-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tvv3e2xSgY4HznidQ8ZpfmpCnzN6VvKDpAjB4xw7Fk12iaOh2jzTeg4NE7n3nH3I xaCPUOCX2HdcHQk1bERF3w== 0001047469-98-034481.txt : 19980915 0001047469-98-034481.hdr.sgml : 19980915 ACCESSION NUMBER: 0001047469-98-034481 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980914 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOSERV TECHNOLOGIES INC CENTRAL INDEX KEY: 0000746072 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS REPAIR SERVICES [7600] IRS NUMBER: 963619990 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13608 FILM NUMBER: 98708946 BUSINESS ADDRESS: STREET 1: 320 WESTWAY STREET 2: STE 520 CITY: ARLINGTON STATE: TX ZIP: 76018 BUSINESS PHONE: 8008485385 MAIL ADDRESS: STREET 1: 320 WESTWAY STREET 2: STE 250 CITY: ARLINGTON STATE: TX ZIP: 76018 FORMER COMPANY: FORMER CONFORMED NAME: MMI MEDICAL INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q 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 JULY 31, 1998 [ ] 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 11, 1998, the Registrant had outstanding 3,009,395 shares of its common stock, $.01 par value. INNOSERV TECHNOLOGIES, INC. FORM 10-Q JULY 31, 1998 TABLE OF CONTENTS
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of July 31, 1998 and April 30, 1998 3 Consolidated Statements of Operations for the three months ended July 31, 1998 and 1997 4 Consolidated Statements of Cash Flows for the three months ended July 31, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 INDEX TO EXHIBITS 16
2 INNOSERV TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
July 31, 1998 April 30, (Unaudited) 1998 ----------- -------- ASSETS Current assets Cash and cash equivalents $ 4,605 $ 3,088 Receivables 3,784 3,821 Inventory: Spare parts and supplies, net 3,803 4,031 Inventory held for sale 750 878 Prepaid expenses 747 572 -------- -------- Total current assets 13,689 12,390 Capital equipment, net 2,701 3,042 Goodwill, net 3,202 3,240 Other assets 41 41 -------- -------- $ 19,633 $ 18,713 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 317 $ 479 Accounts payable 5,146 5,974 Accrued liabilities 2,158 2,283 Deferred revenues 3,617 4,248 -------- -------- Total current liabilities 11,238 12,984 Shareholders' equity Preferred stock, $.01 par value: 5,000,000 shares authorized; 700,000 shares of Series B issued at July 31, 1998 7 -- Common stock, $.01 par value: 10,000,000 shares authorized; 3,009,395 issued 30 30 Paid-in capital 20,103 17,324 Accumulated deficit (11,745) (11,625) -------- -------- Total shareholders' equity 8,395 5,729 -------- -------- $ 19,633 $ 18,713 -------- -------- -------- --------
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, -------------------- 1998 1997 -------- -------- Revenues: Service $ 8,229 $ 7,534 Sale of parts and equipment 922 1,610 -------- -------- Total revenues 9,151 9,144 Costs: Cost of service 7,260 6,890 Cost of parts and equipment 408 711 -------- -------- Total cost of operations 7,668 7,601 Gross profit 1,483 1,543 Depreciation and amortization 381 394 Selling and administrative 1,207 1,384 -------- -------- Loss from operations (105) (235) Interest expense, net 3 17 -------- -------- Loss before income taxes (108) (252) Provision for income taxes 12 -- -------- -------- Net loss $ (120) $ (252) -------- -------- -------- -------- Net loss per share - basic and diluted $ (.04) $ (.05) -------- -------- -------- -------- Weighted average shares - basic and diluted 3,009 5,036 -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. 4 INNOSERV TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Three Months Ended July 31, -------------------- 1998 1997 -------- -------- Cash flows from: Operations: Net loss $ (120) $ (252) Adjustments to reconcile net loss to net cash flows from operations: Depreciation and amortization 381 394 Changes in assets and liabilities: Receivables 37 822 Inventory 356 (135) Prepaid expenses (175) 125 Accounts payable (828) 368 Accrued liabilities (125) (309) Deferred revenues (631) (144) Other assets -- 2 -------- -------- Net cash provided by (used for) operations (1,105) 871 Investing activities: Purchase of equipment (2) (8) -------- -------- Net cash used for investing activities (2) (8) Financing activities: Net proceeds from issuance of Preferred Stock 2,786 -- Payments on long-term debt (162) (121) -------- -------- Net cash provided by (used for) financing activities 2,624 (121) -------- -------- Net increase in cash and cash equivalents 1,517 742 Cash and cash equivalents at beginning of period 3,088 1,806 -------- -------- Cash and cash equivalents at end of period $ 4,605 $ 2,548 -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. 5 INNOSERV TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 31, 1998 (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, 1998 and 1997, 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 regulations, 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, 1998, filed with the Securities and Exchange Commission. The results of operations for the three months ended July 31, 1998, are not necessarily indicative of the results that may be expected for the year ending April 30, 1999. Certain reclassifications have been made in the prior year's consolidated financial statements to conform to the fiscal 1999 presentation. 2. INTEREST EXPENSE, NET Interest expense is net of interest income of $40,000 and $16,000 for the periods ended July 31, 1998 and 1997, respectively. 3. SUPPLEMENTAL CASH FLOW DISCLOSURE Interest and income taxes paid in the three months ended July 31, 1998 and 1997 were as follows:
Three Months Ended July 31, --------------------- 1998 1997 -------- -------- Interest $ 45,000 $ 25,000 Income taxes $ 13,000 $ 4,000
6 INNOSERV TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 1998 (UNAUDITED) 4. EARNINGS PER SHARE 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 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. 5. LONG-TERM DEBT On April 14, 1997, InnoServ entered into a new loan agreement with a bank pursuant to which amounts outstanding under InnoServ's prior revolving line of credit and term loan agreements with the bank were converted into a new term loan aggregating $1,198,000. Borrowings under the new term loan bear interest at the rate of prime (8.5% at July 31, 1998) plus 1% per annum. Monthly principal installments of $54,000 plus interest are required through January 8, 1999. Obligations under the loan agreement are secured by a security interest in InnoServ's accounts receivable, inventory and capital equipment. The loan agreement contains financial covenants including maintenance of certain financial ratios, net worth requirements and restrictions on future borrowings and payment of dividends. As a result of the loss for the period, InnoServ failed to meet the cash flow ratio under the loan agreement as of July 31, 1998. InnoServ's bank waived this event of default through January 8, 1999. 6. MERGER AGREEMENT On May 19, 1998, InnoServ entered into an Agreement and Plan of Merger (the "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 payment to MEDIQ Incorporated ("MEDIQ") pursuant to a Stock Purchase Agreement dated November 13, 1997 (the "MEDIQ Agreement"), holders of InnoServ common stock will receive a range of consideration between approximately $3.97 and $4.25 per share, depending upon the final amount payable to MEDIQ. 7 INNOSERV TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 1998 (UNAUDITED) 6. MERGER AGREEMENT (CONTINUED) 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, upon consummation of the Merger MEDIQ would have been entitled to $6,437,994, based upon the Merger consideration. 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 percent 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 (the "Escrow Agreement"). In a letter agreement among InnoServ and MEDIQ, the parties agreed to submit such dispute to binding arbitration pursuant to the terms of the MEDIQ Agreement to determine the amount MEDIQ and/or holders of outstanding shares of InnoServ's common stock on the effective date will receive pursuant to the Escrow Agreement. 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. MEDIQ has not specified the nature of its concerns and, in depositions taken in connection with the arbitration proceedings referenced herein, MEDIQ's Chief Executive Officer and its outside counsel have testified that they knew of no facts to suggest that the representations are untrue or that the description is inaccurate. 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 nor will it effect InnoServ's or GE's obligations under the Merger Agreement. It is unlikely that the amount MEDIQ is entitled to receive will be finally resolved before the Merger is consummated. Should MEDIQ ultimately obtain a final judgment against InnoServ that it is owed more than the sum of the MEDIQ Payment and the Escrow Payment, InnoServ would be responsible for payment of that excess amount. 8 INNOSERV TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 1998 (UNAUDITED) 6. MERGER AGREEMENT (CONTINUED) 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 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 waiting period under 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 or FTC did not grant 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. InnoServ has called a Special Meeting of Shareholders ("Special Meeting") to be held on September 15, 1998 at 8:00 a.m., central daylight time, at the Hilton Arlington Hotel located at 2401 E. Lamar Boulevard, Arlington, Texas 76006, to consider and vote upon a proposal to approve and adopt the Merger Agreement and the Merger. Holders of record of InnoServ common stock at the close of business on August 27, 1998 are entitled to notice of, and to vote at, the Special Meeting. Proxy materials were mailed to holders of record on August 31, 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. 