<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED OCTOBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 0-13608
INNOSERV TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
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)
Registrant's telephone number, including area code: (817) 468-3377
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
----- -----
At December 10, 1997, the Registrant had outstanding 3,009,395 shares of
its common stock, $.01 par value.
<PAGE>
INNOSERV TECHNOLOGIES, INC.
FORM 10-Q
OCTOBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1997
and April 30, 1997 3
Consolidated Statements of Operations for the
three months ended October 31, 1997 and 1996 4
Consolidated Statements of Operations for the six
months ended October 31, 1997 and 1996 5
Consolidated Statements of Cash Flows for the six
months ended October 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
INDEX TO EXHIBITS 16
</TABLE>
2
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INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
October 31,
1997 April 30,
(Unaudited) 1997
----------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,695 $ 1,806
Receivables 3,068 3,693
Inventory:
Spare parts and supplies, net 4,547 4,484
Inventory held for sale 1,041 772
Prepaid expenses 251 453
----------- ---------
Total current assets 11,602 11,208
Capital equipment, net 3,802 4,491
Goodwill, net 3,316 3,392
Other assets 7 11
----------- ---------
$ 18,727 $ 19,102
----------- ---------
----------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 657 $ 629
Accounts payable 4,271 3,658
Accrued liabilities 1,762 2,224
Deferred revenues 4,208 3,719
----------- ---------
Total current liabilities 10,898 10,230
Long-term debt, less current portion 155 479
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 (9,680) (8,961)
----------- ---------
Total shareholders' equity 7,674 8,393
----------- ---------
$ 18,727 $ 19,102
----------- ---------
----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Service $ 7,761 $ 8,644
Sale of parts and equipment 1,446 2,040
-------- --------
Total revenues 9,207 10,684
Costs:
Cost of service 7,283 7,755
Cost of parts and equipment 651 1,366
-------- --------
Total cost of operations 7,934 9,121
Gross profit 1,273 1,563
Depreciation and amortization 430 505
Selling and administrative expenses 1,307 1,445
-------- --------
Loss from operations (464) (387)
Interest expense, net 3 69
-------- --------
Loss before income taxes (467) (456)
Provision for income taxes -- --
-------- --------
Net loss $ (467) $ (456)
-------- --------
-------- --------
Per share information:
Net loss $ (.09) $ (.09)
-------- --------
-------- --------
Weighted average shares outstanding 5,036 5,036
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
Service $ 15,295 $ 17,783
Sale of parts and equipment 3,056 4,689
--------- ---------
Total revenues 18,351 22,472
Costs:
Cost of service 14,393 16,165
Cost of parts and equipment 1,142 2,979
--------- ---------
Total cost of operations 15,535 19,144
Gross profit 2,816 3,328
Depreciation and amortization 824 1,016
Selling and administrative expenses 2,691 3,299
--------- ---------
Loss from operations (699) (987)
Interest expense, net 20 96
--------- ---------
Loss before income taxes (719) (1,083)
Provision for income taxes -- --
--------- ---------
Net loss $ (719) $ (1,083)
--------- ---------
Per share information:
Net loss $ (.14) $ (.22)
--------- ---------
--------- ---------
Weighted average shares outstanding 5,036 5,036
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
------------------------
1997 1996
--------- ----------
<S> <C> <C>
Cash flows from:
Operations -
Net loss $ (719) $ (1,083)
Adjustments to reconcile net loss to
net cash flows from operations:
Depreciation and amortization 824 1,016
Changes in assets and liabilities:
Receivables 625 1,025
Inventory (332) 1,189
Prepaid expenses 202 (68)
Other assets 3 37
Accounts payable 613 (488)
Accrued liabilities (462) (609)
Deferred revenues 490 (542)
--------- ----------
Net cash provided by operations 1,244 477
Investments and acquisitions -
Purchase of capital equipment (59) (163)
--------- ----------
Net cash used for investments and acquisitions (59) (163)
Financing activities -
Borrowings from line of credit -- 242
Principal payments of long-term debt (296) (331)
--------- ----------
Net cash used for financing activities (296) (89)
--------- ----------
Net increase in cash and cash equivalents 889 225
Cash and cash equivalents at beginning of period 1,806 941
--------- ----------
Cash and cash equivalents at end of period $ 2,695 $ 1,166
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(UNAUDITED)
1. GENERAL
The consolidated financial statements included herein have been prepared
by InnoServ Technologies, Inc. ("InnoServ") without audit, include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the three months and six months
ended October 31, 1997 and 1996, pursuant to the rules and regulations of the
Securities and Exchange Commission, and include the accounts of InnoServ and
its consolidated subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Any and all adjustments made are of a
normal and recurring nature in accordance with Rule 10-01(b)(8) of Regulation
S-X. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulation, however, InnoServ believes that the disclosures in such
financial statements are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with
InnoServ's annual report on Form 10-K for the fiscal year ended April 30,
1997, filed with the Securities and Exchange Commission. The results of
operations for the six months ended October 31, 1997, are not necessarily
indicative of the results that may be expected for the year ending April 30,
1998.
