UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JANUARY 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 0-13608
INNOSERV TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3619990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 WESTWAY, SUITE 530, ARLINGTON, TEXAS 76018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 468-3377
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
At March 10, 1997, the Registrant had outstanding 5,035,833 shares of its
common stock, $.01 par value.
INNOSERV TECHNOLOGIES, INC.
FORM 10-Q
JANUARY 31, 1997
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of January 31, 1997 and April 30, 1996 3
Consolidated Statements of Operations for the three months ended
January 31, 1997 and 1996 4
Consolidated Statements of Operations for the nine months ended
January 31, 1997 and 1996 5
Consolidated Statements of Cash Flows for the nine months ended
January 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
INDEX TO EXHIBITS 15
2
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
January 31,
1997 April 30,
(Unaudited) 1996
----------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 1,551 $ 941
Receivables 4,445 5,238
Inventory:
Spare parts and supplies, net 4,966 5,580
Inventory held for sale 983 1,878
Prepaid expenses 268 350
------- -------
Total current assets 12,213 13,987
Equipment, net 4,945 6,186
Goodwill, net 3,430 3,544
Other assets 55 123
------- -------
$20,643 $23,840
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 1,046 $ 862
Accounts payable 4,045 4,613
Accrued liabilities 2,804 3,090
Deferred revenues 3,329 4,399
------- -------
Total current liabilities 11,224 12,964
Long-term debt 500 910
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 (8,435) (7,388)
------- -------
Total shareholders' equity 8,919 9,966
------- -------
$20,643 $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
January 31,
---------------------
1997 1996
------- -------
Revenues $10,231 $11,062
Costs and expenses:
Cost of operations 8,129 9,263
Depreciation and amortization 499 493
Selling and administrative 1,524 2,222
Interest expense (income), net 43 (14)
------- -------
Total costs and expenses 10,195 11,964
------- -------
Income (loss) before income taxes 36 (902)
Benefit for income taxes -- (362)
------- -------
Net income (loss) $ 36 $ (540)
------- -------
------- -------
Per share information:
Net income (loss) $ .01 $ (.11)
------- -------
------- -------
Weighted average shares outstanding 5,036 5,037
------- -------
------- -------
The accompanying notes are an integral part of these financial statements.
4
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Nine Months Ended
January 31,
--------------------
1997 1996
------- -------
Revenues $32,703 $34,928
Costs and expenses:
Cost of operations 27,273 27,976
Depreciation and amortization 1,515 1,479
Selling and administrative 4,823 6,185
Interest expense, net 139 70
------- -------
Total costs and expenses 33,750 35,710
------- -------
Loss before income taxes (1,047) (782)
Benefit for income taxes -- (313)
------- -------
Net loss $(1,047) $ (469)
------- -------
------- -------
Per share information:
Net loss $ (.21) $ (.09)
------- -------
------- -------
Weighted average shares outstanding 5,036 5,037
------- -------
------- -------
The accompanying notes are an integral part of these financial statements.
5
INNOSERV TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
January 31,
-------------------
1997 1996
-------- -------
Cash flows from:
Operations -
Net loss $ (1,047) $ (469)
Adjustments to reconcile net loss to
net cash flows from operations:
Depreciation and amortization 1,515 1,479
Gain on disposal of equipment -- (68)
Deferred income taxes -- (57)
Changes in assets and liabilities:
Receivables 793 1,019
Inventory 1,509 (896)
Prepaid expenses 82 (92)
Other assets 68 (342)
Accounts payable (568) 1,006
Accrued liabilities (286) (1,101)
Deferred revenues (1,070) 876
-------- -------
Net cash provided by operations 996 1,355
Investments and acquisitions -
Sale of equipment -- 180
Purchase of equipment (160) (1,085)
-------- -------
Net cash used for investments and acquisitions (160) (905)
Financing activities -
Borrowings from line of credit 242 800
Proceeds from long-term debt -- 1,500
Principal payments of long-term debt (468) (3,965)
-------- -------
Net cash used for financing activities (226) (1,665)
-------- -------
Net increase (decrease) in cash and cash equivalents 610 (1,215)
Cash and cash equivalents at beginning of period 941 1,827
-------- -------
Cash and cash equivalents at end of period $ 1,551 $ 612
-------- -------
-------- -------
The accompanying notes are an integral part of these financial statements.
