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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
DECISIONONE HOLDINGS CORP.
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-28090 13-3435409
(State or other jurisdiction of (Commission file #) (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
DECISIONONE CORPORATION
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-28411 23-2328680
(State or other jurisdiction of (Commission file #) (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
50 EAST SWEDESFORD ROAD
FRAZER, PENNSYLVANIA 19355
(610) 296-6000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
PRINCIPAL EXECUTIVE OFFICES OF REGISTRANTS)
SECURITIES REGISTERED PURSUANT TO THE SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------------------------------- ----------------------------------------
<S> <C>
DECISIONONE HOLDINGS CORP.:
9 3/4 SENIOR SUBORDINATED NOTES DUE 2007 NONE
DECISIONONE CORPORATION:
11 1/2 SENIOR DISCOUNT DEBENTURES DUE 2009 NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF
THE ACT:
DECISIONONE HOLDINGS CORP.:
COMMON STOCK, $.01 PAR VALUE NONE
</TABLE>
Indicate by check mark whether DecisionOne Holdings Corp. (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 12 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 [CHECK] No_______
Indicate by check mark whether DecisionOne Corporation (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 12 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__________ No [CHECK]
The aggregate market value of the voting stock of DecisionOne Holdings
Corp. held by non-affiliates, based upon the closing price of Common Stock on
September 11, 1997, as reported by the Nasdaq National Market System, was
approximately $44,170,728. In making such calculation, registrant is not making
a determination of the affiliate or non-affiliate status of any holders of
shares of Common Stock. All of the voting stock of DecisionOne Corporation is
held by DecisionOne Holdings Corp.
At September 11, 1997, 12,499,978 shares of DecisionOne Holdings Corp.
common stock were outstanding and one share of DecisionOne Corporation common
stock was outstanding.
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 Form 10-K or any amendment to this
Form 10-K. [CHECKED BOX]
DecisionOne Corporation meets the conditions set forth in General
Instruction I(1) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of DecisionOne Holdings Corp.'s Proxy Statement prepared in
connection with its 1997 Annual Meeting of Stockholders (Part III)
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<PAGE> 2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This amendment to the Registrant's Form 10-K for the fiscal year ended June
30, 1997 (the "1997 Form 10-K") amends and modifies the financial statements and
supplementary data for DecisionOne Holdings Corp. and DecisionOne Corporation
listed in Item 14 which are attached hereto and made a part hereof.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
This amendment to the 1997 Form 10-K amends and modifies the 1997 Form 10-K
to reflect the filing of Exhibits 10.3, 10.21 and 10.22.
<PAGE> 3
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 in Frazer, Pennsylvania
on October 8, 1997.
DECISIONONE HOLDINGS CORP.
By: /s/ THOMAS J. FITZPATRICK
------------------------------------
Thomas J. Fitzpatrick
Vice President and
Chief Financial Officer
<PAGE> 4
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENT OF DECISIONONE HOLDINGS CORP.:
<TABLE>
<S> <C>
Independent Auditors' Report...................................................... F-2
Consolidated Balance Sheets as of June 30, 1997 and 1996.......................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and
1995........................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1997,
1996 and 1995.................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1997 and
1995........................................................................... F-6
Notes to Consolidated Financial Statements........................................ F-7
CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE CORPORATION:
Independent Auditors' Report...................................................... F-26
Consolidated Balance Sheets as of June 30, 1997 and 1996.......................... F-27
Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and
1995........................................................................... F-28
Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1997,
1996 and 1995.................................................................. F-29
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1997 and
1995........................................................................... F-30
Notes to Consolidated Financial Statements........................................ F-31
FINANCIAL STATEMENT SCHEDULES:
Schedule I -- Condensed Financial Information of Registrant (DecisionOne Holdings
Corp. only).................................................................... S-1
Schedule II -- Valuation and Qualifying Accounts.................................. S-5
</TABLE>
F-1
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of DecisionOne Holdings Corp.:
We have audited the accompanying consolidated balance sheets of DecisionOne
Holdings Corp. and subsidiaries (the "Company") as of June 30, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended June 30, 1997. Our
audits also included the financial statement schedules listed in the Index at
Item 14. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in
all material respects, the financial position of DecisionOne Holdings Corp. and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
August 15, 1997
F-2
<PAGE> 6
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 10,877 $ 8,221
Accounts receivable, net of allowances of $14,869 and $9,580......... 127,462 92,650
Consumable parts, net of allowances of $17,889 and $19,537........... 34,518 29,770
Prepaid expenses and other assets.................................... 4,542 5,112
Deferred tax asset................................................... 5,236 8,018
-------- --------
Total current assets......................................... 182,635 143,771
REPAIRABLE PARTS, Net of accumulated amortization of $154,555 and
$105,462............................................................. 199,900 154,970
PROPERTY AND EQUIPMENT................................................. 34,227 32,430
INTANGIBLES............................................................ 191,366 164,659
OTHER ASSETS........................................................... 14,977 18,680
-------- --------
TOTAL ASSETS........................................................... $623,105 $514,510
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................................... $ 4,788 $ 2,321
Accounts payable and accrued expenses................................ 95,516 89,564
Deferred revenues.................................................... 56,600 38,485
Income taxes and other liabilities................................... 4,664 479
-------- --------
Total current liabilities.................................... 161,568 130,849
REVOLVING CREDIT LOAN AND LONG-TERM DEBT............................... 232,721 188,582
OTHER LIABILITIES...................................................... 13,928 14,286
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; authorized 5,000,000 shares; none
outstanding
Common stock, $.01 par value; authorized 100,000,000 shares; issued
and outstanding 27,817,832 shares in 1997 and 27,340,288 shares in
1996.............................................................. 278 273
Additional paid-in capital........................................... 258,331 255,262
Accumulated deficit.................................................. (42,432) (73,516)
Other................................................................ (1,289) (1,226)
-------- --------
Total shareholders' equity................................... 214,888 180,793
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $623,105 $514,510
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES................................................... $785,950 $540,191 $163,020
COST OF REVENUES........................................... 581,860 402,316 113,483
-------- -------- --------
GROSS PROFIT............................................... 204,090 137,875 49,537
OPERATING EXPENSES:
Selling, general and administrative expenses............. 112,870 72,829 21,982
Amortization of intangibles.............................. 23,470 15,673 6,776
-------- -------- --------
OPERATING INCOME........................................... 67,750 49,373 20,779
INTEREST EXPENSE, Net of interest income of $197 in 1997,
$239 in 1996 and $53 in 1995............................. 14,698 14,714 2,468
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(BENEFIT), DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEM..................................................... 53,052 34,659 18,311
PROVISION (BENEFIT) FOR INCOME TAXES....................... 21,968 13,870 (23,104)
-------- -------- --------
INCOME BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEM..................................................... 31,084 20,789 41,415
DISCONTINUED OPERATIONS -- Income from operations of
discontinued products division........................... 1,113
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM........................... 31,084 20,789 42,528
EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $1,284........... 1,927
-------- -------- --------
NET INCOME................................................. $ 31,084 $ 18,862 $ 42,528
======== ======== ========
PRO FORMA INFORMATION (UNAUDITED):
Net income before interest expense adjustment............ $ 31,084
Interest expense adjustment, net of tax.................. (31,267)
--------
Pro forma net loss....................................... $ (183)
========
Pro forma loss per share................................. $ (.01)
========
Pro forma weighted average number of common and common
equivalent shares outstanding......................... 14,200
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 8
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN TOTAL
------------------- ADDITIONAL CURRENCY PENSION SHAREHOLDERS'
NUMBER OF PAID-IN ACCUMULATED TRANSLATION LIABILITY (DEFICIENCY)
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT EQUITY
---------- ------ ---------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994................ 8,920,348 $ 89 $108,358 $(134,906) $ 457 $ (1,625) $ (27,627)
Net income.......................... 42,528 42,528
Adjustment to pension liability..... (80) (80)
Foreign currency translation
adjustment........................ 223 223
Accrued dividends on Series A and B
Redeemable Preferred Stock........ (375) (375)
Exercise of stock options........... 15,000 8 8
----------- ---- -------- --------- ---- ------- --------
BALANCE, JUNE 30, 1995................ 8,935,348 89 107,991 (92,378) 680 (1,705) 14,677
Net income.......................... 18,862 18,862
Adjustment to pension liability..... (143) (143)
Common Stock issued:
Exercise of preemptive rights..... 384,502 4 1,526 1,530
Public offering................... 6,300,000 63 106,250 106,313
Exercise of stock options......... 329,850 3 300 303
Exercise of warrants.............. 118,664 1 598 599
Conversion of Redeemable Preferred
Stock........................... 11,271,924 113 37,529 37,642
Stock issuance costs................ (1,573) (1,573)
Issuance of warrants................ 126 126
Issuance of warrants attached to
Subordinated Debentures........... 3,400 3,400
Foreign currency translation
adjustment........................ (58) (58)
Accrued dividends on Redeemable
Preferred Stock................... (885) (885)
----------- ---- -------- --------- ---- ------- --------
BALANCE, JUNE 30, 1996................ 27,340,288 273 255,262 (73,516) 622 (1,848) 180,793
Net income.......................... 31,084 31,084
Adjustment to pension liability..... (25) (25)
Tax benefit -- disqualifying stock
disposition....................... 2,635 2,635
Foreign currency translation
adjustment........................ (38) (38)
Exercise of stock options........... 477,544 5 434 439
----------- ---- -------- --------- ---- ------- --------
BALANCE, JUNE 30, 1997................ 27,817,832 $278 $258,331 $ (42,432) $ 584 $ (1,873) $ 214,888
=========== ==== ======== ========= ==== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 9
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 31,084 $ 18,862 $ 42,528
Adjustments to reconcile net income to net cash provided
by operating activities:
Income from discontinued operations................... (1,113)
Depreciation.......................................... 13,549 8,309 1,779
Amortization of repairable parts...................... 63,870 37,869 7,688
Amortization of intangibles........................... 23,470 15,673 6,775
Provision for losses on accounts receivable........... 7,849 3,434 1,930
Provision for consumable parts obsolescence........... 2,554 1,171 1,995
Extraordinary item.................................... 1,927
Changes in operating assets and liabilities, net of
effects from companies acquired, which provided
(used) cash:
Accounts receivable................................. (38,365) (1,900) (8,836)
Consumable parts.................................... (6,038) (1,248) 931
Accounts payable and accrued expenses............... 3,885 256 (1,171)
Deferred revenues................................... (25,427) (33,928) 6,811
Net changes in other assets and liabilities......... 12,543 1,469 (20,902)
--------- --------- --------
Net cash provided by operating activities........ 88,974 51,894 38,415
--------- --------- --------
INVESTING ACTIVITIES:
Capital expenditures..................................... (10,540) (7,278) (2,786)
Repairable spare parts purchases, net.................... (86,446) (63,514) (12,154)
Acquisitions of companies and contracts.................. (32,258) (275,562) (39,331)
--------- --------- --------
Net cash used in investing activities............ (129,244) (346,354) (54,271)
--------- --------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................ 31,392
Proceeds from issuance of subordinated debentures........ 30,000
Proceeds from issuance of common stock................... 439 106,313
Payment of subordinated debentures....................... (30,000)
Net proceeds from borrowings............................. 43,625 165,711 17,537
Principal payments under capital leases.................. (1,075) (3,423)
Other.................................................... (63) 29
--------- --------- --------
Net cash provided by financing activities........ 42,926 300,022 17,537
--------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 2,656 5,562 1,681
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............... 8,221 2,659 978
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR..................... $ 10,877 $ 8,221 $ 2,659
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the year for:
Interest.............................................. $ 15,640 $ 14,838 $ 2,065
Income taxes.......................................... 8,381 5,344 1,009
Noncash investing/financing activities:
Issuance of seller notes in connection with
acquisitions........................................ 2,224 587 2,866
Issuance of seller notes in exchange for repairable
parts............................................... 1,855
Repairable parts received in lieu of cash for accounts
receivable.......................................... 1,124
Accretion of accrued dividends........................ 885 375
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1. NATURE OF BUSINESS
DecisionOne Holdings Corp. and its wholly-owned subsidiaries (the
"Company") are providers of multivendor computer maintenance and technology
support services. The Company offers its customers a single-source, independent
(i.e., not affiliated with an original equipment manufacturer, or "OEM")
solution for computer maintenance and technology support requirements, including
hardware maintenance services, software support, end-user/help desk services,
network support and other technology support services. These services are
provided by the Company across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, personal
computers ("PCs") and related peripherals. In addition, the Company provides
outsourcing services for OEMs, software publishers, system integrators and other
independent service organizations. The Company delivers its services through an
extensive field service organization of approximately 4,000 field technicians in
over 150 service locations throughout North America and through strategic
alliances in selected international markets.
Through June 30, 1995, the Company's services predominantly involved the
provision of maintenance services to the midrange computer market. On October
20, 1995, the Company acquired Bell Atlantic Business Systems Services, Inc.
("BABSS") (see Note 4). BABSS provided computer maintenance and technology
support services for computer systems ranging from the data center, which
includes both mainframe and midrange systems, to desk top. Subsequent to the
acquisition, the Company's principal operating subsidiary, Decision Servcom,
Inc., was merged into BABSS, which had changed its name to DecisionOne
Corporation. As a result, DecisionOne Corporation is the principal operating
subsidiary of the Company.
The Company's wholly owned, direct international subsidiaries are not
significant to the Company's consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of DecisionOne Holdings Corp. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Pro Forma Information (Unaudited) -- The pro forma information included in
the accompanying statement of operations and in Note 3 has been prepared to
reflect the Company's recapitalization and merger with Quaker Holding Co.
("Quaker") and related transactions as if these had occurred on July 1, 1996.
Historical earnings per share data for the fiscal years ended June 30, 1997,
1996 and 1995 is not presented as this would not be meaningful.
Cash and Cash Equivalents -- Cash and cash equivalents are highly liquid
investments with remaining maturities of three months or less at the time of
purchase. Cash equivalents, consisting primarily of repurchase agreements with
banks, are stated at cost, which approximates fair market value.
Consumable Parts and Repairable Parts -- In order to provide maintenance
and repair services to its customers, the Company is required to maintain
significant levels of computer parts. These parts are classified as consumable
parts or as repairable parts. Consumable parts, which are utilized during the
repair process, are stated at cost, principally determined using the weighted
average method, less an accumulated allowance for obsolescence and shrinkage.
Consumable parts are reflected in cost of revenues during the period utilized.
Repairable (rotable) parts, which can be refurbished and reused, are stated
at original cost less accumulated amortization. Amortization of repairable parts
is reflected in cost of revenues. Costs of refurbishing repairable parts are
also included in cost of revenues as these costs are incurred. Amortization of
repairable parts is based principally on the composite group method, using
straight-line composite rates.
F-7
<PAGE> 11
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Repairable parts generally have an economic life which corresponds to the normal
life cycle of the related products, currently estimated to be three to five
years.
As consumable and repairable parts are retired, the weighted average gross
amounts at which such parts have been carried are removed from the respective
assets accounts, and charged to the accumulated allowance or accumulated
amortization accounts, as applicable. Periodic revisions to amortization and
allowance estimates are required, based upon the evaluation of several factors,
including changes in product life cycles, usage levels and technology changes.
Changes in these estimates are reflected on a prospective basis unless such
changes result from an extraordinary retirement or from other events or
circumstances which indicate that impairment may exist. Impairment is recognized
when the net carrying value of the parts exceeds the estimated current and
anticipated undiscounted net cash flows. Measurement of the amount of
impairment, if any, is calculated based upon the difference between carrying
value and fair value.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is provided for using the straight-line method over the estimated
useful lives of the depreciable assets. Capitalized equipment leases and
leasehold improvements are amortized over the shorter of the related lease terms
or asset lives. Maintenance and repairs are charged to expense as incurred. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is charged to operations.
Business and Contract Acquisitions -- Business and contract acquisitions
have been accounted for as purchase transactions, with the purchase price of
each acquisition allocated to the assets acquired and liabilities assumed based
upon their respective estimated fair values at the dates of acquisition.
Consistent with the Company's parts retirement accounting methods, the gross
value of parts acquired is generally stated at weighted average cost. Fair value
adjustments, if any, are reflected as adjustments to the respective accumulated
amortization or allowance accounts. The excess of the purchase price over
identified net assets acquired is amortized, on a straight-line basis, over the
expected period of future benefit (see Note 6).
Typical contract acquisitions are comprised primarily of customer
maintenance and support contracts of complementary entities, along with the
accompanying consumable and repairable parts required to support these contracts
and other identifiable intangibles, such as noncompete agreements. Liabilities
assumed in business and contract acquisitions consist primarily of prepaid
amounts related to multi-period customer maintenance and support contracts.
These liabilities are recorded as deferred revenues at acquisition dates and are
recognized as revenues when earned in accordance with the terms of the
respective contracts.
Intangible Assets -- Intangible assets are comprised of excess purchase
price over the fair value of net assets acquired, acquired customer lists and
other intangible assets, including the fair value of contractual profit
participation rights and amounts assigned to noncompete agreements.
Intangible assets, which arise principally from acquisitions, are generally
amortized on a straight-line basis over their respective estimated useful lives
(see Note 6). The Company evaluates the carrying value of intangible assets
whenever events or changes in circumstances indicate that these carrying values
may not be recoverable within the amortization period. Impairment is recognized
when the net carrying value of the intangible asset exceeds the estimated
current and anticipated discounted future net cash flows. Measurement of the
amount of impairment, if any, is calculated based upon the difference between
carrying value and fair value.
Revenue -- The Company enters into maintenance contracts whereby it
services various manufacturers' equipment. Revenues from these contracts are
recognized ratably over the terms of such contracts. Prepaid revenues from
multi-period contracts are recorded as deferred revenues and are recognized
ratably over the term of the contracts.
F-8
<PAGE> 12
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues derived from the maintenance of equipment not under contract are
recognized as the service is performed. Revenues derived from other technology
support services are recognized as the service is performed or ratably over the
term of the contract.
Foreign Currency Translation -- Gains and losses resulting from foreign
currency translation are accumulated as a separate component of shareholders'
equity. Gains and losses resulting from foreign currency transactions are
included in operations.
Credit Risk -- Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base and their dispersion across many industries.
Fair Value of Financial Instruments -- The following disclosures of the
estimated fair value of financial instruments were made in accordance with the
requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies.
Cash and Cash Equivalents, Accounts Receivable, and Accounts
Payable -- The carrying amount of these items are a reasonable estimate of
their fair value.
Short-Term Debt and Long-Term Debt -- As more fully described in Note
8, under its revolving borrowing facility the Company incurs interest at
variable rates based upon market conditions (i.e., based upon the prime
rate or LIBOR). Rates applicable to other debt instruments, which consist
primarily of short-term notes payable in connection with certain
acquisitions, are comparable to those of similar instruments currently
available to the Company. Accordingly, the carrying amount of debt is a
reasonable estimate of its fair value.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates and
assumptions.
Discontinued Operations -- During fiscal 1993, in connection with the sale
of its products division, the Company established estimated liabilities relating
to the settlement of the remaining assets and liabilities of this division. In
1995, the Company revised its estimates as a result of settlement of these
liabilities, and the consolidated statement of operations for 1995 reflects an
increase in net income of $1,113,000 for the change in estimate.
Stock-Based Compensation -- Effective July 1, 1996, the Company adopted the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123 encourages, but does not require, companies to record compensation cost for
stock-based compensation plans at fair value. The Company has elected to
continue to account for stock-based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, as permitted by SFAS 123. Compensation
expense for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock (see Note 11).
Derivative Financial Instruments -- Derivative financial instruments, which
constitute interest rate swap agreements (see Note 8), are periodically used by
the Company in the management of its variable interest rate exposure. Amounts to
be paid or received under interest rate swap agreements are recognized as
interest expense or interest income during the period in which these accrue.
Gains realized, if any, on the early termination of interest rate swap contracts
are deferred, to be recognized upon the termination of the related asset or
liability or expiration of the original term of the swap contract, whichever is
earlier. The Company does not hold any derivative financial instruments for
trading purposes.
F-9
<PAGE> 13
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Pronouncement -- In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128, Earnings Per Share. SFAS No.
128, which supersedes APB No. 15, Earnings Per Share, requires a dual
presentation of basic and diluted earnings per share as well as disclosures
including a reconciliation of the computation of basic earnings per share to
diluted earnings per share. Basic earnings per share excludes the dilutive
impact of common stock equivalents and is computed by dividing net income by the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings per share, which will approximate the Company's currently
reported pro forma earnings (loss) per share, includes the effect of potential
dilution from the exercise of outstanding common stock equivalents into common
stock, using the treasury stock method at the average market price of the
Company's common stock for the period.
SFAS No. 128 is effective for interim and annual financial reporting
periods ending after December 15, 1997, and early adoption is not permitted.
When adopted by the Company, as required, for the fiscal quarter ending December
31, 1997, all prior quarters' earnings (loss) per share information will be
required to be restated on a comparable basis.
Assuming that SFAS No. 128 had been implemented, supplemental pro forma
basic loss per share and supplemental pro forma diluted loss per share would not
have differed from the pro forma loss per share presented in the accompanying
consolidated statements of operations for the fiscal year ended June 30, 1997.
Reclassifications -- Certain reclassifications have been made to the 1996
balances in order to conform with the 1997 presentation.
3. MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION
On August 7, 1997, the Company consummated a merger with Quaker Holding Co.
("Quaker"), an affiliate of DLJ Merchant Banking Partners II. The merger, which
will be recorded as a recapitalization for accounting purposes as of the
consummation date, occurred pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") between the Company and Quaker dated May 4, 1997. The
accompanying historical consolidated financial statements do not include any
adjustments with respect to the consummation of the merger.
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and the holders of approximately 94.7% of shares of Company
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Company common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Company common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's revolving
credit facility (see Note 8).
In connection with the merger, the Company raised $85 million through the
public issuance of discount debentures, in addition to publicly issued
subordinated notes for approximately $150 million. The Company also entered into
a new syndicated credit facility providing for term loans of $470 million and
revolving loans of up to $105 million. The proceeds of the discount notes,
subordinated notes, the initial borrowings under the new credit facility and the
purchase of approximately $225 million of Company common stock by Quaker have
been used to finance the payments of cash to cash-electing shareholders, to pay
the holders of stock options and stock warrants canceled or converted, as
applicable, in connection with the merger, to repay the Company's existing
revolving credit facility and to pay expenses incurred in connection with the
merger.
As a result of the merger, the Company incurred various expenses,
aggregating approximately $71 million on a pretax basis (approximately $64
million after related tax benefit), subject to adjustment, in connection with
consummating the transaction. These costs consisted primarily of compensation
costs, underwriting
F-10
<PAGE> 14
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discounts and commissions, professional and advisory fees and other expenses.
The Company will report this one-time charge during the first quarter of fiscal
1998. In addition to these expenses, the Company also incurred approximately
$22.3 million of capitalized debt issuance costs associated with the merger
financing. These costs will be charged to expense over the terms of the related
debt instruments.
The following summarized unaudited pro forma information as of and for the
year ended June 30, 1997 assumes that the merger had occurred on July 1, 1996.
The pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the financial condition or of the results of
operations which actually would have resulted had the merger occurred as of July
1, 1996 or which may result in the future.
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
PRO FORMA BALANCE SHEET INFORMATION:
Total assets.................................................................. $652,085
Long term indebtedness (including current portion)............................ 724,500
Other liabilities............................................................. 170,708
Shareholders' (deficit)....................................................... (243,123)
PRO FORMA INCOME STATEMENT INFORMATION:
Revenues...................................................................... $785,950
Operating income.............................................................. 67,750
Loss from continuing operations before income tax benefit..................... (312)
Net loss...................................................................... (183)
Loss per common share......................................................... $ (0.01)
Weighted average common and common equivalent shares outstanding.............. 14,200
</TABLE>
The pro forma net loss reflects a net increase in interest expense of
approximately $53.4 million ($31.3 million after related pro forma tax effect),
attributable to additional financing incurred in connection with the merger, net
of repayment of the Company's existing revolving credit facility. Pro forma
weighted average common and common equivalent shares outstanding include
12,499,978 shares outstanding immediately subsequent to the merger on August 7,
1997 and dilutive common stock warrants and stock options (convertible into
281,960 and 1,418,530 shares of common stock, respectively) issued in connection
with or immediately subsequent to the merger.
4. BUSINESS AND CONTRACT ACQUISITIONS
During the years ended June 30, 1997, 1996 and 1995, the Company acquired
certain net assets of other service companies as follows (in thousands):
<TABLE>
<CAPTION>
EXCESS
CONSIDERATION PURCHASE
----------------------------------------------------------- PRICE OVER
TOTAL FAIR VALUE
NUMBER OF PURCHASE OTHER OF NET ASSETS
YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTANGIBLES ACQUIRED
- -------------------------------- ------------ -------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Significant business acquisitions:
June 30, 1995................. 1 $ 27,413 $ 2,094 $ 29,507 $15,600 $ 7,394
June 30, 1996................. 1 250,549 250,549 72,581 60,533
Nonsignificant business or maintenance contract acquisitions:
June 30, 1995................. 5 9,327 255 9,582 4,577 8,680
June 30, 1996................. 5 14,853 578 15,431 6,522 6,318
June 30, 1997................. 9 31,749 2,224 33,973 231 47,200
</TABLE>
F-11
<PAGE> 15
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 31, 1994, the Company purchased certain net assets and
liabilities of IDEA/Servcom, Inc. for approximately $29,500,000. This
acquisition was funded by cash and the issuance of a $2,600,000 noninterest-
bearing note to the seller. See seller notes payable section of Note 8. The
excess of asset purchase price over the fair value of net assets acquired at the
date of purchase was approximately $7,400,000.
On October 20, 1995, the Company acquired all of the outstanding common
stock of BABSS, a subsidiary of Bell Atlantic Corporation ("BAC") for
approximately $250,549,000. The acquisition was funded with the proceeds from
the issuance of $30,000,000 of Series C preferred stock, $30,000,000 of
subordinated debentures and the balance from additional bank borrowings (see
Notes 8 and 13). The excess of asset purchase price over the fair value of net
assets acquired at the date of purchase was initially recorded as approximately
$58,796,000. Subsequent to the acquisition, the Company recorded a net
adjustment increasing the initial amount by $1,737,000 and adjusted other
balance sheet accounts principally by the same amount. This resulted from the
adjustment and reclassification of certain tax accruals offset by favorable
negotiations on certain leased facilities (see Note 7). As part of the
acquisition, the Company purchased from BAC contractual profit participation
rights whereby the Company will receive a fixed percentage of the annual
operating profits (3.2% or 3.5%, depending upon the level of profits) earned by
a former foreign affiliate of BAC which provides computer maintenance and
technology support services in Europe. The estimated value of the discounted
estimated future cash flows over a twenty-year period from the acquisition date
from these contractual profit participation rights is $25,000,000.
