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Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-28265
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DECISIONONE
DecisionOne Holdings Corp.
50 East Swedesford Road
Frazer, Pennsylvania 19355
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
AUGUST 7, 1997
To the Stockholders of
DecisionOne Holdings Corp.:
Notice is hereby given that a special meeting of stockholders (the
"Special Meeting") of DECISIONONE HOLDINGS CORP. (the "Company") will be held
on August 7, 1997 at 8 a.m., at the Waldorf Astoria Hotel, located at 301
Park Avenue, New York, New York, for the following purposes:
1. To consider and vote on a proposal to approve and adopt an Agreement
and Plan of Merger, dated as of May 4, 1997 (the "Merger Agreement"), among
the Company and Quaker Holding Co. ("MergerSub"), pursuant to which MergerSub
will be merged with and into the Company (the "Merger"). Pursuant to the
Merger, each share (a "Share") of common stock, par value $.01 per share, of
the Company issued and outstanding immediately prior to the effective time of
the Merger (other than (i) Shares held by the Company as treasury stock or
owned by MergerSub, which Shares shall be canceled, and (ii) Shares as to
which appraisal rights have been exercised) will be, subject to certain
limitations, converted at the election of the holder thereof and subject to
the terms described herein, into either (a) the right to receive $23.00 in
cash, or (b) the right to retain one fully paid and nonassessable Share of
the Company following the Merger.
2. To transact such other business as may properly come before the Special
Meeting.
Only stockholders of record as of the close of business on July 14, 1997
will be entitled to notice of the Special Meeting and to vote at the Special
Meeting or at any adjournment or postponement thereof. A list of stockholders
entitled to vote at the Special Meeting will be available for inspection by
any stockholder, for any purpose relevant to the Special Meeting, during the
Special Meeting and during normal business hours for ten days prior to the
Special Meeting at the offices of Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York.
Approval and adoption of the Merger Agreement requires the affirmative
vote of a majority of the outstanding shares of Company common stock entitled
to vote at the Special Meeting.
The Board of Directors, by unanimous vote of those directors
participating, recommends that stockholders vote to approve the Merger
Agreement, which is described in detail in the accompanying Proxy
Statement/Prospectus.
By Order of the Board of Directors,
Thomas M. Molchan
Secretary
Frazer, Pennsylvania
July 17, 1997
EACH STOCKHOLDER IS URGED TO COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY
CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. IF A STOCKHOLDER DECIDES TO ATTEND THE SPECIAL MEETING, HE OR
SHE MAY, IF SO DESIRED, REVOKE THE PROXY AND VOTE THE SHARES IN PERSON.
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DECISIONONE
DecisionOne Holdings Corp.
50 East Swedesford Road
Frazer, Pennsylvania 19355
------------------------------
PROXY STATEMENT/PROSPECTUS
For
Special Meeting of Stockholders
To Be Held On
August 7, 1997
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This Proxy Statement/Prospectus is being furnished to holders of common
stock, par value $.01 per share ("Company Common Stock"), of DecisionOne
Holdings Corp., a Delaware corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company for use
at the special meeting of stockholders, and at any adjournment or
postponement thereof (the "Special Meeting"), to be held at 8 a.m. at the
Waldorf Astoria Hotel, located at 301 Park Avenue, New York, New York, on
August 7, 1997. The Special Meeting has been called to consider and vote
upon a proposal to approve and adopt the Agreement and Plan of Merger, dated
as of May 4, 1997 (as subsequently amended, the "Merger Agreement"), among
the Company and Quaker Holding Co., a Delaware corporation ("MergerSub"), an
affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated
funds and entities (collectively, the "DLJMB Funds").
