SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTER ENDED JULY 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 0-13608
INNOSERV TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3619990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 WESTWAY, SUITE 530, ARLINGTON, TEXAS 76018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 468-3377
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
At September 13, 1996, the Registrant had outstanding 5,035,833 shares of
its common stock, $.01 par value.
INNOSERV TECHNOLOGIES, INC.
FORM 10-Q
JULY 31, 1996
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 1996, and
April 30, 1996 3
Consolidated Statements of Operations for the three months
ended July 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the three months
ended July 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 2. Changes in Securities 12
Item 6. Exhibits and Report on Form 8-K 12
SIGNATURES 13
INDEX TO EXHIBITS 14
2
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
July 31,
1996 April 30,
(Unaudited) 1996
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 1,042 $ 941
Receivables 5,466 5,238
Inventory:
Spare parts and supplies, net 5,453 5,580
Inventory held for sale 1,180 1,878
Prepaid expenses 302 350
---------- ----------
Total current assets 13,443 13,987
Equipment, net 5,797 6,186
Goodwill, net 3,505 3,544
Other assets 148 123
---------- ----------
$ 22,893 $ 23,840
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 1,591 $ 862
Accounts payable 4,536 4,613
Accrued liabilities 2,761 3,090
Deferred revenues 3,896 4,399
---------- ----------
Total current liabilities 12,784 12,964
Long-term debt 770 910
Shareholders' equity
Preferred stock, $.01 par value: 5,000,000
shares authorized; no shares issued -- --
Common stock, $.01 par value: 10,000,000
shares authorized; 5,035,833 issued 51 51
Paid-in capital 17,303 17,303
Accumulated deficit (8,015) (7,388)
---------- ----------
Total shareholders' equity 9,339 9,966
---------- ----------
$ 22,893 $ 23,840
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
3
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
July 31,
--------------------------
1996 1995
----------- ----------
Revenues $ 11,788 $ 11,968
Costs and expenses:
Cost of operations 10,023 9,466
Depreciation and amortization 511 485
Selling and administrative 1,854 2,156
Interest expense, net 27 49
---------- ----------
Total costs and expenses 12,415 12,156
---------- ----------
Loss before income taxes (627) (188)
Benefit for income taxes -- (75)
---------- ----------
Net loss $ (627) $ (113)
---------- ----------
---------- ----------
Per share information:
Net loss $ (.12) $ (.02)
---------- ----------
---------- ----------
Weighted average shares outstanding 5,036 5,039
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
4
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
July 31,
------------------------
1996 1995
--------- ---------
Cash flows from:
Operations -
Net loss $ (627) $ (113)
Adjustments to reconcile net loss to net
cash flows from operations:
Depreciation and amortization 511 485
Gain on disposal of equipment -- (100)
Deferred income taxes -- (19)
Changes in assets and liabilities:
Receivables (228) 839
Inventory 825 (778)
Prepaid expenses 48 (309)
Accounts payable (77) 1,102
Accrued liabilities (329) (114)
Other assets (25) (177)
Deferred revenues (503) 214
--------- ---------
Net cash provided by (used for) operations (405) 1,030
Investments and acquisitions -
Sale of equipment -- 180
Purchase of equipment (83) (321)
--------- ---------
Net cash used for investments and acquisitions (83) (141)
Financing activities -
Borrowings from line of credit 776 --
Principal payments of long-term debt (187) (1,794)
--------- ---------
Net cash provided by (used for) financing activities 589 (1,794)
--------- ---------
Net increase (decrease) in cash and cash equivalents 101 (905)
Cash and cash equivalents at beginning of period 941 1,827
--------- ---------
Cash and cash equivalents at end of period $ 1,042 $ 922
--------- ---------
--------- ---------
The accompanying notes are an integral part of these financial statements.