Included in nonsignificant maintenance contract acquisitions is the
acquisition of substantially all of the contracts and related assets, including
spare parts of the U.S. computer service business of Memorex Telex Corporation
and certain of its affiliates (collectively, "Memorex Telex"). Memorex Telex had
filed a petition in bankruptcy in the United States Bankruptcy Court (the
"Court") in the District of Delaware on October 15, 1996; the Court approved the
sale to the Company on November 1, 1996. The adjusted purchase price was $52.7
million, comprised of the assumption of certain liabilities under contracts of
the service business, which were valued at $28.3 million, and base cash
consideration of approximately $24.4 million, after certain purchase price
adjustments, excluding transaction and closing costs.
The estimated fair market values of certain assets acquired, as well as
liabilities assumed, are subject to further adjustment as additional information
becomes available to the Company. During the third quarter of fiscal 1997, the
Company recorded an adjustment increasing the deferred revenues assumed in the
Memorex Telex acquisition by approximately $2,300,000, to revise the estimated
fair value of certain contract liabilities of the business assumed by the
Company.
The following summarized unaudited pro forma information for significant
acquisitions that have a material effect on the Company's results of operations
for the years ended June 30, 1996 and 1995 assumes that the acquisitions
occurred as of July 1, 1994. The nonsignificant business and maintenance
contract acquisitions are not considered material individually or in the
aggregate. The pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the significant acquisitions been in effect on
the dates indicated or which may result in the future.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenues....................................................... $697,676 $679,284
Income from continuing operations before extraordinary item.... 31,080 20,153
Net income..................................................... 29,153 21,266
</TABLE>
F-12
<PAGE> 16
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings............................................. $ 6,318 $ 2,055
Equipment...................................................... 16,248 13,858
Computer hardware and software................................. 35,030 27,277
Furniture and fixtures......................................... 8,308 8,051
Leasehold improvements......................................... 4,628 4,125
-------- --------
70,532 55,366
Accumulated depreciation and amortization...................... (36,305) (22,936)
-------- --------
$ 34,227 $ 32,430
======== ========
</TABLE>
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (20-40); equipment (3-10);
computer hardware and software (3-5); furniture and fixtures (5-10) and
leasehold improvements (term of related leases).
Depreciation and amortization expense was approximately $13,549,000,
$8,309,000 and $1,779,000 for the fiscal years ended 1997, 1996 and 1995,
respectively.
6. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Excess purchase price over fair value of net assets acquired... $130,548 $ 82,355
Customer lists................................................. 64,688 64,758
Contractual profit participation rights........................ 25,000 25,000
Noncompete agreements.......................................... 4,631 4,500
Other intangibles.............................................. 9,131 7,671
-------- --------
233,998 184,284
Accumulated amortization....................................... (42,632) (19,625)
-------- --------
$191,366 $164,659
======== ========
</TABLE>
The periods (in years) used in determining the amortization rates of
intangible assets are: excess purchase price over fair value of net assets
acquired (4-20); customer lists (3-8); contractual profit participation rights
(20); noncompete agreements (3-5) and other (1-6).
Amortization expense relating to intangibles was approximately $23,470,000,
$15,673,000 and $6,775,000, for the fiscal years ended 1997, 1996 and 1995,
respectively.
F-13
<PAGE> 17
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable................................................. $55,723 $53,347
Compensation and benefits........................................ 22,706 22,115
Interest......................................................... 563 1,505
Unused leases.................................................... 878 3,485
Pension accrual.................................................. 1,371 1,258
Accrued accounting and legal fees................................ 1,435 1,073
Non-income taxes and other....................................... 12,840 6,781
------ ------
$95,516 $89,564
====== ======
</TABLE>
Prior to 1994, the Company received $2,600,000 in tax bills (primarily
interest) from the Internal Revenue Service ("IRS") related to claims for tax
and interest for the years 1981 through 1987. The Company paid approximately
$500,000 of the claims upon receipt of the bills. Although the Company disputed
the tax bills, an IRS mandated payment of $828,000 was made in 1996. As of June
30, 1996, the Company had an accrued liability of $1,883,000 related to this
assessment. During fiscal 1997, the Company paid $1,729,000 in full settlement
of these tax and interest bills.
In connection with the acquisition of BABSS, which has been accounted for
using the purchase method of accounting (see Note 4), the Company recorded
approximately $11,000,000 in liabilities resulting from planned actions with
respect to BABSS, which included the costs to exit certain leased facilities and
to involuntarily terminate employees. The provision of approximately $3,500,000
for the costs to exit certain leased facilities principally relates to future
lease payments on a warehouse in California which has been made idle.
Approximately $4,000,000 was provided for severance and termination benefits of
approximately 210 employees in the field, operations support, sales and
administration. Approximately $3,000,000 was provided in connection with the
exit plan for write-downs of spare parts and equipment at two California
facilities which will not be utilized in future operations. The provision for
various other charges of approximately $500,000 consisted of costs to complete
the exit plan. As of June 30, 1996, the Company had settled all of these
liabilities, except for the lease liabilities on idle facilities for which
payments were scheduled to continue through 1999 (see Note 15). At June 30, 1997
and 1996 remaining amounts due under these leases were $0 and $1,200,000,
respectively.
As a result of successful negotiations of unutilized leased facilities,
during 1996, the Company recorded a reduction of approximately $975,000 to both
the provisions for leased facilities and excess purchase price over fair value
of net assets acquired.
F-14
<PAGE> 18
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. REVOLVING CREDIT LOAN AND LONG-TERM DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit loans......................................... $231,671 $186,400
Seller noninterest-bearing notes payable....................... 2,922 2,118
Seller note payable -- purchase of spare parts................. 1,608
Capitalized lease obligations, payable in varying installments
at interest rates ranging from 7.25% to 13.01% at June 30,
1997......................................................... 1,308 2,385
------- -------
237,509 190,903
Less current portion........................................... 4,788 2,321
------- -------
$232,721 $188,582
======= =======
</TABLE>
REVOLVING CREDIT LOANS
On October 20, 1995, in connection with the BABSS acquisition (see Note 4)
the Company entered into a Credit Agreement which provided for a term loan (the
"1995 Term Loan") of $230,000,000 and a revolving credit facility of up to a
maximum of $30,000,000. The 1995 Term Loan provided for 19 equal quarterly
principal payments of $10,000,000 to be due and payable on the last day of each
calendar quarter commencing December 31, 1995 with a final payment due on
September 30, 2000. Loans under the revolving credit facility were to mature on
September 30, 2000. Interest on the 1995 Term Loan and the revolving credit
facility were at varying rates based, at the Company's option, on the Eurodollar
rate or the Alternative Base Rate (NationsBanc prime rate), plus the Applicable
Margins. Margins were based on the ratio of Total Funded Debt to EBITDA; the
Eurodollar Margin ranged from 1.75% to 2.5%, while the Alternative Base Rate
Margin ranged from 0.5% to 1.25%.
In April 1996, the Company completed an initial public offering (see Note
13). The Company used a portion of the proceeds to repay approximately $70
million of the 1995 Term Loan.
Also in April 1996, the Company converted the 1995 Term Loan and the
existing $30 million Revolving Credit Facility into a $225 million variable
rate, unsecured revolving credit facility ("the 1996 Revolving Credit
Facility"). During fiscal 1997, the 1996 Revolving Credit Facility commitment
was increased to $300 million, in connection with the acquisition of certain
contracts and assets. The 1996 Revolving Credit Facility is at floating interest
rates, based either on the LIBOR or prime rate, in either case plus an
Applicable Margin, at the Company's option. As of June 30, 1997, the applicable
rate was LIBOR plus .75% or approximately 6.5%. The 1996 Revolving Credit
Facility enables the Company to borrow up to $300 million in the form of
revolving credit loans with a maturity date of April 26, 2001 and with interest
periods determined principally on a quarterly basis. To offset the variable rate
characteristics of the borrowings, the Company entered into interest rate swap
agreements with two banks resulting in fixed interest rates of 5.4% on $40.0
million notional principal amount through December 1997 and 5.5% on another
$40.0 million notional principal amount through December 1998.
During fiscal 1997, the Company terminated these swap agreements, resulting
in an insignificant gain which has been deferred to the first quarter of fiscal
1998.
Under the terms of the 1996 Revolving Credit Facility, the Company may use
up to $25,000,000 for letters of credit, subject to the limitation of
$300,000,000 in total credit. As of June 30, 1997, letters of credit in the face
amount of $3,067,000 were outstanding.
F-15
<PAGE> 19
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The loan agreement relating to the 1996 Revolving Credit Facility contains
various terms and covenants which provide for certain restrictions on the
Company's indebtedness, liens, investments, disposition of assets and mergers
and acquisitions and require the Company, among other things, to maintain
minimum levels of consolidated net worth and certain minimum financial ratios.
The borrower under the 1996 Revolving Credit Facility is DecisionOne
Corporation. Repayment of the debt is guaranteed by the Company and its other
subsidiaries except for its Canadian subsidiary.
The Company's debt agreements and other agreements to which it is a party
contain certain covenants restricting the payment of dividends on, or
repurchases of, Company common stock.
The Company had average borrowings of $221,069,000 and $172,065,000 during
1997 and 1996, respectively, at an average interest rate of 6.4% and 8.69%,
respectively. Maximum borrowings during 1997 and 1996 were $243,350,000 and
$268,748,000, respectively.
Subsequent to June 30, 1997, in connection with the Company's merger with
Quaker (see Note 3), the 1996 Revolving Credit Facility was repaid in full,
including all interest due thereon. This refinancing was accomplished, in part,
through the issuance of certain new debt instruments, consisting of senior
discount notes, senior subordinated notes and a term loan/revolving credit
facility which, in the aggregate, provide financing of approximately $810
million, subject to certain conditions. The new revolving credit facility
provides the Company with $105 million of available financing, subject to a
borrowing base, for working capital purposes subsequent to the merger.
The Company's Canadian subsidiary has available a $1.5 million (Canadian)
revolving line of credit agreement with a local financial institution. At June
30, 1997, approximately $471,000 (in U.S. dollars) was outstanding under this
agreement. There were no amounts outstanding at June 30, 1996.
SELLER NOTES PAYABLE
In connection with certain acquisitions (see Note 4), the Company issued
noninterest-bearing notes, the principal of which is primarily due upon
settlement of contingent portions of the acquisition purchase price within a
specified period subsequent to closing, generally not exceeding one year from
the acquisition date. Contingencies typically pertain to actual amounts of
monthly maintenance contract revenues acquired and prepaid contract liabilities
assumed in comparison to amounts estimated in acquisition agreements. The
Company imputes interest, based upon market rates, for long-term,
non-interest-bearing obligations.
During 1997, the Company issued a secured note payable to the seller for
the purchase of repairable parts in the original amount of $1,854,000. The note
accrues interest at an interest rate of approximately 8%, and requires quarterly
payments of principal and interest of approximately $273,000 until maturity in
December 1998.
SUBORDINATED DEBENTURES
In connection with the BABSS acquisition (see Note 4) on October 20, 1995,
the Company issued and sold to its principal shareholders, an aggregate
$30,000,000 principal amount of 10.101% Debentures (the "Affiliate Notes") due
on October 20, 2001. The Affiliate Notes were subordinated to the 1995 Term Loan
and the revolving credit facility. Interest on the Affiliate Notes was payable
semiannually on the last business day of June and December of each year
commencing on December 31, 1995.
In connection with the issuance of the debentures, the Company issued
468,750 Common Stock Purchase Warrants (the "Warrants"). Each Warrant initially
entitled the owner to buy one share of Common Stock for $0.10. The number of
shares that can be purchased per Warrant steps up over 24 months in conjunction
with the increasing conversion privilege applicable to the Preferred Stock such
that, at the end of 24 months, each Warrant entitled the holder to buy
approximately 1.21 shares of Common Stock at a price of
F-16
<PAGE> 20
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$0.10 per share. The Warrants were exercisable from October 20, 1997 until
October 20, 2001, provided that if the Company had a public offering of its
Common Stock meeting certain requirements before October 20, 1997, the Warrants
became exercisable at the time of the public offering and the number of shares
that could be purchased on exercise was fixed at that time and no longer
increased in steps. The Warrants also became exercisable upon retirement of the
Debentures. Each Warrant had an assigned value of $7.25333 which resulted in an
original issue discount of $3,400,000 which was being amortized over the term of
the Affiliate Notes. Upon consummation of its initial public offering in April
1996, the Company was required to pay up to the total amount outstanding under
the Affiliate Notes and, accordingly, the Company used $30,000,000 of the
proceeds to retire the Affiliate Notes. As a result, in 1996 the Company
recorded an extraordinary loss in the amount of $3,211,000, net of taxes of
$1,284,000, due to the acceleration of the amortization of original issue
discount. In connection with the Company's merger with Quaker in August 1997
(see Note 3), the Warrants were converted into cash, with warrant holders
receiving an amount equal to $23 less the exercise price for each Warrant.
In connection with previous credit agreements, the Company issued warrants
to purchase shares of the Company's common stock. At June 30, 1997, warrants to
purchase 134,478 shares at an exercise price of $5.90 per share remained
outstanding. In connection with the Company's merger with Quaker, these warrants
were also converted into cash, with warrant holders receiving an amount equal to
$23 less the exercise price for each warrant.
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $10,909 $ 2,892 $ 16,065
State.............................................. 3,616 1,595 4,599
Foreign............................................ 1,080 548 (1,272)
Deferred:
Federal............................................ 6,460 8,945 (29,897)
State.............................................. 16 641 (3,617)
Foreign............................................ (113) (499)
Benefit of operating loss carryforwards:
Federal............................................ (7,729)
State.............................................. (1,253)
Foreign............................................ (252)
------- ------- --------
Provision (benefit) for income taxes................. $21,968 $13,870 $(23,104)
======= ======= ========
</TABLE>
F-17
<PAGE> 21
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable............................................ $ 4,771 $ 1,341
Inventory...................................................... 2,195 2,586
Accrued expenses............................................... 7,000 6,378
Unused leases.................................................. 390
Fixed assets................................................... 299
Intangibles.................................................... 6,196 5,670
Operating loss carryforwards................................... 4,868 14,252
Tax credit carryforwards....................................... 1,670 1,170
------- -------
Gross deferred tax assets........................................ 27,090 31,696
Gross deferred tax liabilities:
Repairable spare parts......................................... (8,918) (7,273)
Fixed assets................................................... (108)
------- -------
Gross deferred tax liabilities................................... (9,026) (7,273)
------- -------
Net deferred tax asset........................................... $18,064 $24,423
======= =======
</TABLE>
Net operating loss and minimum tax credit carryforwards available at June
30, 1997 expire in the following years:
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION
AMOUNT ----------
--------------
(IN THOUSANDS)
<S> <C> <C>
Federal operating losses............................... $ 12,877 2006-2008
State operating losses................................. 8,669 1998-2008
Investment tax credit.................................. 134 2004
Minimum tax credit..................................... 1,536 INDEFINITE
</TABLE>
As a result of the Company's initial public offering in April, 1996, an
"ownership change" occurred pursuant to Section 382 of the Internal Revenue
Code. Accordingly, for Federal income tax purposes, net operating loss and tax
credit carryforwards arising prior to the ownership change are limited during
any future period to the Section 382 "limitation amount" of approximately $20.0
million per annum. In addition, the Company's merger with Quaker on August 7,
1997 (see Note 3) represents another such "ownership change" pursuant to Section
382. The Company estimates that the limitation on the use of tax loss
carryforwards and other credits, for Federal income tax purposes, in any
post-merger period will be reduced to approximately $9.0 million per annum.
F-18
<PAGE> 22
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the provision (benefit) for income taxes, computed
by applying the statutory federal income tax rate of 35% for 1997, 1996 and 1995
to income before income taxes, and the actual provision (benefit) for income
taxes follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ------
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate........... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax provision...... 5.0 4.6 3.5
Foreign income taxes......................................... 0.4 (6.9)
Unused lease credit.......................................... (0.1)
Benefit of operating loss carryforward....................... (0.8) (49.1)
Change in valuation allowance................................ (1.4) (108.9)
Other........................................................ 1.0 2.6 0.3
---- ---- ------
Actual income tax provision (benefit) effective tax rate..... 41.4% 40.0% (126.2)%
==== ==== ======
</TABLE>
The Company has recorded a deferred tax asset of $4,868,000 reflecting the
benefit of federal and state net operating loss carryforwards, which expire in
varying amounts between 1998 and 2008. Realization depends on generating
sufficient taxable income before expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will ultimately be realized.
The valuation allowance for deferred tax assets as of July 1, 1994 was
$44,160,000. The net changes in the valuation allowance for the years ended June
30, 1996 and 1995 were decreases of $686,000 and $43,474,000, respectively. Of
these amounts, $252,000 and $8,982,000 resulted from the realization of net
operating loss carryforwards. The remaining decreases of $434,000 and
$34,492,000 for 1996 and 1995, respectively, resulted from the Company's
expected future taxable income.
10. OTHER LIABILITIES
Other (noncurrent) liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued severance and unutilized lease losses.................... $ 4,532 $ 2,227
Other noncurrent liabilities..................................... 9,396 12,059
------- -------
$ 13,928 $ 14,286
======= =======
</TABLE>
As more fully described in Note 15, accrued severance and unutilized lease
losses represent remaining liabilities for estimated future employee severance
costs and for lease/contract losses associated with duplicate facilities to be
closed. These liabilities were recorded by the Company in connection with the
Memorex Telex and BABSS acquisitions in November 1996 and October 1995,
respectively.
Other noncurrent liabilities include deferred operating lease liabilities
related to scheduled rent increases, recorded in accordance with the provisions
of SFAS No. 13, Accounting for Leases. Also included in other noncurrent
liabilities are provisions relating to various tax matters.
11. STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
Under the 1988 Stock Option and Restricted Stock Purchase Plan, the name of
which was subsequently changed to DecisionOne Stock Option and Restricted Stock
Purchase Plan (the "Plan"), the Company, at the discretion of the Board of
Directors, may issue restricted stock, incentive stock options and non-qualified
F-19
<PAGE> 23
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options for shares of the Company's common stock. Vesting of the restricted
stock and stock options is at the discretion of the Board of Directors and
generally occurs at a rate of 25% per year.
During 1994, the Board of Directors amended the Plan increasing the total
number of shares issuable to approximately 2,350,000. Additionally, in November
1995 the Board of Directors amended the Plan increasing the total number of
shares issuable to approximately 3,350,000, and in December 1996 to 5,350,000.
The price of the incentive stock options issued to employees under the Plan
is not less than 100% of the fair market value of the common shares at the date
of issuance. The option price for nonqualified options is determined by the
Board of Directors at the time of grant and may be less than the fair market
value of the common shares at the time of grant. However, no such options were
granted at prices less then 100% of the fair value of common shares at the date
of issuance.
Options expire through February 2007. Restricted shares which are not
vested upon an employee's termination are subject to a repurchase right of the
Company at a price equal to the amount paid by the employee.
Presented below is the activity in the Plan for the years ended June 30,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
--------- ---------------
<S> <C> <C>
Balance, June 30, 1994................................. 1,943,595 $.50 - $100.00
Options exercised.................................... (15,000) $.50
Options granted...................................... 410,000 $1.25 - $6.00
Options cancelled.................................... (75,275) $.50 - $100.00
---------
Balance, June 30, 1995................................. 2,263,320 $.50 - $6.00
Options exercised.................................... (329,850) $.50 - $6.00
Options granted...................................... 803,000 $8.00 - $27.50
Options cancelled.................................... (125,000) $1.25 - $8.00
---------
Balance, June 30, 1996................................. 2,611,470 $.50 - $27.50
Options exercised.................................... (477,544) $.50 - $8.00
Options granted...................................... 1,254,000 $14.00 - $22.13
Options cancelled.................................... (532,579) $1.25 - $27.50
---------
Balance, June 30, 1997................................. 2,855,347 $.50 - $26.75
=========
</TABLE>
In connection with the Company's merger with Quaker on August 7, 1997 (see
Note 3), all vested and unvested options then outstanding under the Plan were
cancelled, and the holders of these options received the right to receive cash
payments equal to the excess, if any, of $23.00 over the exercise price of each
option. Certain option holders were afforded the opportunity to convert these
options into options to purchase common stock of the merged Company, in lieu of
cash payments.
Pursuant to the 1997 Management Incentive Plan approved subsequent to the
Merger, the Company granted 1,179,000 options at a weighted average exercise
price of approximately $20.61 with a weighted average fair market value of
$11.23.
Because the Company accounts for the Plan under APB No. 25, no compensation
cost has been recognized for stock options. Had compensation expense for the
Plan been determined based on the fair value at the grant dates under the
provisions of SFAS No. 123, the Company's pro forma net loss and pro forma loss
F-20
<PAGE> 24
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
per share (see Note 3) would have been increased to the following adjusted pro
forma amounts (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Pro forma net loss -- as reported.......................................... $ (183)
Pro forma net loss -- as adjusted.......................................... $(2,741)
Pro forma loss per share -- as reported.................................... $ (0.01)
Pro forma loss per share -- as adjusted.................................... $ (0.19)
</TABLE>
The fair value of options was estimated using the Black-Scholes option
pricing model based on the following assumptions:
<TABLE>
<CAPTION>
EXPECTED LIVES
RISK-FREE INTEREST RATE EXPECTED VOLATILITY (YRS)
------------------------ -------------------- ---------------
<S> <C> <C> <C>
Grants issued in 1996... 5.85%-6.85% 26.9% 10
Grants issued in 1997... 6.47% 26.5% 10
</TABLE>
12. LEASE COMMITMENTS
The Company conducts its operations primarily from leased warehouses and
office facilities and uses certain computer, data processing and other equipment
under operating lease agreements expiring on various dates through 2005. The
future minimum lease payments for operating leases having initial or remaining
noncancelable terms in excess of one year for the five years succeeding June 30,
1997 and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $18,415
1999............................................................... 15,224
2000............................................................... 11,406
2001............................................................... 5,815
2002............................................................... 2,879
Thereafter......................................................... 4,757
-------
$58,496
=======
</TABLE>
Rental expense amounted to approximately $17,367,000, $13,149,000 and
$5,878,000, for the fiscal years ended 1997, 1996 and 1995, respectively.
13. SHAREHOLDERS' EQUITY
During fiscal 1994 and 1996, the Company issued three classes of redeemable
preferred stock (Series A, Series B and Series C preferred stock; collectively,
the "Preferred Stock"), aggregating 376,416 preferred stock shares, in exchange
for cash or in settlement of certain debt obligations. The Preferred Stock,
which was valued at $100 per share, accrued dividends at rates ranging between
$4 per share per annum and $6 per share per annum, to be paid as declared by the
Company's Board of Directors. Additionally, the Preferred Stock was to be
automatically converted into Company common stock if the Company were to
complete a public offering of common stock which met certain specified criteria.
On February 9, 1996, the Company amended its Certificate of Incorporation
to increase the number of authorized shares of common stock to 100,000,000
shares and to authorize 5,000,000 shares of Preferred Stock.
F-21
<PAGE> 25
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1996, the Company completed a public offering of 6,300,000 shares
of common stock at $18.00 per share (the "Offering"). Prior to the Offering,
there was no public market for the Company's common stock. The common stock is
listed on the Nasdaq National Market under the symbol "DOCI".
The net proceeds of the offering, after deducting applicable issuance costs
and expenses were $104,740,000. The proceeds were used to repay approximately
$70,000,000 of the 1995 Term Loan, $30,000,000 in Affiliate Notes, approximately
$1,446,000 in accrued and declared dividends to holders of the Preferred Stock
and for other general corporate purposes. In connection with the offering, the
Preferred Stock was automatically converted into 11,271,924 shares of common
stock.
During the year ended June 30, 1996, certain shareholders exercised their
preemptive right to subscribe for and purchase additional shares of common stock
or other securities so issued at the same price as originally issued on certain
occasions from 1992 through 1995. On December 4, 1995, the following securities
were purchased: (a) 382,578 shares of common stock at a price of $4 per share;
(b) 999 shares of Series A Preferred Stock, at a price of $100 per share; (c)
1,776 shares of Series B Preferred Stock, at a price of $100 per share; (d)
1,924 shares of common stock at a price of $.50 per share; (e) 311,141 shares of
Series C Preferred Stock, at a price of $100 per share; and (f) 17,407 Common
Stock Purchase Warrants at a price of $7.25333 per warrant which entitles the
holder to purchase 17,407 shares of common stock at an exercise price of $.10
per share. The 17,407 Common Stock Purchase Warrants were exercised in 1996.
In consideration of his service as a director and Chairman of the Board,
the Company, in a prior year, granted an individual warrants to purchase an
aggregate of 66,667 shares of common stock at an exercise price of $4.00 per
share. In connection with the Company's merger with Quaker in August 1997 (see
Note 3), these warrants were converted into cash, with the holder receiving an
amount equal to $23 less the exercise price.
As more fully described in Note 3, the Company merged with Quaker on August
7, 1997. In accordance with the terms of the Merger Agreement, which was
formally approved by the Company's shareholders on August 7, 1997, Quaker merged
with and into the Company, and the holders of approximately 94.7% of shares of
Company common stock outstanding immediately prior to the merger received $23 in
cash in exchange for these shares. Holders of approximately 5.3% of shares of
Company common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Company common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's revolving
credit facility (see Note 8).
14. RETIREMENT PLANS
The Company maintains a 401(k) plan for its employees which is funded
through the contributions of its participants. A similar plan exists for former
employees of an acquired company for which eligibility and additional
contributions were frozen in September 1988.
In addition, the Company assumed the liability of the defined benefit
pension plan applicable to employees of a company acquired in 1986. The
eligibility and benefits were frozen as of the date of the acquisition.
F-22
<PAGE> 26
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension expense for the defined benefit pension plan was computed as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1996 1995
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost.............................................. $ 521 $ 495 $ 482
Actual return on plan assets............................... (409) (449) (312)
Net amortization and deferral.............................. 9 72 (42)
----- ----- -----
Periodic pension costs..................................... $ 121 $ 118 $ 128
===== ===== =====
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% and the expected long-term rate of return
on assets was 8.5% for 1997, 1996 and 1995.
The following table sets forth the funded status of the frozen pension plan
as of May 1, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefits (100% vested)............................... $ 7,290 $ 7,116
Fair value of plan assets........................................ 6,128 5,800
------- -------
Unfunded projected benefit obligation.................. 1,162 1,316
Unrecognized net loss............................................ 1,873 1,848
Unrecognized net transition obligation........................... 470 504
Adjustment to recognized minimum liability....................... (2,343) (2,352)
------- -------
Accrued pension costs............................................ $ 1,162 $ 1,316
======= =======
</TABLE>
15. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
During the second quarter of fiscal 1997, in connection with the Memorex
Telex acquisition (see Note 4), the Company recorded a $3.4 million pre-tax
charge for estimated future employee severance costs, and a $0.9 million pre-tax
charge for unutilized lease/contract losses ("exit costs"), primarily associated
with duplicate facilities to be closed. The $3.4 million charge, recorded in
accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits,
reflects the actuarially determined benefit costs for the separation of
employees who are entitled to benefits under pre-existing separation pay plans.
