
The undersigned , Samuel Salen, M.D., certifies that:
1. He is the President and Secretary of MMI Medical, Inc., a California
corporation (the "Corporation").
2. Article I of the Articles of Incorporation of the Corporation is amended
and restated to read in its entirety as follows:
"I
The name of the corporation is
INNOSERV TECHNOLOGIES, INC."
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors of this Corporation.
4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with Section 902 of
the California Corporation Code. The total number of shares of capital stock
entitled to vote thereon outstanding on the record date set for approval of such
amendments was 5,035,833 shares of Common Stock. The number of shares voting in
favor of the amendments equaled or exceeded the vote required. The percentage
vote required was more than 50%.
I further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of my own knowledge.
DATED: September 26, 1995
/s/ SAMUEL SALEN
--------------------------------------
Samuel Salen, M.D.
PRESIDENT AND SECRETARY
<PAGE>
EXHIBIT 10.24
LETTER AGREEMENT AMENDING THE LOAN AGREEMENT
Overton Bank & Trust, N.A.
South Arlington Office
Curtis F. Von Der Ahe
President
July 25, 1996
Mr. Tom Hoefert, CFO
InnoServ Technologies, Inc.
4330 Beltway #300
Arlington, TX 76018
REFERENCE: LOAN AGREEMENT DATED DECEMBER 15, 1995 COVENANT VIOLATIONS.
Dear Mr. Hoefert,
You have indicated that you are in violation of the Minimum Tangible Net
Worth and Current Ratio covenants outlined in our loan agreement referenced
above. We hereby waive compliance with these covenants thru April 30, 1996 and
re-set these covenants as follows:
<TABLE>
<S> <C>
Minimum Tangible Net Worth $5,722,000
Minimum Current Ratio 1.00 to 1.00
</TABLE>
If you require anything else, please do not hesitate to call.
Sincerely,
/s/ CURTIS F. VON DER AHE
- --------------------------------------
Curtis F. Von Der Ahe,
PRESIDENT
<PAGE>
EXHIBIT 10.25
LETTER AGREEMENT OF EMPLOYMENT
INNOSERV TECHNOLOGIES, INC.
PERSONAL & CONFIDENTIAL
December 8, 1995
Mr. Michael G. Puls
8595 Calumet Way
Cincinnati, OH 45249
RE: OFFER OF EMPLOYMENT
Dear Mike:
InnoServ Technologies, Inc.-Registered Trademark- ("The Company") is pleased
to extend to you an offer of employment as set forth in this letter. In
accordance with the proposed terms of employment, you will be named President
and Chief Executive Officer of the Company and its subsidiaries, reporting to
the Board of Directors, with all powers and duties consistent with these titles.
You will also become a member of the Board of Directors of the Company on the
day you begin employment.
Your annual base salary will be $200,000 with the opportunity for annual
merit increases with the first salary review occurring on or about July 1, 1996.
You will be eligible for an annual bonus based on your performance against
established objectives up to a maximum of 50% of your base salary.
You will also receive a grant of options to purchase 150,000 shares of the
Company's common stock pursuant to the Company's Stock Incentive Plan. The stock
options will have an exercise price equal to the fair market value of the common
stock as defined in the Company's Stock Incentive Plan on the date you become an
employee of the Company and a term of ten years, and one-third of the stock
options will vest on an annual basis so that after three years of employment the
options will be fully vested. As you are aware, there are stock options
available for grant to key employees in the discretion of the Company's
Compensation Committee as part of an overall management group incentive program.
Upon employment with the Company you will be eligible to participate in the
Company's medical and dental insurance plans which are available to other
officers and employees of the Company. You will be entitled to four weeks of
paid vacation per year.
If your employment is terminated by the Company for any reason other than
for cause (which shall mean for all purposes herein fraud, dishonesty or willful
misconduct), you will receive a severance payment by the continuation of your
then current monthly salary (less appropriate withholding amounts) for 12 months
following your separation. In addition, the Company will pay for your
participation in its medical and insurance plans for 12 months following your
separation. Payment of the severance benefit is conditioned upon your providing
to the Company at the time of your separation a written release of any and all
claims against the Company and your agreement not to compete with the Company or
to hire any of its employees for a period of two years following your separation
from the Company.