Certain reclassifications have been made in the prior year's
consolidated financial statements to conform to the fiscal 1998 presentation.
2. INTEREST EXPENSE, NET
Interest expense is net of interest income of $18,000 and $8,000 for the
three months ended October 31, 1997 and 1996, respectively.
Interest expense is net of interest income of $34,000 and $23,000 for
the six months ended October 31, 1997 and 1996, respectively.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest and income taxes paid in the six months ended October 31, 1997
and 1996 were as follows:
Six Months Ended
October 31,
---------------------
1997 1996
-------- ---------
Interest $ 48,000 $ 124,000
Income taxes $ 5,000 $ 53,000
7
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INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(UNAUDITED)
4. EARNINGS PER SHARE
Earnings 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
earnings per share is anti-dilutive, only primary earnings per share amounts
are presented.
5. LONG-TERM DEBT
On April 14, 1997 InnoServ entered into a new loan agreement with a bank
pursuant to which amounts outstanding under InnoServ's prior revolving line
of credit and term loan agreements with the bank were converted into a new
term loan aggregating $1,198,000. Borrowings under the new term loan bear
interest at the rate of prime (8.5% at October 31, 1997) plus 1% per annum.
Monthly principal installments of $54,000 plus interest are required through
January 8, 1999. Obligations under the loan agreement are secured by a
security interest in InnoServ's accounts receivable, inventory and capital
equipment. 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 loss for the period, InnoServ failed to meet the net worth covenant under
the loan agreement as of October 31, 1997. InnoServ's bank waived this event
of default and has amended the net worth covenant effective October 31, 1997
through the expiration date of the loan agreement of January 8, 1999.
InnoServ was in compliance with the financial covenants, as amended, at
October 31, 1997.
6. SUBSEQUENT EVENT
Pursuant to a Stock Purchase Agreement dated November 13, 1997
("Agreement"), among InnoServ, a California corporation, MEDIQ Incorporated
("MEDIQ") and MEDIQ Investment Services, Inc. ("MIS" and together with MEDIQ,
collectively the "Seller"), each a Delaware corporation, InnoServ reacquired
from Seller 2,026,438 shares of InnoServ's common stock ("Shares") and a
warrant to purchase 325,000 shares of InnoServ's common stock ("Warrant").
Such 2,026,438 shares represented approximately 40% of the then outstanding
shares of common stock of InnoServ. The Shares and Warrant had been issued
to MEDIQ in connection with InnoServ's acquisition of MEDIQ Equipment and
Maintenance Services, Inc., a wholly-owned subsidiary of MEDIQ, in August
1994.
8
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(UNAUDITED)
Under the terms of the Agreement, no cash payment was made for the
reacquisition of the Shares and Warrant. However, in the event of a change
of control of InnoServ prior to April 1, 1998, Seller will be entitled to
certain payments from the acquiring party as if 100% of the Shares remained
outstanding. In the event of a change of control of InnoServ from and after
April 1, 1998 and through September 30, 1998, Seller will be entitled to
certain payments as if 50% of the Shares remained outstanding.