These costs are included in selling, general and administrative expenses in the
accompanying consolidated statement of operations for the year ended June 30,
1997.
In the second quarter of fiscal 1996, in connection with the acquisition of
BABSS, the Company recorded pre-tax charges for exit costs of $6.9 million, and
estimated future employee severance costs of $0.1 million. During the fourth
quarter of fiscal 1996, the Company reversed $3.4 million of these employee
severance and exit cost liabilities. The reversal was primarily the result of
the Company's ability to utilize and sublease various facilities identified in
the original $7.0 million combined liability. Such information was unknown to
the Company when the original liability was recorded.
See Note 10 for further information regarding accrued severance and
unutilized lease losses.
16. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect to four waste disposal sites that have been identified by the United
States Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party with respect to a fifth, related site, but
F-23
<PAGE> 27
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has not received any other communication with respect to that site. Under
applicable law, all parties responsible for disposal of hazardous substances at
those sites are jointly and severally liable for clean-up costs. The Company
originally estimated that its share of the costs of the clean-up of one of these
sites would be approximately $500,000 which is provided for in liabilities
related to the discontinued products division in the accompanying consolidated
balance sheets as of June 30, 1997 and 1996. Complete information as to the
scope of required clean-up at these sites is not yet available and, therefore,
management's evaluation may be affected as further information becomes
available. However, in light of information currently available to management,
including information regarding assessments of the sites to date and the nature
of involvement of the Company's predecessor at the sites, it is management's
opinion that the Company's potential additional liability, if any, for the cost
of clean-up of these sites will not be material to the consolidated financial
position, results of operations or liquidity of the Company.
The Company is also party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, these actions can be successfully defended or resolved without a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
During the fourth quarter of fiscal 1997, the Company received $2.0 million
in full settlement of a claim against its former insurance carrier, related to
unreimbursed losses. This settlement was reflected as a reduction of selling,
general and administrative costs in the accompanying statement of operations.
17. RELATED PARTY TRANSACTIONS
Prior to 1994, the Company entered into an agreement to purchase printer
products from Genicom Corporation (Genicom). The Company and Genicom are under
common ownership. The initial term of the agreement is for five years with an
option to extend based on mutual agreement of the parties. Purchases from
Genicom for the years ended June 30, 1997, 1996 and 1995 were approximately
$472,000, $1,512,000 and $1,972,000, respectively. Accounts payable to Genicom
amounted to approximately $30,000 and $14,000 as of June 30, 1997 and 1996,
respectively.
During the year ended June 30, 1996, the Company paid approximately
$125,000 for expense reimbursements to certain shareholders for services
rendered in connection with an acquisition in 1988. The amount was accrued for
in prior years.
In connection with the Company's financing of the BABSS acquisition on
October 20, 1995, the Company issued subordinated debentures and redeemable
preferred stock to certain related parties (see Notes 8 and 13).
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information
for the fiscal years ended 1997 and 1996:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH
SEPTEMBER 30, DECEMBER 31,(1) 31, JUNE 30,
------------- --------------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenues................................. $ 176,426 $ 191,253 $205,070 $213,201
Gross profit............................. 41,861 48,221 54,698 59,310
Net income............................... 5,455 4,954 9,507 11,168
Pro forma net income (loss) (Note 3)..... (2,306) (2,813) 1,787 3,149
Pro forma earnings (loss) per share (Note
3)..................................... (0.16) (0.20) 0.13 0.22
</TABLE>
F-24
<PAGE> 28
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
MARCH
SEPTEMBER 30, DECEMBER 31, 31, JUNE 30,(2)
------------- --------------- -------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Revenues................................. $ 46,791 $ 149,703 $172,673 $ 171,024
Gross profit............................. 15,524 38,224 42,711 41,416
Income before extraordinary item......... 4,386 638 5,842 9,923
Net income............................... 4,386 638 5,842 7,996
</TABLE>
- ---------------
(1) Net income for the second quarter of 1997 includes a $3.4 million pre-tax
charge for estimated future employee severance costs, and a $.9 million
pre-tax charge for unutilized lease/contract losses, primarily associated
with duplicate facilities to be closed in connection with the Memorex Telex
acquisition (see Note 15).
(2) Net income for the fourth quarter of 1996 includes (a) a $3.4 million
reversal of the previously recorded restructuring charge for unutilized
leases (Note 15); and (b) a $1.5 million adjustment related to recoveries of
previously reserved receivables.
* * * * * *
F-25
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder
of DecisionOne Corporation:
We have audited the accompanying consolidated balance sheets of DecisionOne
Corporation (a wholly-owned subsidiary of DecisionOne Holdings Corp.) and
subsidiaries (the "Company") as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. Our audits also
included the related financial statement schedule listed in the Index at Item
14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement 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, such consolidated financial statements present fairly, in
all material respects, the financial position of DecisionOne Corporation and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, the 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.
As discussed in Note 1 to the consolidated financial statements, on May 29,
1997, DecisionOne Holdings Corp. completed a restructuring of the legal
organization of certain of its subsidiaries. The Company's consolidated
financial statements have been presented giving effect to the reorganization for
all periods presented in a manner similar to a pooling of interests.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
August 15, 1997
F-26
<PAGE> 30
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 10,877 $ 8,221
Accounts receivable, net of allowances of $14,869 and $9,580......... 127,462 92,650
Consumable parts, net of allowances of $17,889 and $19,537........... 34,518 29,770
Prepaid expenses and other assets.................................... 4,542 5,112
Deferred tax asset................................................... 5,236 8,018
-------- --------
Total current assets......................................... 182,635 143,771
REPAIRABLE PARTS, Net of accumulated amortization of $154,555 and
$105,462............................................................. 199,900 154,970
PROPERTY AND EQUIPMENT................................................. 34,227 32,430
INTANGIBLES............................................................ 191,366 164,659
OTHER ASSETS........................................................... 14,977 18,680
-------- --------
TOTAL ASSETS........................................................... $623,105 $514,510
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................................... $ 4,788 $ 2,321
Accounts payable and accrued expenses................................ 95,516 89,564
Deferred revenues.................................................... 56,600 38,485
Income taxes and other liabilities................................... 4,664 479
-------- --------
Total current liabilities.................................... 161,568 130,849
REVOLVING CREDIT LOAN AND LONG-TERM DEBT............................... 232,721 188,582
OTHER LIABILITIES...................................................... 13,928 14,286
SHAREHOLDER'S EQUITY:
Common stock, no par value; one share authorized, issued and
outstanding in 1997 and 1996...................................... -- --
Additional paid-in capital........................................... 258,609 255,535
Accumulated deficit.................................................. (42,432) (73,516)
Other................................................................ (1,289) (1,226)
-------- --------
Total shareholder's equity................................... 214,888 180,793
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................. $623,105 $514,510
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE> 31
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES................................................... $785,950 $540,191 $163,020
COST OF REVENUES........................................... 581,860 402,316 113,483
-------- -------- --------
GROSS PROFIT............................................... 204,090 137,875 49,537
OPERATING EXPENSES:
Selling, general and administrative expenses............. 112,870 72,829 21,982
Amortization of intangibles.............................. 23,470 15,673 6,776
-------- -------- --------
OPERATING INCOME........................................... 67,750 49,373 20,779
INTEREST EXPENSE, Net of interest income of $197 in 1997,
$239 in 1996 and $53 in 1995............................. 14,698 14,714 2,468
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(BENEFIT), DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEM..................................................... 53,052 34,659 18,311
PROVISION (BENEFIT) FOR INCOME TAXES....................... 21,968 13,870 (23,104)
-------- -------- --------
INCOME BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEM..................................................... 31,084 20,789 41,415
DISCONTINUED OPERATIONS -- Income from operations of
discontinued products division........................... 1,113
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM........................... 31,084 20,789 42,528
EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $1,284........... 1,927
-------- -------- --------
NET INCOME................................................. $ 31,084 $ 18,862 $ 42,528
======== ======== ========
PRO FORMA INFORMATION (UNAUDITED):
Net income before interest expense adjustment............ $ 31,084
Interest expense adjustment, net of tax.................. (25,358)
--------
Pro forma net income..................................... $ 5,726
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE> 32
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
FOREIGN TOTAL
ADDITIONAL CURRENCY PENSION SHAREHOLDER'S
PAID-IN ACCUMULATED TRANSLATION LIABILITY (DEFICIENCY)
CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT EQUITY
---------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994...................................... $114,883 $(134,906) $ 457 $ (1,625) $ (21,191)
Net income................................................ 42,528 42,528
Adjustment to pension liability........................... (80) (80)
Foreign currency translation adjustment................... 223 223
Contributed capital....................................... 8 8
-------- --------- ---- ------- --------
BALANCE, JUNE 30, 1995...................................... 114,891 (92,378) 680 (1,705) 21,488
Net income................................................ 18,862 18,862
Adjustment to pension liability........................... (143) (143)
Contributed capital....................................... 142,090 142,090
Foreign currency translation adjustment................... (58) (58)
Dividends declared........................................ (1,446) (1,446)
-------- --------- ---- ------- --------
BALANCE, JUNE 30, 1996...................................... 255,535 (73,516) 622 (1,848) 180,793
Net income................................................ 31,084 31,084
Adjustment to pension liability........................... (25) (25)
Foreign currency translation adjustment................... (38) (38)
Contributed capital....................................... 3,074 3,074
-------- --------- ---- ------- --------
BALANCE, JUNE 30, 1997...................................... $258,609 $ (42,432) $ 584 $ (1,873) $ 214,888
======== ========= ==== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE> 33
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 31,084 $ 18,862 $ 42,528
Adjustments to reconcile net income to net cash provided
by operating activities:
Income from discontinued operations................... (1,113)
Depreciation.......................................... 13,549 8,309 1,779
Amortization of repairable parts...................... 63,870 37,869 7,688
Amortization of intangibles........................... 23,470 15,673 6,775
Provision for losses on accounts receivable........... 7,849 3,434 1,930
Provision for consumable parts obsolescence........... 2,554 1,171 1,995
Extraordinary item.................................... 1,927
Changes in operating assets and liabilities, net of
effects from companies acquired, which provided
(used) cash:
Accounts receivable................................. (38,365) (1,900) (8,836)
Consumable parts.................................... (6,038) (1,248) 931
Accounts payable and accrued expenses............... 3,885 256 (1,171)
Deferred revenues................................... (25,427) (33,928) 6,811
Net changes in other assets and liabilities......... 12,543 1,469 (20,902)
--------- --------- --------
Net cash provided by operating activities........ 88,974 51,894 38,415
--------- --------- --------
INVESTING ACTIVITIES:
Capital expenditures..................................... (10,540) (7,278) (2,786)
Repairable spare parts purchases, net.................... (86,446) (63,514) (12,154)
Acquisitions of companies and contracts.................. (32,258) (275,562) (39,331)
--------- --------- --------
Net cash used in investing activities............ (129,244) (346,354) (54,271)
--------- --------- --------
FINANCING ACTIVITIES:
Capital contributions.................................... 439 142,090
Proceeds from issuance of subordinated debentures........ 30,000
Payment of dividends..................................... (1,446)
Payment of subordinated debentures....................... (30,000)
Net proceeds from borrowings............................. 43,625 162,772 17,537
Principal payments under capital leases.................. (1,075) (3,423)
Other.................................................... (63) 29
--------- --------- --------
Net cash provided by financing activities........ 42,926 300,022 17,537
--------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 2,656 5,562 1,681
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............... 8,221 2,659 978
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR..................... $ 10,877 $ 8,221 $ 2,659
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the year for:
Interest.............................................. $ 15,640 $ 14,838 $ 2,065
Income taxes.......................................... 8,381 5,344 1,009
Noncash investing/financing activities:
Issuance of seller notes in connection with
acquisitions........................................ 2,224 587 2,866
Issuance of seller notes in exchange for repairable
parts............................................... 1,855
Repairable parts received in lieu of cash for accounts
receivable.......................................... 1,124
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 34
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1. NATURE OF BUSINESS
DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings
Corp., herein called "Holdings") and its wholly-owned subsidiaries (the
"Company") are providers of multivendor computer maintenance and technology
support services. The Company offers its customers a single-source, independent
(i.e., not affiliated with an original equipment manufacturer, or "OEM")
solution for computer maintenance and technology support requirements, including
hardware maintenance services, software support, end-user/ help desk services,
network support and other technology support services. These services are
provided by the Company across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, personal
computers ("PCs") and related peripherals. In addition, the Company provides
outsourcing services for OEMs, software publishers, system integrators and other
independent service organizations. The Company delivers its services through an
extensive field service organization of approximately 4,000 field technicians in
over 150 service locations throughout North America and through strategic
alliances in selected international markets.
Through June 30, 1995, the Company's services predominantly involved the
provision of maintenance services to the midrange computer market. On October
20, 1995, the Company acquired Bell Atlantic Business Systems Services, Inc.
("BABSS") (see Note 4). BABSS provided computer maintenance and technology
support services for computer systems ranging from the data center, which
includes both mainframe and midrange systems, to desk top. Subsequent to the
acquisition, Holding's principal operating subsidiary, Decision Servcom, Inc.,
was merged into BABSS, which had changed its name to DecisionOne Corporation. As
a result, DecisionOne Corporation is the principal operating subsidiary of the
Holdings.
On May 29, 1997, Holdings completed a restructuring of the legal
organization of its subsidiaries (the "Corporate Reorganization"). The Corporate
Reorganization involved Holdings' contribution to DecisionOne Corporation of
ownership interests in its subsidiaries, all of which were under Holdings'
control (the "Contributed Subsidiaries"). The Corporate Reorganization has been
accounted for in a manner similar to a pooling of interests. Accordingly, the
Company's consolidated financial statements include the accounts of the
Contributed Subsidiaries for all periods presented.
The Company's wholly owned, direct international subsidiaries are not
significant to the Company's consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of DecisionOne Corporation and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Pro Forma Information (Unaudited) -- The pro forma information included in
the accompanying statement of operations and in Note 3 has been prepared to
reflect the Company's and Holding's recapitalization and merger with Quaker
Holding Co. ("Quaker") and related transactions as if these had occurred on July
1, 1996.
Cash and Cash Equivalents -- Cash and cash equivalents are highly liquid
investments with remaining maturities of three months or less at the time of
purchase. Cash equivalents, consisting primarily of repurchase agreements with
banks, are stated at cost, which approximates fair market value.
Consumable Parts and Repairable Parts -- In order to provide maintenance
and repair services to its customers, the Company is required to maintain
significant levels of computer parts. These parts are classified as consumable
parts or as repairable parts. Consumable parts, which are utilized during the
repair process, are
F-31
<PAGE> 35
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stated at cost, principally determined using the weighted average method, less
an accumulated allowance for obsolescence and shrinkage. Consumable parts are
reflected in cost of revenues during the period utilized.
Repairable (rotable) parts, which can be refurbished and reused, are stated
at original cost less accumulated amortization. Amortization of repairable parts
is reflected in cost of revenues. Costs of refurbishing repairable parts are
also included in cost of revenues as these costs are incurred. Amortization of
repairable parts is based principally on the composite group method, using
straight-line composite rates. Repairable parts generally have an economic life
which corresponds to the normal life cycle of the related products, currently
estimated to be three to five years.
As consumable and repairable parts are retired, the weighted average gross
amounts at which such parts have been carried are removed from the respective
assets accounts, and charged to the accumulated allowance or accumulated
amortization accounts, as applicable. Periodic revisions to amortization and
allowance estimates are required, based upon the evaluation of several factors,
including changes in product life cycles, usage levels and technology changes.
Changes in these estimates are reflected on a prospective basis unless such
changes result from an extraordinary retirement or from other events or
circumstances which indicate that impairment may exist. Impairment is recognized
when the net carrying value of the parts exceeds the estimated current and
anticipated undiscounted net cash flows. Measurement of the amount of
impairment, if any, is calculated based upon the difference between carrying
value and fair value.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is provided for using the straight-line method over the estimated
useful lives of the depreciable assets. Capitalized equipment leases and
leasehold improvements are amortized over the shorter of the related lease terms
or asset lives. Maintenance and repairs are charged to expense as incurred. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is charged to operations.
Business and Contract Acquisitions -- Business and contract acquisitions
have been accounted for as purchase transactions, with the purchase price of
each acquisition allocated to the assets acquired and liabilities assumed based
upon their respective estimated fair values at the dates of acquisition.
Consistent with the Company's parts retirement accounting methods, the gross
value of parts acquired is generally stated at weighted average cost. Fair value
adjustments, if any, are reflected as adjustments to the respective accumulated
amortization or allowance accounts. The excess of the purchase price over
identified net assets acquired is amortized, on a straight-line basis, over the
expected period of future benefit (see Note 6).
Typical contract acquisitions are comprised primarily of customer
maintenance and support contracts of complementary entities, along with the
accompanying consumable and repairable parts required to support these contracts
and other identifiable intangibles, such as noncompete agreements. Liabilities
assumed in business and contract acquisitions consist primarily of prepaid
amounts related to multi-period customer maintenance and support contracts.
These liabilities are recorded as deferred revenues at acquisition dates and are
recognized as revenues when earned in accordance with the terms of the
respective contracts.
Intangible Assets -- Intangible assets are comprised of excess purchase
price over the fair value of net assets acquired, acquired customer lists and
other intangible assets, including the fair value of contractual profit
participation rights and amounts assigned to noncompete agreements.
Intangible assets, which arise principally from acquisitions, are generally
amortized on a straight-line basis over their respective estimated useful lives
(see Note 6). The Company evaluates the carrying value of intangible assets
whenever events or changes in circumstances indicate that these carrying values
may not be recoverable within the amortization period. Impairment is recognized
when the net carrying value of the intangible asset exceeds the estimated
current and anticipated discounted future net cash flows. Measurement of the
amount of impairment, if any, is calculated based upon the difference between
carrying value and fair value.
F-32
<PAGE> 36
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue -- The Company enters into maintenance contracts whereby it
services various manufacturers' equipment. Revenues from these contracts are
recognized ratably over the terms of such contracts. Prepaid revenues from
multi-period contracts are recorded as deferred revenues and are recognized
ratably over the term of the contracts.
Revenues derived from the maintenance of equipment not under contract are
recognized as the service is performed. Revenues derived from other technology
support services are recognized as the service is performed or ratably over the
term of the contract.
Foreign Currency Translation -- Gains and losses resulting from foreign
currency translation are accumulated as a separate component of shareholders'
equity. Gains and losses resulting from foreign currency transactions are
included in operations.
Credit Risk -- Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base and their dispersion across many industries.
Fair Value of Financial Instruments -- The following disclosures of the
estimated fair value of financial instruments were made in accordance with the
requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies.
Cash and Cash Equivalents, Accounts Receivable, and Accounts
Payable -- The carrying amount of these items are a reasonable estimate of
their fair value.
Short-Term Debt and Long-Term Debt -- As more fully described in Note
8, under its revolving borrowing facility the Company incurs interest at
variable rates based upon market conditions (i.e., based upon the prime
rate or LIBOR). Rates applicable to other debt instruments, which consist
primarily of short-term notes payable in connection with certain
acquisitions, are comparable to those of similar instruments currently
available to the Company. Accordingly, the carrying amount of debt is a
reasonable estimate of its fair value.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates and
assumptions.
Discontinued Operations -- During fiscal 1993, in connection with the sale
of its products division, the Company established estimated liabilities relating
to the settlement of the remaining assets and liabilities of this division. In
1995, the Company revised its estimates as a result of settlement of these
liabilities, and the consolidated statement of operations for 1995 reflects an
increase in net income of $1,113,000 for the change in estimate.
Derivative Financial Instruments -- Derivative financial instruments, which
constitute interest rate swap agreements (see Note 8), are periodically used by
the Company in the management of its variable interest rate exposure. Amounts to
be paid or received under interest rate swap agreements are recognized as
interest expense or interest income during the period in which these accrue.
Gains realized, if any, on the early termination of interest rate swap contracts
are deferred, to be recognized upon the termination of the related asset or
liability or expiration of the original term of the swap contract, whichever is
earlier. The Company does not hold any derivative financial instruments for
trading purposes.
Reclassifications -- Certain reclassifications have been made to the 1996
balances in order to conform with the 1997 presentation.
F-33
<PAGE> 37
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION
On August 7, 1997, the Company and Holdings consummated a merger with
Quaker Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II.
The merger, which will be recorded as a recapitalization for accounting purposes
as of the consummation date, occurred pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") by and among the Company, Holdings and Quaker
dated May 4, 1997. The accompanying historical consolidated financial statements
do not include any adjustments with respect to the consummation of the merger.
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into Holdings, and the holders of approximately 94.7% of shares of Holdings
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Holdings common stock outstanding immediately prior to the merger retained such
shares in the merged Holdings, as determined based upon shareholder elections
and stock proration factors specified in the Merger Agreement. Immediately
following the merger, continuing shareholders owned approximately 11.9% of
shares of outstanding Holdings common stock. The aggregate value of the merger
transaction was approximately $940 million, including refinancing of the
Company's revolving credit facility (see Note 8).
In connection with the merger, Holdings raised $85 million through the
public issuance of discount debentures, and the Company issued publicly held
subordinated notes for approximately $150 million. The Company also entered into
a new syndicated credit facility providing for term loans of $470 million and
revolving loans of up to $105 million. The proceeds of the discount notes,
subordinated notes and the initial borrowings under the new credit facility
along with a loan of approximately $59.1 million from the Company to Holdings
and the purchase of approximately $225 million of Holdings common stock by
Quaker have been used to finance the payments of cash to cash-electing Holdings
shareholders, to pay the holders of Holdings stock options and stock warrants
canceled or converted, as applicable, in connection with the merger, to repay
the Company's existing revolving credit facility and to pay expenses incurred in
connection with the merger.
As a result of the merger, the Company and Holdings incurred various
expenses, aggregating approximately $71 million on a pretax basis (approximately
$64 million after related tax benefit), subject to adjustment, in connection
with consummating the transaction. These costs consisted primarily of
compensation costs, underwriting discounts and commissions, professional and
advisory fees and other expenses. The Company will report this one-time charge
during the first quarter of fiscal 1998. In addition to these expenses, the
Company and Holdings also incurred approximately $22.3 million of capitalized
debt issuance costs associated with the merger financing. These costs will be
charged to expense over the terms of the related debt instruments.
The following summarized unaudited pro forma information of the Company as
of and for the year ended June 30, 1997 assumes that the merger had occurred on
July 1, 1996. The pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the financial condition or of the
results of operations which actually would have resulted had the merger occurred
as of July 1, 1996 or which may result in the future.
F-34
<PAGE> 38
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
PRO FORMA BALANCE SHEET INFORMATION:
Total assets................................................................... $707,785
Long term indebtedness (including current portion)............................. 641,376
Other liabilities.............................................................. 170,708
Shareholders' (deficit)........................................................ (104,299)
PRO FORMA INCOME STATEMENT INFORMATION:
Revenues....................................................................... $785,950
Operating income............................................................... 67,750
Income from continuing operations before income taxes.......................... 9,772
Net income..................................................................... 5,726
</TABLE>
The pro forma net loss reflects a net increase in interest expense of
approximately $43.3 million ($25.4 million after related pro forma tax effect),
attributable to additional financing incurred in connection with the merger, net
of repayment of the Company's existing revolving credit facility.
4. BUSINESS AND CONTRACT ACQUISITIONS
During the years ended June 30, 1997, 1996 and 1995, the Company acquired
certain net assets of other service companies as follows (in thousands):
<TABLE>
<CAPTION>
EXCESS
CONSIDERATION PURCHASE
--------------------------------------------------------- PRICE OVER
TOTAL FAIR VALUE
NUMBER OF PURCHASE OTHER OF NET ASSETS
YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTANGIBLES ACQUIRED
- ---------------------------------- ------------ -------- ------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Significant business acquisitions:
June 30, 1995................... 1 $ 27,413 $2,094 $ 29,507 $15,600 $ 7,394
June 30, 1996................... 1 250,549 250,549 72,581 60,533
Nonsignificant business or maintenance contract acquisitions:
June 30, 1995................... 5 9,327 255 9,582 4,577 8,680
June 30, 1996................... 5 14,853 578 15,431 6,522 6,318
June 30, 1997................... 9 31,749 2,224 33,973 231 47,200
</TABLE>
On August 31, 1994, the Company purchased certain net assets and
liabilities of IDEA/Servcom, Inc. for approximately $29,500,000. This
acquisition was funded by cash and the issuance of a $2,600,000 noninterest-
bearing note to the seller. See seller notes payable section of Note 8. The
excess of asset purchase price over the fair value of net assets acquired at the
date of purchase was approximately $7,400,000.
On October 20, 1995, the Company acquired all of the outstanding common
stock of BABSS, a subsidiary of Bell Atlantic Corporation ("BAC") for
approximately $250,549,000. The acquisition was funded with the proceeds from
the issuance of $30,000,000 of Series C preferred stock, $30,000,000 of
subordinated debentures and the balance from additional bank borrowings (see
Notes 8 and 13). The excess of asset purchase price over the fair value of net
assets acquired at the date of purchase was initially recorded as approximately
$58,796,000. Subsequent to the acquisition, the Company recorded a net
adjustment increasing the initial amount by $1,737,000 and adjusted other
balance sheet accounts principally by the same amount. This resulted from the
adjustment and reclassification of certain tax accruals offset by favorable
negotiations on certain leased facilities (see Note 7). As part of the
acquisition, the Company purchased from BAC contractual profit participation
rights whereby the Company will receive a fixed percentage of the annual
operating profits (3.2% or 3.5%, depending upon the level of profits) earned by
a former foreign affiliate of
F-35
<PAGE> 39
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BAC which provides computer maintenance and technology support services in
Europe. The estimated value of the discounted estimated future cash flows over a
twenty-year period from these contractual profit participation rights is
$25,000,000.
Included in nonsignificant maintenance contract acquisitions is the
acquisition of substantially all of the contracts and related assets, including
spare parts of the U.S. computer service business of Memorex Telex Corporation
and certain of its affiliates (collectively, "Memorex Telex"). Memorex Telex had
filed a petition in bankruptcy in the United States Bankruptcy Court (the
"Court") in the District of Delaware on October 15, 1996; the Court approved the
sale to the Company on November 1, 1996. The adjusted purchase price was $52.7
million, comprised of the assumption of certain liabilities under contracts of
the service business, which were valued at $28.3 million, and base cash
consideration of approximately $24.4 million, after certain purchase price
adjustments, excluding transaction and closing costs.