5
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
(UNAUDITED)
1. GENERAL
The consolidated financial statements included herein have been prepared by
InnoServ Technologies, Inc. ("InnoServ") without audit, include all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results of operations for the three months ended July 31, 1996 and 1995,
pursuant to the rules and regulations of the Securities and Exchange Commission,
and include the accounts of InnoServ and its consolidated subsidiaries. All
significant intercompany accounts and transactions have been eliminated. Any and
all adjustments made are of a normal and recurring nature in accordance with
Rule 10-01(b)(8) of Regulation S-X. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulation, however, InnoServ believes that the
disclosures in such financial statements are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with InnoServ's annual report on Form 10-K for the fiscal year ended
April 30, 1996, filed with the Securities and Exchange Commission. The results
of operations for the three months ended July 31, 1996, are not necessarily
indicative of the results that may be expected for the year ending April 30,
1997.
2. INTEREST EXPENSE, NET
Interest expense is net of interest income of $15,000 for the period ended
July 31, 1996. No interest income was recognized for the period ended July 31,
1995.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest and income taxes paid in the three months ended July 31, 1996 and
1995 were as follows:
Three Months Ended
July 31,
------------------------
1996 1995
--------- ---------
Interest $ 36,000 $ 61,000
Income taxes $ 13,000 $ 8,000
6
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
(UNAUDITED)
4. LONG-TERM DEBT
InnoServ has a loan agreement with a bank to borrow up to $3,000,000. The
loan agreement contains a $1,500,000 term loan expiring January 30, 1999, and a
$1,500,000 revolving line of credit for working capital, against which InnoServ
had outstanding borrowings of $1,250,000 and $1,032,000, respectively, at July
31, 1996. Obligations under the loan agreement are secured by a security
interest in InnoServ's accounts receivable, inventory and equipment. Interest is
payable quarterly on all obligations under the loan agreement based on varying
interest rates above the prime rate and the term loan requires quarterly
principal payments of $125,000. The interest rate at July 31, 1996, on the term
loan was 9.25 percent and was 8.75 percent on the revolving line of credit. The
loan agreement contains financial covenants including maintenance of certain
financial ratios, net worth requirements and restrictions on future borrowings
and payment of dividends, with which InnoServ was in compliance at July 31,
1996.
Subsequent to July 31, 1996, the expiration date of the revolving line of
credit was extended from August 12, 1996, to October 12, 1996, and the limit of
the line of credit was reduced to $500,000, the amount outstanding at August 12,
1996. InnoServ has completed negotiations with another financial institution as
to the terms of secured financing to replace the bank loan agreement and is in
the process of preparing the loan documentation. InnoServ believes the new
agreement will be completed prior to the October 12, 1996, expiration date of
the bank line of credit.
5. RESTRUCTURING
In the fourth quarter of fiscal 1996, InnoServ adopted a plan to reorganize
its operations in order to strategically focus on its comprehensive asset
management services business ("Asset Management"). As a result of this
reorganization, InnoServ recorded restructuring charges in the fourth quarter of
fiscal 1996 of $154,000 for employee termination benefits for 25 employees. As
of July 31, 1996, $56,000 of this amount had been paid to 15 employees. The
reorganization is expected to be completed by the end of the third quarter of
fiscal 1997.
