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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1998
/ / 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 ______________
COMMISSION FILE NUMBER 0-13608
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INNOSERV TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
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<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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common stock, $.01 Par Value NASDAQ National Market
</TABLE>
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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 From 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 17, 1998 was $5,855,640.
At July 17, 1998, the Registrant had outstanding 3,009,395 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 October 13, 1998.
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PART I
ITEM 1. BUSINESS.
GENERAL
InnoServ Technologies, Inc.-Registered Trademark- ("InnoServ") is a
California corporation organized in 1981. InnoServ provides comprehensive asset
management programs 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
refers to InnoServ Technologies, Inc. and its subsidiaries.
InnoServ operates its business primarily through its wholly-owned
subsidiary, InnoServ Technologies Maintenance Services, Inc. ("InnoServ
Maintenance"), and through its imaging operation.
On May 19, 1998, InnoServ entered into an Agreement and Plan of Merger with
General Electric Company ("GE") whereby GE Medical Systems, a division of GE,
will acquire all of the outstanding common stock of InnoServ (the "Merger") (see
Note 15 to the Notes to Consolidated Financial Statements). The Merger, which is
subject to approval by InnoServ's shareholders, government regulatory approval
and other customary contingencies, is planned to close in late August 1998.
Certain InnoServ shareholders, representing 53 percent of InnoServ shares (an
amount sufficient to approve the Merger), have entered into agreements with GE
to vote in favor of the Merger. On July 14, 1998, GE and InnoServ received
written notice that the Federal Trade Commission has granted early termination
of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976.
INNOSERV TECHNOLOGIES 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, and pricing is determined on
either a fixed or volume related basis. Maintenance services are performed at a
customer's site by InnoServ Maintenance's field service engineers and equipment
specialists. InnoServ Maintenance's personnel, through the use of proprietary
software information systems, also provide customers of the Asset Management
services with an array of analytical reports and consultative services to help
manage the customer's imaging, biomedical and laboratory capital equipment. In
addition to performing regular preventive maintenance services, InnoServ
Maintenance's engineers are on call 24 hours a day, seven days a week, to
provide emergency maintenance of medical equipment. InnoServ Maintenance also
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 as a service to its customers.
In support of its field service operations, InnoServ Maintenance maintains a
supply of spare parts in strategic locations across the nation. Analysis and
repair of defective parts are performed at InnoServ's 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.
IMAGING OPERATION
InnoServ owns 6 mobile CT scanners and 6 cardiac catheterization
laboratories (the "Imaging Operation") which are offered to customers under
lease agreements. Customers typically enter into these
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leases while their in-house equipment is being installed, serviced or upgraded
or to supplement in-house equipment during periods of heavy patient volume.
InnoServ may also provide technologists and other additional support services
pursuant to the lease. Typically, 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.
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, 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 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.
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 1998, InnoServ provided its Asset Management, maintenance,
distribution and diagnostic services in 41 states to customers including
hospitals, health maintenance organizations, out-patient clinics and private
physician offices. Revenues from an Asset Management service agreement with IHC
Health Services, Inc. accounted for 13 percent of InnoServ's consolidated
revenues for fiscal 1998.
COMPETITION
The healthcare industry in general and the market for medical equipment
maintenance, distribution and diagnostic imaging 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
substantially greater financial and marketing resources than InnoServ, and other
third party maintenance service companies. Certain large hospital systems also
provide in-house maintenance service on their own equipment.
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
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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 readily available, and in many cases alternate
sources currently exist. InnoServ procures certain x-ray tubes and other
proprietary components from certain 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 customers' 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, and employee health insurance coverage, subject to normal
deductibles. InnoServ believes its present insurance coverage is adequate.
EMPLOYEES
At June 30, 1998, InnoServ had 207 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 generally to be satisfactory.
ITEM 2. PROPERTIES.
InnoServ leases approximately 76,000 square feet of office, maintenance and
storage facilities in nine locations at an approximate annual cost of $690,000.
Individual lease terms extend up to 41 months with various renewal options.
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.
Pursuant to a stock purchase agreement dated November 13, 1997 (the "MEDIQ
Agreement"), by and among InnoServ and MEDIQ Incorporated and MEDIQ Investment
Services, Inc. (collectively "MEDIQ"), InnoServ repurchased 2,026,438 shares of
InnoServ's common stock (the "MEDIQ Shares") from MEDIQ in exchange for an
agreement that InnoServ would not enter into or consummate a change of control
(as defined in the MEDIQ Agreement) unless the other party or parties thereto
agree, as a condition precedent to such transaction, to pay to MEDIQ the amount
that would have been received by MEDIQ in connection with the change of control
transaction if all of the MEDIQ Shares were outstanding and held by MEDIQ at the
effective time of such change of control transaction. The MEDIQ Agreement
further provides that, after April 1, 1998 and through September 30, 1998,
InnoServ shall not enter into or consummate a change of control unless the other
party or parties thereto agree, as a condition precedent to such transaction, to
pay MEDIQ 50% of the amount that would have been received by MEDIQ in connection
with the change of control transaction if all of the MEDIQ Shares were
outstanding and held by MEDIQ at the effective time of such change of control
transaction.
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MEDIQ and InnoServ are currently in dispute as to the amount that would be
owed to MEDIQ under the terms of the MEDIQ Agreement upon consummation of the
Merger. If InnoServ and GE had entered into or consummated a change of control
on or prior to April 1, 1998, MEDIQ would have been entitled to $6,437,994,
based upon the Merger consideration, upon consummation of the Merger. Pursuant
to a letter agreement dated May 19, 1998, among InnoServ, MEDIQ and GE (the
"Letter Agreement"), MEDIQ has acknowledged that it believes that, based on the
accuracy of the representations described below, it will be owed $4,052,876 upon
consummation of the Merger, while InnoServ has acknowledged that it believes
that MEDIQ will be owed $3,218,997, which amount is 50% of $6,437,994. The
Merger Agreement provides for the payment on the effective date of the Merger by
GE (i) to MEDIQ of an amount equal to $3,218,997 (the "MEDIQ Payment") and (ii)
to an escrow agent of an amount equal to $833,879, to be held pursuant to an
escrow agreement by and between MEDIQ and InnoServ.
Under the terms of the Letter Agreement, MEDIQ also released InnoServ from
any further obligations under the MEDIQ Agreement, contingent upon the receipt
of the MEDIQ Payment and subject to the representations of InnoServ and GE that
such parties did not affirmatively delay any such change of control transaction
and that a description (provided to MEDIQ) of the parties' discussions with
respect to the Merger was materially correct and not misleading. In connection
with the arbitration of the dispute over whether MEDIQ is owed $4,052,876 or
$3,218,997, MEDIQ has advised InnoServ that it has concerns as to the accuracy
of such representations and that MEDIQ will require discovery with respect to
that issue. While InnoServ believes that the representations are accurate, MEDIQ
may nevertheless claim that they are not accurate and demand that the full
amount of $6,437,994 be paid to MEDIQ upon consummation of the Merger. Although
InnoServ believes that any such claim would be without merit, there is no
assurance, if such a claim is asserted, that InnoServ will prevail on the issue
in the arbitration proceeding or otherwise; however, the ultimate resolution of
this issue will have no effect on the amount of consideration to be received by
InnoServ shareholders.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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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 1998 and 1997 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.
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<CAPTION>
HIGH LOW
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<S> <C> <C>
1998
4th Quarter....................................................................... $ 3 5/8 $ 1 15/16
3rd Quarter....................................................................... $ 3 $ 1 11/16
2nd Quarter....................................................................... $ 2 1/4 $ 1 1/2
1st Quarter....................................................................... $ 2 1/4 $ 1 11/16
1997
4th Quarter....................................................................... $ 3 1/8 $ 1 13/16
3rd Quarter....................................................................... $ 3 1/8 $ 2 1/8
2nd Quarter....................................................................... $ 5 $ 2 7/8
1st Quarter....................................................................... $ 5 5/8 $ 3 5/8
</TABLE>
InnoServ estimates that it had approximately 650 beneficial shareholders as
of July 17, 1998.
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.
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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, 1998. The acquired operations of
MEDIQ Equipment and Maintenance Services, Inc. have been included effective
August 3, 1994. The operations of Advanced Imaging Technologies, Inc. were
disposed of effective March 17, 1997 (see Note 4 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
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APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 29,
1998 1997 1996 1995 1994
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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Operating Data:
Revenues................................................. $ 36,889 $ 42,387 $ 45,727 $ 46,366 $ 40,464
Net income (loss)........................................ (2,664) (1,573) (7,189) (3,630) 1,507
Net income (loss) per share (a):
Basic.................................................. (0.65) (0.31) (1.43) (0.81) 0.51
Diluted................................................ (0.65) (0.31) (1.43) (0.81) 0.49
Cash Dividends Per Share................................... $ -- $ -- $ -- $ 0.23 $ 0.16
Weighted Average Shares (a):
Basic.................................................... 4,098 5,036 5,036 4,511 2,944
Diluted.................................................. 4,098 5,036 5,036 4,511 3,049
Balance Sheet Data:
Total assets............................................. $ 18,713 $ 19,102 $ 23,840 $ 30,506 $ 21,430
Working capital.......................................... (594) 978 1,023 4,077 6,784
Total long-term debt..................................... -- 479 910 141 --
Total shareholders' equity............................... $ 5,729 $ 8,393 $ 9,966 $ 17,155 $ 15,400
</TABLE>
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(a) In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share.
All earnings per share amounts for all periods above have been presented
and, where necessary, restated to conform to the SFAS No. 128 requirements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated revenues for fiscal 1998 were $36,889,000, a decrease of
$5,498,000 from fiscal 1997 consolidated revenues of $42,387,000. The decline in
revenues is primarily attributable to a decrease of $5,221,000 resulting from
the disposition of substantially all of the revenue producing assets of Advanced
Imaging Technologies, Inc. ("AIT") on March 17, 1997 (see Note 4 to the Notes to
Consolidated Financial Statements). Revenues from computed tomography ("CT") and
magnetic resonance imaging ("MRI") maintenance service agreements decreased
approximately $2,400,000 and $210,000, respectively, primarily as a result of
the continued decline in the number and average contract amount of maintenance
service
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agreements in effect as older equipment is being upgraded or removed from
service by customers. Revenues from InnoServ's diagnostic mobile imaging
operations declined approximately $180,000 due to lower customer demand for
these units. Offsetting these declines, revenues from asset management and
multi-vendor services increased approximately $2,050,000 as InnoServ continues
to focus on the growing market for these types of services. In addition, after
taking into effect the disposal of AIT, sale of spare parts, x-ray tubes and
equipment increased by approximately $560,000 as InnoServ experienced a greater
demand for its spare parts and x-ray tubes from other service providers and
distributors.
Cost of operations, excluding the costs of AIT, increased $1,430,000 from
fiscal 1997 to fiscal 1998 as the costs in fiscal 1997 were 84 percent of
revenues, increasing to 88 percent of revenues in fiscal 1998. This increase as
a percentage of revenues was due primarily to a higher failure rate of equipment
under maintenance service agreements than previously experienced, an increasing
utilization of other service providers to supplement InnoServ's own staff of
field engineers to service equipment under maintenance service agreements, a
greater need to source repair parts from third parties rather than utilizing
InnoServ's existing inventory of spare parts, and lower gross margins generally
on asset management contracts awarded to InnoServ during the last year due to
competitive pricing in the marketplace.