The estimated fair market values of certain assets acquired, as well as
liabilities assumed, are subject to further adjustment as additional information
becomes available to the Company. During the third quarter of fiscal 1997, the
Company recorded an adjustment increasing the deferred revenues assumed in the
Memorex Telex acquisition by approximately $2,300,000, to revise the estimated
fair value of certain contract liabilities of the business assumed by the
Company.
The following summarized unaudited pro forma information for significant
acquisitions that have a material effect on the Company's results of operations
for the years ended June 30, 1996 and 1995 assumes that the acquisitions
occurred as of July 1, 1994. The nonsignificant business and maintenance
contract acquisitions are not considered material individually or in the
aggregate. The pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the significant acquisitions been in effect on
the dates indicated or which may result in the future.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenues....................................................... $697,676 $679,284
Income from continuing operations before extraordinary item.... 31,080 20,153
Net income..................................................... 29,153 21,266
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings............................................. $ 6,318 $ 2,055
Equipment...................................................... 16,248 13,858
Computer hardware and software................................. 35,030 27,277
Furniture and fixtures......................................... 8,308 8,051
Leasehold improvements......................................... 4,628 4,125
-------- --------
70,532 55,366
Accumulated depreciation and amortization...................... (36,305) (22,936)
-------- --------
$ 34,227 $ 32,430
======== ========
</TABLE>
F-36
<PAGE> 40
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (20-40); equipment (3-10);
computer hardware and software (3-5); furniture and fixtures (5-10) and
leasehold improvements (term of related leases).
Depreciation and amortization expense was approximately $13,549,000,
$8,309,000 and $1,779,000 for the fiscal years ended 1997, 1996 and 1995,
respectively.
6. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Excess purchase price over fair value of net assets acquired... $130,548 $ 82,355
Customer lists................................................. 64,688 64,758
Contractual profit participation rights........................ 25,000 25,000
Noncompete agreements.......................................... 4,631 4,500
Other intangibles.............................................. 9,131 7,671
-------- --------
233,998 184,284
Accumulated amortization....................................... (42,632) (19,625)
-------- --------
$191,366 $164,659
======== ========
</TABLE>
The periods (in years) used in determining the amortization rates of
intangible assets are: excess purchase price over fair value of net assets
acquired (4-20); customer lists (3-8); contractual profit participation rights
(20); noncompete agreements (3-5) and other (1-6).
Amortization expense relating to intangibles was approximately $23,470,000,
$15,673,000 and $6,775,000, for the fiscal years ended 1997, 1996 and 1995,
respectively.
7. ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable................................................. $55,723 $53,347
Compensation and benefits........................................ 22,706 22,115
Interest......................................................... 563 1,505
Unused leases.................................................... 878 3,485
Pension accrual.................................................. 1,371 1,258
Accrued accounting and legal fees................................ 1,435 1,073
Non-income taxes and other....................................... 12,840 6,781
------ ------
$95,516 $89,564
====== ======
</TABLE>
Prior to 1994, the Company received $2,600,000 in tax bills (primarily
interest) from the Internal Revenue Service ("IRS") related to claims for tax
and interest for the years 1981 through 1987. The Company paid approximately
$500,000 of the claims upon receipt of the bills. Although the Company disputed
the tax bills, an IRS mandated payment of $828,000 was made in 1996. As of June
30, 1996, the
F-37
<PAGE> 41
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company had an accrued liability of $1,883,000 related to this assessment.
During fiscal 1997, the Company paid $1,729,000 in full settlement of these tax
and interest bills.
In connection with the acquisition of BABSS, which has been accounted for
using the purchase method of accounting (see Note 4), the Company recorded
approximately $11,000,000 in liabilities resulting from planned actions with
respect to BABSS, which included the costs to exit certain leased facilities and
to involuntarily terminate employees. The provision of approximately $3,500,000
for the costs to exit certain leased facilities principally relates to future
lease payments on a warehouse in California which has been made idle.
Approximately $4,000,000 was provided for severance and termination benefits of
approximately 210 employees in the field, operations support, sales and
administration. Approximately $3,000,000 was provided in connection with the
exit plan for write-downs of spare parts and equipment at two California
facilities which will not be utilized in future operations. The provision for
various other charges of approximately $500,000 consisted of costs to complete
the exit plan. As of June 30, 1996, the Company had settled all of these
liabilities, except for the lease liabilities on idle facilities for which
payments were scheduled to continue through 1999 (see Note 15). At June 30, 1997
and 1996 remaining amounts due under these leases were $0 and $1,200,000,
respectively.
As a result of successful negotiations of unutilized leased facilities,
during 1996, the Company recorded a reduction of approximately $975,000 to both
the provisions for leased facilities and excess purchase price over fair value
of net assets acquired.
8. REVOLVING CREDIT LOAN AND LONG-TERM DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit loans......................................... $231,671 $186,400
Seller noninterest-bearing notes payable....................... 2,922 2,118
Seller note payable -- purchase of spare parts................. 1,608
Capitalized lease obligations, payable in varying installments
at interest rates ranging from 7.25% to 13.01% at June 30,
1997......................................................... 1,308 2,385
------- -------
237,509 190,903
Less current portion........................................... 4,788 2,321
------- -------
$232,721 $188,582
======= =======
</TABLE>
REVOLVING CREDIT LOANS
On October 20, 1995, in connection with the BABSS acquisition (see Note 4)
the Company entered into a Credit Agreement which provided for a term loan (the
"1995 Term Loan") of $230,000,000 and a revolving credit facility of up to a
maximum of $30,000,000. The 1995 Term Loan provided for 19 equal quarterly
principal payments of $10,000,000 to be due and payable on the last day of each
calendar quarter commencing December 31, 1995 with a final payment due on
September 30, 2000. Loans under the revolving credit facility were to mature on
September 30, 2000. Interest on the 1995 Term Loan and the revolving credit
facility were at varying rates based, at the Company's option, on the Eurodollar
rate or the Alternative Base Rate (NationsBanc prime rate), plus the Applicable
Margins. Margins were based on the ratio of Total Funded Debt to EBITDA; the
Eurodollar Margin ranged from 1.75% to 2.5%, while the Alternative Base Rate
Margin ranged from 0.5% to 1.25%.
F-38
<PAGE> 42
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1996, the Company completed an initial public offering. The
Company used a portion of the proceeds to repay approximately $70 million of the
1995 Term Loan.
Also in April 1996, the Company converted the 1995 Term Loan and the
existing $30 million Revolving Credit Facility into a $225 million variable
rate, unsecured revolving credit facility ("the 1996 Revolving Credit
Facility"). During fiscal 1997, the 1996 Revolving Credit Facility commitment
was increased to $300 million, in connection with the acquisition of certain
contracts and assets. The 1996 Revolving Credit Facility is at floating interest
rates, based either on the LIBOR or prime rate, in either case plus an
Applicable Margin, at the Company's option. As of June 30, 1997, the applicable
rate was LIBOR plus .75% or approximately 6.5%. The 1996 Revolving Credit
Facility enables the Company to borrow up to $300 million in the form of
revolving credit loans with a maturity date of April 26, 2001 and with interest
periods determined principally on a quarterly basis. To offset the variable rate
characteristics of the borrowings, the Company entered into interest rate swap
agreements with two banks resulting in fixed interest rates of 5.4% on $40.0
million notional principal amount through December 1997 and 5.5% on another
$40.0 million notional principal amount through December 1998.
During fiscal 1997, the Company terminated these swap agreements, resulting
in an insignificant gain which has been deferred to the first quarter of fiscal
1998.
Under the terms of the 1996 Revolving Credit Facility, the Company may use
up to $25,000,000 for letters of credit, subject to the limitation of
$300,000,000 in total credit. As of June 30, 1997, letters of credit in the face
amount of $3,067,000 were outstanding.
The loan agreement relating to the 1996 Revolving Credit Facility contains
various terms and covenants which provide for certain restrictions on the
Company's indebtedness, liens, investments, disposition of assets and mergers
and acquisitions and require the Company, among other things, to maintain
minimum levels of consolidated net worth and certain minimum financial ratios.
The borrower under the 1996 Revolving Credit Facility is DecisionOne
Corporation. Repayment of the debt is guaranteed by the Company, Holdings and
the Company's other subsidiaries except for its Canadian subsidiary.
The Company's debt agreements and other agreements to which it is a party
contain certain covenants restricting the payment of dividends on, or
repurchases of, Holdings common stock.
The Company had average borrowings of $221,069,000 and $172,065,000 during
1997 and 1996, respectively, at an average interest rate of 6.4% and 8.69%,
respectively. Maximum borrowings during 1997 and 1996 were $243,350,000 and
$268,748,000, respectively.
Subsequent to June 30, 1997, in connection with the Company's and Holdings'
merger with Quaker (see Note 3), the 1996 Revolving Credit Facility was repaid
in full, including all interest due thereon. This refinancing was accomplished,
in part, through the issuance of certain new debt instruments, consisting of
senior discount notes, senior subordinated notes and a term loan/revolving
credit facility which, in the aggregate, provide financing of approximately $810
million (including financing obtained by Holdings), subject to certain
conditions. The new revolving credit facility provides the Company with $105
million of available financing, subject to a borrowing base, for working capital
purposes subsequent to the merger.
The Company's Canadian subsidiary has available a $1.5 million (Canadian)
revolving line of credit agreement with a local financial institution. At June
30, 1997, approximately $471,000 (in U.S. dollars) was outstanding under this
agreement. There were no amounts outstanding at June 30, 1996.
SELLER NOTES PAYABLE
In connection with certain acquisitions (see Note 4), the Company issued
noninterest-bearing notes, the principal of which is primarily due upon
settlement of contingent portions of the acquisition purchase price within a
specified period subsequent to closing, generally not exceeding one year from
the acquisition date.
F-39
<PAGE> 43
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contingencies typically pertain to actual amounts of monthly maintenance
contract revenues acquired and prepaid contract liabilities assumed in
comparison to amounts estimated in acquisition agreements. The Company imputes
interest, based upon market rates, for long-term, non-interest-bearing
obligations.
During 1997, the Company issued a secured note payable to the seller for
the purchase of repairable parts in the original amount of $1,854,000. The note
accrues interest at an interest rate of approximately 8%, and requires quarterly
payments of principal and interest of approximately $273,000 until maturity in
December 1998.
SUBORDINATED DEBENTURES
In connection with the BABSS acquisition (see Note 4) on October 20, 1995,
the Company issued and sold to Holdings principal shareholders, an aggregate
$30,000,000 principal amount of 10.101% Debentures (the "Affiliate Notes") due
on October 20, 2001. The Affiliate Notes were subordinated to the 1995 Term Loan
and the revolving credit facility. Interest on the Affiliate Notes was payable
semiannually on the last business day of June and December of each year
commencing on December 31, 1995.
In connection with the issuance of the debentures, Holdings issued 468,750
Common Stock Purchase Warrants (the "Warrants"). Each Warrant initially entitled
the owner to buy one share of Common Stock for $0.10. The number of shares that
can be purchased per Warrant steps up over 24 months in conjunction with the
increasing conversion privilege applicable to the Preferred Stock such that, at
the end of 24 months, each Warrant entitled the holder to buy approximately 1.21
shares of Common Stock at a price of $0.10 per share. The Warrants were
exercisable from October 20, 1997 until October 20, 2001, provided that if
Holdings had a public offering of its Common Stock meeting certain requirements
before October 20, 1997, the Warrants became exercisable at the time of the
public offering and the number of shares that could be purchased on exercise was
fixed at that time and no longer increased in steps. The Warrants also became
exercisable upon retirement of the Debentures. Each Warrant had an assigned
value of $7.25333 which resulted in an original issue discount of $3,400,000
which was being amortized over the term of the Affiliate Notes. Upon
consummation of Holdings initial public offering in April 1996, the Company was
required to pay up to the total amount outstanding under the Affiliate Notes
and, accordingly, the Company used $30,000,000 of the proceeds to retire the
Affiliate Notes. As a result, in 1996 the Company recorded an extraordinary loss
in the amount of $3,211,000, net of taxes of $1,284,000, due to the acceleration
of the amortization of original issue discount.
F-40
<PAGE> 44
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $10,909 $ 2,892 $ 16,065
State.............................................. 3,616 1,595 4,599
Foreign............................................ 1,080 548 (1,272)
Deferred:
Federal............................................ 6,460 8,945 (29,897)
State.............................................. 16 641 (3,617)
Foreign............................................ (113) (499)
Benefit of operating loss carryforwards:
Federal............................................ (7,729)
State.............................................. (1,253)
Foreign............................................ (252)
------- ------- --------
Provision (benefit) for income taxes................. $21,968 $13,870 $(23,104)
======= ======= ========
</TABLE>
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable............................................ $ 4,771 $ 1,341
Inventory...................................................... 2,195 2,586
Accrued expenses............................................... 7,000 6,378
Unused leases.................................................. 390
Fixed assets................................................... 299
Intangibles.................................................... 6,196 5,670
Operating loss carryforwards................................... 4,868 14,252
Tax credit carryforwards....................................... 1,670 1,170
------- -------
Gross deferred tax assets........................................ 27,090 31,696
Gross deferred tax liabilities:
Repairable spare parts......................................... (8,918) (7,273)
Fixed assets................................................... (108)
------- -------
Gross deferred tax liabilities................................... (9,026) (7,273)
------- -------
Net deferred tax asset........................................... $18,064 $24,423
======= =======
</TABLE>
F-41
<PAGE> 45
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net operating loss and minimum tax credit carryforwards available at June
30, 1997 expire in the following years:
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION
AMOUNT ----------
--------------
(IN THOUSANDS)
<S> <C> <C>
Federal operating losses............................... $ 12,877 2006-2008
State operating losses................................. 8,669 1998-2008
Investment tax credit.................................. 134 2004
Minimum tax credit..................................... 1,536 INDEFINITE
</TABLE>
As a result of the Company's initial public offering in April, 1996, an
"ownership change" occurred pursuant to Section 382 of the Internal Revenue
Code. Accordingly, for Federal income tax purposes, net operating loss and tax
credit carryforwards arising prior to the ownership change are limited during
any future period to the Section 382 "limitation amount" of approximately $20.0
million per annum. In addition, the Company's merger with Quaker on August 7,
1997 (see Note 3) represents another such "ownership change" pursuant to Section
382. The Company estimates that the limitation on the use of tax loss
carryforwards and other credits, for Federal income tax purposes, in any
post-merger period will be reduced to approximately $9.0 million per annum.
A reconciliation between the provision (benefit) for income taxes, computed
by applying the statutory federal income tax rate of 35% for 1997, 1996 and 1995
to income before income taxes, and the actual provision (benefit) for income
taxes follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ------
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate........... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax provision...... 5.0 4.6 3.5
Foreign income taxes......................................... 0.4 (6.9)
Unused lease credit.......................................... (0.1)
Benefit of operating loss carryforward....................... (0.8) (49.1)
Change in valuation allowance................................ (1.4) (108.9)
Other........................................................ 1.0 2.6 0.3
---- ---- ------
Actual income tax provision (benefit) effective tax rate..... 41.4% 40.0% (126.2)%
==== ==== ======
</TABLE>
The Company has recorded a deferred tax asset of $4,868,000 reflecting the
benefit of federal and state net operating loss carryforwards, which expire in
varying amounts between 1998 and 2008. Realization depends on generating
sufficient taxable income before expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized.
The valuation allowance for deferred tax assets as of July 1, 1994 was
$44,160,000. The net changes in the valuation allowance for the years ended June
30, 1996 and 1995 were decreases of $686,000 and $43,474,000, respectively. Of
these amounts, $252,000 and $8,982,000 resulted from the realization of net
operating loss carryforwards. The remaining decrease of $434,000 and $34,492,000
for 1996 and 1995, respectively, resulted from the Company's expected future
taxable income.
F-42
<PAGE> 46
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. OTHER LIABILITIES
Other (noncurrent) liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued severance and unutilized lease losses.................... $ 4,532 $ 2,227
Other noncurrent liabilities..................................... 9,396 12,059
------- -------
$ 13,928 $ 14,286
======= =======
</TABLE>
As more fully described in Note 15, accrued severance and unutilized lease
losses represent remaining liabilities for estimated future employee severance
costs and for lease/contract losses associated with duplicate facilities to be
closed. These liabilities were recorded by the Company in connection with the
Memorex Telex and BABSS acquisitions in November 1996 and October 1995,
respectively.
Other noncurrent liabilities include deferred operating lease liabilities
related to scheduled rent increases, recorded in accordance with the provisions
of SFAS No. 13, Accounting for Leases. Also included in other noncurrent
liabilities are provisions relating to various tax matters.
11. LEASE COMMITMENTS
The Company conducts its operations primarily from leased warehouses and
office facilities and uses certain computer, data processing and other equipment
under operating lease agreements expiring on various dates through 2005. The
future minimum lease payments for operating leases having initial or remaining
noncancelable terms in excess of one year for the five years succeeding June 30,
1997 and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $18,415
1999............................................................... 15,224
2000............................................................... 11,406
2001............................................................... 5,815
2002............................................................... 2,879
Thereafter......................................................... 4,757
-------
$58,496
=======
</TABLE>
Rental expense amounted to approximately $17,367,000, $13,149,000 and
$5,878,000, for the fiscal years ended 1997, 1996 and 1995, respectively.
12. RETIREMENT PLANS
The Company maintains a 401(k) plan for its employees which is funded
through the contributions of its participants. A similar plan exists for former
employees of an acquired company for which eligibility and additional
contributions were frozen in September 1988.
In addition, the Company assumed the liability of the defined benefit
pension plan applicable to employees of a company acquired in 1986. The
eligibility and benefits were frozen as of the date of the acquisition.
F-43
<PAGE> 47
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension expense for the defined benefit pension plan was computed as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1996 1995
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost.............................................. $ 521 $ 495 $ 482
Actual return on plan assets............................... (409) (449) (312)
Net amortization and deferral.............................. 9 72 (42)
----- ----- -----
Periodic pension costs..................................... $ 121 $ 118 $ 128
===== ===== =====
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% and the expected long-term rate of return
on assets was 8.5% for 1997, 1996 and 1995.
The following table sets forth the funded status of the frozen pension plan
as of May 1, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefits (100% vested)............................... $ 7,290 $ 7,116
Fair value of plan assets........................................ 6,128 5,800
------- -------
Unfunded projected benefit obligation.................. 1,162 1,316
Unrecognized net loss............................................ 1,873 1,848
Unrecognized net transition obligation........................... 470 504
Adjustment to recognized minimum liability....................... (2,343) (2,352)
------- -------
Accrued pension costs............................................ $ 1,162 $ 1,316
======= =======
</TABLE>
13. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
During the second quarter of fiscal 1997, in connection with the Memorex
Telex acquisition (see Note 4), the Company recorded a $3.4 million pre-tax
charge for estimated future employee severance costs, and a $0.9 million pre-tax
charge for unutilized lease/contract losses ("exit costs"), primarily associated
with duplicate facilities to be closed. The $3.4 million charge, recorded in
accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits,
reflects the actuarially determined benefit costs for the separation of
employees who are entitled to benefits under pre-existing separation pay plans.
These costs are included in selling, general and administrative expenses in the
accompanying consolidated statement of operations for the year ended June 30,
1997.
In the second quarter of fiscal 1996, in connection with the acquisition of
BABSS, the Company recorded pre-tax charges for exit costs of $6.9 million, and
estimated future employee severance costs of $0.1 million. During the fourth
quarter of fiscal 1996, the Company reversed $3.4 million of these employee
severance and exit cost liabilities. The reversal was primarily the result of
the Company's ability to utilize and sublease various facilities identified in
the original $7.0 million combined liability. Such information was unknown to
the Company when the original liability was recorded.
See Note 10 for further information regarding accrued severance and
unutilized lease losses.
14. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect to four waste disposal sites that have been identified by the United
States Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party with respect to a fifth, related site, but
F-44
<PAGE> 48
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has not received any other communication with respect to that site. Under
applicable law, all parties responsible for disposal of hazardous substances at
those sites are jointly and severally liable for clean-up costs. The Company
originally estimated that its share of the costs of the clean-up of one of these
sites would be approximately $500,000 which is provided for in liabilities
related to the discontinued products division in the accompanying consolidated
balance sheets as of June 30, 1997 and 1996. Complete information as to the
scope of required clean-up at these sites is not yet available and, therefore,
management's evaluation may be affected as further information becomes
available. However, in light of information currently available to management,
including information regarding assessments of the sites to date and the nature
of involvement of the Company's predecessor at the sites, it is management's
opinion that the Company's potential additional liability, if any, for the cost
of clean-up of these sites will not be material to the consolidated financial
position, results of operations or liquidity of the Company.
The Company is also party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, these actions can be successfully defended or resolved without a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
During the fourth quarter of fiscal 1997, the Company received $2.0 million
in full settlement of a claim against its former insurance carrier, related to
unreimbursed losses. This settlement was reflected as a reduction of selling,
general and administrative costs in the accompanying statement of operations.
15. RELATED PARTY TRANSACTIONS
Prior to 1994, the Company entered into an agreement to purchase printer
products from Genicom Corporation (Genicom). The Company and Genicom are under
common ownership. The initial term of the agreement is for five years with an
option to extend based on mutual agreement of the parties. Purchases from
Genicom for the years ended June 30, 1997, 1996 and 1995 were approximately
$472,000, $1,512,000 and $1,972,000, respectively. Accounts payable to Genicom
amounted to approximately $30,000 and $14,000 as of June 30, 1997 and 1996,
respectively.
During the year ended June 30, 1996, the Company paid approximately
$125,000 for expense reimbursements to certain shareholders for services
rendered in connection with an acquisition in 1988. The amount was accrued for
in prior years.
F-45
<PAGE> 49
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(PARENT COMPANY ONLY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Investment in equity of subsidiaries................................. $214,888 $180,793
-------- --------
Total assets........................................................... $214,888 $180,793
======== ========
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value; authorized 5,000,000 shares; none
outstanding
Common stock, $.01 par value -- authorized, 100,000,000 shares;
issued and outstanding 27,817,832 shares in 1997 and 27,340,288
shares in 1996.................................................... $ 278 $ 273
Additional paid-in capital........................................... 258,331 255,262
Accumulated deficit.................................................. (42,432) (73,516)
Foreign currency translation adjustment.............................. 584 622
Pension liability adjustment......................................... (1,873) (1,848)
-------- --------
Total shareholders' equity............................................. $214,888 $180,793
======== ========
</TABLE>
See note to condensed financial information.
S-1
<PAGE> 50
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
(PARENT COMPANY ONLY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Equity in net income of subsidiaries....................... $ 31,084 $ 18,862 $ 42,528
-------- -------- --------
Net income................................................. $ 31,084 $ 18,862 $ 42,528
======== ======== ========
</TABLE>
See note to condensed financial information.
S-2
<PAGE> 51
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------
1997 1996 1995
-------- --------- -------
<S> <C> <C> <C>
Operating Activities:
Net income.................................................. $ 31,084 $ 18,862 $42,528
Adjustment to reconcile net income to net cash provided by
operating activities..................................... (31,084) (17,416) (42,528)
-------- --------- --------
Net cash provided by operating activities.............. -- 1,446 --
-------- --------- --------
Investing Activities -- contribution to capital of
subsidiaries................................................ (439) (142,090) --
-------- --------- --------
Financing Activities:
Proceeds from issuance of preferred stock 31,392
Proceeds from issuance of common stock and warrants......... 439 110,698
Dividends paid on preferred stock........................... (1,446)
-------- --------- --------
Net cash provided by financing activities.............. 439 140,644 --
-------- --------- --------
Net Change in Cash.......................................... $ -- $ $ --
======== ========= ========
</TABLE>
See note to condensed financial information.
S-3
<PAGE> 52
SCHEDULE 1
DECISIONONE HOLDINGS CORP.
NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
DecisionOne Holdings Corp. (the Parent) and on an equity basis its subsidiaries
and should be read in conjunction with the consolidated financial statements of
DecisionOne Holdings Corp. and Subsidiaries (the "Company") and the notes
thereto.
S-4
<PAGE> 53
SCHEDULE II
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
DECISIONONE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING OF CORP. AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------ ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 1995:
Accounts Receivable --
Allowance for uncollectable
accounts................. $ 1,461 $1,930 $ 3,225 $ 6,616
Consumable parts --
Allowance for
Obsolescence............. $ 8,370 $1,995 $ 1,423(b) $ 11,788
Year Ended June 30, 1996:
Allowance for uncollectable
accounts.................... $ 6,616 $ 3,434 $ (470)(a) $ 9,580
Consumable parts --
Allowance for
Obsolescence............. $ 11,788 $1,171 $ 10,193(b) $ (3,615) $ 19,537
Year Ended June 30, 1997:
Accounts Receivable --
Allowance for Uncollectable
Accounts.................... $ 9,580 $7,848 $ 1,593(b) $ (4,152)(a) $ 14,869
Consumable parts --
Allowance for Obsolescence.... $ 19,537 $2,554 $ 3,849(b) $ (8,051) $ 17,889
</TABLE>
- ---------------
(a) Amount primarily represents net recoveries (write-offs) during the year.
(b) Amount primarily represents allowance recorded as a result of acquisitions
during the year.