The Merger Agreement provides, among other things, for the merger of
MergerSub with and into the Company (the "Merger"), with the Company as the
surviving corporation. Pursuant to the Merger, each share (a "Share") of
Company Common Stock issued and outstanding immediately prior to the
effective time of the Merger (the "Effective Time") (other than (i) Shares
held by the Company as treasury stock or owned by MergerSub, which Shares
shall be canceled, and (ii) Shares as to which appraisal rights have been
exercised) will be converted, at the election of the holder thereof and
subject to the terms described herein, into either (a) the right to receive
$23.00 in cash, or (b) the right to retain one fully paid and nonassessable
share of Company Common Stock. Because the number of shares of Company Common
Stock to be retained by existing stockholders must equal 1,474,345 plus 5.3%
of the number of Shares issued after April 21, 1997 but prior to the
Effective Time in respect of certain options and warrants (the "Stock
Election Number"), the right to receive $23.00 in cash or retain Company
Common Stock is subject to proration as set forth in the Merger Agreement and
described in this Proxy Statement/Prospectus. See "The Merger--Merger
Consideration."
STOCKHOLDERS ARE URGED TO READ THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGES 16 TO 23 OF THIS PROXY STATEMENT/PROSPECTUS.
The Company has filed a registration statement on Form S-4 (together with
all amendments, exhibits and schedules thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the 1,580,940 shares of Company Common Stock (assuming exercise of
all outstanding and exercisable options and warrants) to be retained by
stockholders in the Merger.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to the Company's stockholders on or about July 17, 1997.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Proxy Statement/Prospectus does not cover any resales of Company
Common Stock to be received by the stockholders of the Company upon
consummation of the Merger, and no person is authorized to make any use of
this Proxy Statement/Prospectus in connection with any such resale.
The date of this Proxy Statement/Prospectus is July 17, 1997.
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AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549
and at the Regional Offices of the Commission at Seven World Trade Center,
13th Floor, New York, New York 10048, Suite 500 East, Tishman Building, 5757
Wilshire Boulevard, Los Angeles, California, 90036, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained at prescribed rates from the Public Reference Branch
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549. Such material also may be accessed electronically by means of the
Commission's home page on the Internet (http:// www.sec.gov).
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY THE SECURITIES COVERED BY THIS PROXY STATEMENT/PROSPECTUS
OR A SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO OR FROM ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER
OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
ii
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY AND SPECIAL FACTORS ......................................................... 1
The Company ........................................................................ 1
MergerSub .......................................................................... 1
The Special Meeting ................................................................ 1
The Merger ......................................................................... 2
Risk Factors ....................................................................... 10
Summary Selected Historical and Unaudited Pro Forma Condensed Consolidated Financial
Data .............................................................................. 11
Price of the Common Stock .......................................................... 15
RISK FACTORS ........................................................................ 16
THE COMPANY ......................................................................... 24
Overview ........................................................................... 24
Competitive Strengths .............................................................. 24
Business Strategy .................................................................. 25
Industry Background ................................................................ 26
Company Services ................................................................... 27
Sales and Marketing ................................................................ 29
International Business Partners .................................................... 29
Service Infrastructure ............................................................. 30
Service Technology ................................................................. 30
Training ........................................................................... 31
Customers .......................................................................... 31
Competition ........................................................................ 31
Facilities ......................................................................... 32
Employees .......................................................................... 32
Legal Proceedings .................................................................. 32
THE SPECIAL MEETING ................................................................. 33
Matters to be Considered ........................................................... 33
Required Votes ..................................................................... 34
Voting and Revocation of Proxies ................................................... 34
Record Date; Stock Entitled to Vote; Quorum ........................................ 34
Appraisal Rights ................................................................... 35
Solicitation of Proxies ............................................................ 35
THE MERGER .......................................................................... 36
Background of the Merger ........................................................... 36
Recommendation of the Board of Directors; Reasons for the Merger ................... 39
Opinion of Financial Advisor ....................................................... 42
Certain Estimates of Future Operations and Other Information ....................... 46
Merger Consideration ............................................................... 47
Stock Election ..................................................................... 47
Possible Effects of Proration ...................................................... 48
Stock Election Procedure ........................................................... 49
Effective Time of the Merger ....................................................... 50
Conversion/Retention of Shares; Procedures for Exchange of Certificates ............ 50