Depreciation and amortization expenses decreased $291,000, or 15 percent,
from the prior year primarily as a result of the completed depreciation of
certain capital equipment. Selling and administrative expenses decreased
$996,000, or 16 percent, primarily as a result of reductions in InnoServ's
administrative functions resulting from the disposal of AIT, representing
approximately $680,000 of the total decline, and cost containment activities.
The loss before income taxes increased by $1,026,000 to $2,646,000 in fiscal
1998 from $1,620,000 in fiscal 1997 primarily as a result of the factors
identified in the discussion of cost of operations above.
In fiscal 1998 InnoServ recorded a tax provision of $18,000 for income taxes
due to certain states in which InnoServ conducts business. InnoServ did not
recognize a federal tax benefit from the operating loss in fiscal 1998. Under
SFAS No. 109, "Accounting for Income Taxes", net operating losses enter into the
calculation of deferred tax assets and liabilities. At April 30, 1998, InnoServ
had an estimated net deferred tax asset before valuation allowance of
$6,416,000, primarily as a result of net operating losses and tax credit
carryforwards. 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 and, accordingly, InnoServ has recorded a valuation allowance for
the full amount of the net deferred tax asset.
On May 19, 1998, InnoServ entered into an Agreement and Plan of Merger
("Merger Agreement") with General Electric Company ("GE") whereby GE Medical
Systems, a division of GE, will acquire all of the outstanding common stock of
InnoServ (the "Merger") (see Note 15 to the Notes to Consolidated Financial
Statements). The Merger, which is subject to approval by InnoServ's
shareholders, government regulatory approval and other customary contingencies,
is planned to close in late August 1998. Certain InnoServ shareholders,
representing 53 percent of InnoServ's shares (an amount sufficient to approve
the Merger), have entered into agreements with GE to vote in favor of the
Merger. On July 14, 1998, GE and InnoServ received written notice that the
Federal Trade Commission has granted early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Should the
Merger not close as expected, it could have a material adverse effect on
InnoServ's ongoing business due to anticipated terminations of employees and
difficulty in attracting new employees and customers.
FISCAL 1997 COMPARED TO FISCAL 1996
Consolidated revenues for fiscal 1997 were $42,387,000, a decrease of
$3,340,000 from fiscal 1996 consolidated revenues of $45,727,000. The decrease
occurred primarily as a result of the continued decline in the number and
average contract amount of CT maintenance service agreements in effect as a
result of older equipment being upgraded or removed from service by customers
and InnoServ's decision to not renew certain CT maintenance contracts in
unprofitable locations. Revenues for fiscal 1997 related to CT
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maintenance contracts declined by approximately $6,200,000 as compared to fiscal
1996 revenues. In addition, sales of spare parts, supplies, x-ray tubes and
equipment declined by $815,000 primarily due to the disposition of substantially
all of the revenue producing assets of AIT on March 17, 1997 (see Note 4 to the
Notes to Consolidated Financial Statements). AIT's business was no longer
consistent with the strategic focus of InnoServ. These declines were partially
offset by revenue increases in InnoServ's other product lines, principally asset
management and multi-vendor services which grew by $3,680,000 as compared to
1996 revenues as InnoServ continued to focus on the growing market for these
types of services. In addition, the decline was partially offset by a reduction
of approximately $200,000 in the reserve for sales allowances during the fourth
quarter of fiscal 1997. This reduction was a result of management's ongoing
analysis of service billings.
Cost of operations for fiscal 1997 decreased by $3,958,000 as those costs
were approximately 85 percent of fiscal 1997 revenues as compared to
approximately 87 percent of revenues in fiscal 1996. These decreases were the
result of the cost reduction actions, including employment terminations, taken
in fiscal 1997 and 1996 by management as well as the increase in asset
management services which generally had higher operating margins than the
operating margins of most of InnoServ's other product lines, including CT
maintenance contracts, which have margins that continue to decline. In addition,
during the fourth quarter of fiscal 1997, InnoServ recorded a reduction of
approximately $300,000 in certain accruals as determined through management's
ongoing evaluation of estimated liabilities.
Depreciation and amortization expenses for fiscal 1997 were $98,000 less
than in fiscal 1996 which reflects the reduction in expenditures for capital
equipment, principally test equipment used in the maintenance service product
lines as InnoServ concentrated its activities on the asset management services
which require less capital than the other InnoServ product lines.
Selling and administrative expenses decreased in fiscal 1997 by $2,134,000
to $6,223,000 which is the result of management's efforts to reduce expenses in
fiscal 1997 which included reductions in InnoServ's sales force and
administrative personnel. Additionally, the decrease is due to the elimination
of certain nonrecurring costs incurred in fiscal 1996 of $313,000 in
restructuring costs recorded in the third quarter of fiscal 1996 as well as
other training and duplicate salary expenses for the relocation of InnoServ's
headquarters.
Loss before income taxes declined by $3,090,000 to $1,620,000 in fiscal 1997
from $4,710,000 in fiscal 1996, partially as a result of improved operating
margins resulting from the increase in revenue from asset management services
which had higher operating margins than the other product lines. In addition,
the loss before income taxes in fiscal 1996 reflected special charges of
$2,267,000, restructuring costs to effect the relocation of InnoServ's
headquarters and spare parts repair operations, and unfavorable operating
margins associated with the CT maintenance business. Because InnoServ employs
field service engineers over a wide geographic area, the level of revenues were
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 recorded a $47,000 tax benefit in fiscal 1997 representing an
estimated tax refund for state income taxes paid in prior years. InnoServ did
not recognize a federal tax benefit from the operating loss for fiscal 1997. At
April 30, 1997, InnoServ had an estimated net deferred tax asset before
valuation allowance of $5,513,000, primarily as a result of net operating losses
and tax credit carryforwards. 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. Due to the
cumulative losses incurred in recent years, the deferred tax assets did not meet
the criteria for recognition under SFAS No. 109.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at April 30, 1998, totaled $3,088,000. The
principal source of cash for fiscal 1998 was operations which generated
$2,017,000 due primarily to an increase in accounts payable of $2,316,000 due to
the timing of payments, the non-cash effect of depreciation and amortization of
$1,707,000, a reduction in inventory of $347,000 due to the amortization of
spare parts inventory partially offset by additional purchases of spare parts
and x-ray tubes required to service newer technology CT and MRI scanners, and an
increase in deferred revenues of $529,000 as payments received for services to
be provided exceeded services provided during the period. Offsetting these
positive cash flows, receivables increased by $128,000 as a result of the timing
of cash receipts from customers and prepaid expenses increased by $119,000 for
costs incurred in conjunction with the Merger Agreement with GE, which costs
have been deferred until consummation of the Merger. The funds generated from
operations financed purchases of new capital equipment of $106,000 and debt
payments of $629,000.
Under the terms of the Merger Agreement, GE purchased 700,000 shares of a
newly created Series B Preferred Stock of InnoServ (the "Preferred Shares") for
$2,800,000, which payment was received by InnoServ on June 5, 1998. The
Preferred Shares accrue dividends of $0.32 per share per annum, beginning six
months from the issuance of such shares, whether or not earned or declared, and
are redeemable by InnoServ at anytime at a price equal to $4.00 per share plus
any accrued but unpaid dividends. Each Preferred Share is also convertible into
common stock of InnoServ, at the option of the holders, at anytime after the
earlier of (i) the consummation of a reorganization of InnoServ with a third
party or (ii) the later of (A) September 30, 1998 or (B) the termination of the
Merger Agreement.
InnoServ's allowance for doubtful accounts at April 30, 1998 was $869,000,
or 19 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 reimbursement from Medicare and insurance companies. Factors
impacting InnoServ's allowance for doubtful accounts include the timing of
account write-offs and 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 term loan and revolving
line of credit with the bank were converted into a new term loan of $1,198,000.
Borrowings under the new term loan bear interest at the rate of prime (8.5% at
April 30, 1998) plus 1% per annum. Monthly 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
net loss for the period, InnoServ failed to meet the net worth covenant, the
current ratio and the cash flow ratio required under the loan agreement as of
April 30, 1998. InnoServ's bank waived these events of noncompliance effective
April 30, 1998 and through September 30, 1998 for the net worth covenant and the
current ratio and through January 8, 1999 for the cash flow ratio. As a result
of the $2,800,000 in proceeds received on June 5, 1998 from the issuance of the
Preferred Shares, InnoServ expects to be in compliance with the net worth
covenant and current ratio at September 30, 1998.
InnoServ believes it has sufficient cash resources to meets its operating
needs and does not anticipate making any significant capital purchases for the
next twelve months.
YEAR 2000 ISSUES
InnoServ maintains or services certain customer owned medical equipment
containing microprocessors and software programs with date functionality which
could malfunction in the year 2000 ("Year 2000
10
<PAGE>
Issue"). InnoServ has, among other actions, sent written communications to all
of its customers to ensure they are aware of the Year 2000 Issue as it pertains
to their medical equipment and they have initiated actions to bring their
equipment into compliance with the Year 2000 Issue, if applicable. Solutions for
bringing equipment into compliance range from a simple reprogramming of the
software, to the replacement of circuit boards or components, to retiring the
equipment because it cannot be brought into compliance cost effectively. These
solutions, particularly if a customer chooses to retire equipment, could have an
adverse effect on InnoServ's revenue stream.
InnoServ has conducted an assessment of its own computer systems and other
date sensitive electronic systems and determined they are substantially
compliant with the Year 2000 Issue. No interruption of InnoServ's business is
expected to occur and the costs to bring systems in full compliance is not
expected to be material.
RISK FACTORS
The statements in this Management's Discussion and Analysis and elsewhere in
this report that are not based on historical fact are forward looking
statements, which involve numerous risks and uncertainties. InnoServ's future
results of operations and financial condition may differ materially from these
expectations due to many factors, including the closing of the Merger with GE
and, in the absence of such closing, InnoServ's ability to implement its
operating plans to reduce costs while providing an increasing array of services
to its customers, to retain existing employees and customers and to attract new
employees and customers, competitive and regulatory conditions in the healthcare
industry generally, and other factors, many of which are beyond the control of
InnoServ.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following financial statements and financial statement schedule of
InnoServ and the Report of Independent Auditors are included herein on the pages
indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Auditors......................................... 13
Consolidated Balance Sheets at April 30, 1998 and 1997................. 14
Consolidated Statements of Operations for the years ended April 30,
1998, 1997 and 1996.................................................. 15
Consolidated Statements of Shareholders' Equity for the years ended
April 30, 1998, 1997 and 1996........................................ 16
Consolidated Statements of Cash Flows for the years ended April 30,
1998, 1997 and 1996.................................................. 17
Notes to Consolidated Financial Statements............................. 18
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts......................... 30
</TABLE>
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.
12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
InnoServ Technologies, Inc.
We have audited the accompanying consolidated balance sheets of InnoServ
Technologies, Inc. as of April 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended April 30, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 8. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended April 30, 1998, 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.