9 INNOSERV TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 1998 (UNAUDITED) 6. MERGER AGREEMENT (CONTINUED) GE and InnoServ will close the Merger transaction as soon as all necessary approvals are obtained, which is currently expected to occur on or shortly after September 15, 1998, the date of the Special Meeting. As of July 31, 1998, InnoServ recorded prepaid expenses of $284,000 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 $340,000, will be charged to income. 7. PREFERRED STOCK 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. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FIRST QUARTER FISCAL 1999 COMPARED TO FIRST QUARTER FISCAL 1998 Consolidated revenues for the first quarter of fiscal 1999 were $9,151,000, essentially unchanged from the first quarter of fiscal 1998 revenues of $9,144,000. Revenues from asset management and multi-vendor services increased approximately $595,000 as InnoServ continued to focus on the growing market for these types of services. Revenues from magnetic resonance imaging ("MRI") maintenance service agreements increased approximately $130,000 primarily as a result of new service agreements. Revenues from computed tomography ("CT") maintenance service agreements increased approximately $130,000 primarily as a result of additional time and material billings associated with such agreements. Offsetting these increases, revenues from the sale of parts and equipment declined approximately $690,000 and revenues from InnoServ's diagnostic mobile imaging operations declined approximately $160,000 due to lower customer demand for parts and the mobile units, respectively. Cost of operations increased $67,000 from the same period in the prior fiscal year. Gross profit as a percentage of revenues decreased to 16 percent in the first quarter of fiscal 1999 as compared to gross profit of 17 percent in the prior year's first quarter. The decrease in gross profit as a percentage of revenues is the result of lower gross profit margins generally on asset management contracts awarded to InnoServ during the past year due to competitive pricing in the marketplace. Selling and administrative expenses decreased $177,000, or 13 percent, from the prior year primarily as a result of lower staffing in sales and administration following the announcement of the pending merger with General Electric Company. Depreciation and amortization expenses decreased $13,000 from the same period in the prior fiscal year primarily as a result of the completed depreciation of certain capital equipment. The loss before income taxes for the first quarter of fiscal 1999 was $108,000 as compared to a $252,000 loss in the first quarter of fiscal 1998. 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. Additionally, due to the broad range of equipment serviced under asset management and multi-vendor service agreements, InnoServ experienced an increasing utilization of other service providers to supplement InnoServ's own staff of field service engineers to service equipment under such maintenance service agreements and a greater need to source repair parts from third parties rather than utilizing InnoServ's existing inventory of spare parts. In the first quarter of fiscal 1999, InnoServ recorded a tax provision of $12,000 for income taxes due to certain states in which InnoServ conducts business. InnoServ did not recognize a tax benefit from the operating losses for the first quarter of fiscal 1998 or fiscal 1999. Under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," net operating losses enter into the calculation of deferred tax assets and liabilities. At July 31, 1998, InnoServ had a net deferred tax asset before valuation allowance of approximately $6,460,000, primarily as a result of net operating 11 losses and tax credit carryforwards. Due to the cumulative losses incurred in recent years, the deferred tax assets do not 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. MERGER AGREEMENT On May 19, 1998, InnoServ entered into an Agreement and Plan of Merger (the "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 6 of the Notes to Consolidated Financial Statements). The Merger is subject to approval by InnoServ's shareholders, government regulatory approval and other customary contingencies. 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. A Special Meeting of Shareholders will be held on September 15, 1998 (the "Special Meeting") to consider and vote upon a proposal to approve and adopt the Merger Agreement and Merger. 