Fractional Shares .................................................................. 51
Conduct of Business Pending the Merger ............................................. 51
Conditions to the Consummation of the Merger ....................................... 51
Federal Income Tax Consequences .................................................... 51
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PAGE
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Accounting Treatment ............................................................... 55
Effect on Stock Options and Employee Benefit Matters ............................... 55
Interests of Certain Persons in the Merger ......................................... 55
Investors' Agreement ............................................................... 56
NASDAQ Listing ..................................................................... 56
Resale of Company Common Stock Following the Merger ................................ 57
Merger Financing ................................................................... 57
Conversion of MergerSub Stock ...................................................... 57
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA ........................... 58
DESCRIPTION OF COMPANY CAPITAL STOCK ................................................ 67
General ............................................................................ 67
Common Stock ....................................................................... 67
Preferred Stock .................................................................... 67
Section 203 of Delaware General Corporation Law .................................... 68
Capital Stock of the Company Following the Merger .................................. 69
CERTAIN PROVISIONS OF THE MERGER AGREEMENT .......................................... 70
The Merger ......................................................................... 70
Elections .......................................................................... 70
Proration of Election Price ........................................................ 71
Surrender and Payment .............................................................. 72
The Surviving Corporation .......................................................... 74
Representations and Warranties ..................................................... 74
Certain Pre-Closing Covenants ...................................................... 74
No Solicitation of Transactions .................................................... 75
Board of Directors of the Company Following the Merger ............................. 77
Preferred Stock .................................................................... 77
Indemnification and Insurance ...................................................... 77
Employee Benefit Plans ............................................................. 78
Financing .......................................................................... 78
NASDAQ Listing ..................................................................... 78
Access to Information .............................................................. 78
Cooperation and Reasonable Best Efforts ............................................ 78
Conditions to the Consummation of the Merger ....................................... 78
Termination ........................................................................ 80
Amendment and Waiver ............................................................... 81
Expenses ........................................................................... 81
CERTAIN PROVISIONS OF THE VOTING AGREEMENT .......................................... 82
Transfer Restrictions .............................................................. 82
Voting ............................................................................. 82
No Solicitation .................................................................... 83
Surrender of Warrants .............................................................. 83
Appraisal Rights ................................................................... 83
Certain Representations and Warranties ............................................. 83
Termination ........................................................................ 83
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 84
Company History .................................................................... 84
Strategic Initiatives .............................................................. 85
Recent Developments ................................................................ 86
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PAGE
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Results of Operations ............................................................. 86
Three and Nine Months Ended March 31, 1997 ........................................ 87
Fiscal 1996 Compared to Fiscal 1995 ............................................... 89
Fiscal 1995 Compared to Fiscal 1994 ............................................... 90
Limitation on Use of Net Operating Loss and Other Tax Credits...................... 90
Liquidity and Capital Resources ................................................... 91
Effect of Inflation ............................................................... 94
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY .................................... 95
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................... 97
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS ................................... 99
Employment and Severance Agreements ............................................... 101
Compensation of Directors ......................................................... 101
Compensation Committee Interlocks and Insider Participation ....................... 101
MANAGEMENT FOLLOWING THE MERGER .................................................... 102
Board of Directors ................................................................ 102
Executive Officers ................................................................ 102
REGULATORY CONSIDERATIONS .......................................................... 103
Antitrust ......................................................................... 103
Exon-Florio ....................................................................... 103
Defense Department ............................................................... 103
MERGERSUB AND DLJMB ................................................................ 104
DISSENTING STOCKHOLDERS' RIGHTS .................................................... 105
EXPERTS ............................................................................ 108
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY.................................... F-1 - F-47
Annex A Agreement and Plan of Merger and Amendment No. 1 Thereto
Annex B Voting Agreement and Irrevocable Proxy
Annex C Opinion and Supplemental Confirmation of Smith Barney Inc.