Additionally, in connection with the transaction, MEDIQ and InnoServ
agreed to terminate certain continuing arrangements including the right to
designate two directors. Consequently, Thomas E. Carroll, President and
Chief Executive Officer of MEDIQ, who had been serving at MEDIQ's
designation, resigned from InnoServ's Board of Directors. Michael Sandler,
the former Chief Financial Officer of MEDIQ, who also had been serving at
MEDIQ's designation, will continue as a director of InnoServ.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SECOND QUARTER FISCAL 1998 COMPARED TO SECOND QUARTER FISCAL 1997
Consolidated revenues for the second quarter of fiscal 1998 were
$9,207,000 as compared to $10,684,000 in the same period of fiscal 1997, a
decline of $1,477,000, or 14 percent. The decline in revenues is primarily
attributable to a decrease of $1,200,000 resulting from the disposition of
substantially all of the revenue producing assets of Advanced Imaging
Technologies ("AIT"), a wholly owned subsidiary of InnoServ, on March 17,
1997. Revenues from computerized tomography ("CT") maintenance service
agreements decreased approximately $650,000 primarily 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 InnoServ's decision to not renew certain CT
maintenance agreements in unprofitable locations. Offsetting these declines,
revenues from comprehensive asset management services ("Asset Management")
and multi-vendor services increased approximately $290,000 as InnoServ
continues to focus on the growing market for these type services. In
addition, after taking into effect the disposal of AIT, sales of spare parts
increased by approximately $170,000.
Cost of operations decreased $1,187,000 from the same period in the
prior fiscal year primarily as a result of the disposition of AIT. As a
percent of on-going revenues, cost of operations for the second quarter of
1998 was 85%, unchanged from the same period of fiscal 1997.
Selling and administrative expenses decreased $138,000, or 10 percent,
from the prior year primarily as a result of reductions in InnoServ's
administrative functions resulting from the disposal of AIT. Depreciation and
amortization expenses decreased by $75,000 due to the completed depreciation
of certain capital equipment and a change in the estimated remaining life of
certain other assets.
The loss before income taxes for the second quarter of fiscal 1998 was
$467,000 as compared to a loss of $456,000 in the second quarter of fiscal
1997. The loss for fiscal 1998 was primarily the result of unfavorable
operating margins associated with InnoServ's maintenance business. 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 and indirect costs of providing maintenance and repair services.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". InnoServ is required to adopt SFAS No. 128 in the
third quarter of fiscal 1998. The adoption of this standard is not expected
to materially impact InnoServ's earnings per share calculations. The adoption
will have no impact on InnoServ's results of operations.
10
<PAGE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", and No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 requires that an enterprise report, by
major component and as a single total, the change in its equity during the
period from nonshareholder sources, and SFAS No. 131 establishes annual and
interim reporting requirements for an enterprise's operating segments and
related disclosures about its products and services, geographical areas in
which it operates and major customers. Both statements are effective for
fiscal years beginning after December 15, 1997, with earlier application
permitted. Adoption of these statements is not expected to materially impact
InnoServ's consolidated financial position or statements of operations,
shareholders' equity and cash flows. Effects of the adoption of these
statements, if any, will primarily be limited to the form and content of
InnoServ's disclosures.
SIX MONTHS FISCAL 1998 COMPARED TO SIX MONTHS FISCAL 1997
Consolidated revenues for the first six months of fiscal 1998 were
$18,351,000 as compared to $22,472,000 in the same period of fiscal 1997, a
decline of $4,121,000, or 18 percent. The decline in revenues is primarily
attributable to a decrease of $2,900,000 resulting from the disposition of
substantially all of the revenue producing assets of AIT on March 17, 1997.
Revenues from CT maintenance service agreements decreased approximately
$1,800,000 primarily 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
InnoServ's decision to not renew certain CT maintenance agreements in
unprofitable locations. Offsetting these declines, revenues from Asset
Management and multi-vendor services increased approximately $370,000 as
InnoServ continues to focus on the growing market for these type services.
In addition, after taking into effect the disposal of AIT, sale of spare
parts increased by approximately $420,000.
Cost of operations decreased $3,609,000 from the same period in the
prior fiscal year, primarily as a result of the disposition of AIT and the
decline in on-going revenues. As a percent of on-going revenues, cost of
operations for the first six months of 1998 was 85%, unchanged from the first
six months of fiscal 1997.
Selling and administrative expenses decreased $608,000, or 18 percent,
from the prior year primarily as a result of reductions in InnoServ's
administrative functions resulting from the disposal of AIT and cost
containment activities. Depreciation and amortization expenses decreased
$192,000 from fiscal 1997 due to the completed depreciation of certain
capital equipment and a change in the estimated remaining life of certain
other assets.