S-5
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- --------------------------------------- ----
<C> <S> <S>
10.3 Investors' Agreement dated as of August 7, 1997
10.21+ Form of Purchase Agreement dated as of August 7, 1997
10.22+ Form of Option Agreement dated as of august 7, 1997
23 Consent of Deloitte & Touche LLP
</TABLE>
<PAGE> 1
EXHIBIT 10.3
CONFORMED COPY
INVESTORS' AGREEMENT
dated as of
August 7, 1997
among
DECISIONONE HOLDINGS CORP.,
DLJ MERCHANT BANKING PARTNERS II, L.P.,
DLJ MERCHANT BANKING PARTNERS II - A, L.P.,
DLJ OFFSHORE PARTNERS II, C.V.,
DLJ DIVERSIFIED PARTNERS, L.P.,
DLJ DIVERSIFIED PARTNERS - A, L.P.,
DLJ MILLENNIUM PARTNERS, L.P.,
DLJ MILLENNIUM PARTNERS - A, L.P.,
DLJMB FUNDING II, INC.,
UK INVESTMENT PLAN 1997 PARTNERS,
DLJ EAB PARTNERS, L.P.,
DLJ FIRST ESC, LLC,
AND
CERTAIN OTHER PERSONS NAMED HEREIN
<PAGE> 2
TABLE OF CONTENTS
--------------
PAGE
----
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions.....................................................2
ARTICLE 2
CORPORATE GOVERNANCE AND MANAGEMENT
SECTION 2.01. Composition of the Board.......................................10
SECTION 2.02. Removal........................................................10
SECTION 2.03. Vacancies......................................................10
SECTION 2.04. Action by the Board............................................11
SECTION 2.05. Conflicting Charter or Bylaw Provision.........................11
ARTICLE 3
RESTRICTIONS ON TRANSFER
SECTION 3.01. General........................................................12
SECTION 3.02. Legends........................................................12
SECTION 3.03. Permitted Transferees..........................................13
SECTION 3.04. Restrictions on Transfers by Institutional Shareholders........13
SECTION 3.05. Restrictions on Transfers by Management Shareholders...........13
ARTICLE 4
TAG-ALONG RIGHTS; DRAG-ALONG RIGHTS; PREEMPTIVE RIGHTS
SECTION 4.01. Rights to Participate in Transfer..............................15
SECTION 4.02. Right to Compel Participation in Certain Transfers.............17
SECTION 4.03. Preemptive Rights..............................................19
SECTION 4.04. Certain Other Purchases of Common Stock........................20
ARTICLE 5
REGISTRATION RIGHTS
SECTION 5.01. Demand Registration............................................21
SECTION 5.02. Piggyback Registration.........................................23
SECTION 5.04. Registration Procedures........................................25
<PAGE> 3
PAGE
----
SECTION 5.05. Indemnification by the Company.................................29
SECTION 5.06. Indemnification by Participating Shareholders..................29
SECTION 5.08. Contribution...................................................31
SECTION 5.09. Participation in Public Offering...............................33
SECTION 5.10. Cooperation by the Company.....................................33
SECTION 5.11. No Transfer of Registration Rights.............................33
ARTICLE 6
CERTAIN COVENANTS AND AGREEMENTS
SECTION 6.01. Confidentiality................................................33
SECTION 6.02. Reports........................................................34
SECTION 6.03. Limitations on Subsequent Registration.........................35
SECTION 6.04. Exclusive Financial Advisor and Investment Banking
Advisor........................................................35
SECTION 6.05. Limitation on Purchase of Common Stock.........................35
ARTICLE 7
MISCELLANEOUS
SECTION 7.01. Entire Agreement...............................................35
SECTION 7.02. Binding Effect; Benefit........................................36
SECTION 7.03. Assignability..................................................36
SECTION 7.04. Amendment; Waiver; Termination.................................36
SECTION 7.05. Notices........................................................37
SECTION 7.06. Headings.......................................................38
SECTION 7.07. Counterparts...................................................38
SECTION 7.08. Applicable Law.................................................38
SECTION 7.09. Specific Enforcement...........................................38
SECTION 7.10. Consent to Jurisdiction; Expenses..............................39
SECTION 7.11. Severability...................................................39
ii
<PAGE> 4
INVESTORS' AGREEMENT
AGREEMENT dated as of August 7, 1997 among (i) DecisionOne Holdings Corp.
(the "Company"), (ii) DLJ Merchant Banking Partners II, L.P. ("DLJMB"), DLJ
Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJMB Funding II,
Inc., DLJ Merchant Banking Partners II - A, L.P., DLJ Diversified Partners - A.,
L.P., DLJ Millennium Partners, L.P., DLJ Millennium Partners - A, L.P., UK
Investment Plan 1997 Partners, DLJ EAB Partners, L.P., and DLJ First ESC, LLC
(each a "DLJ Entity" and a "Shareholder" and collectively the "DLJ Entities"),
(iii) Apollo Investment Fund III L.P. ("Apollo Investment"), Apollo Overseas
Partners III L.P. ("Apollo Overseas"), Apollo (U.K.) Partners III, L.P. ("Apollo
U.K."), Bain Capital Fund V L.P. ("Bain Capital V"), Bain Capital Fund, V-B,
L.P. ("Bain Capital V-B"), BCIP Associates ("BCIP"), BCIP Trust Associates L.P.
("BCIP Trust"), Thomas H. Lee Equity Fund III, L.P. ("THL"), Thomas H. Lee
Foreign Fund III, L.P. ("THL Foreign Fund"), THL Co-Investors III-A, LLC ("THL
Co-Investors A"), THL Co-Investors III-B, LLC ("THL Co-Investors B"), DLJ
Capital Corp. ("DLJ Capital"), Sprout Growth II, L.P. ("Sprout"), The Sprout CEO
Fund, L.P. ("Sprout CEO Fund"), and Ontario Teachers' Pension Plan Board (each a
"Shareholder" and collectively, the Shareholders listed in this clause (iii) are
referred to as the "Institutional Shareholders") and (iv) certain other Persons
listed on the signature pages hereof (each a "Shareholder" and collectively, the
"Management Shareholders").
W I T N E S S E T H :
WHEREAS, pursuant to the Subscription Agreement and the DecisionOne Direct
Investment Program (as defined below) certain parties hereto are or will be
acquiring securities of Quaker Holding Co. and the Company, respectively; and
WHEREAS, pursuant to the terms of the Merger Agreement (as defined below),
Quaker Holding Co. will be merged with and into the Company, with the Company as
the surviving corporation (the "Merger");
WHEREAS, the parties hereto desire to enter into this Agreement to govern
certain of their rights, duties and obligations after consummation of the
transactions contemplated by the Merger Agreement, the Subscription Agreement
and the DecisionOne Direct Investment Program;
The parties hereto agree as follows:
<PAGE> 5
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. (a) The following terms, as used herein, have
the following meanings:
"Adjusted Initial Ownership" means, with respect to any Management
Shareholder, the number of shares of Common Stock and Common Stock Equivalents
owned as of the date hereof, or in the case of any Person that shall become a
party to this Agreement on a later date, as of such date, taking into account
any stock split, stock dividend, reverse stock-split or similar event.
"Adverse Person" means any Person whom the Board of Directors of the
Company determines is a competitor or a potential competitor of the Company or
its Subsidiaries.
"Affiliate" means, with respect to any Person, any other Person directly
or indirectly controlling, controlled by, or under common control with such
Person, provided that no securityholder of the Company shall be deemed an
Affiliate of any other securityholder solely by reason of any investment in the
Company. For the purpose of this definition, the term "control" (including with
correlative meanings, the terms "controlling", "controlled by" and "under common
control with"), as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities or by contract or otherwise.
"Affiliated Employee Benefit Trust" means any trust that is a successor to
the assets held by a trust established under an employee benefit plan subject to
ERISA or any other trust established directly or indirectly under such plan or
any other such plan having the same sponsor.
"Apollo Entities" means Apollo Investment, Apollo Overseas, Apollo U.K.
and their Permitted Transferees.
"Bain Entities" means Bain Capital V, Bain Capital V-B, BCIP, BCIP Trust
and their Permitted Transferees.
"beneficially own" shall have the meaning set forth in Rule 13d-3 of the
Exchange Act.
"Board" means the board of directors of the Company.
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"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in New York City are authorized by law to close.
"Change of Control" means such time as (a) the DLJ Entities shall own less
than 20% of the outstanding shares of Common Stock, (b) the transfer of all or
substantially all of the assets of the Company to any Person or group shall have
been consummated, or (c) the Company shall have been liquidated.
"Closing Date" means August 7, 1997.
"Common Stock" shall mean the common stock, par value $.01 per share, of
the Company and any stock into which such Common Stock may thereafter be
converted or changed.
"Common Stock Equivalent" means
(20.61 - P) x N
---------------
20.61
where "N" equals the number of Roll-Over Options, and "P" equals the exercise
price of such Roll-Over Option.
"DecisionOne Direct Investment Program" means the investment program of
the Company pursuant to which certain members of the Company's management will
acquire shares of Common Stock.
"Drag-Along Portion" means, with respect to any Other Shareholder and any
class of Common Stock, the number of such class of Common Stock beneficially
owned by such Other Shareholder multiplied by a fraction, the numerator of which
is the number of such class of Common Stock proposed to be sold by the DLJ
Entities on behalf of the DLJ Entities and the Other Shareholders and the
denominator of which is the total number of such class of Common Stock on a
Fully Diluted basis beneficially owned by the Shareholders.
"Equity Securities" means the Common Stock, securities convertible into or
exchangeable for Common Stock and options, warrants or other rights to acquire
Common Stock, preferred stock or any other equity security issued by the
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"First Public Offering" means the first sale after the date hereof of
Common Stock pursuant to an effective registration statement under the
Securities Act (other than a registration statement on Form S-8 or any successor
form).
"Fully Diluted" means all outstanding shares of Common Stock and all
shares issuable in respect of securities convertible into or exchangeable for
such Common Stock, stock appreciation rights or options, warrants and other
irrevocable rights to purchase or subscribe for such Common Stock or securities
convertible into or exchangeable for such Common Stock; provided that no Person
shall be deemed to own such number of Fully Diluted shares of any Common Stock
as such Person has the right to acquire from any Person other than the Company.
"Initial Ownership" means, with respect to any Shareholder, the number of
shares of Common Stock beneficially owned (and (without duplication) which such
Persons have the right to acquire from any Person) as of the date hereof, or in
the case of any Person that shall become a party to this Agreement on a later
date, as of such date, taking into account any stock split, stock dividend,
reverse stock split or similar event.
"Merger Agreement" means the Agreement and Plan of Merger dated as of May
4, 1997, as subsequently amended, between the Company and Quaker Holding Co.
"Other Shareholders" means all Shareholders other than the DLJ Entities.
"Percentage Ownership" means, with respect to any Shareholder at any time,
(i) the number of shares of Fully Diluted Common Stock that such Shareholder
beneficially owns (and (without duplication) has the right to acquire from any
Person) at such time, divided by (ii) the total number of shares of Fully
Diluted Common Stock at such time.
"Permitted Transferee" means (i) in the case of an Institutional
Shareholder (a) any general or limited partner or shareholder of such
Shareholder, and any corporation, partnership or other entity that is an
Affiliate of such Shareholder (collectively, "Shareholder Affiliates"), (b) any
general partner, limited partner, employee, officer or director of such
Shareholder or a Shareholder Affiliate, or any spouse, lineal descendant,
sibling, parent, heir, executor, administrator, testamentary trustee, legatee or
beneficiary of any of the foregoing persons described in this clause (b)
(collectively, "Shareholder Associates"), and (c) any trust, the beneficiaries
of which, or any corporation, limited liability company or partnership,
stockholders, members or general or limited partners of
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which include only such Shareholder, such Shareholder Affiliates or Shareholder
Associates;
(ii) in the case of a Management Shareholder (a) any other Shareholder,
(b) a spouse or lineal descendant (whether natural or adopted), sibling, parent,
heir, executor, administrator, testamentary trustee, legatee or beneficiary of
any of such Management Shareholder, (c) any trust, the beneficiaries of which,
or any corporation, limited liability company or partnership, stockholders,
members or general or limited partners of which include only the Persons named
in clauses (a) or (b) or (d) any charitable remainder trust; or
(iii) in the case of any DLJ Entity (A) any other DLJ Entity, (B) any
general or limited partner of any such entity (a "DLJ Partner"), and any
corporation, partnership, Affiliated Employee Benefit Trust or other entity
which is an Affiliate of any DLJ Partner (collectively, the "DLJ Affiliates"),
(C) any managing director, general partner, director, limited partner, officer
or employee of such DLJ Entity or a DLJ Affiliate, or the heirs, executors,
administrators, testamentary trustees, legatees or beneficiaries of any of the
foregoing Persons referred to in this clause (C) (collectively, "DLJ
Associates"), and (D) any trust, the beneficiaries of which, or any corporation,
limited liability company or partnership, the stockholders, members or general
or limited partners of which, include only such DLJ Entity, DLJ Affiliates, DLJ
Associates, their spouses or their lineal descendants. The term "DLJ Entities",
to the extent such entities shall have transferred any of their Shares to
"Permitted Transferees", shall mean the DLJ Entities and the Permitted
Transferees of the DLJ Entities, taken together, and any right or action that
may be exercised or taken at the election of the DLJ Entities may be exercised
or taken at the election of the DLJ Entities and such Permitted Transferees.
"Person" means an individual, corporation, limited liability company,
partnership, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Pro Rata Portion" means the number of Shares a Shareholder holds (either
Purchased Shares or non-Purchased Shares, as the case may be) multiplied by a
fraction, the numerator of which is the number of Shares to be sold by the DLJ
Entities and the Institutional Shareholders and their Permitted Transferees in a
Public Offering and the denominator of which is the total number of Shares, on a
Fully Diluted basis, held in the aggregate by the DLJ Entities and the
Institutional Shareholders and their Permitted Transferees prior to such Public
Offering.
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"Public Offering" means any primary or secondary public offering of Common
Stock pursuant to an effective registration statement under the Securities Act
other than pursuant to a registration statement filed in connection with a
transaction of the type described in Rule 145 of the Securities Act or for the
purpose of issuing securities pursuant to an employee benefit plan.
"Purchased Shares" means those Shares purchased by a Management
Shareholder on the Closing Date for cash and/or with the proceeds of a
promissory note of the type contemplated by the DecisionOne Direct Investment
Plan.
"Registrable Securities" means at any time, with respect to any
Shareholder or its Permitted Transferees, any shares of Common Stock then owned
by such Shareholder or its Permitted Transferees until (i) a registration
statement covering such securities has been declared effective by the SEC and
such securities have been disposed of pursuant to such effective registration
statement, (ii) such securities are sold under circumstances in which all of the
applicable conditions of Rule 144 (or any similar provisions then in force)
under the Securities Act are met or such securities may be sold pursuant to Rule
144(k) or (iii) such securities are otherwise transferred, the Company has
delivered a new certificate or other evidence of ownership for such securities
not bearing the legend required pursuant to this Agreement and such securities
may be resold without subsequent registration under the Securities Act.
"Registration Expenses" means (i) all registration and filing fees, (ii)
fees and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of counsel in connection with blue sky
qualifications of the securities registered), (iii) printing expenses, (iv)
internal expenses of the Company (including, without limitation, all salaries
and expenses of its officers and employees performing legal or accounting
duties), (v) reasonable fees and disbursements of counsel for the Company and
customary fees and expenses for independent certified public accountants
retained by the Company (including expenses relating to any comfort letters or
costs associated with the delivery by independent certified public accountants
of a comfort letter or comfort letters requested pursuant to Section 5.04(g)
hereof), (vi) the reasonable fees and expenses of any special experts retained
by the Company in connection with such registration, (vii) reasonable fees and
expenses of up to one counsel for the Shareholders participating in the
offering, (viii) fees and expenses in connection with any review of underwriting
arrangements by the National Association of Securities Dealers, Inc. (the
"NASD") including fees and expenses of any "qualified independent underwriter"
and (ix) fees and disbursements of underwriters customarily paid by issuers or
sellers of securities, but shall not include any underwriting fees, discounts or
commissions attributable to the sale of
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<PAGE> 10
Registrable Securities, or any out-of-pocket expenses (except as set forth in
clause (vii) above) of the Shareholders or any fees and expenses of
underwriter's counsel.
"Restriction Termination Date" means the fourth anniversary of the Closing
Date.
"Roll-Over Option" means an option granted by the Company to a Management
Shareholder prior to the Merger which option, at the effective time of the
Merger, was converted into an option to purchase shares of Common Stock of the
surviving corporation.
"Section 4.03 Portion" means the pro rata portion of any Equity Securities
proposed to be issued by the Company with respect to which Shareholders shall be
entitled to exercise their rights under Section 4.03,
(a) in the case of any Institutional Shareholder, based upon such
Institutional Shareholder's Initial Ownership of shares of Common Stock as a
percentage of the sum of (i) the Initial Ownership of Common Stock of the DLJ
Entities and all Institutional Stockholders and (ii) the Adjusted Initial
Ownership of all Management Stockholders, or
(b) in the case of any Management Shareholder, based upon such Management
Shareholder's Adjusted Initial Ownership of shares of Common Stock as a
percentage of the sum of (i) the Initial Ownership of the DLJ Entities and the
Institutional Shareholders and (ii) the Adjusted Initial Ownership of all
Management Shareholders.
"Section 4.04 Portion" means, with respect to any Shareholder at any time,
the number of shares of common stock purchased by DLJ Entities in a transaction
subject to Section 4.04, multiplied by a fraction, the numerator of which is (i)
the number of shares of Common Stock on a Fully Diluted basis that such
Shareholder beneficially owns at such time, and the denominator of which is (ii)
the total number of shares of Common Stock on a Fully Diluted basis beneficially
owned at such time by all Other Shareholders and the DLJ Entities.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shareholder" means each Person (other than the Company) who shall be a
party to this Agreement, whether in connection with the execution and delivery
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<PAGE> 11
hereof as of the date hereof, pursuant to Section 7.03 or otherwise, so long as
such Person shall beneficially own any Common Stock.
"Shares" means shares of Common Stock held by the Shareholders.
"Sprout Entities" means DLJ Capital, Sprout, Sprout CEO Fund, and their
Permitted Transferees.
"Subject Securities" means the Common Stock beneficially owned by the
Management Shareholders and Institutional Shareholders to be transferred in a
Section 4.02 Sale.
"Subscription Agreement" means the Subscription Agreement of even date
herewith among Quaker Holding Co., the DLJ Entities and the Institutional
Investors.
"Subsidiary" means, with respect to any Person, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned by such Person.
"THL Entities" means THL, THL Foreign Fund, THL Co-Investors A, THL
Co-Investors B, and their Permitted Transferees.
"Tag-Along Portion" means the number of shares of Common Stock held (or,
without duplication, that such Shareholder has the right to acquire from any
Person) by the Tagging Person or the Selling Person, as the case may be,
multiplied by a fraction, the numerator of which is the number of shares of
Common Stock proposed to be sold by the Selling Person pursuant to Section 4.01,
and the denominator of which is the aggregate number of shares of Common Stock
on a Fully Diluted basis owned by all Shareholders.
"Third Party" means a prospective purchaser of Common Stock in an
arm's-length transaction from a Shareholder where such purchaser is not a
Permitted Transferee of such Shareholder.
"Underwritten Public Offering" means a firmly underwritten public offering
of Registrable Securities of the Company pursuant to an effective registration
statement under the Securities Act.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
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Term Section
Cause 2.02
Confidential Information 6.01(b)
Demand Registration 5.01(a)
Drag-Along Rights 4.02(a)
Holders 5.01(a)(ii)
Incidental Registration 5.02(a)
Indemnified Party 5.07
Indemnifying Party 5.07
Inspectors 5.04(g)
Maximum Offering Size 5.01(e)
Nominee 2.03(a)
Piggyback Registration 5.02(a)
Public Offering Limitations 3.05(a)
Records 5.04(g)
Representatives 6.01(b)
Section 4.01 Response Notice 4.01(a)
Section 4.02 Sale 4.02(a)
Section 4.02 Notice 4.02(a)
Section 4.02 Sale Price 4.02(a)
Section 4.02 Notice Period 4.02(a)
Section 4.03 Notice 4.03
Section 4.03 Portion 4.03
Section 4.04 Notice 4.04
Selling Person 4.01(a)
Selling Shareholder 5.01(a)
Shareholder 7.03
Tag-Along Notice 4.01(a)
Tag-Along Notice Period 4.01(a)
Tag-Along Offer 4.01(a)
Tag-Along Right 4.01(a)
Tag-Along Sale 4.01(a)
Tagging Person 4.01(a)
Transfer 3.01(a)
Trigger Date 6.05
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ARTICLE 2
CORPORATE GOVERNANCE AND MANAGEMENT
SECTION 2.01. Composition of the Board. The Board shall consist of seven
members, of whom four shall be nominated by DLJMB, two shall be nominated by
DLJMB and shall be individuals which are not "Affiliates" or "Associates" (as
those terms are used within the meaning of Rule 12b-2 of the General Rules and
Regulations under the Exchange Act) of any Shareholder or its Affiliates, and
one shall be nominated by the Management Shareholders. Each Shareholder entitled
to vote for the election of directors to the Board agrees that it will vote its
shares of Common Stock or execute consents, as the case may be, and take all
other necessary action (including causing the Company to call a special meeting
of shareholders) in order to ensure that the composition of the Board is as set
forth in this Section 2.01; provided that, no Shareholder shall be required to
vote for another Shareholder's nominee(s) if the number of shares of Common
Stock held by the Shareholder or group of Shareholders, as applicable, making
the nomination (or, in the case of a nomination by DLJMB, of the DLJ Entities)
is, at the close of business on the day preceding such vote or execution of
consents, less than 10% of such Shareholder's or group of Shareholders' (or the
DLJ Entities'), as applicable, Initial Ownership of Common Stock on a Fully
Diluted basis.
SECTION 2.02. Removal. Each Shareholder agrees that if, at any time, it is
then entitled to vote for the removal of directors of the Company, it will not
vote any of its shares of Common Stock in favor of the removal of any director
who shall have been designated or nominated pursuant to Section 2.01 unless such
removal shall be for Cause or the Person(s) entitled to designate or nominate
such director shall have consented to such removal in writing, provided that if
the Persons entitled to designate or nominate any director pursuant to Section
2.01 shall request the removal, with or without Cause, of such director in
writing, such Shareholder shall vote its shares of Common Stock in favor of such
removal. Removal for "Cause" shall mean removal of a director because of such
director's (a) willful and continued failure substantially to perform his duties
with the Company in his established position, (b) willful conduct which is
injurious to the Company or any of its Subsidiaries, monetarily or otherwise,
(c) conviction for, or guilty plea to, a felony or a crime involving moral
turpitude, or (d) abuse of illegal drugs or other controlled substances or
habitual intoxication.
SECTION 2.03. Vacancies. If, as a result of death, disability, retirement,
resignation, removal (with or without Cause) or otherwise, there shall exist or
occur any vacancy on the Board:
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(a) The Shareholder(s) entitled under Section 2.01 to nominate such
director whose death, disability, retirement, resignation or removal resulted in
such vacancy, may, subject to the provisions of Section 2.01, nominate another
individual (the "Nominee") to fill such vacancy and serve as a director of the
Company; and
(b) each Shareholder then entitled to vote for the election of the Nominee
as a director of the Company agrees that it will vote its shares of Common
Stock, or execute a written consent, as the case may be, in order to ensure that
the Nominee be elected to the Board; provided that, no Shareholder shall be
required to vote for another party's Nominee(s) if the Percentage Ownership of
the Shareholder or group of Shareholders, as applicable, making the nomination
(or, in the case of a nomination by DLJMB, of the DLJ Entities), at the close of
business of the day preceding such vote or execution of consents, is less than
10% on a Fully Diluted basis of such Shareholder's or group of Shareholders' (or
the DLJ Entities'), as applicable, Initial Ownership of Common Stock.
SECTION 2.04. Action by the Board. (a) A quorum of the Board shall consist
initially of four directors; provided that DLJMB shall have the right, in its
sole discretion, until such time as the Percentage Ownership of the DLJ Entities
is less than 10% on a Fully Diluted basis of the DLJ Entities' Initial Ownership
of Common Stock, to increase or decrease the number of directors necessary to
constitute a quorum.
(b) All actions of the Board shall require the affirmative vote of at
least a majority of the directors at a duly convened meeting of the Board at
which a quorum is present or the unanimous written consent of the Board;
provided that, in the event there is a vacancy on the Board and an individual
has been nominated to fill such vacancy, the first order of business shall be to
fill such vacancy.
SECTION 2.05. Conflicting Charter or Bylaw Provision. Each Shareholder
shall vote its shares of Common Stock, and shall take all other actions
reasonably necessary, to ensure that the Company's certificate of incorporation
and bylaws (copies of which are attached hereto as Exhibits A and B) facilitate
and do not at any time conflict with any provision of this Agreement.
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ARTICLE 3
RESTRICTIONS ON TRANSFER
SECTION 3.01. General. (a) Each Shareholder understands and agrees that
the Common Stock purchased pursuant to the Subscription Agreement or the
DecisionOne Direct Investment Program have not been registered under the
Securities Act and are restricted securities. Each Shareholder agrees that it
will not, directly or indirectly, sell, assign, transfer, grant a participation
in, pledge or otherwise dispose of ("transfer") any Common Stock (or solicit any
offers to buy or otherwise acquire, or take a pledge of any Common Stock) except
in compliance with the Securities Act and the terms and conditions of this
Agreement.
(b) Any attempt to transfer any Common Stock not in compliance with this
Agreement shall be null and void and the Company shall not, and shall cause any
transfer agent not to, give any effect in the Company's stock records to such
attempted transfer.
SECTION 3.02. Legends. (a) In addition to any other legend that may be
required, each certificate for shares of Common Stock that is issued to any
Shareholder shall bear a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT
IN COMPLIANCE THEREWITH. THIS SECURITY IS ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER AS SET FORTH IN THE INVESTORS' AGREEMENT DATED AS OF
AUGUST 7, 1997, COPIES OF WHICH MAY BE OBTAINED UPON REQUEST FROM DECISIONONE
HOLDINGS CORP. OR ANY SUCCESSOR THERETO."
(b) If any Common Stock shall cease to be Registrable Securities under
clause (i) or clause (ii) of the definition thereof, the Company shall, upon the
written request of the holder thereof, issue to such holder a new certificate
evidencing such shares without the first sentence of the legend required by
Section 3.02(a) endorsed thereon. If any Common Stock cease to be subject to any
and all restrictions on transfer set forth in this Agreement, the Company shall,
upon the written request of the holder thereof, issue to such holder a new
certificate evidencing such Common Stock without the second sentence of the
legend required by Section 3.02(a) endorsed thereon.
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SECTION 3.03. Permitted Transferees. Notwithstanding anything in this
Agreement to the contrary, any Shareholder may at any time transfer any or all
of its Common Stock to one or more of its Permitted Transferees without the
consent of the Board or any other Shareholder or group of Shareholders and
without compliance with Sections 3.04, 3.05 and 4.01 so long as (a) such
Permitted Transferee shall have agreed in writing to be bound by the terms of
this Agreement and (b) the transfer to such Permitted Transferee is not in
violation of applicable federal or state securities laws.
SECTION 3.04. Restrictions on Transfers by Institutional Shareholders. (a)
Except as provided in Section 3.03, each Institutional Shareholder and each
Permitted Transferee of such Institutional Shareholder may transfer its Common
Stock only as follows:
(i) in a transfer made in compliance with Section 4.01 or 4.02;
(ii) in a Public Offering in connection with the exercise of its
rights under Article 5 hereof; or
(iii) following the earlier to occur of (i) the date on which the
Percentage Ownership of such Institutional Shareholder is less than 25% of
its Initial Ownership of Common Stock and (ii) the seventh anniversary of
the Closing Date, to any Person other than any Adverse Person.
(b) The restrictions set forth in Section 3.04(a)(i) and (a)(ii) shall
terminate at such time as aggregate Percentage Ownership of the DLJ Entities and
their Permitted Transferees is equal to or less than 50% of the aggregate
Initial Ownership of Common Stock of DLJ Entities.