6
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997
(UNAUDITED)
1. GENERAL
The consolidated financial statements included herein have been prepared by
InnoServ Technologies, Inc. ("InnoServ") without audit, include all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results of operations for the three months and nine months ended January 31,
1997 and 1996, pursuant to the rules and regulations of the Securities and
Exchange Commission, and include the accounts of InnoServ and its consolidated
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. Any and all adjustments made are of a normal and recurring nature in
accordance with Rule 10-01(b)(8) of Regulation S-X. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulation, however, InnoServ believes that
the disclosures in such financial statements are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with InnoServ's annual report on Form 10-K for the fiscal year
ended April 30, 1996, filed with the Securities and Exchange Commission. The
results of operations for the nine months ended January 31, 1997, 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 $5,000 and $4,000 for the
three months ended January 31, 1997 and 1996, respectively.
Interest expense is net of interest income of $28,000 and $20,000 for the
nine months ended January 31, 1997 and 1996, respectively.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest and income taxes paid in the nine months ended January 31, 1997
and 1996 were as follows:
Nine Months Ended
January 31,
----------------------
1997 1996
-------- --------
Interest $174,000 $111,000
Income taxes $ 53,000 $ 17,000
7
INNOSERV TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997
(UNAUDITED)
4. LONG-TERM DEBT
InnoServ has a loan agreement which contains a $1,000,000 term loan
expiring January 30, 1999, and a $500,000 revolving line of credit for working
capital, against which InnoServ had outstanding borrowings of $498,000 at
January 31, 1997. Obligations under the loan agreement are secured by a security
interest in InnoServ's accounts receivable, inventory and equipment. The
principal of the term loan is payable in equal quarterly installments of
$125,000. Interest on the term loan is payable quarterly and is payable monthly
under the revolving line of credit. The interest rate on both the term loan and
the revolving line of credit is 1.0 percent above the prime rate and was 9.25
percent at January 31, 1997. The loan agreement contains financial covenants
including maintenance of certain financial ratios, net worth requirements and
restrictions on future borrowings and payment of dividends. InnoServ was in
compliance with such financial covenants at January 31, 1997.
The revolving line of credit expires on March 12, 1997, at which time
InnoServ expects to restructure the loan agreement with its bank to provide for
a new $1,500,000 term loan and to eliminate the revolving line of credit. The
new term loan is expected to expire on January 30, 1999, and will require
monthly principal and interest payments. The interest rate is expected to be
1.0 percent above the prime rate.
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 January 31, 1997, $149,000 of this amount had been paid to 29 employees and
this reorganization was substantially complete. An additional $6,000 in
employee termination benefits are expected to be paid in the fourth quarter of
fiscal 1997.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER FISCAL 1997 COMPARED TO THIRD QUARTER FISCAL 1996
Consolidated revenues for the third quarter of fiscal 1997 were $10,231,000
as compared to $11,062,000 in the same period of fiscal 1996, a decline of
$831,000, or 8 percent. Revenues from computed tomography ("CT") maintenance
service agreements decreased approximately $850,000 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 equipment sales
decreased approximately $490,000 primarily as a result of the sale of
refurbished equipment in the third quarter of fiscal 1996. Revenues at Advanced
Imaging Technologies, Inc. ("AIT") were approximately $210,000 lower than the
revenues in the same period in fiscal 1996 as a result of a decline in revenues
from maintenance service agreements and lower sales of x-ray film, chemistry and
related accessories. Offsetting these declines, revenues from Asset Management
and multi-vendor services increased approximately $740,000 as InnoServ continues
to focus on the growing market for these type services.