/s/ Ernst & Young LLP
Fort Worth, Texas
June 17, 1998
13
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................................... $ 3,088 $ 1,806
Receivables, net........................................................................ 3,821 3,693
Inventory............................................................................... 4,909 5,256
Prepaid expenses........................................................................ 572 453
---------- ----------
Total current assets.................................................................. 12,390 11,208
Capital equipment, net.................................................................... 3,042 4,491
Goodwill, net............................................................................. 3,240 3,392
Other assets.............................................................................. 41 11
---------- ----------
$ 18,713 $ 19,102
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt....................................................... $ 479 $ 629
Accounts payable........................................................................ 5,974 3,658
Accrued liabilities..................................................................... 2,283 2,224
Deferred revenues....................................................................... 4,248 3,719
---------- ----------
Total current liabilities............................................................. 12,984 10,230
Long-term debt, less current portion...................................................... -- 479
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; 3,009,395 issued at April
30, 1998 and 5,035,833 issued at April 30, 1997....................................... 30 51
Paid-in capital......................................................................... 17,324 17,303
Accumulated deficit..................................................................... (11,625) (8,961)
---------- ----------
Total shareholders' equity............................................................ 5,729 8,393
---------- ----------
$ 18,713 $ 19,102
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Service..................................................................... $ 31,452 $ 33,819 $ 36,344
Sale of parts and equipment................................................. 5,437 8,568 9,383
---------- ---------- ----------
Total revenues............................................................ 36,889 42,387 45,727
Costs:
Cost of service............................................................. 30,198 30,303 32,873
Cost of parts and equipment................................................. 2,401 5,551 6,939
---------- ---------- ----------
Total cost of operations.................................................. 32,599 35,854 39,812
Depreciation and amortization................................................. 1,707 1,998 2,096
Selling and administrative.................................................... 5,227 6,223 8,357
---------- ---------- ----------
Loss from operations.......................................................... (2,644) (1,688) (4,538)
Interest expense, net......................................................... (2) (112) (172)
Other income.................................................................. -- 180 --
---------- ---------- ----------
Loss before income taxes...................................................... (2,646) (1,620) (4,710)
Provision (benefit) for income taxes.......................................... 18 (47) 2,479
---------- ---------- ----------
Net loss...................................................................... $ (2,664) $ (1,573) $ (7,189)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share--basic and diluted......................................... $ (0.65) $ (0.31) $ (1.43)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares--basic and diluted.................................... 4,098 5,036 5,036
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
($.01 PAR VALUE)
------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ------- ----------- -------
<S> <C> <C> <C> <C> <C>
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
Net loss.................................................. -- -- -- (1,573) (1,573)
---------- ------ ------- ----------- -------
Balance, April 30, 1997..................................... 5,035,833 51 17,303 (8,961) 8,393
Repurchase of shares...................................... (2,026,438) (21) 21 -- --
Net loss.................................................. -- -- -- (2,664) (2,664)
---------- ------ ------- ----------- -------
Balance, April 30, 1998..................................... 3,009,395 $ 30 $17,324 $(11,625) $ 5,729
---------- ------ ------- ----------- -------
---------- ------ ------- ----------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from:
Operations:
Net loss.......................................................................... $ (2,664) $ (1,573) $ (7,189)
Adjustments to reconcile net loss to net cash flows from operations:
Depreciation and amortization................................................... 1,707 1,998 2,096
Gain on disposal of equipment................................................... -- -- (98)
Provision for deferred income taxes............................................. -- -- 3,347
Changes in assets and liabilities:
Receivables................................................................... (128) 977 (701)
Inventory..................................................................... 347 1,840 1,741
Prepaid expenses.............................................................. (119) (105) 182
Accounts payable.............................................................. 2,316 (942) 1,398
Accrued liabilities........................................................... 59 (849) (1,138)
Deferred revenues............................................................. 529 (529) 1,894
Other assets.................................................................. (30) 112 459
--------- --------- ---------
Net cash provided by operations................................................... 2,017 929 1,991
Investing activities:
Sale of capital equipment....................................................... -- -- 180
Sale of AIT assets.............................................................. -- 788 --
Purchase of capital equipment................................................... (106) (188) (1,427)
--------- --------- ---------
Net cash provided by (used for) investing activities.............................. (106) 600 (1,247)
Financing activities:
Payments on long-term debt...................................................... (594) (500) (125)
Payments under capital lease obligations........................................ (35) (106) (356)
Decrease in borrowings from line of credit...................................... -- (256) (2,649)
Proceeds from the issuance of long-term debt.................................... -- 198 1,500
--------- --------- ---------
Net cash used for financing activities............................................ (629) (664) (1,630)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 1,282 865 (886)
Cash and cash equivalents at beginning of period.................................. 1,806 941 1,827
--------- --------- ---------
Cash and cash equivalents at end of period........................................ $ 3,088 $ 1,806 $ 941
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
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 parts 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.
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the fiscal 1998 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 $869,000
and $910,000 at April 30, 1998 and 1997, 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.
An allowance for doubtful accounts is established based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
INVENTORY
Equipment held for resale, x-ray tubes, 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 used or sold.
Spare parts inventory is amortized over the estimated useful life of the parts
which has been determined to be seven years. Spare parts inventory is stated at
cost net of such accumulated amortization and allowances of $5,819,000 and
$5,040,000 at April 30, 1998 and 1997, respectively. The estimated useful life
and carrying value of spare parts inventory are evaluated based upon historical
usage
18
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and the type and duration of the maintenance contracts in effect. Inventory at
April 30, 1998 and 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1998 1997
----------- -----------
<S> <C> <C>
Spare parts and supplies, net............................................ $ 4,031 $ 4,484
Inventory held for resale................................................ 878 772
----------- -----------
$ 4,909 $ 5,256
----------- -----------
----------- -----------
</TABLE>
CAPITAL EQUIPMENT
Capital 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. Capital equipment at April 30,
1998 and 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1998 1997
---------- ----------
<S> <C> <C>
Cost.................................................................. $ 27,065 $ 27,907
Less accumulated depreciation......................................... (24,023) (23,416)
---------- ----------
$ 3,042 $ 4,491
---------- ----------
---------- ----------
</TABLE>
Depreciation expense for the years ended April 30, 1998, 1997 and 1996 was
$1,555,000, $1,846,000, and $1,942,000, respectively.
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 (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, 1998 and 1997 was $1,205,000 and $1,053,000, respectively.
LONG-TERM ASSETS
InnoServ evaluates the carrying value of long-term assets, including
goodwill, 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.
19
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Amounts invoiced in advance of the provision of service under maintenance
contracts are not included in receivables if payment has 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.
INTEREST EXPENSE, NET
Interest expense is net of interest income of $83,000, $33,000, and $22,000
for the years ended April 30, 1998, 1997, and 1996, respectively.
STOCK BASED COMPENSATION
InnoServ grants stock options for a fixed number of shares to employees and
non-employee directors with an exercise price equal to the fair value of the
underlying common stock at the date of grant. InnoServ has elected to follow
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its employee
stock options because, as discussed in Note 6, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of InnoServ's stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Proceeds from common stock issued pursuant
to InnoServ's employee stock option plans are credited to common stock and
paid-in capital at the time an option is exercised.
EARNINGS PER SHARE
Basic earnings per share amounts are computed based upon the weighted
average shares of common stock outstanding during each period. Outstanding stock
options, if dilutive, are included in the computation of diluted earnings per
share.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest and income taxes paid in the years ended April 30, 1998, 1997 and
1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest.............................................................. $ 81 $ 211 $ 209
Income taxes.......................................................... $ 13 $ 55 $ 20
</TABLE>
20
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
4. ASSET SALES
On March 17, 1997, InnoServ sold substantially all of the net assets of
Advanced Imaging Technologies, Inc. ("AIT") for $788,000 in cash, which
approximated the net carrying value of such assets. In connection with the sale,
InnoServ also entered into a consulting agreement pursuant to which InnoServ
received $180,000. InnoServ believes all services which were required to be
provided under the consulting agreement were provided before April 30, 1997.
Accordingly, the amount received by InnoServ for consulting services is
reflected as "Other income" in the Consolidated Statement of Operations for
fiscal 1997. Revenues for AIT in fiscal 1998, 1997, and 1996 were $0,
$5,221,000, and $6,186,000, respectively.
5. LONG-TERM DEBT
Long-term debt at April 30, 1998 and 1997 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1998 1997
--------- ---------
<S> <C> <C>
Bank term loan.............................................. $ 479 $1,073
Capital lease obligations payable through December 1997, at
a fixed rate of interest of 9.56%......................... -- 35
--------- ---------
479 1,108
Less amount classified as current........................... (479) (629)
--------- ---------
Total long-term debt........................................ $ -- $ 479
--------- ---------
--------- ---------
</TABLE>
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 April 30, 1998) plus 1% per annum. Monthly
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 net loss for the period, InnoServ
failed to meet the net worth covenant, the current ratio and the cash flow ratio
required under the loan agreement as of April 30, 1998. InnoServ's bank waived
these events of noncompliance effective April 30, 1998 and through September 30,
1998 for the net worth covenant and the current ratio and through January 8,
1999 for the cash flow ratio. As a result of the $2,800,000 in proceeds received
on June 5, 1998 from the issuance of the Preferred Shares (see Note 15),
InnoServ expects to be in compliance with the net worth covenant and current
ratio at September 30, 1998.
The outstanding principal balance of $479,000 on long-term debt is required
to be paid under the terms of the loan agreement in the year ending April 30,
1999.
6. STOCK OPTIONS
InnoServ has an incentive plan which provides for the granting of stock
options to key employees and non-employee directors to purchase common stock at
a purchase price of not less than fair market value, as defined by such plan, on
the date of the grant. InnoServ has also entered into a stock option agreement
21
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
6. STOCK OPTIONS (CONTINUED)
with its chief executive officer to purchase 150,000 shares of common stock at a
purchase price that was equal to the fair market value of the common stock at
the time of grant. The options granted under the plan and agreement are
exercisable in three equal installments over a three year vesting period 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, 1998, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at April 30, 1995............................... 327,834 $4.34
Granted................................................... 373,000 3.51
Canceled.................................................. (266,934) 4.39
--------- -----
Outstanding at April 30, 1996............................... 433,900 3.60
Granted................................................... 46,000 3.52
Canceled.................................................. (48,500) 3.35
--------- -----
Outstanding at April 30, 1997............................... 431,400 3.62
Granted................................................... 46,000 2.59
Canceled.................................................. (72,200) 3.42
--------- -----
Outstanding at April 30, 1998............................... 405,200 $3.52
--------- -----
--------- -----
Options exercisable at April 30, 1998....................... 245,872 $3.66
--------- -----
--------- -----
Options exercisable at April 30, 1997....................... 152,069 $3.77
--------- -----
--------- -----
Options exercisable at April 30, 1996....................... 44,500 $4.06
--------- -----
--------- -----
</TABLE>
The weighted average fair value of options granted during fiscal 1998 is
$1.03.
At April 30, 1998 and 1997, there were 74,800 and 48,600 shares of common
stock available for future grants, respectively. The outstanding options at
April 30, 1998 had exercise prices ranging from $1.50 to $5.25 per share and the
weighted average remaining contractual life of such options was 5.6 years.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if InnoServ had accounted
for its stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option valuation model with the following weighted-average
assumptions for fiscal 1998, 1997 and 1996, respectively: risk-free interest
rates of 5.76%, 6.25% and 6.25%; no expected dividend yields for all years;
volatility factors of the expected market price of InnoServ's common stock of
.373, .405 and .504; and a weighted-average expected life of all options of 4.5
years.