SECTION 3.05. Restrictions on Transfers by Management Shareholders. (a)
Except as provided in Section 3.03, each Management Shareholder and each
Permitted Transferee of such Management Shareholder may transfer its Common
Stock only as follows:
(i) in a transfer made in compliance with Section 4.01 or 4.02;
(ii) subject to the Public Offering Limitations (as defined below),
in a Public Offering in connection with the exercise of its rights under
Article 5 hereof;
(iii) 180 days following a Public Offering, to any Third Party, in a
transfer made in compliance with Rule 144 promulgated under the Securities
Act; provided, however, that until the Restriction Termination
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Date, the Percentage Ownership of such Management Shareholder as a result
of such transfer shall be equal to or exceed the greater of (x) 50% of
such Management Shareholder's Initial Ownership of Common Stock and (y) a
percentage of such Management Shareholder's Initial Ownership equal to the
Remaining Percentage. For purposes of this Section 3.05(a)(iii),
"Remaining Percentage" means the Percentage Ownership of the DLJ Entities
and the Institutional Investors immediately prior to such proposed
transfer pursuant to this Section 3.05(a)(iii) calculated by subtracting
from the Initial Ownership of the DLJ Entities and the Institutional
Investors the number of shares of Common Stock theretofore transferred by
the DLJ Entities and the Institutional Investors; or
(iv) following the Restriction Termination Date, to any Third Party other
than an Adverse Person for consideration consisting solely of cash, provided,
however, that the number of Shares transferred by such Management Shareholder
pursuant to this Section 3.05(a)(iv) in any twelve-month period shall not exceed
20% of such Management Shareholder's Percentage Ownership at the beginning of
such twelve month period.
For purposes of this Agreement, "Public Offering Limitations" means (A)
except as set forth in the proviso at the end of this paragraph, no Management
Shareholder shall be permitted to exercise its rights under Section 5.02 hereof
(x) with respect to the First Public Offering and (y) until such time as the
Percentage Ownership of the DLJ Entities and the Institutional Shareholders and
their Permitted Transferees shall be less than 50% of their aggregate Initial
Ownership of Common Stock and (B) in each Public Offering following the First
Public Offering, such Management Shareholder shall be entitled to transfer a
number of Shares not exceeding such Management Shareholder's Pro Rata Portion of
non-Purchased Shares; provided, however, that notwithstanding the restrictions
set forth in clauses (A) and (B), each Management Shareholder shall be permitted
to exercise its rights pursuant to Section 5.02 hereof in respect of such
Management Shareholder's Pro Rata Portion of its Purchased Shares in any Public
Offering and transfer such Purchased Shares pursuant to Section 3.05(a)(ii).
(b) The provisions of Section 3.05(a) shall terminate upon the earliest to
occur of (i) one or more Public Offerings of Shares yielding aggregate gross
proceeds of at least $100,000,000, (ii) the fourth anniversary of the Closing
Date and (iii) a Change of Control. Notwithstanding the foregoing sentence, the
provisions of Section 3.05(a) shall not terminate with respect to any Management
Shareholder's Shares which shall have been pledged to the Company as security in
connection with any indebtedness for borrowed money owed by such Management
Shareholder to the Company unless the proceeds from the sale of
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such Shares, net of any taxes due on such proceeds, are applied to repay the
such indebtedness in full.
ARTICLE 4
TAG-ALONG RIGHTS; DRAG-ALONG RIGHTS; PREEMPTIVE RIGHTS
SECTION 4.01. Rights to Participate in Transfer. (a) If DLJ Entities (the
"Selling Person") propose to transfer (other than transfers of shares of Common
Stock (i) in a Public Offering, (ii) to any Permitted Transferee of any of the
DLJ Entities or (iii) up to 2.5% in the aggregate of the securities of such
class outstanding on the date of the first transfer of any shares of Common
Stock by any of the DLJ Entities (such percentage, the "Free Percentage")), in a
transaction otherwise permitted by Article 3 hereof, (a "Tag-Along Sale"), the
Other Shareholders may, at their option, elect to exercise their rights under
this Section 4.01 (each such Shareholder, a "Tagging Person"). In the event of
such a proposed transfer, the Selling Person shall provide each Other
Shareholder written notice of the terms and conditions of such proposed transfer
("Tag-Along Notice") and offer each Tagging Person the opportunity to
participate in such sale. The Tag-Along Notice shall identify the number of
shares of Common Stock subject to the offer ("Tag-Along Offer"), the cash price
at which the transfer is proposed to be made, and all other material terms and
conditions of the Tag-Along Offer, including the form of the proposed agreement,
if any. From the date of the Tag-Along Notice, each Tagging Person shall have
the right (a "Tag-Along Right"), exercisable by written notice ("Section 4.01
Response Notice") given to the Selling Person within 5 Business Days (the
"Tag-Along Notice Period"), to request that the Selling Person include in the
proposed transfer the number of Shares held by such Tagging Person as is
specified in such notice; provided that if the aggregate number of Shares
proposed to be sold by the Selling Person and all Tagging Persons in such
transaction exceeds the number of Shares which can be sold on the terms and
conditions set forth in the Tag-Along Notice, then only the Tag-Along Portion of
Shares of the Selling Person and each Tagging Person shall be sold pursuant to
the Tag-Along Offer. In the event the DLJ Entities shall propose to transfer a
number of Shares in excess of the Free Percentage, the Tag-Along Portion shall
be calculated with respect to all of the Shares proposed to be transferred by
the DLJ Entities. If the Tagging Persons exercise their Tag-Along Rights
hereunder, each Tagging Person shall deliver, together with its Section 4.01
Response Notice, to the Selling Person the certificate or certificates
representing the Shares of such Tagging Person to be included in the transfer,
together with a limited power-of-attorney authorizing the Selling Person to
transfer such Shares on the terms set forth in the Tag-Along
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Notice. It is understood that to the extent the DLJ Entities can do so without
affecting the other terms on which the Tag-Along Sale is proposed to be made,
the DLJ Entities will seek to exclude from the terms of such Tag-Along Sale any
material restrictions on the ability, following such Tag-Along Sale, of any
Tagging Person to conduct its business in a manner consistent with past
practice. Delivery of such certificate or certificates representing the Shares
to be transferred and the limited power-of-attorney authorizing the Selling
Person to transfer such Shares shall constitute an irrevocable acceptance of the
Tag-Along Offer by such Tagging Persons. If, at the end of a 120 day period
after such delivery, the Selling Person has not completed the transfer of all
such Shares on substantially the same terms and conditions set forth in the
Tag-Along Notice, the Selling Person shall return to each Tagging Person the
limited power-of-attorney (and all copies thereof) together with all
certificates representing the Shares which such Tagging Person delivered for
transfer pursuant to this Section 4.01.
(b) Concurrently with the consummation of the Tag-Along Sale, the Selling
Person shall notify the Tagging Persons thereof, shall remit to the Tagging
Persons the total consideration (by bank or certified check) for the Shares of
the Tagging Persons transferred pursuant thereto, and shall, promptly after the
consummation of such Tag-Along Sale furnish such other evidence of the
completion and time of completion of such transfer and the terms thereof as may
be reasonably requested by the Tagging Persons.
(c) If at the termination of the Tag-Along Notice Period any Tagging
Person shall not have elected to participate in the Tag-Along Sale, such Tagging
Person will be deemed to have waived its rights under Section 4.01(a) with
respect to the transfer of its securities pursuant to such Tag-Along Sale.
(d) If any Tagging Person declines to exercise its Tag-Along Rights or
elects to exercise its Tag-Along Rights with respect to less than such Tagging
Person's Tag-Along Portion, the DLJ Entities shall be entitled to transfer,
pursuant to the Tag-Along Offer, a number of Shares held by the DLJ Entities
equal to the number of Shares constituting the portion of such Tagging Person's
Tag-Along Portion with respect to which Tag-Along Rights were not exercised.
(e) The DLJ Entities and any Tagging Person who exercises the Tag-Along
Rights pursuant to this Section 4.01 may sell the Shares subject to the
Tag-Along Offer on the terms and conditions set forth in the Tag-Along Notice
(provided, however, that the cash price payable in any such sale may exceed the
cash price specified in the Tag-Along Notice by up to 10%) within 120 days of
the date on which Tag-Along Rights shall have been waived, exercised or expire.
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SECTION 4.02. Right to Compel Participation in Certain Transfers. (a) If
(i) the DLJ Entities propose to transfer not less than 50% of their Initial
Ownership of Common Stock to a Third Party in a bona fide sale, (ii) the DLJ
Entities propose a transfer in which the Shares to be transferred by the DLJ
Entities, the Institutional Shareholders and their Permitted Transferees
constitute more than 50% of the outstanding shares of Common Stock (a "Section
4.02 Sale"), the DLJ Entities may at their option require all Other Shareholders
to sell the Subject Securities ("Drag-Along Rights") then held by every Other
Shareholder, and (subject to and at the closing of the Section 4.02 Sale) to
exercise all, but not less than all, of the options held by every Other
Shareholder and to sell all of the shares of Common Stock received upon such
exercise to such Third Party, for the same consideration per share of Common
Stock and otherwise on the same terms and conditions as the DLJ Entities;
provided that any Other Shareholder who holds options the exercise price per
share of which is greater than the per share price at which the Shares are to be
sold to the Third Party may, if required by the DLJ Entities to exercise such
options, in place of such exercise, submit to irrevocable cancellation thereof
without any liability for payment of any exercise price with respect thereto. In
the event the Section 4.02 Sale is not consummated with respect to any shares
acquired upon exercise of such options, or the Section 4.02 Sale is not
consummated, such options shall be deemed not to have been exercised or
cancelled, as applicable. DLJMB shall provide written notice of such Section
4.02 Sale to the Other Shareholders (a "Section 4.02 Notice") not later than the
15th day prior to the proposed Section 4.02 Sale. The Section 4.02 Notice shall
identify the transferee, the number of Subject Securities, the consideration for
which a transfer is proposed to be made (the "Section 4.02 Sale Price") and all
other material terms and conditions of the Section 4.02 Sale. The number of
shares of Common Stock to be sold by each Other Shareholder will be the
Drag-Along Portion of the shares of Common Stock that such Other Shareholder
owns. Subject to Section 4.02(d), each Other Shareholder shall be required to
participate in the Section 4.02 Sale on the terms and conditions set forth in
the Section 4.02 Notice and to tender all its Subject Securities as set forth
below. It is understood that to the extent the DLJ Entities can do so without
affecting the other terms on which the Section 4.02 Sale is proposed to be made,
the DLJ Entities will seek to exclude from the terms of such Section 4.02 Sale
any material restrictions on the ability, following such Section 4.02 Sale, of
any Other Shareholder to conduct its business in a manner consistent with past
practice. The price payable in such transfer shall be the Section 4.02 Sale
Price. Not later than the 10th day following the date of the Section 4.02 Notice
(the "Section 4.02 Notice Period"), each of the Other Shareholders shall deliver
to a representative of DLJMB designated in the Section 4.02 Notice certificates
representing all Subject Securities held by such Other Shareholder, duly
endorsed, together with all other documents required to be executed in
connection with such Section 4.02 Sale or, if such delivery is not permitted by
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applicable law, an unconditional agreement to deliver such Subject Securities
pursuant to this Section 4.02 at the closing for such Section 4.02 Sale against
delivery to such Other Shareholder of the consideration therefor. If an Other
Shareholder should fail to deliver such certificates to DLJMB, the Company shall
cause the books and records of the Company to show that such Subject Securities
are bound by the provisions of this Section 4.02 and that such Subject
Securities shall be transferred to the purchaser of the Subject Securities
immediately upon surrender for transfer by the holder thereof.
(b) The DLJ Entities shall have a period of 90 days from the date of
receipt of the Section 4.02 Notice to consummate the Section 4.02 Sale on the
terms and conditions set forth in such Section 4.02 Sale Notice. If the Section
4.02 Sale shall not have been consummated during such period, DLJMB shall return
to each of the Other Shareholders all certificates representing Shares that such
Other Shareholder delivered for transfer pursuant hereto, together with any
documents in the possession of DLJMB executed by the Other Shareholder in
connection with such proposed transfer, and all the restrictions on transfer
contained in this Agreement or otherwise applicable at such time with respect to
Common Stock owned by the Other Shareholders shall again be in effect.
(c) Concurrently with the consummation of the transfer of Shares pursuant
to this Section 4.02, DLJMB shall give notice thereof to all Shareholders, shall
remit to each of the Shareholders who have surrendered their certificates the
total consideration (by bank or certified check) for the Shares transferred
pursuant hereto and shall furnish such other evidence of the completion and time
of completion of such transfer and the terms thereof as may be reasonably
requested by such Shareholders.
(d) Notwithstanding any provision of this Agreement to the contrary, in
the event the terms on which a Section 4.02 Sale is proposed to be made shall
include a provision which materially and adversely affects the ability of any
Other Shareholder to compete in any line of business or geographic area, such
Other Shareholder shall not be required to participate in the Section 4.02 Sale
on the terms and conditions set forth in the Section 4.02 Notice. In the event
any Shareholder shall elect, pursuant to the preceding sentence, not to
participate in the Section 4.02 Sale, the DLJ Entities shall have the right to
purchase, and such Shareholder shall be obligated to sell to the DLJ Entities,
such Shareholder's Subject Securities, at the Section 4.02 Sale Price and on
substantially the same terms (other than any such non-compete provision), not
later than immediately prior to the consummation of the Section 4.02 Sale.
SECTION 4.03. Preemptive Rights. (a) The Company shall provide each
Shareholder with a written notice (a "Section 4.03 Notice") of any proposed
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issuance by the Company of Equity Securities at least 10 days prior to the
proposed issuance date. Such notice shall specify the price at which the Equity
Securities are to be issued and the other material terms of the issuance. In the
event the DLJ Entities propose to purchase any such Equity Securities from the
Company, each Other Shareholder shall be entitled to purchase, at the price and
on the terms at which the DLJ Entities propose to purchase such Equity
Securities and specified in such Section 4.03 Notice, such Shareholder's Section
4.03 Portion of the Equity Securities proposed to be issued. A Shareholder may
exercise its rights under this Section 4.03 by delivering written notice of its
election to purchase Equity Securities to the Company, DLJMB and each Other
Shareholder within 5 days of receipt of the Section 4.03 Notice. A delivery of
such a written notice (which notice shall specify the number of shares (or
amount) of Equity Securities to be purchased by the Shareholder submitting such
notice) by such Shareholder shall constitute a binding agreement of such
Shareholder to purchase, subject to the purchase by the DLJ Entities of their
portion of such Equity Securities, at the price and on the terms specified in
the Section 4.03 Notice, the number of shares (or amount) of Equity Securities
specified in such Shareholder's written notice. In the event the Equity
Securities proposed to be issued by the Company are not shares of Common Stock,
it shall be a condition to the consummation of the purchase of such Equity
Securities pursuant to this Section 4.03 by any Shareholder that such
Shareholder shall execute an amendment of this Agreement on the terms consistent
with this Agreement reasonably satisfactory to the Company and the DLJ Entities.
(b) In the event any Other Shareholder declines to exercise its preemptive
rights under this Section 4.03 or elects to exercise such rights with respect to
less than such Shareholder's Section 4.03 Portion, the DLJ Entities shall be
entitled to purchase from the Company the number of Equity Securities
constituting the Section 4.03 Portion with respect to which such Other
Shareholder shall not have exercised its preemptive rights.
(c) In the case of any issuance of Equity Securities, the Company shall
have 90 days from the date of the Section 4.03 Notice to consummate the proposed
issuance of any or all of such Equity Securities which the Shareholders have not
elected to purchase at the price and upon terms that are not materially less
favorable to the Company than those specified in the Section 4.03 Notice. At the
consummation of such issuance, the Company shall issue certificates representing
the Equity Securities to be purchased by each Shareholder exercising preemptive
rights pursuant to this Section 4.03 registered in the name of such Shareholder,
against payment by such Shareholder of the purchase price for such Equity
Securities. If the Company proposes to issue Equity Securities after such 90-day
period, it shall again comply with the procedures set forth in this Section.
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(d) Notwithstanding the foregoing, no Shareholder shall be entitled to
purchase Equity Securities as contemplated by this Section 4.03 in connection
with issuances of Equity Securities (i) to employees of the Company or any
Subsidiary pursuant to employee benefit plans or arrangements approved by the
Board (including upon the exercise of employee stock options), (ii) in
connection with any bona fide, arm's-length restructuring of outstanding debt of
the Company or any Subsidiary, or (iii) in connection with any bona fide,
arm's-length direct or indirect merger, acquisition or similar transaction. The
Company shall not be under any obligation to consummate any proposed issuance of
Equity Securities, regardless of whether it shall have delivered a Section 4.03
Notice in respect of such proposed issuance.
(e) The Company will use its reasonable best efforts to provide the
Section 4.03 Notice at least 15 Business Days prior to any proposed issuance of
Equity Securities. In the event it is impracticable to provide the Section 4.03
Notice at least 15 Business Days prior to such issuance, any Shareholder may
offer to finance or arrange to finance the purchase by any other Shareholder of
such other Shareholder's Section 4.03 Portion and such financing or arranging
Shareholder shall be entitled to receive as compensation for such services
reasonable and customary fees and expenses. No Shareholder shall be under any
obligation to provide or arrange such financing for any other Shareholder.
SECTION 4.04. Certain Other Purchases of Common Stock. In the event, at
any time prior to the Trigger Date, the DLJ Entities shall acquire any shares of
Common Stock from any Person other than the Shareholders, the DLJ Entities shall
deliver, within five Business Days of the date of such acquisition, a notice to
each Other Shareholder (a "Section 4.04 Notice") specifying the number of shares
of Common Stock acquired and the weighted average of price per share paid by the
DLJ Entities. Such Section 4.04 Notice shall constitute an offer to each such
Other Shareholder to purchase such Shareholder's Section 4.04 Portion of the
number of shares of Common Stock acquired by the DLJ Entities. A Shareholder may
exercise its rights under this Section 4.04 by delivering written notice of its
election to purchase its Section 4.04 Portion within 10 days of receipt of the
Section 4.04 Notice. A delivery of such written notice (which shall specify the
number of shares of Common Stock to be purchased by the Shareholder submitting
such notice) by such Shareholder shall constitute a binding agreement of such
Shareholder to purchase, at the price and on the terms specified in the Section
4.04 Notice, the number of shares of Common Stock specified in such notice. At
the consummation of the transfer of the shares of Common Stock purchased by the
DLJ Entities to any Shareholder that shall have exercised its rights hereunder,
the DLJ Entities shall deliver to such Shareholder certificates representing the
shares of Common Stock to be purchased against payment by such Shareholder of
the purchase price for such shares of Common Stock.
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ARTICLE 5
REGISTRATION RIGHTS
SECTION 5.01. Demand Registration. (a) If the Company shall receive a
written request by the DLJ Entities or their Permitted Transferees (any such
requesting Person, a "Selling Shareholder") that the Company effect the
registration under the Securities Act of all or a portion of such Selling
Shareholder's Registrable Securities, and specifying the intended method of
disposition thereof, then the Company shall promptly give written notice of such
requested registration (a "Demand Registration") at least 5 days prior to the
anticipated filing date of the registration statement relating to such Demand
Registration to the Other Shareholders and thereupon will use its best efforts
to effect, as expeditiously as possible, the registration under the Securities
Act of:
(i) the Registrable Securities which the Company has been so
requested to register by the Selling Shareholders, then held by the
Selling Shareholders; and
(ii) subject to the restrictions set forth in Section 5.02, all
other Registrable Securities of the same type as that to which the request
by the Selling Shareholders relates which any Other Shareholder entitled
to request the Company to effect a Piggyback Registration (as such term is
defined in Section 5.02) pursuant to Section 5.02 (all such Shareholders,
together with the Selling Shareholders, the "Holders") has requested the
Company to register by written request received by the Company within 2
days (one of which shall be a Business Day) after the receipt by such
Holders of such written notice given by the Company,
all to the extent necessary to permit the disposition (in accordance with the
intended methods thereof as aforesaid) of the Registrable Securities so to be
registered; provided that, subject to Section 5.01(d) hereof, the Company shall
not be obligated to effect more than six Demand Registrations for the DLJ
Entities; and provided further that the Company shall not be obligated to effect
a Demand Registration unless the aggregate proceeds expected to be received from
the sale of the Common Stock requested to be included in such Demand
Registration, in the reasonable opinion of DLJMB exercised in good faith, equals
or exceeds (x) $50,000,000 if such Demand Registration would constitute the
First Public Offering, or (y) $10,000,000 in all other cases. In no event will
the Company be required to effect more than one Demand Registration within any
four-month period.
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(b) Promptly after the expiration of the 2-day period referred to in
Section 5.01(a)(ii) hereof, the Company will notify all the Holders to be
included in the Demand Registration of the other Holders and the number of
Registrable Securities requested to be included therein. The Selling
Shareholders requesting a registration under Section 5.01(a) may, at any time
prior to the effective date of the registration statement relating to such
registration, revoke such request, without liability to any of the other
Holders, by providing a written notice to the Company revoking such request, in
which case such request, so revoked, shall be considered a Demand Registration
unless such revocation arose out of the fault of the Company or unless the
participating Shareholders reimburse the Company for all costs incurred by the
Company in connection with such registration, in which case such request shall
not be considered a Demand Registration.
(c) The Company will pay all Registration Expenses in connection with any
Demand Registration.
(d) A registration requested pursuant to this Section 5.01 shall not be
deemed to have been effected (i) unless the registration statement relating
thereto (A) has become effective under the Securities Act and (B) has remained
effective for a period of at least 180 days (or such shorter period in which all
Registrable Securities of the Holders included in such registration have
actually been sold thereunder); provided that if after any registration
statement requested pursuant to this Section 5.01 becomes effective (x) such
registration statement is interfered with by any stop order, injunction or other
order or requirement of the SEC or other governmental agency or court and (y)
less than 75% of the Registrable Securities included in such registration
statement has been sold thereunder, such registration statement shall not be
considered a Demand Registration, or (ii) if the Maximum Offering Size (as
defined below) is reduced in accordance with Section 5.01(e) such that less than
66 2/3% of the Registrable Securities of the Selling Shareholders sought to be
included in such registration are included.
(e) If a Demand Registration involves an Underwritten Public Offering and
the managing underwriter shall advise the Company and the Selling Shareholders
that, in its view, (i) the number of shares of Registrable Securities requested
to be included in such registration (including any securities which the Company
proposes to be included which are not Registrable Securities) or (ii) the
inclusion of some or all of the shares of Registrable Securities owned by the
Holders, in any such case, exceeds the largest number of shares which can be
sold without having an adverse effect on such offering, including the price at
which such shares can be sold (the "Maximum Offering Size"), the Company will
include in such registration, in the priority listed below, up to the Maximum
Offering Size:
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(A) first, all Registrable Securities requested to be
registered by the parties requesting such Demand Registration and
all Registrable Securities requested to be included in such
registration by any other Holder (allocated, if necessary for the
offering not to exceed the Maximum Offering Size, pro rata among
such Holders on the basis of the relative number of Registrable
Securities so requested to be included in such registration); and
(B) second, any securities proposed to be registered by the
Company.
(f) Upon written notice to each Selling Shareholder, the Company may
postpone effecting a registration pursuant to this Section 5.01 on one occasion
during any period of six consecutive months for a reasonable time specified in
the notice but not exceeding 90 days (which period may not be extended or
renewed), if (1) an investment banking firm of recognized national standing
shall advise the Company and the Selling Shareholders in writing that effecting
the registration would materially and adversely affect an offering of securities
of such Company the preparation of which had then been commenced or (2) the
Company is in possession of material non-public information the disclosure of
which during the period specified in such notice the Company believes, in its
reasonable judgment, would not be in the best interests of the Company.
(g) After the Company has effected two Demand Registrations pursuant to
this Section 5.01 of Common Stock, the Other Shareholders, upon request of the
Other Shareholders owning a majority of the Shares acquired by the Other
Shareholders on Closing Date, may request that the Company register Common Stock
which are Registrable Securities then owned by such Other Shareholders. In no
event will the Company be required to effect more than one such Demand
Registration. The provisions of this Article 5 shall apply, mutatis mutandis, to
any such Demand Registration.
SECTION 5.02. Piggyback Registration. (a) If the Company proposes to
register any of its Common Stock under the Securities Act (including pursuant to
a Demand Registration), whether or not for sale for its own account, it will
each such time, subject to the provisions of Section 5.02(b) hereof, give prompt
written notice at least 5 days prior to the anticipated filing date of the
registration statement relating to such registration to all Shareholders and
their respective Permitted Transferees (or, in the case of a Demand Registration
requested by the DLJ Entities, to all Other Shareholders), which notice shall
set forth such Shareholders' rights under this Section 5.02 and shall offer all
Shareholders the opportunity to include in such registration statement such
number of shares of Common Stock as each such Shareholder may request (a
"Piggyback
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Registration"). Upon the written request of any such Shareholder made within 2
days (one of which shall be a Business Day) after the receipt of notice from the
Company (which request shall specify the number of shares of Common Stock
intended to be disposed of by such Shareholder), the Company will use its
reasonable best efforts to effect the registration under the Securities Act of
all shares of Common Stock which the Company has been so requested to register
by such Shareholders, to the extent requisite to permit the disposition of the
shares of Common Stock so to be registered; provided that (i) if such
registration involves an Underwritten Public Offering, all such Shareholders
requesting to be included in the Company's registration must sell their
Registrable Securities to the underwriters selected as provided in Section
5.04(f) on the same terms and conditions as apply to the Company or the Selling
Shareholder, as applicable, and (ii) if, at any time after giving written notice
of its intention to register any stock pursuant to this Section 5.02(a) and
prior to the effective date of the registration statement filed in connection
with such registration, the Company shall determine for any reason not to
register such stock, the Company shall give written notice to all such
Shareholders and, thereupon, shall be relieved of its obligation to register any
Registrable Securities in connection with such registration; and provided
further that the right of the Management Shareholders and their Permitted
Transferees to request a Piggyback Registration will be subject to the Public
Offering Limitations. No registration effected under this Section 5.02 shall
relieve the Company of its obligations to effect a Demand Registration to the
extent required by Section 5.01 hereof. The Company will pay all Registration
Expenses in connection with each registration of Registrable Securities
requested pursuant to this Section 5.02.