Annex D Section 262 of the General Corporation Law of the State of Delaware
</TABLE>
v
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SUMMARY AND SPECIAL FACTORS
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement/Prospectus. Unless the context
otherwise requires, all references to the "Company" or "DecisionOne" prior to
the Effective Time refer to DecisionOne Holdings Corp., its predecessors and
subsidiaries, and after the Effective Time, to the Surviving Corporation.
This summary is not intended to be complete and is qualified in its entirety
by the more detailed information contained elsewhere in this Proxy
Statement/Prospectus, the Appendices hereto and the documents incorporated by
reference or otherwise referred to herein. Stockholders are urged to review
this entire Proxy Statement/Prospectus carefully, including the Appendices
hereto and such other documents. References to industry size and statistics
contained herein, unless otherwise indicated, are derived from information
provided by Dataquest Incorporated ("Dataquest"). Ownership percentages
following the Effective Time are based on the assumption that the DLJMB Funds
(and any Institutional Investors described below) will own 9,782,609 shares
of Company Common Stock, that there will be outstanding warrants to purchase
up to 1,417,180 shares of Company Common Stock and that existing stockholders
will retain 1,474,345 shares of Company Common Stock.
THE COMPANY
DecisionOne is the largest independent (i.e., not affiliated with an
original equipment manufacturer ("OEM")) provider of multivendor computer
maintenance and technology support services in the United States, based on
Dataquest estimates for calendar year 1996. The Company's services include
hardware support, end-user and software support, network support and other
support services. These services are offered by the Company across a broad
range of computing environments, including mainframes, midrange and
distributed systems, workgroups, personal computers ("PCs") and related
peripherals.
The Company's principal executive offices are located at 50 East
Swedesford Road, Frazer, Pennsylvania 19355, and the Company's telephone
number is (610) 296-6000.
MERGERSUB
MergerSub was incorporated on April 30, 1997 and has not carried on any
activities to date other than those incident to its formation and the
transactions contemplated by the Merger Agreement. All of the outstanding
capital stock of MergerSub is owned by DLJMB and affiliated funds and
entities (the "Funds"). Certain additional funds affiliated with DLJMB (the
"Additional Funds") are expected to acquire a portion of the securities of
MergerSub immediately prior to the Merger. As used herein, all references to
the "DLJMB Funds" prior to the time of the acquisition of securities of
MergerSub by the Additional Funds shall refer to the Funds, and thereafter,
to the Funds and the Additional Funds, collectively. The DLJMB Funds expect
that a limited number of institutional investors (the "Institutional
Investors") may acquire a portion of the securities of MergerSub that would
otherwise be purchased by the DLJMB Funds as described in this Proxy
Statement/Prospectus. In no event would any such purchases reduce the fully
diluted ownership by the DLJMB Funds of Company Common Stock after the
Effective Time to below a majority, or limit the rights of the DLJMB Funds as
described in "The Merger--Investors Agreement."
THE SPECIAL MEETING
TIME AND PLACE OF MEETING; MATTER TO BE CONSIDERED
The Special Meeting will be held at the Waldorf Astoria Hotel, located at
301 Park Avenue, New York, New York, on August 7, 1997, starting at 8:00 a.m.,
local time. At the Special Meeting, holders of Company Common Stock will be
asked to approve and adopt the Merger Agreement. See "The Merger" and "The
Merger Agreement."