The Black-Scholes option valuation model is used in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility and the
average life of options. Because InnoServ's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
22
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
6. STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense on a straight-line basis over the options'
vesting period. The pro forma effects on the net loss for fiscal 1998, 1997 and
1996 are not representative of the pro forma effect on net income in future
years because they do not take into consideration pro forma compensation expense
related to grants made prior to fiscal 1996. InnoServ's pro forma information
follows (in thousands of dollars, except for earnings per share information):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net loss............................................ $ (2,812) $ (1,679) $ (7,232)
Pro forma net loss per share--basic and diluted............... $ (0.69) $ (0.33) $ (1.44)
</TABLE>
7. SHARES AND WARRANT REPURCHASE
Pursuant to a stock purchase agreement dated November 13, 1997 (the "MEDIQ
Agreement"), by and among InnoServ and MEDIQ Incorporated and MEDIQ Investment
Services, Inc. (collectively, "MEDIQ"), InnoServ repurchased from MEDIQ
2,026,438 shares of InnoServ's common stock (the "MEDIQ Shares") and a warrant
to purchase 325,000 shares of InnoServ's common stock ("Warrant"). Such
2,026,438 shares represented approximately 40 percent of the then outstanding
shares of common stock of InnoServ. The MEDIQ Shares and Warrant had been issued
to MEDIQ in connection with InnoServ's acquisition of MEDIQ Equipment and
Maintenance Services, Inc. ("MEMS"), a wholly-owned subsidiary of MEDIQ, in
August 1994.
The MEDIQ Shares and Warrant were repurchased in exchange for an agreement
that InnoServ would not enter into or consummate a change of control (as defined
in the MEDIQ Agreement) unless the other party or parties thereto agree, as a
condition precedent to such transaction, to pay to MEDIQ the amount that would
have been received by MEDIQ in connection with the change of control transaction
if all of the MEDIQ Shares were outstanding and held by MEDIQ at the effective
time of such change of control transaction. The MEDIQ Agreement further provides
that, after April 1, 1998 and through September 30, 1998, InnoServ shall not
enter into or consummate a change of control unless the other party or parties
thereto agree, as a condition precedent to such transaction, to pay MEDIQ 50% of
the amount that would have been received by MEDIQ in connection with the change
of control transaction if all of the MEDIQ Shares were outstanding and held by
MEDIQ at the effective time of such change of control transaction. MEDIQ and
InnoServ are currently in dispute as to the amount that would be owed to MEDIQ
under the terms of the MEDIQ Agreement upon consummation of the Merger (as
hereinafter defined) with General Electric Company (see Note 15).
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, continues as
a director of InnoServ.
8. 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
23
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
8. RETIREMENT PLAN (CONTINUED)
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 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, 1998, 1997 and 1996 were $72,000, $96,000, and $85,000,
respectively.
9. SPECIAL CHARGES
In fiscal 1996, InnoServ's management team undertook 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 the asset management capabilities and services of InnoServ
Technologies Maintenance Services, Inc. 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 was recorded as special charges of
approximately $2,267,000 in the fourth quarter of fiscal 1996. These charges
were included in cost of operations and consisted of the following (in
thousands):
<TABLE>
<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.
(5) Represents additional depreciation as a result of lowering the estimated
useful lives of certain equipment.
24
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
10. INCOME TAXES
The provision (benefit) for income taxes for the years ended April 30, 1998,
1997 and 1996 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................ $ -- $ -- $ (868)
State.............................................................. 18 (47) --
--------- --------- ---------
18 (47) (868)
Deferred:
Federal............................................................ -- -- 2,983
State.............................................................. -- -- 364
--------- --------- ---------
-- -- 3,347
--------- --------- ---------
$ 18 $ (47) $ 2,479
--------- --------- ---------
--------- --------- ---------
</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, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 3,797 $ 3,137
Tax credits............................................................ 1,400 1,400
Accrued expenses....................................................... 214 350
Allowance for doubtful accounts........................................ 330 335
Inventory.............................................................. 419 343
Deferred compensation.................................................. 223 268
Capital equipment...................................................... 33 --
--------- ---------
Gross deferred tax asset............................................. 6,416 5,833
Valuation allowance for deferred tax asset............................. (6,416) (5,513)
--------- ---------
Total deferred tax asset............................................. -- 320
Deferred tax liabilities:
Capital equipment...................................................... -- (320)
--------- ---------
Net deferred tax asset............................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
In accordance with SFAS No. 109, "Accounting for Income Taxes", InnoServ has
recorded 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. Due to
the cumulative losses incurred in
25
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
10. INCOME TAXES (CONTINUED)
recent years the deferred tax assets do not currently meet the criteria for
recognition under SFAS No. 109 and, accordingly, the net deferred asset has been
reduced to zero.
The net change in the valuation allowance during fiscal 1998 was $903,000.
Approximately $1,214,000 of the recorded valuation allowance of $6,416,000
relates to deferred tax assets resulting from the acquisition of MEMS, a
wholly-owned subsidiary of MEDIQ, on August 3, 1994. 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, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory rates................................. (34.0)% (34.0)% (34.0)%
State income taxes net of federal tax benefit............... (2.9) (3.5) (3.8)
Change in valuation allowance............................... 34.0 30.7 88.6
Other....................................................... 3.6 3.8 1.8
----- ----- -----
0.7% (3.0)% 52.6%
----- ----- -----
----- ----- -----
</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 approximately
$9,905,000 as of April 30, 1998 which will begin to expire in 2011.
As a result of the transactions pursuant to the MEDIQ Agreement (see Note
7), InnoServ has potentially undergone a change in ownership under Internal
Revenue Code Section 382. If such change in ownership has occurred, an annual
limitation may be applicable to the utilization of net operating loss and other
tax credit carryforwards. Such a limitation could cause a portion of such
carryforwards to go unused.
11. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". SFAS No. 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where necessary, restated to conform to the SFAS No. 128
requirements.
Basic and diluted per share amounts were the same for all periods presented,
as stock options to purchase shares of common stock were not included in the
computation of diluted earnings per share as they were antidilutive. At April
30, 1998, stock options to purchase 405,200 shares of common stock were
outstanding and could potentially dilute earnings per share in future periods.
26
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
12. OPERATING LEASES
InnoServ 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, 1998, 1997, and 1996 was approximately $702,000, $732,000, and
$779,000, respectively.
Future minimum rental payments, including interest thereon, under
noncancelable operating leases with third parties at April 30, 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR ENDING LEASES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
1999............................................................................... $ 613
2000............................................................................... 551
2001............................................................................... 551
2002............................................................................... 230
2003............................................................................... --
-----------
$ 1,945
-----------
-----------
</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. MAJOR CUSTOMER
InnoServ provides asset management services to IHC Health Services, Inc.
("IHC") under an agreement which expires on December 31, 2000. Revenues from IHC
under this asset management services agreement for the years ended April 30,
1998, 1997 and 1996 amounted to approximately 13 percent, 9 percent and 3
percent of consolidated revenues, respectively.
15. SUBSEQUENT EVENT
On May 19, 1998, InnoServ entered into an Agreement and Plan of Merger
("Merger Agreement") with General Electric Company ("GE") whereby GE Medical
Systems, a division of GE, will acquire all of the outstanding common stock of
InnoServ for $16,000,000 in cash (the "Merger"), including the MEDIQ Payment (as
hereinafter defined) and the Escrow Payment (as hereinafter defined). After
payments to MEDIQ pursuant to the MEDIQ Agreement dated November 13, 1997 (see
Note 7), holders of InnoServ common stock will receive a range of consideration
between approximately $3.97 and $4.25 per share, depending upon the amount
payable to MEDIQ, upon consummation of the Merger.
MEDIQ and InnoServ are currently in dispute as to the amount that would be
owed to MEDIQ under the terms of the MEDIQ Agreement upon consummation of the
Merger. If InnoServ and GE had entered into or consummated a change of control
on or prior to April 1, 1998, MEDIQ would have been entitled to $6,437,994,
based upon the Merger consideration, upon consummation of the Merger. Pursuant
to a letter agreement dated May 19, 1998, among InnoServ, MEDIQ and GE (the
"Letter Agreement"), MEDIQ has
27
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
15. SUBSEQUENT EVENT (CONTINUED)
acknowledged that it believes that, based on the accuracy of the representations
described below, it will be owed $4,052,876 upon consummation of the Merger,
while InnoServ has acknowledged that it believes that MEDIQ will be owed
$3,218,997, which amount is 50% of $6,437,994. The Merger Agreement provides for
the payment on the effective date of the Merger by GE (i) to MEDIQ of an amount
equal to $3,218,997 (the "MEDIQ Payment") and (ii) to an escrow agent of an
amount equal to $833,879 (the "Escrow Payment"), to be held pursuant to an
escrow agreement by and between MEDIQ and InnoServ.
Under the terms of the Letter Agreement, MEDIQ also released InnoServ from
any further obligations under the MEDIQ Agreement, contingent upon the receipt
of the MEDIQ Payment and subject to the representations of InnoServ and GE that
such parties did not affirmatively delay any such change of control transaction
and that a description (provided to MEDIQ) of the parties' discussions with
respect to the Merger was materially correct and not misleading. In connection
with the arbitration of the dispute over whether MEDIQ is owed $4,052,876 or
$3,218,997, MEDIQ has advised InnoServ that it has concerns as to the accuracy
of such representations and that MEDIQ will require discovery with respect to
that issue. While InnoServ believes that the representations are accurate, MEDIQ
may nevertheless claim that they are not accurate and demand that the full
amount of $6,437,994 be paid to MEDIQ upon consummation of the Merger. Although
InnoServ believes that any such claim would be without merit, there is no
assurance, if such a claim is asserted, that InnoServ will prevail on the issue
in the arbitration proceeding or otherwise; however, the ultimate resolution of
this issue will have no effect on the amount of consideration to be received by
InnoServ shareholders.
The obligations of InnoServ and GE to consummate the Merger are subject to
fulfillment or waiver of the following conditions: (i) approval of the Merger
Agreement by the shareholders of InnoServ; (ii) the expiration or termination of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act") and the absence of any order by any governmental entity
restraining, enjoining or prohibiting the Merger; (iii) the performance in all
material aspects of the agreements of each party, respectively, under the Merger
Agreement and the receipt by each party of certificates from an officer of the
other party to such effect; (iv) the representations and warranties contained in
the Merger Agreement of each party, respectively, being correct and true as of
the effective date of the Merger (except where the failure to be so true,
individually or in the aggregate, with other such failures would not have a
material adverse effect as such term is defined in the Merger Agreement), and
the receipt by each party of certificates from an officer of the other party to
such effect; and (v) the receipt by GE of an opinion of counsel of InnoServ.
GE and InnoServ will close the Merger transaction as soon as all necessary
approvals are obtained, which is expected to occur in late August 1998.
Certain InnoServ shareholders, representing 53 percent of InnoServ shares
(an amount sufficient to approve the Merger), have entered into agreements with
GE to vote in favor of the Merger.
GE and InnoServ filed notification and report forms with the U.S. Department
of Justice (the "DOJ") and the Federal Trade Commission (the "FTC") seeking
early termination of the HSR Act on December 24, 1997 and December 30, 1997,
respectively. On July 14, 1998, GE and InnoServ received written notice that the
FTC has granted early termination of the waiting period under the HSR Act.
Pursuant to the terms of the Merger Agreement, GE and InnoServ entered into a
side agreement dated May 19, 1998 (the "Side Agreement"), wherein GE had agreed
to pay InnoServ $1,200,000 if the DOJ did not grant
28
<PAGE>
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
15. SUBSEQUENT EVENT (CONTINUED)
early termination or expiration of the waiting period under the HSR Act prior to
the later of (i) June 22, 1998 or (ii) the date of the meeting of the
shareholders of InnoServ at which the Merger is approved. Since early
termination has been granted, no amount is payable by GE to InnoServ under the
Side Agreement.