(b) If a registration pursuant to this Section 5.02 involves an
Underwritten Public Offering (other than in the case of an Underwritten Public
Offering requested by the DLJ Entities in a Demand Registration, in which case
the provisions with respect to priority of inclusion in such offering set forth
in Section 5.01(e) shall apply) and the managing underwriter advises the Company
that, in its view, the number of shares of Common Stock which the Company and
the selling Shareholders intend to include in such registration exceeds the
Maximum Offering Size, the Company will include in such registration, in the
following priority, up to the Maximum Offering Size:
(i) first, so much of the Common Stock proposed to be registered for
the account of the Company as would not cause the offering to exceed the
Maximum Offering Size; and
(ii) second, all Registrable Securities requested to be included in
such registration by any Shareholder pursuant to Section 5.02 (allocated,
if necessary for the offering not to exceed the Maximum Offering Size, pro
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rata among such Shareholders on the basis of the relative number of shares
of Registrable Securities so requested to be included in such
registration).
SECTION 5.03. Holdback Agreements. With respect to each and every firmly
underwritten Public Offering, each Shareholder agrees and their Permitted
Transferees will agree not to offer or sell any shares of Common Stock (except
for shares of Common Stock, if any, sold in that Public Offering) during the 14
days prior to the effective date of the applicable registration statement for a
public offering of shares of Common Stock (except as part of such registration)
and during the period after such effective date equal to the lesser of: (i) 180
days or (ii) any such shorter period as the Company and the lead managing
underwriter of an Underwritten Public Offering agree.
SECTION 5.04. Registration Procedures. Whenever Shareholders request that
any Registrable Securities be registered pursuant to Section 5.01 or 5.02
hereof, the Company will, subject to the provisions of such Sections, use its
reasonable best efforts to effect the registration and the sale of such
Registrable Securities in accordance with the intended method of disposition
thereof as quickly as practicable, and in connection with any such request:
(a) The Company will as expeditiously as possible prepare and file with
the SEC a registration statement on any form selected by counsel for the Company
and which form shall be available for the sale of the Registrable Securities to
be registered thereunder in accordance with the intended method of distribution
thereof, and use its reasonable best efforts to cause such filed registration
statement to become and remain effective for a period of not less than 180 days
(or such shorter period in which all of the Registrable Securities of the
Holders included in such registration statement shall have actually been sold
thereunder).
(b) The Company will, if requested, prior to filing a registration
statement or prospectus or any amendment or supplement thereto, furnish to each
Shareholder and each underwriter, if any, of the Registrable Securities covered
by such registration statement copies of such registration statement as proposed
to be filed, and thereafter the Company will furnish to such Shareholder and
underwriter, if any, such number of copies of such registration statement, each
amendment and supplement thereto (in each case including all exhibits thereto
and documents incorporated by reference therein), the prospectus included in
such registration statement (including each preliminary prospectus) and such
other documents as such Shareholder or underwriter may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by such
Shareholder. Each Shareholder shall have the right to request that the Company
modify any information contained in such registration statement, amendment and
supplement
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thereto pertaining to such Shareholder and the Company shall use its reasonable
best efforts to comply with such request, provided, however, that the Company
shall not have any obligation to so modify any information if so doing would
cause the prospectus to contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading.
(c) After the filing of the registration statement, the Company will (i)
cause the related prospectus to be supplemented by any required prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 under the
Securities Act, (ii) comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities covered by such
registration statement during the applicable period in accordance with the
intended methods of disposition by the sellers thereof set forth in such
registration statement or supplement to such prospectus and (iii) promptly
notify each Shareholder holding Registrable Securities covered by such
registration statement of any stop order issued or threatened by the SEC or any
state securities commission under state blue sky laws and take all reasonable
actions required to prevent the entry of such stop order or to remove it if
entered.
(d) The Company will use its reasonable best efforts to (i) register or
qualify the Registrable Securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions in the United
States as any Shareholder holding such Registrable Securities reasonably (in
light of such Shareholder's intended plan of distribution) requests and (ii)
cause such Registrable Securities to be registered with or approved by such
other governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company and do any and all other acts and things
that may be reasonably necessary or advisable to enable such Shareholder to
consummate the disposition of the Registrable Securities owned by such
Shareholder; provided that the Company will not be required to (A) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this paragraph (d), (B) subject itself to taxation
in any such jurisdiction or (C) consent to general service of process in any
such jurisdiction.
(e) The Company will immediately notify each Shareholder holding such
Registrable Securities covered by such registration statement, at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the occurrence of an event requiring the preparation of a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or
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necessary to make the statements therein not misleading and promptly prepare and
make available to each such Shareholder and file with the SEC any such
supplement or amendment.
(f) In connection with (i) any Demand Registration requested by the DLJ
Entities or their Permitted Transferees or (ii) any registration of Registrable
Securities pursuant to this Article 5 the Company shall appoint the underwriter
or underwriters chosen by DLJMB. The Company will enter into customary
agreements (including an underwriting agreement in customary form) and take such
other actions as are reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities, including the engagement of a
"qualified independent underwriter" in connection with the qualification of the
underwriting arrangements with the NASD.
(g) Upon execution of confidentiality agreements in form and substance
reasonably satisfactory to the Company, the Company will make available for
inspection by any Shareholder and any underwriter participating in any
disposition pursuant to a registration statement being filed by the Company
pursuant to this Section 5.04 and any attorney, accountant or other professional
retained by any such Shareholder or underwriter (collectively, the
"Inspectors"), all financial and other records, pertinent corporate documents
and properties of the Company (collectively, the "Records") as shall be
reasonably requested by any such Person, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
Inspectors in connection with such registration statement.
(h) The Company will furnish to each such Shareholder and to each such
underwriter, if any, a signed counterpart, addressed to such underwriter and the
participating Shareholders, of (i) an opinion or opinions of counsel to the
Company and (ii) a comfort letter or comfort letters from the Company's
independent public accountants, each in customary form and covering such matters
of the type customarily covered by opinions or comfort letters, as the case may
be, as a majority of such Shareholders or the managing underwriter therefor
reasonably requests.
(i) The Company will otherwise use its reasonable best efforts to comply
with all applicable rules and regulations of the SEC and the relevant state blue
sky commissions, and make available to its securityholders, as soon as
reasonably practicable, an earnings statement covering a period of 12 months,
beginning within three months after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
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(j) The Company may require each such Shareholder to promptly furnish in
writing to the Company information regarding the distribution of the Registrable
Securities as the Company may from time to time reasonably request and such
other information as may be legally required in connection with such
registration.
(k) Each such Shareholder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 5.04(e)
hereof, such Shareholder will forthwith discontinue disposition of Registrable
Securities pursuant to the registration statement covering such Registrable
Securities until such Shareholder's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 5.04(e) hereof, and, if so directed
by the Company, such Shareholder will deliver to the Company all copies, other
than any permanent file copies then in such Shareholder's possession, of the
most recent prospectus covering such Registrable Securities at the time of
receipt of such notice. In the event that the Company shall give such notice,
the Company shall extend the period during which such registration statement
shall be maintained effective (including the period referred to in Section
5.04(a) hereof) by the number of days during the period from and including the
date of the giving of notice pursuant to Section 5.04(e) hereof to the date when
the Company shall make available to such Shareholder a prospectus supplemented
or amended to conform with the requirements of Section 5.04(e) hereof.
(l) The Company will use its reasonable best efforts to list such
Registrable Securities on any securities exchange on which the Common Stock is
then listed or on NASDAQ if the Common Stock is then quoted on NASDAQ not later
than the effective date of such registration statement.
SECTION 5.05. Indemnification by the Company. The Company agrees to
indemnify and hold harmless each Shareholder holding Registrable Securities
covered by a registration statement, its officers, directors, employees,
partners and agents, and each Person, if any, who controls such Shareholder
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act (and officers, directors, employees, partners and agents of such
controlling Persons) from and against any and all losses, claims, damages and
liabilities caused by any untrue statement or alleged untrue statement of a
material fact contained in any registration statement or prospectus relating to
the Registrable Securities (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary prospectus,
or caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any such untrue
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statement or omission or alleged untrue statement or omission so made in strict
conformity with information furnished in writing to the Company by such
Shareholder or on such Shareholder's behalf expressly for use therein; provided
that with respect to any untrue statement or omission or alleged untrue
statement or omission made in any preliminary prospectus, or in any prospectus,
as the case may be, the indemnity agreement contained in this paragraph shall
not apply to the extent that any such loss, claim, damage, liability or expense
results from the fact that a current copy of the prospectus (or, in the case of
a prospectus, the prospectus as amended or supplemented) was not sent or given
to the Person asserting any such loss, claim, damage, liability or expense at or
prior to the written confirmation of the sale of the Registrable Securities
concerned to such Person if it is determined that the Company has provided such
current copy of such prospectus (or such amended or supplemented prospectus, as
the case may be) to such Shareholder in a timely manner prior to such sale and
it was the responsibility of such Shareholder under the Securities Act to
provide such Person with a current copy of the prospectus (or such amended or
supplemented prospectus, as the case may be) and such current copy of the
prospectus (or such amended or supplemented prospectus, as the case may be)
would have cured the defect giving rise to such loss, claim, damage, liability
or expense. The Company also agrees to indemnify any underwriters of the
Registrable Securities, their officers and directors and each person who
controls such underwriters on substantially the same basis as that of the
indemnification of the Shareholders provided in this Section 5.05.
SECTION 5.06. Indemnification by Participating Shareholders. Each
Shareholder holding Registrable Securities included in any registration
statement agrees, severally but not jointly, to indemnify and hold harmless the
Company, its officers, directors and agents and each Person (other than such
Shareholder) if any, who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act to the same
extent as the foregoing indemnity from the Company to such Shareholder, but only
(i) with respect to information furnished in writing by such Shareholder or on
such Shareholder's behalf expressly for use in any registration statement or
prospectus relating to the Registrable Securities, or any amendment or
supplement thereto, or any preliminary prospectus or (ii) to the extent that any
loss, claim, damage, liability or expense described in Section 5.05 results from
the fact that a current copy of the prospectus (or, in the case of a prospectus,
the prospectus as amended or supplemented) was not sent or given to the Person
asserting any such loss, claim, damage, liability or expense at or prior to the
written confirmation of the sale of the Registrable Securities concerned to such
Person if it is determined that it was the responsibility of such Shareholder to
provide such Person with a current copy of the prospectus (or such amended or
supplemented prospectus, as the case may be) and such current copy of the
prospectus (or such amended or
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supplemented prospectus, as the case may be) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. Each such Shareholder
shall be prepared, if required by the underwriting agreement, to indemnify and
hold harmless underwriters of the Registrable Securities, their officers and
directors and each person who controls such underwriters on substantially the
same basis as that of the indemnification of the Company provided in this
Section 5.06. As a condition to including Registrable Securities in any
registration statement filed in accordance with Article 5 hereof, the Company
may require that it shall have received an undertaking reasonably satisfactory
to it from any underwriter to indemnify and hold it harmless to the extent
customarily provided by underwriters with respect to similar securities.
No Shareholder shall be liable under Section 5.06 for any damage
thereunder in excess of the net proceeds realized by such Shareholder in the
sale of the Registrable Securities of such Shareholder.
SECTION 5.07. Conduct of Indemnification Proceedings. In case any
proceeding (including any governmental investigation) shall be instituted
involving any Person in respect of which indemnity may be sought pursuant to
this Article 5, such Person (an "Indemnified Party") shall promptly notify the
Person against whom such indemnity may be sought (the "Indemnifying Party") in
writing and the Indemnifying Party shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to such Indemnified Party, and
shall assume the payment of all fees and expenses; provided that the failure of
any Indemnified Party so to notify the Indemnifying Party shall not relieve the
Indemnifying Party of its obligations hereunder except to the extent that the
Indemnifying Party is materially prejudiced by such failure to notify. In any
such proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) in the
reasonable judgment of such Indemnified Party representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the Indemnifying Party shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Indemnified Parties, and that all such fees and expenses shall be
reimbursed as they are incurred. In the case of any such separate firm for the
Indemnified Parties, such firm shall be designated in writing by the Indemnified
Parties. The Indemnifying Party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent, or if there be a final judgment for the plaintiff, the Indemnifying
Party shall indemnify and hold harmless such
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Indemnified Parties from and against any and all losses, claims, damages,
liabilities and expenses or liability (to the extent stated above) by reason of
such settlement or judgment. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, effect any settlement of any pending
or threatened proceeding in respect of which any Indemnified Party is or could
have been a party and indemnity could have been sought hereunder by such
Indemnified Party, unless such settlement includes an unconditional release of
such Indemnified Party from all liability arising out of such proceeding.
SECTION 5.08. Contribution. If the indemnification provided for in this
Article 5 is held by a court of competent jurisdiction to be unavailable to the
Indemnified Parties in respect of any losses, claims, damages or liabilities
referred to herein, then each such Indemnifying Party, in lieu of indemnifying
such Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (i)
as between the Company and the Shareholders holding Registrable Securities
covered by a registration statement and their related Indemnified Parties on the
one hand and the underwriters and their related Indemnified Parties on the
other, in such proportion as is appropriate to reflect the relative benefits
received by the Company and such Shareholders on the one hand and the
underwriters on the other, from the offering of the Shareholders' Registrable
Securities, or if such allocation is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits but also
the relative fault of the Company and such Shareholders on the one hand and of
such underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations and (ii) as between the Company and
their related Indemnified Parties on the one hand and each such Shareholder and
their related Indemnified Parties on the other, in such proportion as is
appropriate to reflect the relative fault of the Company and of each such
Shareholder in connection with such statements or omissions, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and such Shareholders on the one hand and such underwriters on the other
shall be deemed to be in the same proportion as the total proceeds from the
offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company and such Shareholders bear to the total
underwriting discounts and commissions received by such underwriters, in each
case as set forth in the table on the cover page of the prospectus. The relative
fault of the Company and such Shareholders on the one hand and of such
underwriters on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company and such Shareholders or by such underwriters. The
relative fault of the Company on the one hand and of each such Shareholder on
the other shall be
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determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by such party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Shareholders agree that it would not be just and
equitable if contribution pursuant to this Section 5.08 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of the
losses, claims, damages or liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 5.08 no underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to securities purchased by such underwriter in such offering, less
the aggregate amount of any damages which such underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission, and no Shareholder shall be required to contribute any
amount in excess of the amount by which the net proceeds realized on the sale of
the Registrable Securities of such Shareholder exceeds the amount of any damages
which such Shareholder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. Each Shareholder's obligation
to contribute pursuant to this Section 5.08 is several in the proportion that
the proceeds of the offering received by such Shareholder bears to the total
proceeds of the offering received by all such Shareholders and not joint.
SECTION 5.09. Participation in Public Offering. No Person may participate
in any Underwritten Public Offering hereunder unless such Person (a) agrees to
sell such Person's securities on the basis provided in any underwriting
arrangements approved by the Persons entitled hereunder to approve such
arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements and the provisions of
this Agreement in respect of registration rights.
SECTION 5.10. Cooperation by the Company. In the event any Shareholder
shall transfer any Registrable Securities pursuant to Rule 144A under
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the Securities Act, the Company shall cooperate, to the extent commercially
reasonable, with such Shareholder and shall provide to such Shareholder such
information as such Shareholder shall reasonably request.
SECTION 5.11. No Transfer of Registration Rights. None of the rights of
Shareholders under this Article 5 shall be assignable by any Shareholder to any
Person acquiring securities of such Shareholder in any Public Offering or
pursuant to Rule 144A of the Securities Act.
ARTICLE 6
CERTAIN COVENANTS AND AGREEMENTS
SECTION 6.01. Confidentiality. (a) Each Shareholder hereby agrees that
Confidential Information (as defined below) furnished and to be furnished to it
was and will be made available in connection with such Shareholder's investment
in the Company. Each Shareholder agrees that it will use the Confidential
Information only in connection with its investment in the Company and not for
any other purpose. Each Shareholder further acknowledges and agrees that it will
not disclose any Confidential Information to any Person; provided that
Confidential Information may be disclosed (i) to such Shareholder's
Representatives (as defined below) in the normal course of the performance of
their duties or to any financial institution providing credit to such
Shareholder, (ii) to the extent required by applicable law, rule or regulation
(including complying with any oral or written questions, interrogatories,
requests for information or documents, subpoena, civil investigative demand or
similar process to which a Shareholder is subject; provided that such
Shareholder gives the Company prompt notice of such request(s), to the extent
practicable, so that the Company may seek an appropriate protective order or
similar relief (and the Shareholder shall cooperate with such efforts by the
Company, and shall in any event make only the minimum disclosure required by
such law, rule or regulation)), (iii) to any Person to whom such Shareholder is
contemplating a transfer of its Shares (provided that such transfer would not be
in violation of the provisions of this Agreement and as long as such potential
transferee is advised of the confidential nature of such information and agrees
to be bound by a confidentiality agreement in form and substance satisfactory to
the Company (it being understood that a confidentiality agreement consistent
with the provisions hereof shall be satisfactory to the Company)) or (iv) if the
prior written consent of the Board shall have been obtained. Nothing contained
herein shall prevent the use (subject, to the extent possible, to a protective
order) of Confidential Information in connection with the assertion or defense
of any claim by or against the Company or any Shareholder.
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(b) "Confidential Information" means any information concerning the
Company and Persons which are or become its subsidiaries or the financial
condition, business, operations or prospects of the Company and Persons which
are or become its subsidiaries in the possession of or furnished to any
Shareholder (including, without limitation by virtue of its present or former
right to designate a director of the Company); provided that the term
"Confidential Information" does not include information which (i) is or becomes
generally available to the public other than as a result of a disclosure by a
Shareholder or its partners, directors, officers, employees, agents, counsel,
investment advisers or representatives (all such persons being collectively
referred to as "Representatives") in violation of the Merger Agreement or this
Agreement, (ii) is or was available to such Shareholder on a nonconfidential
basis prior to its disclosure to such Shareholder or its Representatives by the
Company or (iii) was or becomes available to such Shareholder on a
non-confidential basis from a source other than the Company, provided that such
source is or was (at the time of receipt of the relevant information) not, to
the best of such Shareholder's knowledge, bound by a confidentiality agreement
with (or other confidentiality obligation to) the Company or another Person.
SECTION 6.02. Reports. The Company will furnish the Institutional
Shareholders with the quarterly and annual financial reports that the Company is
required to file with the Securities and Exchange Commission pursuant to Section
13 or Section 15(d) of the Exchange Act promptly after the filing thereof or, in
the event the Company is not required to file such reports, quarterly and annual
reports containing the same information as would be required in such reports on
the date that such reports would otherwise be filed.
SECTION 6.03. Limitations on Subsequent Registration. The Company shall
not enter into any agreement with any holder or prospective holder of any
securities of the Company (a) that would allow such holder or prospective holder
to include such securities in any registration filed pursuant to Section 5.01 or
5.02 hereof, unless under the terms of such agreement, such holder or
prospective holder may include such securities in any such registration only to
the extent that the inclusion of such securities would not reduce the amount of
the Registrable Securities of the Shareholders included therein or (b) on terms
otherwise more favorable than this Agreement.
SECTION 6.04. Exclusive Financial Advisor and Investment Banking Advisor.
During the period from and including the date hereof through and including the
fifth anniversary of the date hereof, Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJSC"), or any Affiliate that DLJMB may choose in its sole
discretion, shall be engaged as the exclusive financial advisor and
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investment banker for the Company on financial and other terms customary in the
industry to be agreed between the Company and DLJSC.
SECTION 6.05. Limitation on Purchase of Common Stock. Until the earlier to
occur of (i) the seventh anniversary of the Closing Date or (ii) the date on
which at least 40% of the outstanding Common Stock on a Fully Diluted basis of
the Company is held by Persons other than the Shareholders (the "Trigger Date"),
no Institutional Shareholder shall acquire any shares of Common Stock except (i)
in a purchase of Equity Securities pursuant to Section 4.03 or Section 4.04
hereof or (ii) in a transfer from any other Shareholder which is otherwise
permitted under the terms of Article 3 hereof.
ARTICLE 7
MISCELLANEOUS
SECTION 7.01. Entire Agreement. This Agreement, the Merger Agreement and
the Subscription Agreement constitute the entire agreement among the parties
with respect to the subject matter hereof and thereof and supersede all prior
and contemporaneous agreements and understandings, both oral and written,
between the parties with respect to the subject matter hereof and thereof.
SECTION 7.02. Binding Effect; Benefit. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
successors, legal representatives and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended to confer on any Person other than
the parties hereto, and their respective heirs, successors, legal
representatives and permitted assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
SECTION 7.03. Assignability. (a) Neither this Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof shall be
assignable by the Company or any Shareholder; provided that any Person acquiring
shares of Common Stock who is required by the terms of this Agreement to become
a party hereto shall execute and deliver to the Company an agreement to be bound
by this Agreement and shall thenceforth be a "Shareholder".
(b) Any Permitted Transferee of a Management Shareholder who shall become
a party hereto shall be deemed a "Management Shareholder".
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(c) Any Permitted Transferee of an Institutional Shareholder who shall
become a party to this Agreement shall be deemed an "Institutional Shareholder".
SECTION 7.04. Amendment; Waiver; Termination. (a) No provision of this
Agreement may be waived except by an instrument in writing executed by the party
against whom the waiver is to be effective. No provision of this Agreement may
be amended or otherwise modified except by an instrument in writing executed by
the Company with approval of the Board of Directors and holders of at least 50%
of the Shares held by the parties to this Agreement at the time of such proposed
amendment or modification.
(b) In addition, any amendment or modification of any provision of this
Agreement that would adversely affect any DLJ Entity may be effected only with
the consent of such DLJ Entity.
(c) In addition, any amendment or modification of any provision of this
Agreement that would adversely affect any (i) Institutional Shareholder may be
effected only with the consent of Institutional Shareholders holding at least
50% of the shares held by the Institutional Shareholders or (ii) Management
Shareholder may be effected only with the consent of Management Shareholders
holding at least 50% of the shares held by the Management Shareholders.
(d) This Agreement shall terminate on the tenth anniversary of the date
hereof unless earlier terminated.
SECTION 7.05. Notices. (a) All notices and other communications given or
made pursuant hereto or pursuant to any other agreement among the parties,
unless otherwise specified, shall be in writing and shall be deemed to have been
duly given and received when sent by fax (with confirmation in writing via first
class U.S. mail) or delivered personally or on the third Business Day after
being sent by registered or certified U.S. mail (postage prepaid, return receipt
requested) to the parties at the fax number or address set forth below or at
such other addresses as shall be furnished by the parties by like notice:
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if to the Company to:
DecisionOne Holdings Corp.
50 East Swedesford Road
Frazer, PA 19355
Attention: Thomas M. Molchan, Esq.
Fax: 610-408-3820
if to any Shareholder, to such Shareholder at the address specified
by such Shareholder on the signature pages of this Agreement or in a
notice given by such Shareholder to the Company for such purpose
with a copy, in the case of the Institutional Shareholders (other
than the Sprout Entities), to
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
Attention: David A. Katz, Esq.
Fax: 212-403-2000
Any Person who becomes a Shareholder shall provide its address and fax
number to the Company, which shall promptly provide such information to each
other Shareholder.
(b) Notices required to be given pursuant to Sections 5.01(a) and 5.01(b)
and Section 5.02 by the Company shall be deemed given only if such notices are
also be given telephonically and by fax to the following persons (or any other
individual the respective entities may designate in writing to the Company to
replace such person):
(i) for the benefit of the Management Shareholders, to Thomas M.
Molchan at 610-296-6212 and fax: 610-408-3820;
(ii) for the benefit of the Apollo Entities, to any of Michael Gross
at 212-261-4009, fax: 212-261-4071, Joshua Harris at 212-261-4032, fax:
212-459-3301, or Marc Becker at 212-261-4061, fax: 212-459-3302;
(iii) for the benefit of the Bain Entities, to Stephen Pagliuca at
617-572-2629, fax: 617-572-3274 or Domenic Ferrante at 617-572-2563, fax:
617-572-3274;
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(iv) for the benefit of the THL Entities, to any of Scott A. Schoen,
Scott M. Sperling or Kent R. Weldon at 617-227-1050, fax: 617-227- 3514;
(v) for the benefit of the Sprout Entities, to Art Zuckerman at
212-892-4866, fax: 212-892-3444;
(vi) for the benefit of the Ontario Teachers' Pension Plan Board, to
Dean Metcalf at 416-730-6166, fax: 416-730-5374;
(vii) in the case of any registration not requested by the DLJ
Entities, for the benefit of the DLJ Entities, to Peter Grauer, at
212-892- 3636, fax: 212-892-7272; and
(viii) to David Katz at 212-403-1000, fax: 212-403-2000.
SECTION 7.06. Headings. The headings contained in this Agreement are for
convenience only and shall not affect the meaning or interpretation of this
Agreement.
SECTION 7.07. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all of
which together shall be deemed to be one and the same instrument.
SECTION 7.08. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, without regard
to the conflicts of laws rules of such state.
SECTION 7.09. Specific Enforcement. Each party hereto acknowledges that
the remedies at law of the other parties for a breach or threatened breach of
this Agreement would be inadequate and, in recognition of this fact, any party
to this Agreement, without posting any bond, and in addition to all other
remedies which may be available, shall be entitled to obtain equitable relief in
the form of specific performance, a temporary restraining order, a temporary or
permanent injunction or any other equitable remedy which may then be available.
SECTION 7.10. Consent to Jurisdiction; Expenses. (a) Any suit, action or
proceeding seeking to enforce any provision of, or based on any matter arising
out of or in connection with, this Agreement or the transactions contemplated
hereby shall be brought in any Federal Court sitting in New York, New York, or
any New York State court sitting in New York, New York, and each of the parties
hereby consents to the exclusive jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action or proceeding
and irrevocably
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waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such suit, action or
proceeding in any such court or that any such suit, action or proceeding which
is brought in any such court has been brought in an inconvenient forum. Process
in any such suit, action or proceeding may be served on any party anywhere in
the world, whether within or without the jurisdiction of any such court. Without
limiting the foregoing, each party agrees that service of process on such party
by any method provided in Section 7.05 shall be deemed effective service of
process on such party and consents to the personal jurisdiction of any Federal
Court sitting in New York, New York, or any New York State court sitting in New
York, New York.
(b) In any dispute arising under this Agreement among any of the parties
hereto, the costs and expenses (including, without limitation, the reasonable
fees and expenses of counsel) incurred by the prevailing party shall be paid by
the party that does not prevail.
SECTION 7.11. Severability. If one or more provisions of this Agreement
are held to be unenforceable to any extent under applicable law, such provision
shall be interpreted as if it were written so as to be enforceable to the
maximum possible extent so as to effectuate the parties' intent to the maximum
possible extent, and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms to the maximum extent permitted by law.
39
<PAGE> 43
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
DECISIONONE HOLDINGS CORP.