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RECORD DATE; VOTE REQUIRED
Holders of record of Company Common Stock at the close of business on July
14, 1997 (the "Record Date") have the right to receive notice of and to vote
at the Special Meeting. On the Record Date, there were approximately
27,911,185 shares of Company Common Stock outstanding and entitled to vote
and 124 holders of record. Each share of Company Common Stock is entitled to
one vote on each matter that is properly presented to stockholders for a vote
at the Special Meeting. Under the General Corporation Law of the State of
Delaware, as amended (the "DGCL"), the affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock entitled to vote
thereon is required to approve and adopt the Merger Agreement. Affiliates of
J.H. Whitney & Co. ("J.H. Whitney") and certain partnerships associated with
Welsh, Carson, Anderson & Stowe ("Welsh Carson") (together, the "Significant
Stockholders") have entered into a Voting Agreement and Irrevocable Proxy
(the "Voting Agreement") dated as of May 4, 1997, pursuant to which they have
agreed upon the terms set forth therein to vote Shares representing
approximately 30% of the outstanding Company Common Stock in favor of
approval and adoption of the Merger Agreement. See "Certain Provisions of the
Voting Agreement."
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS
As of June 30, 1997 directors and executive officers of the Company and
their affiliates as a group beneficially owned an aggregate of 16,893,715
shares of Company Common Stock (approximately 60.7% of the Company Common
Stock eligible to vote at the Special Meeting). The directors and executive
officers of the Company have indicated that they intend to vote their shares
of Company Common Stock in favor of the approval and adoption of the Merger
Agreement. As of June 30, 1997, the Significant Stockholders together own
approximately 55% of the Company Common Stock eligible to vote at the Special
Meeting.
THE MERGER
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS: THE COMPANY'S REASONS FOR
THE COMBINATION
The Board of Directors of the Company (the "Board") believes that the
Merger is in the best interests of the stockholders, has approved the Merger
Agreement and the transactions contemplated thereby and has recommended that
stockholders vote in favor of approval and adoption of the Merger Agreement.
OPINION OF FINANCIAL ADVISOR TO THE COMPANY'S BOARD OF DIRECTORS
Smith Barney Inc. ("Smith Barney") rendered its oral opinion on May 4,
1997, which was subsequently confirmed by a written opinion dated May 4,
1997, to the Board to the effect that, based upon and subject to certain
matters stated therein, as of the date of such opinion, and a supplemental
confirmation dated July 16, 1997, the consideration to be paid by MergerSub to
holders of Company Common Stock pursuant to the Merger was fair to such
holders from a financial point of view. Copies of the opinion dated
May 4, 1997 and a supplemental confirmation dated July 16, 1997 are attached
hereto as Annex C. See "Opinion of Financial Advisor" and Annex C.
ADVANTAGES AND DISADVANTAGES OF THE MERGER
The Company believes that the principal advantage of the Merger to the
stockholders is that they will have the opportunity to receive an attractive
value for their shares of Company Common Stock while being offered the
opportunity to elect to participate in the growth of the Company through the
retention of shares of Company Common Stock (to the extent such retention is
not otherwise limited by the terms of the Merger Agreement). See "Risk
Factors--Certain Proration Risks," "The Merger--Background of the Merger" and
"The Merger--Recommendation of the Board of Directors; Reasons for the
Merger."
The Company believes that the principal detriments of the Merger to the
stockholders are the inability of stockholders to fully participate in any
growth of the Company that may not be reflected in
2
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the Merger Consideration, the potential delisting of, and loss of liquidity
for, the Company Common Stock to be retained by stockholders, and the
potential dilution following the Merger of the equity ownership percentage
and book value of the shares of Company Common Stock to be retained by
stockholders. See "Risk Factors."
THE DLJMB FUNDS' REASONS FOR THE MERGER
Early in 1997, DLJMB began to explore the possibility of investments in
the technology services sector and evaluated a number of companies as
potential investment candidates, including the Company. As a result of such
evaluation, DLJMB concluded that the Company might be an attractive candidate
for a possible investment by the DLJMB Funds. The DLJMB Funds based their
decision to proceed with the proposed transaction at this time on their
assessment of the values inherent in the Company and the potential that a
transaction of the type ultimately negotiated and described herein could
yield for the DLJMB Funds.