Under the terms of the Merger Agreement, GE purchased 700,000 shares of a
newly created Series B Preferred Stock of InnoServ ("Preferred Shares") for
$2,800,000, which payment was received by InnoServ on June 5, 1998. The
Preferred Shares have no voting rights, accrue dividends of $0.32 per share per
annum beginning six months from the issuance of such shares, whether or not
earned or declared, have a liquidation value of $4.00 per share plus any accrued
but unpaid dividends, and are redeemable by InnoServ at anytime, but mandatory
on May 19, 2008, at a price equal to $4.00 per share plus any accrued but unpaid
dividends. Each Preferred Share is also convertible into common stock of
InnoServ, at the option of the holders, at anytime after the earlier of (i) the
consummation of a reorganization of InnoServ with a third party or (ii) the
later of (A) September 30, 1998 or (B) the termination of the Merger Agreement.
As of April 30, 1998, InnoServ recorded prepaid expenses of $114,000 for
direct costs associated with the Merger Agreement. In the event the Merger does
not close, this amount, in addition to other estimated direct costs of $350,000,
will be charged to income.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited summarized financial data by quarter for the years ended April 30,
1998 and 1997 were as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1998
Revenues.............................................................. $ 9,144 $ 9,207 $ 9,210 $ 9,328
Gross profit.......................................................... 1,543 1,273 891 583
Loss before income taxes.............................................. (252) (467) (845) (1,082)
Net loss.............................................................. (252) (467) (845) (1,100)
Net loss per share--basic and diluted(a).............................. $ (0.05) $ (0.09) $ (0.26) $ (0.37)
Weighted average shares--basic and diluted(a)......................... 5,036 5,036 3,274 3,009
1997
Revenues.............................................................. $ 11,788 $ 10,684 $ 10,231 $ 9,684
Gross profit.......................................................... 1,765 1,563 2,102 1,103
Income (loss) before income taxes(b).................................. (627) (456) 36 (573)
Net income (loss)..................................................... (627) (456) 36 (526)
Net income (loss) per share--basic and diluted(a)..................... $ (0.12) $ (0.09) $ 0.01 $ (0.11)
Weighted average shares--basic and diluted(a)......................... 5,036 5,036 5,036 5,036
</TABLE>
- ------------------------
(a) Reflects the adoption of SFAS No. 128 (see Note 11).
(b) Loss before income taxes in the fourth quarter of fiscal 1997 included a
reduction of approximately $500,000 in certain reserves for sales allowances
and other liabilities. Such reductions were a result of management's ongoing
evaluation of estimated obligations.
29
<PAGE>
INNOSERV TECHNOLOGIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS/ END OF
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS PERIOD
- ---------------------------------------------------------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
April 30, 1996................................................ $ 1,429 $ (89) $ (325) $ 1,015
April 30, 1997................................................ 1,015 (8) (97) 910
April 30, 1998................................................ 910 80 (121) 869
ALLOWANCE FOR INVENTORY AMORTIZATION
April 30, 1996................................................ $ 3,460 $ 1,299 $ (148) $ 4,611
April 30, 1997................................................ 4,611 850 (421) 5,040
April 30, 1998................................................ 5,040 909 (130) 5,819
</TABLE>
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 October 13, 1998, 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 October 13, 1998, 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 October 13, 1998, 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 October 13, 1998, 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 12, are
filed as part of this report.
(b) Reports on Form 8-K:
During the three months ended April 30, 1998, 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 34.
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 attorneys-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.
<TABLE>
<S> <C> <C>
INNOSERV TECHNOLOGIES, INC.
(REGISTRANT)
By: /s/ THOMAS HOEFERT
-----------------------------------------
Thomas E. Hoefert
DATE: JULY 17, 1998 VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
</TABLE>
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DUDLEY A. RAUCH
- ------------------------------ Chairman of the Board of July 17, 1998
Dudley A. Rauch Directors
/s/ SAMUEL SALEN Vice Chairman and
- ------------------------------ Secretary of the Board July 17, 1998
Samuel Salen, M.D. of Directors
/s/ MICHAEL G. PULS President and Chief
- ------------------------------ Executive Officer, July 17, 1998
Michael G. Puls Director
Vice President and Chief
/s/ THOMAS HOEFERT Financial Officer,
- ------------------------------ Principal Financial and July 17, 1998
Thomas E. Hoefert Accounting Officer
/s/ BERNARD J. KORMAN
- ------------------------------ Director July 17, 1998
Bernard J. Korman
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL M. SACHS
- ------------------------------ Director July 17, 1998
Michael M. Sachs
/s/ MICHAEL SANDLER
- ------------------------------ Director July 17, 1998
Michael F. Sandler
/s/ DAVID A. WEGMANN
- ------------------------------ Director July 17, 1998
David A. Wegmann
</TABLE>
33
<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. (5).
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 (3).
3.3 Certificate of Amendment of Articles of Incorporation of the Registrant dated September 26, 1995 (7).
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 (3).
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).
4.2 Stock Purchase Agreement dated November 13, 1997 by and among Registrant, MEDIQ Incorporated and MEDIQ
Investment Services, Inc. (13).
9.1 Voting Agreement dated as of April 29, 1983 between Dudley A. Rauch and certain investors (1).
10.1 Employee Stock Purchase Plan (2).
10.2 Stock Purchase Agreement dated as of July 17, 1985 among Registrant and the shareholders of R Squared
Scan Systems, Inc. (2).
10.3 Form of Agreement of Indemnification between Registrant and Alan D. 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 (3).
10.4 1992 Stock Incentive Plan (4).
10.5 Employment Agreement between MEDIQ Equipment and Maintenance Services, Inc. and J. Thomas Owings and
Registrant (5).
10.6 Letter Agreement of Employment dated December 8, 1995 between Registrant and Michael G. Puls (7).
10.7 Form of Indemnity Agreement between Registrant and Thomas Carroll, Bernard Korman, Michael Puls, and
Michael Sandler as Directors and Thomas Hoefert as an officer (6).
10.8 Loan Agreement dated as of December 15, 1995 by and between Registrant and Overton Bank & Trust, N.A.
(6).
10.9 Revolving Credit Agreement dated as of August 12, 1996 in the principal amount of $500,000 payable by the
Registrant to Overton Bank & Trust, N.A. (8).
10.10 Revolving Credit Agreement dated as of October 12, 1996 in the principal amount of $500,000 payable by
the Registrant to Overton Bank & Trust, N.A. (9).
10.11 Revolving Credit Agreement dated as of November 12, 1996 in the principal amount of $500,000 payable by
the Registrant to Overton Bank & Trust, N.A. (9).
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.12 Form of Security Agreement dated as of November 12, 1996 between Overton Bank & Trust, N.A. and each of
InnoServ Technologies, Inc., InnoServ Technologies Maintenance Services, Inc., Advanced Imaging
Technologies, Inc. and Sietec, Inc. (9).
10.13 Letter dated December 12, 1996 amending the Loan Agreement dated as of December 15, 1995, by and between
Registrant and Overton Bank & Trust, N.A. (9).
10.14 Stock Option Agreement dated as of December 11, 1996 by and between Registrant and Michael G. Puls (10).
10.15 Bonus Agreement dated December 20, 1996 between Registrant and Michael G. Puls (10).
10.16 Agreement dated March 28, 1997 amending the Bonus Agreement dated December 20, 1996 between Registrant
and Michael G. Puls (11).
10.17 Loan Agreement dated as of April 14, 1997 by and between Registrant and Overton Bank & Trust, N.A.
10.18 Term Loan Agreement dated as of April 14, 1997 in the principal amount of $1,197,573 payable by the
Registrant to Overton Bank & Trust, N.A. (11).
10.19 Security Agreement dated April 14, 1997 by and between Registrant and Overton Bank & Trust, N.A.
10.20 Letter Agreement of Employment dated September 10, 1997 by and between Registrant and Thomas E. Hoefert
(12).
10.21 Bonus Agreement dated as of September 29, 1997 between Registrant and Thomas E. Hoefert (12).
10.22 Letter dated December 5, 1997 amending the Loan Agreement dated as of April 14, 1997 by and between
Registrant and Overton Bank & Trust, N.A. (12).
10.23 Letter dated March 6, 1998 waiving the violation of the cash flow covenant of the Loan Agreement dated as
of April 14, 1997 by and between Registrant and Overton Bank & Trust, N.A. (14).
10.24 Agreement dated April 2, 1998 amending the Bonus Agreement dated December 20, 1996 between Registrant and
Michael G. Puls.
10.25 Letter dated July 2, 1998 waiving the violation of certain financial covenants of the Loan Agreement
dated as of April 14, 1997 by and between Registrant and Frost National Bank (formerly Overton Bank &
Trust, N.A.).
21.1 Subsidiaries.
23.1 Consent of Independent Auditors.
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 Annual Report on Form
10-K for the year ended April 28, 1989.
(4) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 33-66752) dated July 30, 1993.
35
<PAGE>
(5) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended April 29, 1994.
(6) Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the period ended January 31, 1996.
(7) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended April 30, 1996.
(8) Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the period ended July 31, 1996.
(9) Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the period ended October 31, 1996.
(10) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended January 31, 1997.
(11) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended April 30, 1997.
(12) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended October 31, 1997.
(13) Previously filed as an exhibit to the Registrant's Form 8-K dated November
13, 1997.
(14) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended January 31, 1998.
36
<PAGE>
EXHIBIT 10.17 - LOAN AGREEMENT
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------
BORROWER BANK
INNOSERV TECHNOLOGIES, INC. OVERTON BANK & TRUST, NATIONAL ASSOCIATION
4330 BELTWAY SUITE 300 PO BOX 150049
ARLINGTON, TEXAS 76017 ARLINGTON, TEXAS 76015
- ------------------------------------------------------------------------------------------
</TABLE>
THIS LOAN AGREEMENT ("Agreement") is made and entered into this 14TH day of
APRIL, 1997, by and between the Borrower and Bank named above.
IN CONSIDERATION OF THE MUTUAL COVENANTS AND AGREEMENTS CONTAINED HEREIN, IT
IS AGREED AS FOLLOWS:
1. THE LOAN.
Subject to the terms and conditions of this Agreement, and in reliance upon
the representations and warranties of Borrower contained herein, Bank agrees to
lend an amount not to exceed the sum of ONE MILLION ONE HUNDRED NINETY SEVEN
THOUSAND FIVE HUNDRED SEVENTY THREE AND NO/100 DOLLARS ($1,197,573.00) (the
"Loan"). The Loan will be evidenced by Borrower's note (the "Note") payable to
the order of Bank, with interest and principal being payable as therein
provided.
2. PURPOSE OF LOAN: COMBINE TWO NOTES INTO ONE TERM LOAN
3. COLLATERAL.
The Note and all other obligations of Borrower to Bank shall be secured by,
among other things, a first and superior security interest in the following
property (collectively, the "Collateral")
ACCOUNTS RECEIVABLE, INVENTORY AND EQUIPMENT
--------------------------------------------
Borrower shall execute such security agreements and other documents as Bank
may require, from time to time, to further describe, create and perfect such
security interests.
4. GUARANTIES.
The Loan will be unconditionally guaranteed as evidenced by guaranties
executed by SIETEC, INC. AND INNOSERV TECHNOLOGIES MAINTENANCE SERVICES, INC.
(collectively, "Guarantor", whether one or more).
/ / IF THIS BOX IS CHECKED, THE FOLLOWING PARAGRAPH 5 SHALL BE PART OF THIS
AGREEMENT.