The loss before income taxes for the first six months of fiscal 1998 was
$719,000 as compared to a loss of $1,083,000 in the first six months of
fiscal 1997. The loss in fiscal 1998 was primarily the result of unfavorable
operating margins associated with InnoServ's maintenance business. 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 and indirect costs of providing maintenance and repair services.
InnoServ is continuing to implement 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 strategic changes it is making
in the operations of the CT and Asset Management business and efforts to
expand the revenue base, will improve InnoServ's operations.
11
<PAGE>
InnoServ did not recognize a tax benefit from the operating loss for the
first six months of fiscal 1998. Under SFAS No. 109, "Accounting for Income
Taxes", net operating losses enter into the calculation of deferred tax
assets and liabilities. At October 31, 1997, InnoServ had an estimated net
deferred tax asset of $5,800,000, primarily as a result of net operating
losses. In accordance with SFAS No. 109, InnoServ recorded a valuation
allowance for the full amount of the net deferred tax asset. The ultimate
realization of the deferred tax asset depends on the ability of InnoServ to
generate sufficient taxable income in the future. While InnoServ believes the
deferred tax asset 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 criteria for recognition under SFAS No.
109.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, InnoServ had working capital of $704,000, of which
$2,695,000 was in cash and cash equivalents. Operations provided $1,244,000
of cash for the six months ended October 31, 1997, primarily as a result of a
$625,000 reduction in accounts receivable due to successful collection
activities and lower revenues, an increase in accounts payable of $613,000
due to the timing of cash disbursements, and an increase in deferred revenues
of $490,000 as payments received for services to be provided exceeded
services provided during the period. These cash increases were offset by a
reduction of accrued liabilities of $462,000 and an increase in inventory of
$332,000 due to the purchase of spare parts and x-ray tubes required to
service newer technology CT and magnetic resonance imaging scanners. Cash
provided by operations was used to fund $59,000 of capital equipment
purchases and $296,000 of principal payments of long-term debt during the
period.
InnoServ's allowance for doubtful accounts at October 31, 1997 was
$851,000, or 22 percent of gross accounts receivable. InnoServ's customers
include hospitals, physician practices, outpatient clinics and
entrepreneurial operations. Some of these customers are thinly capitalized,
operate on small margins and experience cash flow difficulties due to the
lengthy time required to receive reimbursements from Medicare and insurance
companies. Factors impacting InnoServ's allowance for doubtful accounts
include the changes occurring in the healthcare industry, primarily the move
to managed care, which has weakened healthcare providers' ability to honor
their debts and have forced some of the providers out of business.
On April 14, 1997 InnoServ entered into a new loan agreement with a bank
pursuant to which amounts outstanding under InnoServ's prior revolving line
of credit and term loan agreements with the bank were converted into a new
term loan aggregating $1,198,000. Borrowings under the new term loan bear
interest at the rate of prime (8.5% at October 31, 1997) plus 1% per annum.
Monthly principal installments of $54,000 plus interest are required through
January 8, 1999. Obligations under the loan agreement are secured by a
security interest in InnoServ's accounts receivable, inventory and capital
equipment. 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 loss for the period, InnoServ failed to meet the net worth covenant under
the loan agreement as of October 31, 1997. InnoServ's bank waived this event
of default and has amended the net worth covenant effective October 31, 1997
through the expiration date of the loan agreement of January 8, 1999.
InnoServ was in compliance with the financial covenants, as amended, at
October 31, 1997.
12
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InnoServ does not foresee the need to make significant amounts of
capital purchases in the next twelve months and believes sufficient funds
will be available from its operations to meet its working capital
requirements. Should cash flows from operations not be sufficient to meet
all of InnoServ's cash requirements, InnoServ would attempt to obtain a line
of credit to provide the necessary funds.