If a Change of Control (as defined below) occurs, all or your then unvested
stock options will vest immediately. Furthermore, if within six months following
a Change of Control, your employment is terminated without cause, you will also
receive a severance payment as provided for above plus a one-
<PAGE>
Mr. Michael G. Puls
December 8, 1995
Page 2
time payment equivalent to your prior year's bonus. If an employment termination
as a result of a Change of Control occurs prior to your receiving a full year's
bonus, your bonus for the purposes of the prior sentence shall be assumed to be
50% of your then base salary. Such payments shall be subject to the same
conditions as set forth in the preceding paragraph.
For purposes of the preceding paragraph a "Change of Control" shall be
deemed to have occurred if (x) any "person" or "group" of "persons" (as the
terms "person" and "group" are used in Sections 13(d) and 14(d) of the
Securities and Exchange Act of 1934 and the rules and regulations thereunder) is
or becomes, after the date of your employment by the Company, the beneficial
owner, directly or indirectly, of the securities of the Company representing 50%
of the combined voting power of the then outstanding voting securities of the
Company (whether by purchase or acquisition of such securities or by agreement
to act in concert with respect to the voting of such securities or otherwise);
(y) all or substantially all of the assets and/or business of the Company is
sold, transferred or otherwise disposed of to a third party; or (z) a majority
of the Board of Directors of the Company shall be comprised of persons who were
not elected to such offices as part of the "Company nominated slate" of
directors (i.e., the slate of nominees proposed by the Board of Directors in
office immediately prior to the election). Notwithstanding the foregoing, there
shall be excluded from the definition of "Change of Control" any direct or
indirect beneficial ownership change resulting in 50% or more of the combined
voting power of the then outstanding securities of the Company being
beneficially owned individually, jointly or as a group by Dudley A. Rauch,
Samuel Salen, M.D., Donald G. Moehering, Michael M. Sachs, MEDIQ Incorporated or
the trust created by agreement dated November 18, 1983 by Bernard B. Rotko as
grantor (the "Rotko Trust") or any of affiliates, personal representatives,
heirs, testamentary trusts or donees who are members of their family or any of
them.
In connection with your relocation to the Dallas area as soon as possible
after commencing employment with the Company, the Company will pay your moving
expenses to relocate you and your family from Cincinnati to Dallas and will pay
you $100,000, less the aggregate amount of the moving expenses paid by the
Company as provided above. This payment (the "Relocation Payment") will be made
in two installments, $50,000 on the date you commence employment with the
Company and the balance on March 15, 1996. In addition, the Company will make
you a $100,000 loan (the "Relocation Loan") for up to one year in order to
initially fund the down payment on the purchase of a residence in the Dallas
area. The loan will be secured by a second lien on the residence and will bear
interest at the same rate as the first mortgage you obtain from a commercial
lender in connection with the purchase of the residence. Interest on the loan
will be payable monthly and the full amount of the principal and accrued but
unpaid interest will be due and payable on the first anniversary of the loan. In
the event that the loan is not paid in full when due, any subsequent bonus
payments from the Company to which you would otherwise be entitled will be used
by the Company to repay the principal and accrued interest then outstanding on
the loan.
If during the first year of your employment, you voluntarily terminate your
employment or are terminated by the Company for cause, you shall repay to the
Company the Relocation Payment and the Relocation Loan shall immediately become
due and payable. If prior to the full repayment of all principal of and interest
on the Relocation Loan, you are terminated by the Company without cause, the
Relocation Loan shall immediately become due and payable and the Company may use
the severance benefits otherwise due you to satisfy the Relocation Loan, if not
separately paid by you.
Your employment will be governed by the legal principles applicable to
employment at will and noting contained in this letter shall constitute a
contract of employment.
<PAGE>
Mr. Michael G. Puls
December 8, 1995
Page 3
We look forward to working with you in the future and are confident of the
many contributions which you will make to the success of the Company.
Very truly yours,
INNOSERV TECHNOLOGIES,
INC.-REGISTERED TRADEMARK-
By: /s/ SAMUEL SALEN
-----------------------------------
Samuel Salen, M.D.
Agreed to and Acknowledged this
12th day of December, 1995
By: /s/ MICHAEL G. PULS
----------------------------------
Michael G. Puls
SS:sb
<PAGE>
EXHIBIT 10.26
LETTER AGREEMENT OF EMPLOYMENT
INNOSERV TECHNOLOGIES, INC.