5. BORROWING BASE.
The term "Borrowing Base" means an amount determined at any time as the sum
of % of the Eligible Accounts Receivable of Borrower and % of Borrower's
Eligible Inventory. As used herein, the term "Eligible Accounts Receivable"
shall mean, at any particular time, all accounts receivable of Borrower which
are subject to a perfected first priority security interest in favor of Bank,
EXCLUDING (i) all accounts receivable that are greater than ( ) days old
from the original date of the invoice, and (ii) any account that is subject to
any dispute, offset, counterclaim or other claim or defense on the part of the
account debtor denying liability under such account, and (iii) the amount of all
such accounts arising out of contracts or orders which, by their terms, forbid
an assignment or which make such an assignment void and unenforceable, and (iv)
any account receivable of Borrower from any officer, stockholder, director or
related company of Borrower. As used herein, the term "Eligible Inventory" shall
mean, at any particular time, all salable inventory then owned by Borrower and
held for sale or disposition in the ordinary course of business, in which Bank
has a perfected first priority security interest, valued at the
<PAGE>
lower of cost or market, EXCLUDING any work-in-process. For purposes of
determining the Borrowing Base, the Eligible Inventory shall not exceed at any
time the sum of $ .
Borrower shall at all times maintain a Borrowing Base of not less than the
outstanding balance owing on the Note. If, as a result of Bank's determination,
the Borrowing Base should ever become less than the outstanding balance owing
under the Note, or any renewals or extensions thereof, Bank may notify Borrower
of the insufficiency, and within ( ) days of Bank's giving notice, Borrower
shall either pay the indebtedness down to the Borrowing Base or increase the
Borrowing Base up to the amount of the outstanding balance of the Note. Bank's
determination of the Borrowing Base and whether Collateral qualifies for
inclusion in such Borrowing Base, will be final.
6. REPRESENTATIONS AND WARRANTIES.
To induce Bank to enter into this Agreement and to advance funds from time
to time, and for Bank's reliance in so doing, Borrower warrants and represents
to Bank as follows:
A. GOOD STANDING. Borrower is a corporation duly organized and in good
standing under the laws of the State of CALIFORNIA AND TEXAS, and has the power
to own its properties and carry on its business in each jurisdiction in which
Borrower operates.
B. AUTHORITY AND COMPLIANCE. Borrower has full power and authority to
enter into this Agreement, to make the borrowing hereunder, to execute and
deliver the Note and to incur the obligations provided for herein, all of which
has been duly authorized by all proper and necessary corporate action. No
consent or approval of stockholders or of any public authority is required as a
condition to the validity of this Agreement or the Note, and Borrower is in
compliance with all laws and regulatory requirements to which it is subject.
C. BINDING AGREEMENT. This Agreement constitutes, and the Note when issued
and delivered pursuant hereto for value received will constitute, valid and
legally binding obligations of Borrower enforceable in accordance with their
terms.
D. LITIGATION. There are no proceedings pending or, to the knowledge of
Borrower, threatened before any court or administrative agency which will or may
have a material adverse effect on the financial condition or operations of
Borrower or any subsidiary or any Guarantor, except as disclosed to Bank in
writing prior to the date of this Agreement.
E. NO CONFLICTING AGREEMENTS. There are no charter, bylaw or stock
provisions of Borrower and no provisions of any existing agreement, mortgage,
indenture or contract binding on Borrower or affecting its property, which would
conflict with or in any way prevent the execution, delivery or carrying out of
the terms of this Agreement and the Note.
F. OWNERSHIP OF ASSETS. Borrower has good and marketable title to any
Collateral pledged and the Collateral is owned free and clear of liens. Borrower
will at all times maintain its tangible property, real and personal, in good
order and repair taking into consideration reasonable wear and tear.
G. TAXES. All income taxes and other taxes due and payable by Borrower to
the date of this Agreement have been paid prior to becoming delinquent.
H. FINANCIAL STATEMENTS. All financial statements and financial
information of Borrower and Guarantor which have been delivered to Bank have
been presented in conformity with generally accepted accounting principles and
fairly and accurately represent the financial condition of the Borrower and
Guarantor, as of the date of such financial statements or reports, and since
such dates, there has been no material adverse changes in the financial
condition of Borrower or Guarantor.
I. NO DEFAULTS. Borrower and Guarantor are not in default with respect to
any obligation to which Borrower or Guarantor is a party or by which Borrower or
Guarantor, or any of Borrower's or Guarantor's properties is bound.
<PAGE>
7. AFFIRMATIVE COVENANTS.
In addition to the other agreements contained herein, Borrower covenants and
agrees that from the date hereof and until payment in full of principal and
interest owing under the Note, unless Bank shall otherwise consent in writing,
Borrower will do the following:
A. BORROWER'S FINANCIAL STATEMENTS. Borrower shall furnish to Bank: (i) as
soon as available and in any event within ONE HUNDRED TWENTY (120) days after
the end of each fiscal year of Borrower, a copy of Borrower's annual AUDITED
financial statement consisting of at least a balance sheet and statement of
income and retained earnings; (ii) on a quarterly basis, financial statements,
to include balance sheet and profit and loss statement, within FORTY FIVE (45)
days after the end of each such accounting period; (iii) if Paragraph 5 above is
applicable to this Agreement, furnish Bank on a monthly basis a Borrowing Base
report in such form as Bank may require and an aging of accounts receivable of
Borrower, such report and aging to be delivered to Bank not later than N/A (N/A)
days after the end of each calendar quarter; and (iv) promptly upon request,
such additional information, tax returns, officer's certificates, reports or
statements respecting its business operations and financial condition as Bank
may reasonably request from time to time.
B. Omitted. d
C. INSURANCE. Maintain insurance with responsible insurance companies on
such of its properties, in such amounts and against such risks as is customarily
maintained by similar businesses operating in the same vicinity, specifically to
include a policy of fire and extended coverage insurance covering all assets,
business interruption insurance and liability insurance, all to be with such
companies and in such amounts satisfactory to Bank and to contain a mortgage
clause naming Bank as its interest may appear. Evidence of such insurance shall
be supplied to Bank.
D. CORPORATE EXISTENCE AND COMPLIANCE. Maintain its corporate existence in
good standing and comply with all laws, regulations and governmental
requirements applicable to it or to any of its property, business operations and
transactions.
E. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in writing of any
condition, event or act which comes to its attention that would or might
materially affect Borrower's or any Guarantor's financial condition, Bank's
rights in or to the Collateral under this Agreement or the Loan documents, and
of any litigation filed against Borrower or any Guarantor.
F. TAXES. Pay all taxes as the same become due and payable.
G. MAINTENANCE. Maintain all of its tangible property in good condition
and repair and make all necessary replacements thereof, and preserve and
maintain all licenses, privileges, franchises, certificates and the like
necessary for the operation of its business.
H. INSPECTION. Permit Bank, its officers, employees and agents, to inspect
the Collateral and all records of Borrower pertaining to the Collateral, at
Borrower's place of business as set forth above, and to make and remove copies
of such records. Borrower shall promptly pay to Bank the reasonable costs and
expenses of any Collateral audit performed by or for Bank.
I. PAYMENT OF DEBTS. Pay all indebtedness and obligations of Borrower as
the same become due in accordance with the terms of the instruments or documents
evidencing the same.
J. FINANCIAL COVENANTS. In accordance with generally accepted accounting
principles, Borrower shall:
(a) maintain a tangible net worth of not less than $4,500,000;
(b) maintain a ratio of current assets to current liabilities of not less
than 1.0 to 1.0;
(c) not permit the ratio of Borrower's total liabilities to tangible net
worth to be more than N/A to 1.0;
<PAGE>
(d) maintain a ratio of after tax net income plus depreciation to current
maturities of long-term debt of not less than N/A to 1.0; and
(e) other financial covenants, if applicable:
1) No cash dividends,
2) No further notes receivable due from equipment sales, other than
those that are on the books as of 12-15-95,
3) Primary depository account to be maintained w/Overton Bank and Trust,
including use of lockbox,
4) Cash flow ratio of 1.0 to 1.0, defined as net income after taxes plus
depreciation and amortization divided by CMLTD, calculated on a
quarterly basis using the last twelve months of operation.
8. NEGATIVE COVENANTS.
In addition to the other agreements contained herein, Borrower agrees that,
so long as the Loan pursuant to this Agreement is outstanding, Borrower will
not, unless Bank shall otherwise consent in writing:
A. Incur or suffer to exist any indebtedness except (i) indebtedness to Bank,
(ii) indebtedness to trade creditors incurred in the ordinary course of its
business, (iii) for purchase money on lease vehicles, all of which are
necessary to conduct the normal course of Borrower's business, above
$500,000 on a cumulative basis per financial year;
B. Enter into any merger or consolidation, or sell, lease, assign or otherwise
dispose of or transfer any of its assets except in the ordinary course of
its business;
C. Become a guarantor, endorser or contingently liable on any debt;
D. Make any advances or loans (directly or indirectly) to any director,
officer, employee or shareholder of Borrower;
E. Engage in any business which differs substantially or materially from the
business which Borrower is presently engaged in;
F. Create or permit to exist any mortgage, lien or other encumbrance, except as
permitted herein, with respect to any assets now owned by Borrower or
hereafter acquired, except purchase money liens on equipment and/or vehicles
not currently owned by Borrower;
G. Substantially change its present executive or management personnel.
9. EVENTS OF DEFAULT; REMEDIES.
The occurrence of any of the following shall constitute an event of default
hereunder: (i) the failure or refusal of Borrower to timely perform any term,
covenant or agreement contained herein, (ii) any representation or warranty
contained herein or in any financial statement, report or certificate submitted
to Bank in connection with the Loan or pursuant to the requirements of this
Agreement shall prove to have been incorrect or misleading in any material
respect when made, (iii) default shall occur under the terms of the Note or any
security document now or hereafter securing payment of the Note or under any
other promissory note executed by Borrower and held by Bank, or (iv) if Bank, in
good faith believes that the prospect of payment or the prospect of performance
by Borrower hereunder or under the Note or security documents is impaired.
Likewise, a default hereunder shall constitute a default under the Note and all
security documents securing payment of the Note and all other promissory notes
executed by Borrower and held by Bank. Upon the occurrence of any such default,
Bank shall have the option to declare immediately due and payable all
outstanding principal plus unpaid interest on the Note, and Bank shall have no
further obligation to fund under this Agreement. Upon the occurrence of a
default, Bank
<PAGE>
shall be entitled to exercise any and all remedies (i) under the Note and any
security document securing payment of the Note, and (ii) available to Bank at
law or in equity.
10. MISCELLANEOUS.
A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to Bank
hereunder or under any other document delivered hereunder or in connection
herewith, or allowed by law or equity shall be cumulative of and may be
exercised in addition to any and all other rights of Bank, and no delay in
exercising any right shall operate as a waiver thereof, nor shall any single or
partial exercise by Bank of any right preclude any other or future exercise
thereof, or the exercise of any other right. Any of the foregoing covenants and
agreements may be waived by Bank, but only in writing, signed by a vice
president or higher level officer of Bank. Borrower expressly waives any
presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other notice of any kind. No notice to or demand on Borrower in
any case shall, of itself, entitle Borrower to any other or further notice or
demand in similar or other circumstances.
B. GOVERNING LAW. THIS AGREEMENT IS BEING DELIVERED AND IS INTENDED TO BE
PERFORMED IN THE STATE OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. ALL OBLIGATIONS HEREUNDER ARE
PERFORMABLE IN TARRANT COUNTY, TEXAS.
C. BINDING EFFECT. This Agreement shall inure to the benefit of and be
enforceable by Bank and any assignee or participant of Bank, and shall bind
Borrower and its successors and assigns; provided, however, that Borrower may
not assign its rights or obligations hereunder without the prior written
approval of Bank.
D. TEXAS CREDIT CODE. Chapter 15 of the Texas Credit Code shall not apply
to the Loan contemplated hereby.
E. EXPENSES. Borrower agrees to pay all out-of-pocket expenses of Bank in
connection with this Agreement and the collection of the Note.