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, competitive and regulatory conditions in the healthcare
industry generally, and other factors, many of which are beyond the control
of InnoServ.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
InnoServ is party to a lawsuit filed on April 12, 1995 in Superior
Court in the County of Riverside, California, by two former employees who
have claimed wrongful termination in retaliation for filing a claim with the
U.S. Department of Labor. The plaintiffs have sought damages in the amount
of approximately $1,000,000 in the aggregate. In July 1997, one of the
plaintiffs accepted an offer of compromise made by InnoServ for significantly
less than the damages sought by such plaintiff. InnoServ funded this
settlement in early September 1997. The amount of the settlement was accrued
in a previous period and did not impact the earnings of the three months and
six months ended October 31, 1997. InnoServ continues to defend itself
against the other plaintiff and believes the ultimate liability related to
this matter will not exceed amounts currently accrued in the financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on September 15, 1997. At
the annual meeting the shareholders elected directors to hold office until
the 1998 annual meeting of shareholders and until their successors are
elected and qualified. The following directors were elected:
VOTES CAST
-------------------------
DIRECTOR FOR WITHHELD
------------------- --------- --------
Thomas E. Carroll 3,651,302 9,025
Bernard J. Korman 3,651,902 8,425
Michael G. Puls 3,651,902 8,425
Dudley A. Rauch 3,651,902 8,425
Michael M. Sachs 3,651,902 8,425
Samuel Salen, M.D. 3,651,902 8,425
Michael F. Sandler 3,651,302 9,025
David A. Wegmann 3,651,902 8,425
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The information required by this portion of Item 6 is set forth in the
Index to Exhibits beginning on page 16.
(b) Reports on Form 8-K:
During the three months ended October 31, 1997 no reports were filed by
the Registrant on Form 8-K.
14
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SIGNATURES
Pursuant to the requirements 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.
DATED: December 10, 1997
INNOSERV TECHNOLOGIES, INC.
By: /s/ Thomas Hoefert
------------------------
Thomas Hoefert
Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
15
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
--- ----------------------
10.1 Letter Agreement of Employment dated September 10, 1997 by
and between Registrant and Thomas E. Hoefert.
10.2 Indemnity Agreement dated as of September 29, 1997 by and
between Registrant and Thomas E. Hoefert.
10.3 Bonus Agreement dated as of September 29, 1997 between
Registrant and Thomas E. Hoefert.
10.4 Letter Agreement dated December 5, 1997 amending the Loan
Agreement dated as of April 14, 1997, by and between Registrant
and Overton Bank & Trust, N.A.
11.1 Computation of Per Share Earnings.
27.1 Financial Data Schedule.
16
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Exhibit 10.1
InnoServ Technologies, Inc.
September 10, 1997
Mr. Thomas E. Hoefert
1015 Walnut Falls Circle
Mansfield, TX 76063
Dear Tom:
I am pleased that you have decided that you would like to return to INNOSERV.
On that basis, 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. Effectively, it
is our intent to "bridge your service" and return your status at historical
compensation and benefit levels.
Your annual base salary will be $157,500 with the opportunity for annual
merit increases with the first annual review occurring on or about July 1,
1998. Subject to the approval of an executive bonus program, for fiscal year
1998, 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.
For fiscal 1998, you will be eligible for 7/12 of your total bonus
opportunity.
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 exercise price of your
previous grant or $3.50 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. Your previous time of service (i.e. 15
months) will count towards your vesting period. 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, which will be accrued per Company policy.
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
17
<PAGE>
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 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 September 29, 1997.
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 am excited with the prospect of working together again. Your
commitment and contribution are important to me as we continue to build
InnoServ. On behalf of InnoServ, welcome back!
Sincerely,
INNOSERV TECHNOLOGIES, INC. Understood, Agreed and Accepted
/s/ Michael G. Puls /s/ Thomas Hoefert
Michael G. Puls --------------------------------
President & CEO Thomas E. Hoefert
Date: 9/26/97
--------------------------
18
<PAGE>
Exhibit 10.2
INDEMNITY AGREEMENT
This Indemnity Agreement ("Agreement") is made and entered into as of
the 29th day of September, 1997, by and between INNOSERV Technologies, Inc.
- -Registered Trademark-, a California corporation (the "Corporation"), and
Thomas E. Hoefert (the "Agent").
WHEREAS, the Agent is currently serving as an Officer of the Corporation
and the Corporation wishes the Agent to continue in such capacity;
NOW, THEREFORE, in consideration of the foregoing recital and the mutual
agreements set forth herein, and in order to induce the Agent to continue to
serve as an Officer of the Corporation and in consideration of his continued
service, the parties hereto hereby agree as follows:
1. The corporation will pay on behalf of the Agent, and his executors,
administrators or assigns, any amount which the Agent is or becomes legally
obligated to pay in connection with any claim or claims made against the
Agent because of any act or omission or neglect or breach of duty, including
any actual or alleged error or misstatement or misleading statement, which
the Agent commits or suffers while acting in his capacity as an Officer of
the Corporation and solely because of being an Officer. The payments which
the Corporation will be obligated to make hereunder shall include, INTER
ALIA, damages, judgments, settlements and costs, cost of investigation
(excluding salaries of officers or employees of the Corporation) and costs of
defense of legal actions, claims or proceedings and appeals therefrom, and
costs of attachment or similar bonds; provided however, that the Corporation
shall not be obligated to pay fines or other obligations or fees imposed by
law or otherwise make any payments hereunder which it is prohibited by
applicable law from paying as indemnity or for any other reason.