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. GE and InnoServ will close the Merger transaction as soon as all necessary approvals are obtained, which is currently expected to occur on or shortly after September 15, 1998, the date of the Special Meeting. Should the Merger not close as expected, it could have a material adverse effect on InnoServ's ongoing business due to anticipated termination of employees and difficulty in attracting new employees and customers. LIQUIDITY AND CAPITAL RESOURCES At July 31, 1998, InnoServ had working capital of $2,451,000, of which $4,605,000 was in cash and cash equivalents. Cash and cash equivalents increased by $1,517,000 for the three months ended July 31, 1998 primarily as a result of $2,786,000 in net proceeds received from GE for the issuance of 700,000 shares of a newly created Series B of Preferred Stock of InnoServ. Operations used $1,105,000 of cash for the three month period ended July 31, 1998, primarily as a result of net payments totaling $828,000 of accounts payable and $125,000 of accrued liabilities and a reduction in deferred revenues of $631,000 as services were provided in the period for which payment had been received in a prior period. Cash was used for the prepayment of $175,000 of expenses primarily for costs incurred in conjunction with the Merger Agreement with GE. Offsetting these negative cash flows were the non-cash effect of depreciation and amortization of $381,000 and a reduction in inventory of $356,000 due to the amortization of spare parts inventory and the sale of x-ray tubes and equipment held for resale. InnoServ also made debt payments of $162,000. InnoServ's allowance for doubtful accounts at July 31, 1998 was $719,000, 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. 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 pay their debts and have forced some providers out of business. 12 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 July 31, 1998) plus 1% per annum. Monthly principal installments of $54,000 plus interest are required through January 8, 1999. Obligations under the loan agreement are secured by a security interest in InnoServ's accounts receivable, inventory and capital equipment. The loan agreement contains financial covenants including maintenance of certain financial ratios, net worth requirements and restrictions on future borrowings and payment of dividends. As a result of the loss for the period, InnoServ failed to meet the cash flow ratio under the loan agreement as of July 31, 1998. InnoServ's bank waived this event of default through January 8, 1999. InnoServ believes it has sufficient cash resources to meet its operating needs and does not anticipate making any significant capital purchases for the next twelve months. YEAR 2000 ISSUE 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 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. 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: The information required by this portion of Item 6 is set forth in the Index to Exhibits beginning on page 16. (b) Reports on Form 8-K: During the three months ended July 31, 1998, no reports were filed by the Registrant on Form 8-K. 14 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: September 11, 1998 INNOSERV TECHNOLOGIES, INC. By: /s/ Thomas Hoefert -------------------------------------------- Thomas Hoefert Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 15 INDEX TO EXHIBITS Exhibit No. Description of Exhibit ------- ---------------------- 2.1 First Amended and Restated Agreement and Plan of Merger dated as of May 19, 1998 by and among General Electric Company, Diamond Merger Sub, Inc. and Registrant (previously filed as an appendix to the Registrant's Information Statement on Schedule 14A dated August 31, 1998). 4.1 Stock Purchase Agreement dated November 13, 1997 by and among Registrant, MEDIQ Incorporated and MEDIQ Investment Services (previously filed as an exhibit to the Registrant's Form 8-K dated November 13, 1997). 10.1 Agreement dated May 14, 1998 amending the Bonus Agreement dated December 20, 1996, as amended, and the Letter Agreement of Employment dated December 8, 1995 between Registrant and Michael G. Puls. 10.2 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 and Trust, N.A.) (previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended April 30, 1998). 27.1 Financial Data Schedule. 16 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 May 14, 1998 Mr. Michael G. Puls President and CEO 3020 Arbor Oaks Arlington, Texas 76006 Re: Amendment to Bonus Agreement between InnoServ Technologies, Inc. (the "Company") and Michael G. Puls (the "Executive") dated December 20, 1996, as amended (the "Bonus Agreement") and to Employment Offer Agreement between the Company and the Executive dated December 8, 1995 (the "Offer Agreement," and together with the Bonus Agreement, the "Agreements"). Dear Mike: The Company is currently engaged in discussions with General Electric Company ("GE") concerning a possible merger of the Company with an indirect, wholly-owned subsidiary of GE. As part of such discussions, GE has requested that certain provisions in the Agreements be amended. This Letter Agreement is to confirm our understanding and agreement with respect to the following amendments, which amendments shall be effective only upon occurrence of the effective date (the "Effective Date") of the aforementioned merger: AMENDMENT TO BONUS AGREEMENT: 1. The first sentence of Paragraph 