The DLJMB Funds proposed the structure for the transaction because the
DLJMB Funds were interested only in a transaction which would be accounted
for as a recapitalization. The transaction was therefore structured in such a
way as to qualify for recapitalization treatment under generally accepted
accounting principles. One of the requirements for a merger to qualify for
recapitalization treatment is that a certain portion of the outstanding
equity securities of the recapitalized company remain outstanding. The DLJMB
Funds did not consider an unleveraged transaction; the investment strategies
of the DLJMB Funds are generally premised on use of leverage in transactions
to generate higher returns.
As described in more detail under "The Merger--Background of the Merger,"
representatives of DLJMB contacted representatives of the Company to discuss
the possibility of a transaction. The terms of the Merger Agreement and the
Voting Agreement were negotiated at arms' length between the DLJMB Funds, the
Company and certain of its major stockholders. See "The Merger--Background of
the Merger." The DLJMB Funds did not independently consider the fairness of
the Merger Consideration to the stockholders of the Company. Based
exclusively on the evaluation of the Merger by the Board of Directors of the
Company and its financial advisors, including a review of the description
herein of the information and factors considered by each of them in
concluding that the Merger Agreement and the Merger are fair to and in the
best interests of the Company and its stockholders, the DLJMB Funds believe
the Merger Agreement and the Merger are indeed fair to and in the best
interests of the Company and its stockholders. While there may be certain
detriments to the existing stockholders of the Company as a result of the
Merger, such as a possible delisting of the Company Common Stock and a loss
of liquidity due to the anticipated lower trading volume of Company Common
Stock following the Merger (see "Risk Factors"), stockholders of the Company
will benefit from the Merger, if it is approved, since the cash consideration
to be received by stockholders in the Merger (which, if a stockholder
declines to make a Stock Election, will be at least $21.78 per share, and
depending on the results of the proration, could be as much as $23.00 per
share) represents a significant premium over the market price of the Company
Common Stock prior to the announcement of the Merger. In addition, Company
stockholders may elect to receive shares of Company Common Stock as
consideration in the Merger and may therefore, depending on the results of
the Stock Election and possible proration, have the opportunity to
participate in any increase in value of the shares of Company Common Stock
should the Company continue to grow and its value appreciate.
The DLJMB Funds did not receive any report, opinion or appraisal from an
outside party which is materially related to the Merger Agreement or the
Merger. In particular, the DLJMB Funds did not receive any report, opinion or
appraisal relating to the fairness of the Merger Agreement and the Merger to
the Company or any of its stockholders.
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction or waiver of all conditions to
the Merger, MergerSub will be merged with and into the Company, with the
Company as the surviving corporation (the "Surviving
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Corporation"). The Merger will become effective at such time as the
certificate of merger is duly filed with the Secretary of State of the State
of Delaware or at such later time as is specified in the certificate of
merger (the "Effective Time"). From and after the Effective Time, the
Surviving Corporation will possess all the rights, privileges, powers and
franchises and be subject to all of the restrictions, disabilities and duties
of the Company and MergerSub, all as and to the extent provided under the
DGCL.
MERGER CONSIDERATION
At the Effective Time, subject to certain provisions as described herein
with respect to Shares owned by MergerSub, Shares held in treasury,
fractional shares and Shares as to which appraisal rights have been exercised
("Appraisal Shares") and the effects of proration described herein, each
share of Company Common Stock (other than Stock Electing Shares (as defined
below)), will be converted into the right to receive in cash following the
Merger an amount equal to $23.00 (the "Cash Election Price") and each share
of Company Common Stock with respect to which an election to retain Company
Common Stock has been made and not revoked in accordance with the Merger
Agreement (a "Stock Electing Share") will be converted into the right to
retain one fully paid and non-assessable share of Company Common Stock (the
"Stock Election Price," and together with the Cash Election Price, the
"Merger Consideration").