7
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
(UNAUDITED)
In the third quarter of fiscal 1996, InnoServ relocated its headquarters
from Corona, California to Arlington, Texas and recorded restructuring charges
of $411,000. The major components of these charges, the amount paid to date,
adjustments to the liability and the remaining payments at July 31, 1996 were as
follows (in thousands):
Amounts
Paid as of Adjustments
Total July 31, to the Payments
Charges 1996 Liability Remaining
--------- -------- -------- ---------
Employee termination benefits $ 115 $ (115) $ -- $ --
Employee relocation 169 (162) (5) 2
Employee training 67 (67) -- --
Office equipment relocation 30 (30) -- --
Facility closing costs 30 (7) (23) --
------- ------- ------- -----
$ 411 $ (381) $ (28) $ 2
------- ------- ------- -----
------- ------- ------- -----
The termination benefits relate to 12 employees, all of whom were
terminated as of July 31, 1996.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 1997 COMPARED TO FIRST QUARTER FISCAL 1996
Consolidated revenues for the first quarter of fiscal 1997 were $11,788,000
as compared to $11,968,000 in the same period of fiscal 1997, a decline of
$180,000, or 1.5 percent. Revenues from computerized tomography ("CT")
maintenance service agreements decreased approximately $1,900,000 primarily as a
result of the continued decline in the number and average contract amount of CT
maintenance service agreements in effect as older equipment is being upgraded or
removed from service by customers and InnoServ's decision to not renew certain
CT maintenance agreements in unprofitable locations. Revenues from InnoServ's
diagnostic mobile imaging operations were approximately $230,000 lower than the
revenues in the same period in fiscal 1996 as InnoServ discontinued its shared
services program at the end of the first quarter of fiscal 1996. Offsetting
these declines, revenues from Asset Management and multi-vendor services
increased approximately $1,800,000 as InnoServ continues to focus on the growing
market for these type services and revenues from equipment and part sales
increased approximately $250,000.
Cost of operations increased $557,000 from the same period in the prior
fiscal year. This increase was a result of costs required to provide
services for Asset Management agreements, while InnoServ was not able to
reduce its costs to service CT maintenance agreements proportionately due to
certain fixed support costs and the need to retain field service technicians
in certain locations despite a declining revenue base in that location.
Selling and administrative expenses decreased $302,000, or 14 percent, from
the prior year primarily as a result of savings from the consolidation of
InnoServ's administrative functions and lower bad debt and selling expenses.
Depreciation and amortization expenses did not change significantly quarter
to quarter.
The loss before income taxes for the first quarter of fiscal 1997 was
$627,000 as compared to a $188,000 loss in the first quarter of fiscal 1996.
This additional loss was primarily the result of unfavorable operating
margins associated with InnoServ's maintenance business. Because InnoServ
employs field service engineers over a wide geographic area, the current
level of revenues are not sufficient in certain locations to cover the direct
and indirect costs of providing maintenance and repair services. InnoServ is
implementing plans to reorganize its service operations to more cost
effectively provide the services required by its customers and to discontinue
service in selected locations upon the expiration of the existing maintenance
agreements in those locations. InnoServ believes these actions, coupled with
strategic changes it is making in the operations of the CT and Asset
Management business, will improve InnoServ's operations. However, InnoServ
may not realize the full financial impact of these actions until the latter
part of fiscal 1997.
9
InnoServ did not recognize a tax benefit from the operating loss for the
first quarter of fiscal 1997. Under Statement of Financial Accounting Standard
No. 109 ("SFAS 109"), "Accounting for Income Taxes," net operating losses enter
into the calculation of deferred tax assets and liabilities. At July 31, 1996,
InnoServ had a net deferred tax asset, primarily as a result of net operating
losses. In accordance with SFAS 109, InnoServ recorded a valuation allowance
for the full amount of the deferred tax asset. The ultimate realization of the
deferred tax asset depends on the ability of InnoServ to generate sufficient
taxable income in the future. While InnoServ believes the deferred tax asset
will be substantially realized by future operating results, due to the
cumulative losses incurred in recent years the deferred tax assets do not
currently meet the criteria for recognition under SFAS 109. At July 31, 1995,
the effective tax rate was estimated to be 40 percent and a corresponding
benefit for taxes was recorded on the operating losses for the three months
ended July 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, InnoServ had working capital of $659,000, of which
$1,042,000 was in cash and cash equivalents. Operations used $405,000 of cash
for the three month period ended July 31, 1996, primarily as a result of the
operating losses for the period, a reduction in deferred revenues as services
were provided in the period for which payment had been received in a prior
period, and the payment of annual bonuses and commissions. These uses of cash
were offset by a reduction in CT tube inventory as a result of lower
requirements for inventory due to the declining number of CT maintenance service
agreements in effect and management controls on purchases, and the sale of
refurbished CT and magnetic resonance imaging scanners. The funds used for
operations were financed by additional borrowings against InnoServ's revolving
line of credit.