2. If a claim under this Agreement is not paid by the Corporation, or
on its behalf, within 90 days after a written claim has been received by the
Corporation, the claimant may at anytime thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and if successful in
whole or in part, the claimant also shall be entitled to be paid the expense
of prosecuting such claim.
3. In the event of payment under this Agreement, the Corporation shall
be subrogated to the extent of such payment to all of the rights of recovery
of the Agent, who shall execute all papers required and shall do everything
that may be necessary or appropriate to secure such rights, including the
execution of such documents necessary or appropriate to enable the
Corporation effectively to bring suit to enforce such rights.
4. The Corporation shall not be liable under this Agreement to make
any payment in connection with any claim made against the Agent:
(a) for which payment is actually made to the Agent under a valid
and collectible insurance policy, except in respect of any excess beyond
the amount of payment under such insurance;
19
<PAGE>
(b) for which the Agent is entitled to indemnity and/or payment by
reason of having given notice of any circumstance which might give rise to
a claim under any policy of insurance, the terms of which have expired
prior to the effective date of this Agreement;
(c) for which the Agent is indemnified by the Corporation otherwise
than pursuant to this Agreement;
(d) based upon or attributed to the Agent gaining in fact any
personal profit or advantage to which the Agent was not legally entitled;
(e) for an accounting of profits made from the purchase or sale by
the Agent of securities of the Corporation within the meaning of Section
16(b) of the Securities Exchange Act of 1934, as amended, or similar
provisions of any state statutory law or common law; or
(f) brought about or contributed to by the dishonesty of the Agent
seeking payment hereunder; however, notwithstanding the foregoing, the
Agent shall be protected under this Agreement to the fullest extent
permitted under law as to any claims upon which suit may be brought
against the Agent by reason of any alleged dishonesty n his part, unless a
judgment or other final adjudication thereof adverse to the Agent shall
establish that the Agent committed acts of active and deliberate
dishonesty with actual dishonest purpose and intent, which acts were
material to the cause of action so adjudicated.
5. No costs, charges or expenses for which indemnity shall be sought
hereunder shall be incurred without the Corporation's consent, which shall
not be unreasonably withheld.
6. The Agent, as a condition precedent to indemnification under this
Agreement, shall give to the Corporation notice in writing as soon as
practicable of any claim made against the Agent for which indemnity will or
could be sought under this Agreement. Notice to the Corporation shall be
directed to INNOSERV Technologies, Inc., 320 Westway, Suite 520, Arlington,
Texas 76018, Attention: President and Chief Executive Officer (or such other
address as the Corporation shall designate in writing to the Agent); notice
shall be deemed received I sent by prepaid mail properly addressed, the date
of such notice being the date postmarked. In addition, the Agent shall give
the Corporation such information and cooperation as it may reasonably require
and as shall be within the Agent's power.
7. Costs and expenses (including attorneys' fees) incurred by the
Agent in defending or investigating any action, suit, proceeding or
investigation shall be paid by the Corporation in advance of the final
disposition of such matter, if the Agent shall undertake in writing to repay
any such advances in he event that it is ultimately determined that the Agent
is not entitled to indemnification under the terms of this Agreement.
Notwithstanding the foregoing or any other provision of this Agreement, no
advance shall be made by the Corporation if a determination is reasonable and
promptly made by the Board of Directors by a majority vote of a quorum of
disinterested directors, or (if such a quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs) by independent
legal counsel, that, based upon the facts known to the Board of Directors or
counsel at the time such determination is made, (a) the Agent acted in bad
faith or deliberately breached his duty to the Corporation or its
stockholders, and (b) as a result of such actions by the Agent, it is more
likely than not that it will ultimately be determined that the Agent is not
entitled to indemnification under the terms of this Agreement.
20
<PAGE>
8. Nothing herein shall be deemed to diminish or otherwise restrict
the Agent's right to indemnification under any provision of the articles of
incorporation or bylaws of the Corporation or under California law.