January 3, 1996
Mr. Thomas E. Hoefert
2028 Espinosa Drive
Carrollton, Texas 75010
Dear Tom:
INNOSERV Technologies, Inc.-Registered Trademark- ("The Company") is pleased
to extend to you an offer of employment for the position of Vice President,
Chief Financial Officer. This position will report to the President and CEO. You
will be an officer of the Company and a member of the executive management group
that directs the Company. The offer of employment, as set forth in this letter,
supersedes any representations, whether written or oral, that may have occurred
previously.
Your annual base salary will be $150,000 with the opportunity for annual
merit increases with the first annual review occurring on or about July 1, 1997.
Subject to the establishment of an executive bonus program, contemplated for
fiscal year 1997, you will be eligible for an annual bonus based on your
performance against established objectives up to a maximum of 40% of your base
salary.
You will also receive a grant of options to purchase 25,000 shares of the
Company's common stock pursuant to the Company's Stock Incentive Plan. The stock
options will have an exercise price equal to the fair market value of the common
stock as defined in the Company's Stock Option Incentive Plan on the date you
become an employee of the Company and a term of ten years, and one-third of the
stock options will vest on an annual basis so that after three years of
employment the options will be fully vested. As you are aware, there are stock
options available for grant to key employees in the discretion of the Company's
Compensation Committee as part of an overall management group incentive program.
Upon employment with the Company you will be eligible to participate in the
Company's medical and dental insurance plans which are available to other
officers and employees of the Company. You will be entitled to four weeks of
paid vacation per year.
You will receive a car allowance of $600 per month, as well as,
reimbursement for certain maintenance and operating costs, as defined in the
Company Policy and Procedures Manual.
If your employment is terminated by the Company for any reason other than
for cause (which shall mean for all purposes herein, fraud, dishonesty or
willful misconduct), you will receive a severance payment by the continuation of
your then current monthly salary (less appropriate withholding amounts) for six
months following your separation. In addition, the Company will pay for your
participation in its medical and insurance plans for six months following your
separation. Payment of the severance benefit is conditioned upon your providing
to the Company at the time of your separation a written release of any and all
claims against the Company and your agreement not to compete with the Company or
to hire any of its employees for a period of two years following your separation
from the Company. You are not eligible for a severance benefit if you
voluntarily terminate your employment with the Company.
If a Change of Control (as defined below) occurs, all or your then unvested
stock options will vest immediately. Furthermore, if within six months following
a Change of Control, your employment is terminated without cause, you will also
receive a severance payment as provided for above.
For purposes of the preceding paragraph a "Change of Control" shall be
deemed to have occurred if (x) any "person" or "group" of "persons" (as the
terms "person" and "group" are used in
<PAGE>
Mr. Thomas Hoefert
January 3, 1996
Page 2
Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934 and the
rules and regulations thereunder) is or becomes, after the date of your
employment by the Company, the beneficial owner, directly or indirectly, of the
securities of the Company representing 50% of the combined voting power of the
then outstanding voting securities of the Company (whether by purchase or
acquisition of such securities or by agreement to act in concert with respect to
the voting of such securities or otherwise); (y) all or substantially all of the
assets and/or business of the Company is sold, transferred or otherwise disposed
of to a third party; or (z) a majority of the Board of Directors of the Company
shall be comprised of persons who were not elected to such offices as part of
the "Company nominated slate" of directors (i.e., the slate of nominees proposed
by the Board of Directors in office immediately prior to the election).
Notwithstanding the foregoing, there shall be excluded from the definition of
"Change of Control" any direct or indirect beneficial ownership change resulting
in 50% or more of the combined voting power of the then outstanding securities
of the Company being beneficially owned individually, jointly or as a group by
Dudley A. Rauch, Samuel Salen, M.D., Donald G. Moehering, Michael M. Sachs,
MEDIQ Incorporated or the trust created by agreement dated November 18, 1983 by
Bernard B. Rotko as grantor (the "Rotko Trust") or any of affiliates, personal
representatives, heirs, testamentary trusts or donees who are members of their
family or any of them.
Your starting date of employment will be no later than January 22, 1996.
Your employment will be governed by the legal principles applicable to
employment at will and nothing contained in this letter shall constitute a
contract of employment
Tom, I have confidence in your abilities to provide many contributions to
the Company and look forward to your commitment. On behalf of INNOSERV, let me
congratulate you on your decision to join our team.