InnoServ's allowance for doubtful accounts at July 31, 1996, was
$1,022,000, or 16 percent of gross accounts receivable. InnoServ's customers
include hospitals, physician practices, outpatient clinics and entrepreneurial
operations. Some of these customers are thinly capitalized, operate on small
margins and experience cash flow difficulties due to the lengthy time required
to receive reimbursements from Medicare and insurance companies. The changes
occurring in the healthcare industry, primarily the move to managed care, has
weakened healthcare providers' ability to honor their debts and have forced some
of the providers out of business. As a result of these factors, InnoServ has
experienced difficulty in collecting on its accounts receivable.
InnoServ has a loan agreement with a bank to borrow up to $3,000,000. The
loan agreement contains a $1,500,000 term loan expiring January 30, 1999, and a
$1,500,000 revolving line of credit for working capital, against which InnoServ
had outstanding borrowings of $1,250,000 and $1,032,000, respectively, at July
31, 1996. Obligations under the loan agreement are secured by a security
interest in InnoServ's accounts receivable, inventory and equipment. Interest is
payable quarterly on all obligations under the loan agreement based on varying
interest rates above the prime rate and the term loan requires quarterly
principal payments of $125,000. The interest rate at July 31, 1996, on the term
loan was 9.25 percent and was 8.75 percent on the revolving line of credit. The
loan agreement contains financial covenants including maintenance of certain
financial ratios, net worth requirements and restrictions on future borrowings
and payment of dividends, with which InnoServ was in compliance at July 31,
1996.
10
Subsequent to July 31, 1996, the expiration date of the revolving line of
credit was extended from August 12, 1996, to October 12, 1996, and the limit of
the line of credit was reduced to $500,000, the amount outstanding at August 12,
1996. InnoServ has completed negotiations with another financial institution
as to the terms of secured financing to replace the bank loan agreement and is
in the process of preparing the loan documentation. InnoServ believes the new
agreement will be completed prior to the October 12, 1996, expiration date of
the bank line of credit.
InnoServ does not foresee the need to make any significant capital
purchases in the next twelve months and believes sufficient funds will be
available from its operations and line of credit to meet its working capital
requirements.
CAUTIONARY STATEMENT
The statements in this Management's Discussion and Analysis and elsewhere
in this report that are forward looking are based on current expectations which
involve numerous risks and uncertainties. InnoServ's future results of
operations and financial condition may differ materially due to many factors
including InnoServ's ability to attract and retain Asset Management contracts,
InnoServ's ability to implement its operating plan, particularly as it relates
to the CT maintenance business, competitive and regulatory conditions in the
healthcare industry generally, and other factors, many of which are beyond the
control of InnoServ.
11
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In December, 1995 InnoServ entered into a $3,000,000 loan agreement. The
loan agreement contains financial covenants including the maintenance of certain
financial ratios, net worth requirements, and restrictions on future borrowings
and payment of dividends. In addition, the obligations under the loan agreement
are secured by a security interest in InnoServ's accounts receivable, inventory
and equipment.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
(a) Exhibits:
The information required by this portion of Item 6 is set forth in the
Index to Exhibits beginning on page 14.
(b) Reports on Form 8-K:
During the three months ended July 31, 1996, no reports were filed by the
Registrant on Form 8-K.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: September 13, 1996
INNOSERV TECHNOLOGIES, INC.
By: /s/ Thomas Hoefert
------------------------
Thomas Hoefert
Vice President and Chief Financial
Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
13
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
--- ----------------------
10.1 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.
11.1 Computation of Per Share Earnings.
27.1 Financial Data Schedule.
14