Cost of operations decreased $1,134,000 from the same period in fiscal 1996
and as a percent of revenues declined from 84 percent to 79 percent. The fiscal
1996 cost of operations included a $701,000 charge for physical inventory
adjustments and unfavorable production variances associated with the reloading
and rework of CT tube inventory and $98,000 of restructuring expenses as a
result of the relocation of InnoServ's headquarters operations. These costs
were offset in the quarter by $359,000 for a payment received against an
insurance claim. The decrease in cost of operations in fiscal 1997 also
included approximately $410,000 as a result of the lower equipment sales and
approximately $220,000 as a result of cost reductions associated with InnoServ's
maintenance business.
Selling and administrative expenses decreased $698,000, or 31 percent, from
the prior year primarily as a result of savings from the consolidation of
InnoServ's administrative functions, lower selling expenses and restructuring
expenses of $313,000 recorded in fiscal 1996 for the relocation of InnoServ's
headquarters operations. Depreciation and amortization expenses did not change
significantly quarter to quarter.
Income before income taxes for the third quarter of fiscal 1997 was $36,000
as compared to a loss of $902,000 in the third quarter of fiscal 1996. The
results for the third quarter of fiscal 1997 represent InnoServ's first
profitable quarter since the second quarter of fiscal 1996. The improved
performance was primarily the result of cost savings from the consolidation of
InnoServ's administrative functions and actions taken over the past year in
InnoServ's maintenance service operations to provide services required by
customers on a more cost effective basis. This included selective personnel
reductions, changes in employee benefit and incentive compensation programs, and
lower utilization of outside labor, services and materials. InnoServ is
continuing to implement cost containment actions in response to the declining
revenues from CT maintenance agreements.
9
InnoServ did not recognize a tax provision in the third quarter of fiscal
1997 as net operating losses were available from previous periods to offset the
operating income for the current quarter. At January 31, 1996, the effective
tax rate for fiscal 1996 was estimated to be 40 percent and a corresponding
benefit for income taxes was recorded for the three months ended January 31,
1996.
NINE MONTHS FISCAL 1997 COMPARED TO NINE MONTHS FISCAL 1996
Consolidated revenues for the first nine months of fiscal 1997 were
$32,703,000 as compared to $34,928,000 in the same period of fiscal 1996, a
decline of $2,225,000, or 6 percent. Revenues from CT maintenance service
agreements decreased approximately $4,740,000 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 equipment sales
decreased approximately $610,000 primarily as a result of lower customer demand
for refurbished equipment. Revenues at AIT were approximately $560,000 lower as
a result of lower sales of x-ray film, chemistry and related accessories.
Additionally, revenues from InnoServ's diagnostic mobile imaging operations were
approximately $440,000 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 $3,950,000 as
InnoServ continues to focus on the growing market for these type services.
Cost of operations decreased $703,000 from the same period in the prior
fiscal year primarily due to the decline in revenues; however, as a percent of
revenues, cost of operations increased from 80 percent to 83 percent. This
increase as a percent of revenues was primarily the 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 throughout
the nine months due to certain fixed support costs and the need to retain field
service technicians in certain locations despite a declining revenue base in
those locations. Selling and administrative expenses decreased $1,362,000, or
22 percent, from the prior year primarily as a result of savings from the
consolidation of InnoServ's administrative functions, lower selling expenses and
restructuring expenses of $313,000 recorded in fiscal 1996 for the relocation of
InnoServ's headquarters operations. Depreciation and amortization expenses did
not change significantly between the two periods.
The loss before income taxes for the first nine months of fiscal 1997
was $1,047,000 as compared to a loss of $782,000 in the first nine months of
fiscal 1996. The loss in fiscal 1997 was primarily the result of unfavorable
operating margins associated with InnoServ's maintenance business during the
first half of fiscal 1997. Because InnoServ employs field service engineers
over a wide geographic area, the revenues were not sufficient in certain
locations to cover the direct and indirect costs of providing maintenance and
repair services. InnoServ is continuing to implement plans to reorganize its
service operations to more cost effectively provide the services required by
its customers and to discontinue service in selected locations upon the
expiration of the existing maintenance agreements in those locations.
InnoServ believes these actions, coupled with strategic changes it is making
in the operations of the CT and Asset Management businesses and efforts to
expand the revenue base, will improve InnoServ's operations.