1.a. is hereby deleted in its entirety and the following inserted in place thereof: "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 $307,500, less all applicable withholdings (the "Bonus"). AMENDMENT TO OFFER AGREEMENT: 1. The first two sentences of the second paragraph on page 2 are hereby deleted and the following inserted in place thereof: "The Company may, at any time and for any reason, terminate your employment without any liability to you whatsoever except as expressly provided in this letter. If your employment is terminated by the Company for any reason other than for cause (which shall mean for all purposes herein fraud, dishonesty or willful misconduct), the Company will pay to you, within 5 business days after the date of such termination, a lump sum payment equal to the pro rata 17 portion of your base salary (as set forth in the first sentence of the second paragraph of this letter) (a) for the period beginning on the date of such termination and ending on the twenty month anniversary of the Effective Date if such termination occurs on or before the eight month anniversary of the Effective Date; or (b) for the period beginning on the date of such termination and ending on the first year anniversary of such termination if such termination occurs after the eight month anniversary of the Effective Date. If at any time following the 60th day after the Effective Date, you choose voluntarily to terminate your employment, the Company will pay to you, within 5 business days after the date of such termination, a lump sum payment equal to the pro rata portion of your base salary (as set forth in the first sentence of the second paragraph of this letter) for the period beginning on the date of such termination and ending on first year anniversary of such termination." 3. The first, second and third sentences of the third paragraph on page 2 are hereby deleted and the following inserted in place thereof: "Furthermore, if (a) at any time after the Effective Date and before the eight month anniversary of the Effective Date, the Company terminates your employment other than for cause or (b) if at any time following the 60th day after the Effective Date and before the eight month anniversary of the Effective Date you choose to voluntarily terminate your employment, the Company will pay to you, within 5 business days after the date of such termination, a lump sum payment equal to $42,000." AMENDMENT APPLICABLE TO BOTH AGREEMENTS: 4. Notwithstanding anything to the contrary in the Agreements (as amended by this Letter Agreement), any and all payments to the Executive under the Agreements (as modified by this Letter Agreement), shall be reduced (but not below zero) so that the present value, as determined in accordance with Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code"), of such payments plus any other payments that must be taken into account for purposes of any computation relating to the Executive under Section 280G(b)(2)(A)(ii) of the Code, shall not in the aggregate, exceed 2.99 times the Executive's "base amount", as such term is defined in Section 280G(b)(3) of the Code. The Company and the Executive agree that the Executive's "base amount" for these purposes equals $251,606. Notwithstanding any other provision hereof, no reduction in payments under the limitation contained in the immediately preceding sentence shall be applied to payments hereunder which do not constitute "excess parachute payments" within the meaning of the Code. Any payments in excess of the limitation of this Section 4 or otherwise determined to be "excess parachute payments" made to the Executive hereunder shall constitute a loan from the Company to the Executive, resulting in an amount owing from the Executive to the Company with interest from the date of receipt by the Executive to the date of repayment (or offset) at the applicable federal rate under Section 1274(d) of the Code, compounded semi-annually, which shall be payable to the Company upon demand. It is the Company's intent not to make any payments to the Executive that constitute "excess parachute payments" under Section 280G of the Code, and this Section 4 shall be construed strictly in favor of such intent. If the foregoing accurately sets forth the principal terms of our mutual intentions and understandings with respect to these amendments to the Agreements, please execute and return an copy of this Letter Agreement. 18 Sincerely yours, InnoServ Technologies, Inc. By: /s/ DUDLEY RAUCH ------------------------------------- Name: Dudley Rauch Title: Chairman of the Board CONFIRMED, ACKNOWLEDGED AND AGREED ON THIS 15th DAY OF MAY, 1998. /s/ MICHAEL G. PULS - ---------------------------------------- Michael G. Puls 19 EX-27.1 3 EXHIBIT 27.1
5 1,000 3-MOS APR-30-1999 MAY-01-1998 JUL-31-1998 4,605 0 4,193 719 4,553 13,689 27,051 24,350 19,633 11,238 317 7 0 30 8,358 19,633 922 9,151 408 7,668 381 46 43 (108) 12 (120) 0 0 0 (120) (.04) (.04)
-----END PRIVACY-ENHANCED MESSAGE-----