9. This Agreement shall be governed by and construed in accordance
with in internal laws of the State of California.
10. This Agreement shall be binding upon all successors and assigns of
the Corporation (including any transferee of all or substantially all of its
assets and any successor by merger or operation of law) and shall and inure
to the benefit of the heirs, personal representatives and estate of the Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first written.
INNOSERV TECHNOLOGIES, INC.
By: /s/ Michael G. Puls
-------------------------------------
Title: President & CEO
AGENT:
/s/ Thomas Hoefert
-----------------------------------------
Thomas E. Hoefert, VP & CFO
21
<PAGE>
Exhibit 10.3
INNOSERV TECHNOLOGIES, INC.
BONUS AGREEMENT
This Bonus Agreement (this "Agreement") is entered into between InnoServ
Technologies, Inc. (the "Company") and Thomas Hoefert, Vice President and
Chief Financial Officer of the Company (the "Executive").
WITNESSETH:
WHEREAS, the Executive is currently employed by the Company in the
capacity of Vice President and Chief Financial Officer; and
WHEREAS, the board of directors of the Company (the "Board of
Directors") has determined that it is in the best interests of the Company
and the shareholders of the Company that the Company from time to time
investigate strategic alternatives in order to maximize shareholder value; and
WHEREAS, the Executive is a member of senior management of the Company
and has access to proprietary information pertaining to the business and
operations of the Company; and
WHEREAS, the Board of Directors has determined that it is in the best
interests of the Company to provide an incentive to the Executive to remain
in the employ of the Company while the Company is investigating such
strategic alternatives;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Company and Executive agree as follows:
1. Subject to paragraph 2 below, if Executive is a full-time employee
of the Company in good standing on the closing of a Sale of the Company (as
defined in paragraph 3 below), then Executive will be entitled to a one-time
bonus determined according to paragraph 4 below (the "Bonus"). The Bonus
will be payable in full, in cash on the closing date of such Sale of the
Company.
2. Executive will not be eligible for benefits hereunder if he
resigns, retires, becomes disabled, fails to return from a leave of absence,
dies, or is terminated for cause prior to the close of the Sale of the
Company.
3. For purposes of this Agreement, a Sale of the Company shall be
deemed to have occurred if the Company disposes of all of its stock or
substantially all of its assets to another party, whether by way of merger,
transfer of assets or otherwise, for cash or securities, in one or a series
of transactions.
4. a. For purposes of this Agreement, Executive's Bonus shall be
based upon the Sale Price (as hereinafter defined) of the Company. The Bonus
shall be a cash payment, less all applicable withholdings, computed as
follows:
22
<PAGE>
------------------------------------------------------------------------
SALE PRICE AMOUNT OF BONUS
------------------------------------------------------------------------
up to $26,666,667 $150,000
------------------------------------------------------------------------
$26,666,668 to $125,000 + ($75,000 x [(Sale Price -
$29,999,999 $25,000,000)/ $5,000,000])
------------------------------------------------------------------------
$30,000,000 to $200,000 + ($50,000 x [(Sale Price -
$34,999,999 $30,000,000)/$5,000,000])
------------------------------------------------------------------------
$35,000,000 or more $250,000
------------------------------------------------------------------------
b. The Sale Price of the Company, if a stock sale, shall be the
product of (i) the average consideration paid for a share of common stock of
the Company and (ii) the sum of (A) the number of such shares acquired by the
other party to the transaction, plus (B) the number of such shares issuable
upon exercise of options, warrants or other rights or conversion or exchange
of securities all as outstanding on the date of this Agreement and, without
duplication, as thereafter issued or granted. For the purpose of clause (i)
of the foregoing sentence, all shares shall be deemed to have been acquired
if more than 50% of the Company's outstanding common stock is acquired by a
"group" as that term is used in Section 13 (d) (3) of the Securities Exchange
Act of 1934.
c. For the purposes of calculating the Sale Price of the Company,
equity securities constituting a part of the consideration referred to in
clause (i) of paragraph 4.b. above that are traded on a national securities
exchange or quoted on the National Association of Securities Dealers National
Market System shall be valued at the last closing price thereof prior to
the date of the consummation or closing of any such Sale of the Company.
d. The Sale Price of the Company, if an asset sale, shall be the
sum of (i) the cash (or other consideration) paid by the purchaser for such
assets and (ii) any debt incurred by the purchaser of such assets.