10
InnoServ did not recognize a tax benefit from the operating loss for the
first nine months 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
January 31, 1997, InnoServ had an estimated net deferred tax asset of
$5,450,000, primarily as a result of net operating losses. In accordance with
SFAS 109, InnoServ recorded a valuation allowance for the full amount of the net
deferred tax asset. The ultimate realization of the deferred tax asset depends
on the ability of InnoServ to generate sufficient taxable income in the future.
While InnoServ believes the deferred tax asset will be substantially realized by
future operating results, due to the cumulative losses incurred in recent years
the deferred tax assets do not currently meet the criteria for recognition under
SFAS 109. At January 31, 1996, the effective tax rate for fiscal 1996 was
estimated to be 40 percent and a corresponding benefit for income taxes was
recorded for the nine months ended January 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1997, InnoServ had working capital of $989,000, of which
$1,551,000 was in cash and cash equivalents. Operations provided $996,000 of
cash for the nine months ended January 31, 1997, primarily as a result of the
non-cash effect of depreciation and amortization of $1,515,000 on the net loss
of $1,047,000 and a $1,509,000 reduction in inventory due to a decline in CT
tube inventory as a result of lower requirements for inventory because of the
declining number of CT maintenance service agreements in effect and management
controls on purchases, the sale of refurbished CT and magnetic resonance imaging
scanners, and the amortization of spare parts inventory. Additionally,
receivables declined $793,000 due to successful collection activities and lower
revenues. These funds were used to reduce accounts payable by $568,000 and
accrued liabilities by $286,000. Deferred revenues also declined $1,070,000 as
a result of the timing of cash receipts from customers, a lower base of
maintenance agreements in effect and the shipment of refurbished scanners in the
nine months for which payment had been received as of April 30, 1996.
InnoServ's allowance for doubtful accounts at January 31, 1997, was
$890,000, or 17 percent of gross accounts receivable. InnoServ's customers
include hospitals, physician practices, outpatient clinics and imaging centers.
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 and other factors, InnoServ has
experienced difficulty in collecting on certain of its accounts receivable.
InnoServ has a loan agreement which contains a $1,000,000 term loan
expiring January 30, 1999, and a $500,000 revolving line of credit for working
capital, against which InnoServ had outstanding borrowings of $498,000 at
January 31, 1997. Obligations under the loan agreement are secured by a security
interest in InnoServ's accounts receivable, inventory and equipment. The
principal of the term loan is payable in equal quarterly installments of
$125,000. Interest on the term loan is payable quarterly and is payable monthly
under the revolving line of credit. The interest rate on both the term loan and
the revolving line of credit is 1.0 percent above the prime rate and was 9.25
percent at January 31, 1997. The loan agreement contains financial covenants
including maintenance of certain financial ratios, net worth requirements and
restrictions on future borrowings
11
and payment of dividends. InnoServ was in compliance with such financial
covenants at January 31, 1997.
The revolving line of credit expires on March 12, 1997, at which time
InnoServ expects to restructure the loan agreement with its bank to provide for
a new $1,500,000 term loan and to eliminate the revolving line of credit. The
new term loan is expected to expire on January 30, 1999, and will require
monthly principal and interest payments. The interest rate is expected to be
1.0 percent above the prime rate.
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 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, the availability of financing, and other factors,
many of which are beyond the control of InnoServ.
12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The information required by this portion of Item 6 is set forth in the
Index to Exhibits beginning on page 15.
(b) Reports on Form 8-K:
During the three months ended January 31, 1997, no reports were filed by
the Registrant on Form 8-K.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: March 10, 1997
INNOSERV TECHNOLOGIES, INC.
By: /s/ Thomas Hoefert
---------------------------------
Thomas Hoefert
Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
14
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.1 Indemnity Agreement dated as of September 17, 1996 by and
between Registrant and Thomas E. Carroll as director.
10.2 Stock Option Agreement dated as of December 11, 1996 by and
between Registrant and Michael G. Puls.
10.3 Bonus Agreement dated December 20, 1996, between Registrant
and Michael G. Puls.
10.4 Bonus Agreement dated December 20, 1996, between Registrant
and Thomas Hoefert.
11.1 Computation of Per Share Earnings.
27.1 Financial Data Schedule.
15