F. RENEWAL. While the Bank is under no obligation to renew any
indebtedness incurred pursuant to the terms of this Agreement at maturity (or
any renewal or extension term), in the event the Note is renewed, this Agreement
shall apply to said renewal and the representations and warranties made by
Borrower herein shall be deemed to be made again as of the date of any such
renewal. The term "Note" shall include any renewal note.
G. TIME OF ESSENCE. Time is of the essence of this Agreement.
H. NO FIDUCIARY RELATIONSHIP. Borrower acknowledges and agrees that the
relationship between Borrower and Bank is solely that of debtor/creditor and in
no event shall Bank be considered as a partner of Borrower or otherwise have any
fiduciary duties to Borrower or Guarantor.
I. USURY SAVINGS. The parties hereto intend to comply with all usury laws
applicable to national banks and the subject Loan. Nothing contained herein, in
the Note or in any of the security documents shall authorize the collection or
constitute charging of interest in excess of that permitted by applicable law.
J. INDEMNIFICATION OF BANK. BORROWER SHALL INDEMNIFY AND HOLD BANK
HARMLESS AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS, COSTS, EXPENSES AND DISBURSEMENTS
OR ANY KIND OR NATURE WHATSOEVER, WHICH MAY BE IMPOSED ON, INCURRED BY OR
ASSERTED AGAINST BANK, IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT
OR ANY INSTRUMENT EXECUTED PURSUANT HERETO, OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN, TO THE EXTENT THAT ANY SUCH INDEMNIFIED MATTERS RESULT,
DIRECTLY OR INDIRECTLY, FROM ANY CLAIMS MADE OR ACTIONS, SUITS OR PROCEEDINGS
COMMENCED BY OR ON BEHALF OF ANY PERSON OR ENTITY OTHER THAN BANK; PROVIDED,
THAT BANK
<PAGE>
SHALL NOT HAVE THE RIGHT TO BE INDEMNIFIED HEREUNDER FOR ITS GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT.
K. NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
L. ADDITIONAL PROVISIONS (WHICH SHALL CONTROL IN THE EVENT OF ANY CONFLICT WITH
THE PRECEDING PROVISIONS):
EXECUTED as of the day and year first above written.
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------
BANK: BORROWER:
OVERTON BANK & TRUST, INNOSERV TECHNOLOGIES, INC.
NATIONAL ASSOCIATION
By: /s/ CURTIS F. VON DER AHE By: /s/ MICHAEL G. PULS
Name Printed: CURTIS F. VON DER AHE Name Printed: MICHAEL PULS
Title: PRESIDENT Title: PRESIDENT
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 10.19--Security Agreement
<TABLE>
<CAPTION>
<S> <C>
INNOSERV TECHNOLOGIES, INC. OVERTON BANK AND TRUST, N.A.
4330 BELTWAY, SUITE 300 SOUTH ARLINGTON
ARLINGTON, TX 76018 PO BOX 150049
ARLINGTON, TX 76015
TAXPAYER I.D. NUMBER: SECURED PARTY'S NAME AND ADDRESS
DEBTOR'S NAME, ADDRESS AND SSN OR TIN ("YOU" MEANS THE SECURED PARTY, ITS SUCCESSORS AND
("I" MEANS EACH DEBTOR WHO SIGNS.) ASSIGNS.)
</TABLE>
I am entering into this security agreement with you on APRIL 14, 1997 (date).
SECURED DEBTS. I agree that this security agreement will secure the payment and
performance of the debts, liabilities or obligations described below that (Check
one) [ ] I [XX] (name) INNOSERV TECHNOLOGIES, INC. owe(s) to you now or in the
future:
(Check one below):
[ ] Specific Debt(s). The debt(s), liability or obligations evidenced by
(describe): and all extensions, renewals, refinancing,
modifications and replacement of the debt, liability or obligation.
[XX] All Debt(s). Except in those cases listed in the "LIMITATIONS" paragraph on
page 2, each and every debt, liability and obligation of every type and
description (whether such debt, liability or obligation now exists or is
incurred in the future and whether it is or may be direct or indirect, due
or to become due, absolute or contingent, primary or secondary, liquidated
or unliquidated, or joint, several or joint and several).
SECURITY INTEREST. To secure the payment and performance of the above described
Secured Debts, liabilities and obligations, I give you a security interest in
all of the property described below that I now own and that I may own in the
future (including, but not limited to, all parts, accessories, repairs,
improvements, and accessions to the property), wherever the property is or
may be located, and all proceeds and products from the property.
- --
XX INVENTORY: All inventory which I hold for ultimate sale or lease, or which
has been or will be supplied under contracts of service, or which are raw
materials, work in process, or materials used or consumed in my business.
XX EQUIPMENT: All equipment including, but not limited to, all machinery,
vehicles, furniture, fixtures, manufacturing equipment, farm machinery and
equipment, shop equipment, office and recordkeeping equipment, and parts and
tools. All equipment described in a list or schedule which I give to you
will also be included in the secured property, but such a list is not
necessary for a valid security interest in my equipment.
___ FARM PRODUCTS: All farm products including, but not limited to:
(a) all poultry and livestock and their young, along with their products,
produce and replacements;
(b) all crops, annual or perennial, and all products of the crops; and
(c) all feed, seed, fertilizer, medicines, and other supplies used or
produced in my farming operations.
XX ACCOUNTS, INSTRUMENTS, DOCUMENTS, CHATTEL PAPER AND OTHER RIGHTS TO PAYMENT:
All right I have now and that I may have in the future to the payment of
money including, but not limited to:
(a) payment for goods and other property sold or leased or for services
rendered, whether or not I have earned such payment by performance; and
(b) rights to payment arising out of all present and future debt
instruments, chattel paper and loans and obligations receivable.
<PAGE>
The above include any right and interests (including all liens and security
interests) which I may have by law or agreement against any account debtor
or obligor of mine.
___ GENERAL INTANGIBLES: All general intangibles including, but not limited to,
tax refunds, applications for patents, patents, copyrights, trademarks,
trade secrets, good will, trade names, customer lists, permits and
franchises, and the right to use my name.
___ GOVERNMENT PAYMENTS AND PROGRAMS: All payments, accounts, general
intangibles, or other benefits (including, but not limited to, payments in
kind, deficiency payments, letters of entitlement, warehouse receipts,
storage payments, emergency assistance payments, diversion payments, and
conservation reserve payments) in which I now have and in the future may
have any rights or interest and which arise under or as a result of any
preexisting, current or future Federal or state governmental program
(including, but not limited to, all programs administered by the Commodity
Credit Corporation and the ASCS.
___ THE SECURED PROPERTY INCLUDES, BUT IS NOT LIMITED BY, THE FOLLOWING:
If this agreement covers timber to be cut, minerals (including oil and gas),
fixtures or crops growing or to be grown, the legal description is:
- --------------------------------------------------------------------------------
I am a(n) [ ]individual [ ]partnership [X]corporation
[ ] If checked, file this agreement in the real estate
Record Owner (if not me):
- ---------
The property will be used for [ ]personal [XX]business [ ]agricultural [ ]
- ---------reasons.
OVERTON BANK AND TRUST, N.A.
- --------------------------------------------
SOUTH ARLINGTON
- --------------------------------------------
(secured party's name)
By: /s/ CURTIS VON DER AHE
- ----------------------------------------
CURTIS VON DER AHE, PRESIDENT
I AGREE TO THE TERMS SET OUT ON BOTH PAGE 1 AND PAGE 2 OF THIS AGREEMENT. I HAVE
RECEIVED A COPY OF THIS DOCUMENT ON TODAY'S DATE.
INNOSERV TECHNOLOGIES, INC.
- --------------------------------------------
(Debtor's Name)
By: /s/ MICHAEL PULS
- ----------------------------------------
Michael Puls
Title: PRESIDENT
- --------------------------------------
<PAGE>
GENERALLY--"You" means the Secured Party identified on page 1 of this agreement.
"I", "me" and "my" means each person who signs this security agreement as Debtor
and who agrees to give the property described in this agreement as security for
the Secured Debts. All terms and duties under this agreement are joint and
individual. No modification of this security agreement is effective unless made
in writing and signed by you and me. This security agreement remains in effect,
even if the note is paid and I owe no other debt to you, until discharged in
writing. Time is of the essence in this agreement.
APPLICABLE LAW--I agree that this security agreement will be governed by the law
of the state in which you are located. If property described in this agreement
is located in another state, this agreement may also, in some circumstances, be
governed by the law of the state in which the property is located.
To the extent permitted by law, the terms of this agreement may vary
applicable law. If any provision of applicable law may not be varied by
agreement, any provision of this agreement that does not comply with the law
will not be effective. If any provision of this agreement cannot be enforced
according to its terms, this fact will not affect the enforceability of the
remainder of this agreement.
OWNERSHIP AND DUTIES TOWARD PROPERTY--I represent that I own all of the
property, or to the extend this is a purchase money security interest I will
acquire ownership of the property with the proceeds of the loan. I will defend
it against any other claim. Your claim to the property is ahead of the claims of
any other creditor. I agree to do whatever you require to protect your security
interest and to keep your claim in the property ahead of the claims of other
creditors. I will not do anything to harm your position.
I will keep books, records and accounts about the property and my business
in general. I will let you examine these records at any reasonable time. I will
prepare any report or accounting you request, which deals with the property.
I will keep the property in my possession and will keep it in good repair
and use it only for the purpose(s) described on page 1 of this agreement. I will
not change this specified use without your express written permission. I
represent that I am the original owner of the property and, if I am not, that I
have provided you with a list of prior owners of the property.
I will keep the property at my address listed on page 1 of this agreement,
unless we agree I may keep it at another location. If the property is to be used
in another state, I will give you a list of those states. I will not try to sell
the property unless it is inventory or I receive your written permission to do
so. If I sell the property I will have the payment made payable to the order of
you and me.
You may demand immediate payment of the debt(s) if the debtor is not a
natural person and without your prior written consent (1) a beneficial interest
in the debtor is sold or transferred or (2) there is a change in either the
identity or number of members of a partnership or (3) there is a change in
ownership of more than 25 percent of the voting stock of a corporation.
I will pay all taxes and charges on the property as they become due. You
have the right of reasonable access in order to inspect the property. I will
immediately inform you of any loss or damage to the property.
LIMITATIONS--This agreement will not secure a debt described in the section
entitled "Secured Debts" on page 1:
1) if you fail to make any disclosure of the existence of this security
interest required by law for such other debt;
2) if this security interest is in my principal dwelling and you fail to
provide (to all persons entitled) any notice of right of rescission
required by law for such other debt;
3) to the extent that this security interest is in "household goods" and
the other debt to be secured is a "consumer" loan (as those terms are
defined in applicable federal regulations governing unfair and deceptive
credit practices);
4) if this security interest is in margin stock subject to the requirements
of 12 C.F.R. Section 207 or 221 and you do not obtain a statement of
purpose if required under these regulations with respect to that debt; or
5) if this security interest is unenforceable by law with respect to that
debt.
<PAGE>
PURCHASE MONEY SECURITY INTEREST--For the sole purpose of determining the extent
of a purchase money security interest arising under this security agreement: (a)
payments on any non-purchase money loan also secured by this agreement will not
be deemed to apply to the purchase money loan, and (b) payments on the purchase
money loan will be deemed to apply first to the non-purchase money portion of
the loan, if any, and then to the purchase money obligations in the order in
which the items of collateral were acquired or if acquired at the same time, in
the order selected by you. No security interest will be terminated by
application of this formula. "Purchase money loan" means any loan the proceeds
of which, in whole or in part, are used to acquire any collateral securing the
loan and all extensions, renewals, consolidations and refinancings of such
loans.