By: /s/ Thomas J. Fitzpatrick
---------------------------------------
Name: Thomas J. Fitzpatrick
Title: Vice President and Chief
Financial Officer
DLJ MERCHANT BANKING PARTNERS
II, L.P., a Delaware Limited Partnership
By: DLJ Merchant Banking II, Inc.,
as managing general partner
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
DLJ MERCHANT BANKING PARTNERS
II-A, L.P., a Delaware Limited Partnership
By: DLJ Merchant Banking II, Inc.,
as managing general partner
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
40
<PAGE> 44
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
DLJ OFFSHORE PARTNERS II, C.V., a
Netherlands Antilles Limited Partnership
By: DLJ Merchant Banking II, Inc.,
as advisory general partner
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
DLJ DIVERSIFIED PARTNERS, L.P., a
Delaware Limited Partnership
By: DLJ Diversified Partners II, Inc.,
as managing general partner
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
41
<PAGE> 45
DLJ DIVERSIFIED PARTNERS-A, L.P., a
Delaware Limited Partnership
By: DLJ Diversified Partners II, Inc.,
as managing general partner
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
DLJ MILLENNIUM PARTNERS, L.P., a
Delaware Limited Partnership
By: DLJ Merchant Banking II, Inc.,
as managing general partner
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
42
<PAGE> 46
DLJ MILLENNIUM PARTNERS-A, L.P.,
a Delaware Limited Partnership
By: DLJ Merchant Banking II, Inc.,
as managing general partner
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
DLJMB FUNDING II, INC., a Delaware
corporation
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
43
<PAGE> 47
DLJ FIRST ESC, L.L.C.,
By: DLJ LBO Plans Management Corporation,
as manager
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
UK INVESTMENT PLAN 1997
PARTNERS
By: Donaldson, Lufkin & Jenrette, Inc.,
as general partner
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
44
<PAGE> 48
DLJ EAB PARTNERS, L.P.
By: DLJ Merchant Banking Funding II, Inc.,
its general partner
By: /s/ Kirk B. Wortman
---------------------------------------
Name: Kirk B. Wortman
Title: Attorney-in-fact
Address:
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Fax: 212-892-7272
APOLLO INVESTMENT FUND III, L.P.
By Apollo Advisors II, L.P., its
general partner
By Apollo Capital Management II, Inc.,
its general partner
By: /s/ Josh Harris
---------------------------------------
Name: Josh Harris
Title: Vice President
Address:
1301 Avenue of the Americas
38th Floor
New York, NY 10019
Fax: 212-261-4102
45
<PAGE> 49
APOLLO OVERSEAS PARTNERS III L.P.
By Apollo Advisors II, L.P., its
general partner
By Apollo Capital Management II, Inc.,
its general partner
By: /s/ Josh Harris
---------------------------------------
Name: Josh Harris
Title: Vice President
Address:
1301 Avenue of the Americas
38th Floor
New York, NY 10019
Fax: 212-261-4102
APOLLO U.K. PARTNERS III, L.P.
By Apollo Advisors II, L.P., its
general partner
By Apollo Capital Management II, Inc.,
its general partner
By: /s/ Josh Harris
---------------------------------------
Name: Josh Harris
Title: Vice President
Address:
1301 Avenue of the Americas
38th Floor
New York, NY 10019
Fax: 212-261-4102
46
<PAGE> 50
BAIN CAPITAL FUND V L.P.
By: Bain Capital Partners V, L.P.,
its general partner
By: Bain Capital Investors V, Inc., its
general partner
By: /s/ Stephen Pagliuca
---------------------------------------
Name: Stephen Pagliuca
Title: General Partner
Address:
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Stephen Pagliuca
Fax: 617-572-3274
BAIN CAPITAL FUND, V-B, L.P.
By: Bain Capital Investors V, L.P., its
general partner
By: Bain Capital Investors V, Inc.,
its general partner
By: /s/ Stephen Pagliuca
---------------------------------------
Name: Stephen Pagliuca
Title: General Partner
Address:
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Stephen Pagliuca
Fax: 617-572-3274
BCIP ASSOCIATES
47
<PAGE> 51
By: /s/ Stephen Pagliuca
---------------------------------------
Name: Stephen Pagliuca
Title: General Partner
Address:
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Stephen Pagliuca
Fax: 617-572-3274
BCIP TRUST ASSOCIATES, L.P.
By: Bain Capital Investors V, L.P., its
general partner
By: /s/ Stephen Pagliuca
---------------------------------------
Name: Stephen Pagliuca
Title: General Partner
Address:
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Stephen Pagliuca
Fax: 617-572-3274
48
<PAGE> 52
THOMAS H. LEE EQUITY FUND III, L.P.
By: THL Equity Advisors III
Limited Partnership
By: THL Equity Trust III
By: /s/ Scott Schoen
---------------------------------------
Name: Scott Schoen
Title: Managing Director
Address:
c/o Thomas H. Lee Company
75 State Street
Boston, MA 02109
Fax: 617-227-3514
THOMAS H. LEE FOREIGN
FUND III, L.P.
By: THL Equity Advisors III
Limited Partnership
By: THL Equity Trust III
By: /s/ Scott Schoen
---------------------------------------
Name: Scott Schoen
Title: Managing Director
Address:
c/o Thomas H. Lee Company
75 State Street
Boston, MA 02109
Fax: 617-227-3514
49
<PAGE> 53
THL CO-INVESTORS III-A LLC
By: /s/ Thomas H. Lee
---------------------------------------
Name: Thomas H. Lee
Title: Manager
Address:
c/o Thomas H. Lee Company
75 State Street
Boston, MA 02109
Fax: 617-227-3514
THL CO-INVESTORS III-B LLC
By: /s/ Thomas H. Lee
---------------------------------------
Name: Thomas H. Lee
Title: Manager
Address:
c/o Thomas H. Lee Company
75 State Street
Boston, MA 02109
Fax: 617-227-3514
DLJ CAPITAL CORP.
By: /s/ Art Zuckerman
---------------------------------------
Name: Art Zuckerman
Title:
Address:
277 Park Avenue
New York, NY 10172
Fax: 212-892-3444
50
<PAGE> 54
SPROUT GROWTH II, L.P.
By: DLJ Capital Corporation,
its managing general partner
By: /s/ Art Zuckerman
---------------------------------------
Name: Art Zuckerman
Title:
Address:
277 Park Avenue
New York, NY 10172
Fax: 212-892-3444
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation,
its managing general partner
By: /s/ Art Zuckerman
---------------------------------------
Name: Art Zuckerman
Title:
Address:
277 Park Avenue
New York, NY 10172
Fax: 212-892-3444
51
<PAGE> 55
ONTARIO TEACHERS' PENSION
PLAN BOARD
By: /s/ Dean Metcalf
---------------------------------------
Name: Dean Metcalf
Title: Portfolio Manager, Merchant
Banking
Address:
5650 Yonge Street
North York, Ontario
Canada M2M 4H5
Fax: 416-730-5374
52
<PAGE> 56
By: /s/ Kenneth Drager
---------------------------------------
Kenneth Draeger
By: /s/ Steve Felice
---------------------------------------
Steve Felice
By: /s/ Tom Fitzpatrick
---------------------------------------
Tom Fitzpatrick
By: /s/ Steve Friedman
---------------------------------------
Steve Friedman
By: /s/ Joe Giordano
---------------------------------------
Joe Giordano
By: /s/ Jim Greenwell
---------------------------------------
Jim Greenwell
By: /s/ Tom Molchan
---------------------------------------
Tom Molchan
By: /s/ Dwight Wilson
---------------------------------------
Dwight Wilson
By: /s/ John Baldus
---------------------------------------
John Baldus
By: /s/ Bill Beaumont
---------------------------------------
Bill Beaumont
53
<PAGE> 57
By: /s/ Mark Davis
---------------------------------------
Mark Davis
By: /s/ Tom Farrell
---------------------------------------
Tom Farrell
By: /s/ Tom Fogarty
---------------------------------------
Tom Fogarty
By: /s/ Tom Fogelsong
---------------------------------------
Tom Fogelsong
By: /s/ Dan Harkins
---------------------------------------
Dan Harkins
By: /s/ Judy Johnson
---------------------------------------
Judy Johnson
By: /s/ Bill Lanam
---------------------------------------
Bill Lanam
By: /s/ Mike Rogers
---------------------------------------
Mike Rogers
By: /s/ Kirk Scott
---------------------------------------
Kirk Scott
By: /s/ Tom Walker
---------------------------------------
Tom Walker
54
<PAGE> 1
Purchase Agreement
under the
DecisionOne Holdings Corp.
Direct Investment Program
Purchase Date: August 7, 1997
Name of Participant:
Number of Shares:
Purchase Price Per Share: $ 20.6084
Aggregate Purchase Price: $
DecisionOne Holdings Corp., a Delaware corporation (the "Company"),
hereby sells to the above-named Participant (the "Participant"), and Participant
hereby purchases from the Company, that number of Shares set forth above for the
Aggregate Purchase Price set forth above, pursuant to the terms of the Decision
One Holdings Corp. Direct Investment Program (the "Plan") and this Agreement.
Capitalized terms not otherwise defined herein shall have the same
meanings as in the Plan, or if not defined therein, in the Employment Agreement.
The terms and conditions of the Shares purchased hereby, to the extent not
controlled by the terms and conditions contained in the Plan, are as follows:
1. The Aggregate Purchase Price set forth above for the Shares shall
be payable by Participant to the Company upon the execution hereof in either (i)
cash or (ii) such other means, including a Loan, as the Committee may approve or
permit from time to time. Payment in currency or by check, bank draft, cashier's
check, postal money order or wire transfer shall be considered payment in cash
provided any such instrument is honored upon presentation.
<PAGE> 2
2. (a) The Participant represents and warrants to the Company that
he/she is acquiring the Shares for investment purposes only, solely for his/her
own account, and not with a view to, or for resale in connection with, any
distribution thereof.
(b) The Participant's financial situation is such that the Participant can
afford to bear the economic risk of holding the Shares acquired hereunder for an
indefinite period of time, the Participant has adequate means for providing for
his needs and contingencies and can afford to suffer the complete loss of the
investment in the Shares.
(c) The Participant's knowledge and experience in financial and business
matters are such that he/she is capable of evaluating the merits and risks of
the investment in the Shares, or the Participant has been advised by a
representative possessing such knowledge and experience.
(d) The Participant understands that the Shares acquired hereunder are a
speculative investment which involves a high degree of risk of loss of the
entire investment therein, that there are substantial restrictions on the
transferability of the Shares as set forth in the Investors' Agreement and, if
applicable, the Loan, and that for an indefinite period following the date
hereof there will be no (or only a limited) public market for the Shares and
that, accordingly, it may not be possible for Participant to sell the Shares in
case of emergency or otherwise.
(e) The Participant and his/her representatives, including his/her
professional, financial, tax and other advisors, have carefully reviewed all
documents available to them in connection with the investment in the Shares, and
the Participant understands and has taken cognizance of all the risks related to
such investment.
(f) The Participant and his/her representatives have been given the
opportunity to examine all documents and to ask questions of, and to receive
answers from, the Company and its representatives concerning the terms and
conditions of the acquisition of the Shares and related matters and to obtain
all additional information which the Participant or his/her representatives deem
necessary.
(g) All information which the Participant has provided to the Company and
its representatives concerning the Participant and his/her financial position is
true, complete and correct, and the Participant agrees to promptly notify the
Company if at any time this ceases to be the case.
2
<PAGE> 3
3. Certificates issued in respect of Shares shall, unless the
Committee otherwise determines, be registered in the name of the Participant or
the Participant's Permitted Transferees and, so long as a Participant continues
to be governed by the provisions of any Loan, shall be deposited by such
Participant or Permitted Transferee, together with a stock power endorsed in
blank, with the Company. When the Participant ceases to be bound by the
provisions of any Loan, the Company shall deliver such certificates to the
Participant upon request. Such stock certificate shall carry such appropriate
legends, and such written instructions shall be given to the Company's transfer
agent, as may be deemed necessary or advisable by counsel to the Company in
order to comply with the requirements of (i) the Securities Act of 1933, as
amended, any state securities laws or any other applicable laws, (ii) the
Investors' Agreement and (iii) any Loan.
4. Except as otherwise provided in the Employment Agreement, if the
Participant's employment with the Company or any Subsidiary shall terminate,
then the terms and provisions of Section 8 of the Plan and, if applicable, the
Loan, shall govern any Shares held by the Participant.
5. This Purchase Agreement does not confer on the Participant any
right to continue in the employ of the Company or any Subsidiary or interfere in
any way with the right of the Company or any Subsidiary to determine the terms
of the Participant's employment.
6. The Participant shall, as a condition precedent to the purchase
of the Shares hereunder, execute an instrument agreeing to be bound by the
Investors' Agreement or, at the election of the Company, a counterpart of the
Investors' Agreement.
7. This Purchase Agreement and the terms and conditions herein set
forth are subject in all respects to the terms and conditions of the Plan, which
shall be controlling. All interpretations or determinations of the Board and/or
the Committee shall be binding and conclusive upon the Participant and his legal
representatives on any question arising hereunder.
8. Participant acknowledges that any powers, rights or
responsibilities of the Board and/or the Committee set forth herein may be
delegated to and exercised by any subcommittee thereof as permitted under the
Plan.
9. All notices hereunder to the party shall be delivered or mailed
to the following addresses:
If to the Company:
3
<PAGE> 4
DecisionOne Holding Corp.
c/o DLJ Merchant Banking Partners II, L.P.
277 Park Avenue
New York, New York 10172
Attention: Peter T. Grauer
Fax: (212) 892-7272
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: George R. Bason, Jr.
Fax: (212) 450-4800
or to such other address or telecopy number and with such other copies as such
party may hereafter specify for the purpose of notice;
If to the Participant:
To the person and at the address specified on the signature page.
Such addresses for the service of notices may be changed at any time provided
notice of such change is furnished in advance to the other party.
10. This Agreement contains the entire understanding of the parties
hereto in respect of the subject matter contained herein. This Agreement and the
Plan supersedes all prior agreements and understandings between the parties
hereto with respect to the subject matter hereof.
11. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without application of the conflict of
laws principles thereof.
12. This Agreement may be signed in any number of counterparts, each
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
4
<PAGE> 5
IN WITNESS WHEREOF, the undersigned have caused this Purchase
Agreement to be duly executed as of the date first above written.
DECISIONONE HOLDINGS CORP.
By:
---------------------------
Name:
Title:
Participant:
------------------------------
Name:
Address:
5
<PAGE> 1
Option Agreement
under the
DecisionOne Holdings Corp.
Management Incentive Plan
Date of Grant: August 7, 1997
Name of Optionee:
Number of Shares
Time Vesting:
Performance Vesting:
Option Price: $20.6084/share
Expiration Date: August 6, 2007
DecisionOne Holdings Corp., a Delaware corporation (the "Company"), hereby
grants to the above-named optionee (the "Optionee") a time vesting option (the
"Time Vesting Option") and a performance vesting option (the "Performance
Vesting Option" and, together with the Time Vesting Option, the "Options") to
purchase from the Company, for the price per share set forth above, the number
of shares of Common Stock, $.01 par value (the "Shares"), of the Company set
forth above pursuant to the DecisionOne Holdings Corp. Management Incentive Plan
(the "Plan"). This Time Vesting Option is intended to be treated as an Incentive
Stock Option. The Performance Vesting Option is not intended to be treated as an
Incentive Stock Option.
Capitalized terms not otherwise defined herein shall have the same
meanings as in the Plan, or if not defined therein, in the Employment Agreement.
The terms and conditions of the Option granted hereby, to the extent not
controlled by the terms and conditions contained in the Plan, are as follows:
1. The price at which each Share subject to this Option may be purchased
shall be the price set forth above.
<PAGE> 2
2. The number of Shares for which this Option may be exercised at any time
through the Expiration Date set forth above shall be determined as follows,
subject to the provisions of Sections 3 and 7.
(a) On each of the first four anniversaries of the Date of Grant, 25% of
the Time Vesting Option shall vest and become exercisable.
(b) The Performance Vesting Option shall vest and become exercisable on
the seventh anniversary of the Date of Grant.
(c) Notwithstanding subsection (b) above, 25% of the Performance Vesting
Option will vest on the thirtieth day following the availability of audited
financial statements with respect to each of fiscal years 1998, 1999, 2000 and
2001, if the "Implied Equity Value" set forth below for the immediately
preceding June 30 (each a "Valuation Date") is achieved:
Valuation Date Implied Equity Value
June 30, 1998 $23.15
June 30, 1999 $32.17
June 30, 2000 $47.93
June 30, 2001 $66.13
Any portion of the Performance Vesting Option which is not accelerated on a
Valuation Date shall vest on the next subsequent Valuation Date if the Implied
Equity Value set forth above is achieved for such subsequent Valuation Date.
Implied Equity Value shall be calculated in accordance with Schedule A hereto.
3. Except as provided in Section 7 hereof, this Option may not be
exercised unless the Optionee is in the employ of the Company or a Subsidiary at
the time of such exercise.
4. The Optionee (or his representative, devisee or heir, as applicable)
may exercise any portion of this Option which has become exercisable in
accordance with the terms hereof as to all or any of the Shares then available
for purchase by delivering to the Company written notice specifying:
(i) the number of whole Shares to be purchased together with payment
in full of the aggregate Option Price of such shares, provided that this
Option may not be exercised for less than 100 Shares or the number of
Shares remaining subject to this Option, whichever is smaller;
2
<PAGE> 3
(ii) the address to which dividends, notices, reports, etc. are to
be sent; and
(iii) the Optionee's social security number.
Payment shall be in cash, by certified or bank cashier's check payable to the
order of the Company, free from all collection charges, or in Shares (provided
such shares shall have been held by the Optionee for at least six months unless
the Committee determines in its sole discretion that such six-month holding
period is not necessary to comply with any accounting, legal or any regulatory
requirement) having a Fair Market Value equal to the full amount of the Option
Price therefor, or such other form as may be permitted by the Committee. In
addition, the Optionee may pay the Option Price, and/or satisfy any tax
withholding obligations, by electing to have the Company withhold Shares which
would otherwise be issued to the Optionee upon the exercise of the Option having
a Fair Market Value equal to the full amount of the Option Price therefor. Only
one stock certificate will be issued unless the Optionee otherwise requests in
writing. Shares purchased upon exercise of the Option will be issued in the name
of the Optionee or the Optionee's Permitted Transferee. The Optionee shall not
be entitled to any rights as a stockholder of the Company in respect of any
Shares covered by this Option until such shares of Stock shall have been paid
for in full and issued to the Optionee.
5. Certificates issued in respect of Shares acquired upon exercise of the
Option shall, unless the Committee otherwise determines, be registered in the
name of the Optionee or its Permitted Transferee and, so long as the Optionee
continues to be governed by the provisions of any loan, shall be deposited by
the Optionee or its Permitted Transferee, together with a stock power endorsed
in blank, with the Company. When the Optionee ceases to be bound by the
provisions of any loan, the Company shall deliver such certificates to the
Optionee or its Permitted Transferee upon request. Such stock certificate shall
carry such appropriate legends, and such written instructions shall be given to
the Company's transfer agent, as may be deemed necessary or advisable by counsel
to the Company in order to comply with the requirements of (i) the Securities
Act of 1933, any state securities laws or any other applicable laws, (ii) the
Investors' Agreement and (iii) any loan.
6. This Option is personal to the Optionee and may be exercised only by
the Optionee or his or her representative in the event of the Optionee's
Disability or death. Any Incentive Stock Option shall not be transferable other
than by will or the laws of descent and distribution and pursuant to Section
8(v) of the Plan. The vested portion of any Nonqualified Stock Option may be
transferred pursuant to Section 8(v) of the Plan and to (i) the spouse, children
or grandchildren of the Optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive
3
<PAGE> 4
benefit of such Immediate Family Members or (iii) a partnership in which such
Immediate Family Members are the only partners, provided that (x) there may be
no consideration for any such transfer and (y) subsequent transfers of
transferred Options shall be prohibited except by will or the laws of descent
and distribution. Following transfer, any such Option shall continue to be
subject to the same terms and conditions as were applicable immediately prior to
transfer. The events of termination of employment or death of the Optionee set
forth in the Plan shall continue to be applied with respect to the Optionee,
following which the transferred Options shall be exercisable by the transferee
only to the extent and for the periods specified in the Plan.
7. (a) Except as otherwise provided in the Employment Agreement, if the
Optionee's employment with the Company or any Subsidiary shall terminate, then
the terms and provisions of Section 8 of the Plan shall govern any Options held
by the Optionee.
(b) Except as otherwise provided in the Employment Agreement, upon a
Change of Control, the Time Vesting Option shall vest in its entirety and become
immediately exercisable and, if the Implied Equity Value as of the June 30
immediately preceding the Change of Control was achieved, the Performance
Vesting Option shall vest in its entirety and become immediately exercisable.
8. This Option does not confer on the Optionee any right to continue in
the employ of the Company or any Subsidiary or interfere in any way with the
right of the Company or any Subsidiary to determine the terms of the Optionee's
employment.
9. The Optionee shall, as a condition precedent to the exercise of this
Option and his receipt of Shares, execute an instrument agreeing to be bound by
the Investors' Agreement or, at the election of the Company, a counterpart of
the Investors' Agreement.
10. This Option and the terms and conditions herein set forth are subject
in all respects to the terms and conditions of the Plan, which shall be
controlling. All interpretations or determinations of the Committee and/or the
Board shall be binding and conclusive upon the Optionee and his legal
representatives on any question arising hereunder. The Optionee acknowledges
that he has received and reviewed a copy of the Plan.
11. Optionee acknowledges that any powers, rights or responsibilities of
the Board and/or the Committee set forth herein may be delegated to and
exercised by any subcommittee thereof as permitted under the Plan.
4
<PAGE> 5
12. All notices hereunder to the party shall be delivered or mailed to the
following addresses:
If to the Company:
DecisionOne Holding Corp.
c/o DLJ Merchant Banking Partners II, L.P.
277 Park Avenue
New York, New York 10172
Attention: Peter T. Grauer
Fax: (212) 892-7272
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: George R. Bason, Jr.
Fax: (212) 450-4800
If to the Optionee:
To the person and at the address specified on the signature page.
Such addresses for the service of notices may be changed at any time provided
notice of such change is furnished in advance to the other party.
13. This Agreement contains the entire understanding of the parties hereto
in respect of the subject matter contained herein. This Agreement and the Plan
supersedes all prior agreements and understandings between the parties hereto
with respect to the subject matter hereof.
5
<PAGE> 6
14. This Option Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without application of the conflict of
laws principles thereof.
15. This Option Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the undersigned have caused this Option Agreement to
be duly executed as of the date first above written.
DECISIONONE HOLDINGS CORP.
By:
---------------------------
Name:
Title:
OPTIONEE:
------------------------------
Name:
Address:
6
<PAGE> 7
[LETTERHEAD PEB]
Mr. James Clingham
Vice President
David Sarnoff Research Center
CN 5300
Princeton, NJ 08543-5300 November 30, 1992
Dear Jim,
In accordance with the terms of PEB's July 1, 1992 letter to Sarnoff, the terms
of the letter agreement of July 9, 1992 from Sarnoff to PEB, and the Research
Agreement dated November 1, 1990 between PEB and Sarnoff, as amended, PEB
confirms that Sarnoff is authorized to complete Phase II of that program on the
agreed fixed price basis.
PEB also confirms that it will pay Sarnoff $2,000,000, less applicable credit
for prior payments in accordance with the above agreements, uponthe delivery
of the first unit which meets the agreed upon specifications hereto attached.
Very truly yours,
/s/ Brown F Williams
Brown F Williams
President
cc. James E. Carnes
Encls.(Specifications)
<PAGE> 8
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE
OFFERED OR SOLD, UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT
AND APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION
FROM REGISTRATION IS AVAILABLE.
SUBORDINATED PROMISSORY NOTE DUE 2010
$59,100,000.00 AUGUST 7, 1997
New York, New York
DECISIONONE HOLDINGS CORP., a Delaware corporation (the "BORROWER"),
for value received, hereby promises to pay, in lawful money of the United
States in immediately available funds, to DecisionOne Corporation, a Delaware
corporation, or its registered assigns (the "HOLDER"), at 50 East Swedesford
Road, Frazer, Pennsylvania 19355, or such other place as the Holder may
designate from time to time, on August 31, 2010, the principal sum of Fiftynine
Million One Hundred Thousand Dollars (the "PRINCIPAL AMOUNT"). Interest
(computed on the basis of a 360-day year of twelve 30-day months) will be paid
in cash or accrued at the rate of 8.25% per annum on the Principal Amount from
time to time remaining unpaid hereon, semi-annually on November 30 and May 31
of each year (commencing on November 30, 1997) until said Principal Amount
shall be paid in full.
The Borrower hereby waives presentment, demand, protest or notice of
any kind in connection with this Note.
This Note and the indebtedness evidenced hereby is subordinated to the
prior payment in full of all other indebtedness for borrowed money of the
Borrower (but not trade payables arising in the ordinary course of business),
whether currently existing or hereinafter incurred (any such indebtedness, the
"SENIOR DEBT"). No payment of principal, interest or other amounts in respect
of the indebtedness evidenced hereby shall be made at any time at which there
exists any default or event of default in respect of any Senior Debt. Upon any
dissolution, winding up, liquidation or reorganization of the Borrower, all
principal, interest and other amounts payable in respect of any Senior Debt
shall be paid in full before any payment is made in respect of the indebtedness
evidenced hereby. In the event that any payment shall be made in respect of the
<PAGE> 9
indebtedness evidenced hereby in contravention of the terms hereof, such
payment shall be held in trust by the recipients thereof for the benefit of,
and shall be paid forthwith over and delivered to, the holders of the Senior
Debt for application pro rata to the payment of all Senior Debt to the extent
necessary to pay such Senior Debt in full.
Subject to the foregoing, the Borrower may, at its option, pay the
Principal Amount in whole at any time without the Holder's prior demand, and
upon final payment in full of the Principal Amount and any accrued interest
thereon, this Note shall immediately be deemed cancelled and of no further
force or effect without any further action on the part of the Borrower.
This Note is registered on the books of the Borrower and is
transferable only by surrender hereof at the principal office of the Borrower
duly endorsed or accompanied by a written instrument of transfer duly executed
by the Holder or its attorney duly authorized in writing. Payment of or on
account of principal and interest on this Note shall be made only to or upon
the order in writing of the Holder.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND SHALL BE GOVERNED
BY THE INTERNAL LAWS (AND NOT THE CONFLICTS LAWS) OF THE STATE OF NEW YORK.
DECISIONONE HOLDINGS CORP.
By:
---------------------------------
Name:
Title:
2
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-03267, 333-19095, 333-33043, 333-33045 on Form S-8 and 333-33057, 333-33061
on Form S-3 of DecisionOne Holdings Corp. of our reports dated August 15, 1997
appearing in this Annual Report on Form 10-K/A1 of DecisionOne Holdings
Corp. and DecisionOne Corporation for the year ended June 30, 1997.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 8, 1997