5. This Agreement is not and shall not be deemed an employment
agreement, and shall not give the Executive the right to be retained in the
employment of the Company.
6. This Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, successors, legal
representative, and assigns.
7. Neither this Agreement nor any right or interest hereunder shall be
assignable by the Executive, his beneficiaries or legal representatives.
8. If any provision of this Agreement shall be determined to be
invalid, illegal or unenforceable in whole or in part, neither the validity
of the remaining part of such provision nor the validity of any other
provision of this Agreement shall in any way be affected thereby. In lieu of
such invalid, illegal or unenforceable provision, there shall be added
automatically as part of this Agreement a
23
<PAGE>
provision as similar in terms to such invalid, illegal or unenforceable
provision as may be possible and be valid, legal and enforceable.
9. This Agreement shall be governed by Texas law.
10. This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof and supersedes all prior agreements,
oral and written, between the parties hereto with respect to the subject
matter hereof. This Agreement may be modified or amended only by an
instrument in writing signed by both parties hereto.
11. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together constitute one
and the same instrument.
[SIGNATURES ON THE NEXT PAGE]
24
<PAGE>
IN WITNESS WHEREOF, the Company and Executive have executed this
Agreement as of the day and year indicated below.
INNOSERV TECHNOLOGIES, INC.
Dated: 9/29/97 By: /s/ Michael G. Puls
-------------- ----------------------------
Name: Michael G. Puls
----------------------------
Its: President & CEO
----------------------------
EXECUTIVE:
Dated: 9/29/97 /s/ Thomas Hoefert
-------------- ----------------------------------
Printed Name: Thomas Hoefert
--------------------
25
<PAGE>
Exhibit 10.4
OVERTON BANK AND TRUST, N.A.
SOUTH ARLINGTON OFFICE
CURTIS F. VON DER AHE
President
December 5, 1997
Mr. Tom Hoefert, CFO
InnoServ Technologies, Inc.
4330 Beltway #300
Arlington, TX. 76018
REFERENCE: LOAN AGREEMENT DATED APRIL 14, 1997 COVENANT VIOLATIONS.
Dear Mr. Hoefert,
You have indicated that InnoServ is in violation of the Minimum Tangible Net
Worth covenant as outline in the loan agreement referenced above. We hereby
waive compliance with this covenant and re-set the covenant as follows:
Minimum Tangible Net Worth $2,750,000
If you require anything else, please do not hesitate to call.
Sincerely,
/s/ Curtis F. Von Der Ahe
- --------------------------
Curtis F. Von Der Ahe,
President
26
<PAGE>
EXHIBIT 11.1 - COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Primary:
Earnings:
Net loss $ (467) $ (456) $ (719) $ (1,083)
Shares:
Weighted average shares outstanding 5,036 5,036 5,036 5,036
Per share amounts:
Net loss $ (.09) $ (.09) $ (.14) $ (.22)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully diluted (A):
Earnings:
Net loss $ (467) $ (456) $ (719) $ (1,083)
Shares:
Weighted average shares outstanding 5,036 5,036 5,036 5,036
Net shares issuable on exercise of certain
stock options -- 25 -- 67
---------- ---------- ---------- ----------
Weighted average shares outstanding,
as adjusted 5,036 5,061 5,036 5,103
Per share amounts:
Net loss $ (.09) $ (.09) $ (.14) $ (.21)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Note A: This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion
No. 15 because it produces an anti-dilutive result.
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 2,695
<SECURITIES> 0
<RECEIVABLES> 3,730
<ALLOWANCES> 851
<INVENTORY> 5,588
<CURRENT-ASSETS> 11,602
<PP&E> 27,966
<DEPRECIATION> 24,164
<TOTAL-ASSETS> 18,727
<CURRENT-LIABILITIES> 10,898
<BONDS> 812
0
0
<COMMON> 51
<OTHER-SE> 7,623
<TOTAL-LIABILITY-AND-EQUITY> 18,727
<SALES> 3,056
<TOTAL-REVENUES> 18,351
<CGS> 1,142
<TOTAL-COSTS> 15,535
<OTHER-EXPENSES> 824
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> (719)
<INCOME-TAX> 0
<INCOME-CONTINUING> (719)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (719)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