AUTHORITY OF SECURED PARTY TO MAKE ADVANCES AND PERFORM FOR DEBTOR--I agree to
pay you on demand any sums you advanced on my behalf including, but not limited
to, expenses incurred in collecting, insuring, conserving, or protecting the
property or in any inventories, audits, inspections or other examinations by you
in respect to the property. If I fail to pay such sums, you may do so for me,
adding the amount paid to the other amounts secured by this agreement. All such
sums will be due on demand and will bear interest at the highest rate provided
in any agreement, note or other instrument evidencing the Secured Debt(s) and
permitted by law at the time of the advance.
If I fail to perform any of my duties under this security agreement, or any
mortgage, deed of trust, lien or other security interest, you may without notice
to me perform the duties or cause them to be performed. I understand that this
authorization includes, but is not limited to, permission to: (1) prepare, file,
and sign my name to any necessary reports or accountings; (2) notify any account
debtor of your interest in this property and tell the account debtor to make the
payments to you or someone else you name, rather than me; (3) place on any
chattel paper a note indicating your interest in the property; (4) in my name,
demand, collect, receive and give a receipt for compromise, settle, and handle
any suits or other proceedings involving the collateral; (5) take any action you
feel is necessary in order to realize on the collateral, including performing
any part of a contract or endorsing it in my name; and (6) make an entry on my
books and records showing the existence of the security agreement. Your right to
perform for me shall not create an obligation to perform and your failure to
perform will not preclude you from exercising any of your rights under the law
of this security agreement.
INSURANCE--I agree to buy insurance on the property against the risks and for
the amounts you require and to furnish you continuing proof of coverage. I will
have the insurance company name you as loss payee on any such policy. You may
require added security if you agree that insurance proceeds may be used to
repair or replace the property. I will buy insurance from a firm licensed to do
business in the state where you are located. The insurance will last until the
property is released from this agreement. If I fail to buy or maintain the
insurance (or fail to name you as loss payee) you may purchase it yourself.
WARRANTIES AND REPRESENTATIONS--If this agreement includes accounts, I will not
settle any account for less than its full value without your written permission.
I will collect all accounts until you tell me otherwise. I will keep the
proceeds from all the accounts and any goods which are returned tome or which I
take back in trust for you, I will not mix them with any other property of mine.
I will deliver them to you at your request. If you ask me to pay you the full
price on any returned items or items retaken by myself, I will do so.
If this agreement covers inventory, I will not dispose of it except in my
ordinary course of business at the fair market value for the property, or at a
minimum price established between you and me.
If this agreement covers farm products I will provide you, at your request,
a written list of the buyers, commission merchants or selling agents to or
through whom I may sell my farm products. In addition to those parties named on
this written list, I authorize you to notify at your sole discretion any
additional parties regarding your security interest in my farm products. I
remain subject to all applicable penalties for selling my farm products in
violation of my agreement with you and the Food Security Act. In this paragraph
the terms farm products, buyers, commission merchants and selling agents have
the meanings given to them in the Federal Food Security Act of 1985.
<PAGE>
DEFAULT--I will be in default if any one or more of the following occur: (1) I
fail to make a payment on time or in the amount due; (2) I fail to keep the
property insured, if required; (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; (4) any other creditor of mine attempts to
collect any debt I owe him through court proceedings; (5) I die, am declared
incompetent, make an assignment for the benefit of creditors, or become
insolvent (either because my liabilities exceed my assets or I am unable to pay
my debts as they become due); (6) I make any written statement or provide any
financial information that is untrue or inaccurate at the time it was provided;
(7) I do or fail to do something which causes you to believe that you will have
difficulty collecting the amount I owe you; (8) I change my name or assume an
additional name without first notifying you before making such a change; (9)
failure to plant, cultivate and harvest crops in due season; (10) if any loan
proceeds are used for a purpose that will contribute to excessive erosion of
highly erodible land or to the conversion of wetlands to produce an agricultural
commodity, as further explained in 7 C.F.R. Part 1940, Subpart G, Exhibit M.
REMEDIES--If I am in default on this agreement, you have the following remedies:
1) You may demand immediate payment of all I owe you under any obligation
secured by this agreement.
2) You may set off any obligation I have to you against any right I have to
the payment of money from you.
3) You may demand more security or new parties obligated to pay any debt I
owe you as a condition of giving up any other remedy.
4) You may make use of any remedy you have under state or federal law.
5) If I default by failing to pay taxes or other charges, you may pay them
(but you are not required to do so). If you do, I will repay to you the
amount you paid plus interest at the highest contract rate.
6) You may require me to gather the property and make it available to you
in a reasonable fashion.
7) You may repossess the property and sell it as provided by law. You may
repossess the property so long as the repossession does not involve a
breach of the peace or an illegal entry onto my property. You may sell
the property as provided by law. You may apply what you receive from the
sale of the property to: your expenses; your reasonable attorney's fees
and legal expenses (where not prohibited by law); any debt I owe you. If
what you receive from the sale of the property does not satisfy the
debts, you may take me to court to recover the difference (where
permitted by law). I agree that 10 days written notice sent to my address
listed on page 1 by first class mail will be reasonable notice to me
under the Uniform Commercial Code. If any items not otherwise subject to
this agreement are contained in the property when you take possession,
you may hold these items for me at my risk and you will not be liable for
taking possession of them.
8) In some cases, you may keep the property to satisfy the debt. You may
enter upon and take possession of all or any part of my property, so long
as you do not breach the peace or illegally enter onto the property,
including lands, plants, buildings, machinery, and equipment as may be
necessary to permit you to manufacture, produce, process, store or sell
or complete the manufacture, production, processing, storing or sale of
any of the property and to use and operate the property for the length of
time you feel is necessary to protect your interest, all without payment
or compensation to me.
By choosing any one or more of these remedies, you do not waive your right
to later use any other remedy. You do not waive a default if you choose not to
use any remedy, and, by electing not to use any remedy, you do not waive your
right to later consider the event a default and to immediately use any remedies
if it continues or occurs again.
<PAGE>
FILING--A carbon, photographic or other reproduction of this security agreement
or the financing statement covering the property described in this agreement may
be used as a financing statement where allowed by law. Where permitted by law,
you may file a financing statement which does not contain my signature, covering
the property secured by this agreement.
CO-MAKERS--If more than one of us has signed this agreement, we are all
obligated equally under the agreement. You may sue any of one of us or any of us
together if this agreement is violated. You do not have to tell me if any term
of the agreement has not been carried out. You may release any co-signer and I
will still be obligated under this agreement. You may release any of the
security and I will still be obligated under this agreement. Waiver by you of
any of your rights will not affect my duties under this agreement. Extending
this agreement or new obligations under this agreement, will not affect my duty
under the agreement.
<PAGE>
Exhibit 10.24--Amended Bonus Agreement
INNOSERV TECHNOLOGIES, INC.
AMENDMENT TO BONUS AGREEMENT
This Amendment to Bonus Agreement (this "Agreement") is entered into between
InnoServ Technologies, Inc. (the "Company") and Michael G. Puls, President and
Chief Executive Officer of the Company (the "Executive").
WHEREAS, the Executive and the Company have previously entered into a Bonus
Agreement, dated December 20, 1996, which was amended March 28, 1997 (as
amended, the "Bonus Agreement"), in order to provide an incentive to the
Executive to remain in the employ of the Company while the Company is
investigating strategic alternatives in order to maximize shareholder value;
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 to amend the Bonus Agreement as hereinafter provided
in order to better achieve the purposes of the Bonus Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Company and Executive agree as follows:
1. Unless otherwise defined herein, terms are used as defined in the
Bonus Agreement.
2. Paragraph 1 of the Bonus Agreement is hereby amended to read in its
entirety as follows:
"a. 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 of $300,000, PLUS an additional amount equal to (A) $100,000,
multiplied by (B) a fraction, the numerator of which shall equal the amount
by which the Sale Price of the Company exceeds $16 million and the
denominator of which shall equal $4 million, less all applicable
withholdings (the "Bonus"). The Bonus will be payable in full, in cash on
the closing date of such Sale of the Company.
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 (or considered outstanding and for which
payment is made by the acquiror), 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 1.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 assumed by the purchaser of such assets."
3. This Agreement supersedes any prior agreements or understandings
with respect to the subject matter hereof. Except as amended hereby, the
Bonus Agreement shall continue in full force and effect. This Agreement
shall inure to the benefit of, and be binding upon, the parties hereto and
their respective heirs, successors, legal representatives and assigns.
<PAGE>
4. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS.
5. This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument.
6. References in the Bonus Agreement to the "Agreement" shall mean the
Bonus Agreement as amended hereby or previously amended.
IN WITNESS WHEREOF, the Company and Executive have executed this Agreement
as of the day and year indicated below.
<TABLE>
<S> <C> <C>
INNOSERV TECHNOLOGIES, INC.
By: /s/ MICHAEL SANDLER
-----------------------------------------
Name: Michael Sandler
Its: Member of Board of Directors
Date: 4/2/98
EXECUTIVE:
By: /s/ MICHAEL G. PULS
-----------------------------------------
Name: Michael G. Puls
Date: 4/2/98
</TABLE>
<PAGE>
Exhibit 10.25--Compliance Waiver
FROST NATIONAL BANK
Member: Cullen/Frost Bankers. A Family of Texas Banks
July 2, 1998
Mr. Thomas Hoefert, CFO
InnoServ Technologies, Inc.
320 Westway Place
Arlington, Texas 76018-1099
Dear Tom:
You have requested waivers on compliance with sections 7.J.(a), 7.J.(b) and
7.J.(e) item 4, of the loan agreement dated April 14, 1997 and all subsequent
amendments. These sections address the minimum net worth, current ratio, and
cash flow coverage, respectively.
Frost Bank hereby waives compliance with sections 7.J.(a) and 7.J.(b) until
September 30, 1998 and waives compliance with section 7.J.(e) item 4 for the
duration of the loan.
If you need anything else, please call.
Sincerely,
/s/ Curtis F. Von Der Ahe
Curtis F. Von Der Ahe
President
<PAGE>
Exhibit 21.1--Subsidiaries
As of April 30, 1998, the subsidiaries of InnoServ, Technologies, Inc. were:
InnoServ Technologies Maintenance Services, Inc.
Sietec, Inc.
Advanced Imaging Technologies, Inc.
<PAGE>
Exhibit 23.1--Consent of Independent Auditors
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-2133 and No. 33-66752) pertaining to the Employee Stock
Purchase Plan and 1992 Stock Incentive Plan of InnoServ Technologies, Inc. of
our report dated June 17, 1998, 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, 1998.
/s/ Ernst & Young LLP
Fort Worth, Texas
July 17, 1998
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 3,088
<SECURITIES> 0
<RECEIVABLES> 4,366
<ALLOWANCES> 869
<INVENTORY> 4,909
<CURRENT-ASSETS> 12,390
<PP&E> 27,065
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<BONDS> 479
30
0
<COMMON> 0
<OTHER-SE> 5,699
<TOTAL-LIABILITY-AND-EQUITY> 18,713
<SALES> 5,437
<TOTAL-REVENUES> 36,889
<CGS> 2,401
<TOTAL-COSTS> 32,599
<OTHER-EXPENSES> 1,707
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> (2,646)
<INCOME-TAX> 18
<INCOME-CONTINUING> (2,664)
<DISCONTINUED> 0
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<NET-INCOME> (2,664)
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