Sincerely,
<TABLE>
<S> <C>
INNOSERV TECHNOLOGIES, INC. Understood, Agreed and Accepted
/s/ MICHAEL G. PULS /s/ THOMAS HOEFERT
- ------------------------------------------- -------------------------------------------
Michael G. Puls Thomas E. Hoefert
PRESIDENT & CEO Date: 1/9/96
</TABLE>
<PAGE>
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
For the years ended April 30, 1996, April 30, 1995 and April 29, 1994 (in
thousands, except per share data):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Primary:
Shares:
Weighted average shares outstanding......................................... 5,036 4,511 2,944
Net effect of dilutive stock options, based upon the treasury stock
method..................................................................... -- -- 105
--------- --------- ---------
Weighted average shares outstanding, as adjusted............................ 5,036 4,511 3,049
Earnings:
Income (loss) before cumulative effect of change in accounting.............. $ (7,189) $ (3,630) $ 1,002
Cumulative effect of change in accounting for income taxes.................. -- -- 505
--------- --------- ---------
Net income (loss)........................................................... $ (7,189) $ (3,630) $ 1,507
Per share amounts:
Income (loss) before cumulative effect of change in accounting.............. $ (1.43) $ (0.81) $ 0.32
Cumulative effect of change in accounting for income taxes.................. -- -- 0.17
--------- --------- ---------
Net income (loss)........................................................... $ (1.43) $ (0.81) $ 0.49
--------- --------- ---------
--------- --------- ---------
Fully Diluted:
Shares:
Weighted average shares outstanding......................................... 5,036 4,511 2,944
Net effect of dilutive stock options, based upon the treasury stock
method..................................................................... -- -- 105
--------- --------- ---------
Weighted average shares outstanding, as adjusted............................ 5,036 4,511 3,049
Earnings:
Income (loss) before cumulative effect of change in accounting.............. $ (7,189) $ (3,630) $ 1,002
Cumulative effect of change in accounting for income taxes.................. -- -- 505
--------- --------- ---------
Net income (loss)........................................................... $ (7,189) $ (3,630) $ 1,507
Per share amounts:
Income (loss) before cumulative effect of change in accounting.............. $ (1.43) $ (0.81) $ 0.32
Cumulative effect of change in accounting for income taxes.................. -- -- 0.17
--------- --------- ---------
Net income (loss)........................................................... $ (1.43) $ (0.81) $ 0.49
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES
As of April 30, 1996, the subsidiaries of InnoServ Technologies, Inc. were:
InnoServ Technologies Maintenance Services, Inc.
Advanced Imaging Technologies, Inc.
Sietec, Inc.
MMI Medical -- Texas, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 2-99839, No. 33-2133, No. 33-26178 and No. 33-66752) pertaining to
the Incentive Stock Option Plan, Employee Stock Purchase Plan, Nonemployee
Director Stock Incentive Plan and 1992 Stock Incentive Plan of InnoServ
Technologies, Inc. of our report dated July 24, 1996, with respect to the
consolidated financial statements and schedule of InnoServ Technologies, Inc.
included in the Annual Report (Form 10-K) for the year ended April 30, 1996.
/s/ ERNST & YOUNG LLP
Fort Worth, Texas
July 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<CASH> 941
<SECURITIES> 0
<RECEIVABLES> 5,680
<ALLOWANCES> 1,015
<INVENTORY> 7,458
<CURRENT-ASSETS> 13,987
<PP&E> 28,090
<DEPRECIATION> 21,904
<TOTAL-ASSETS> 23,840
<CURRENT-LIABILITIES> 12,964
<BONDS> 1,516
0
0
<COMMON> 51
<OTHER-SE> 9,915
<TOTAL-LIABILITY-AND-EQUITY> 23,840
<SALES> 2,346
<TOTAL-REVENUES> 45,727
<CGS> 1,335
<TOTAL-COSTS> 39,812
<OTHER-EXPENSES> 2,096
<LOSS-PROVISION> (89)
<INTEREST-EXPENSE> 194
<INCOME-PRETAX> (4,710)
<INCOME-TAX> 2,479
<INCOME-CONTINUING> (7,189)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,189)
<EPS-PRIMARY> (1.43)
<EPS-DILUTED> (1.43)
</TABLE>