The Merger Agreement contemplates that approximately 94.7% of the
presently issued and outstanding shares of Company Common Stock will be
converted into cash and that approximately 5.3% of such Shares will be
retained by existing stockholders. Because 5.3% (or 1,474,345 as of April 21,
1997) of the Shares must be retained by existing stockholders in the Merger,
stockholders who do not elect to retain any shares may, due to proration, be
required to retain some shares of Company Common Stock. In addition,
stockholders who elect to retain shares may receive a lesser, prorated number
of shares of Company Common Stock than such stockholders elected to retain,
plus cash, if the aggregate number of Shares elected to be retained exceeds
the Stock Election Number.
Examples illustrating the potential effects of proration are included in
this Proxy Statement/Prospectus under "The Merger--Possible Effects of
Proration."
At the Effective Time, each outstanding option to acquire shares of
Company Common Stock granted to employees and directors, whether vested or
not (the "Options"), will be canceled and, in lieu thereof, as soon as
reasonably practicable as of or after the Effective Time, the holders of such
Options will receive, with respect to each Option, a cash payment in an
amount equal to the product of (x) the excess, if any, of $23.00 over the
exercise price of such Option multiplied by (y) the number of shares of
Company Common Stock subject to such Option (the "Option Cash Proceeds").
Alternatively, a portion of the Options may be converted into options to
purchase common stock of the Surviving Corporation.
The Company will use its reasonable best efforts to cause holders of all
outstanding warrants to acquire Shares (the "Existing Warrants") to surrender
such Existing Warrants to the Company prior to the Effective Time in exchange
for a cash payment immediately after the Effective Time of an amount equal to
the (x) excess, if any, of $23.00 over the exercise price of such Existing
Warrant, multiplied by (y) the number of shares of Company Common Stock
subject to such Existing Warrant (the "Warrant Cash Proceeds"), and upon such
other terms and conditions satisfactory to MergerSub.
No certificates or scrip representing fractional shares of Company Common
Stock will be issued upon the surrender for exchange of certificates
representing Shares, and such fractional share interests will not entitle the
owner thereof to vote or to any rights of a stockholder of the Surviving
Corporation. Each holder of Shares exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Company
Common Stock (after taking into account all Shares delivered by such holder)
will receive, in lieu thereof, a cash payment (without interest) representing
such holder's proportionate interest in the net proceeds from the sale by the
Exchange Agent (following the deduction of applicable transaction costs), on
behalf of all such holders, of the shares (the "Excess Shares") of Company
Common Stock representing such fractions. Such sale will be made as soon as
practicable after the Effective Time. See "Certain Provisions of the Merger
Agreement."
4
<PAGE>
STOCK ELECTION
Subject to the following sentence, record holders of shares of Company
Common Stock will be entitled to make an unconditional election (a "Stock
Election") on or prior to the Election Date (as defined below) to retain the
Stock Election Price. If the number of Stock Electing Shares exceeds the
Stock Election Number, however, then (i) the number of Stock Electing Shares
covered by a holder's Stock Election to be converted into the right to retain
the Stock Election Price will be determined by multiplying the total number
of Stock Electing Shares covered by such Stock Election by a proration factor
(the "Stock Proration Factor") determined by dividing the Stock Election
Number by the total number of Stock Electing Shares and (ii) such number of
Stock Electing Shares will be so converted. All Stock Electing Shares, other
than those Shares converted into the right to retain the Stock Election Price
as described in the immediately preceding sentence, will be converted into
the right to receive the Cash Election Price as if such Shares were not Stock
Electing Shares. If the number of Stock Electing Shares is less than the
Stock Election Number, then (i) all Stock Electing Shares will be converted
into the right to retain Stock Electing Shares in accordance with the Merger
Agreement, (ii) additional shares of Company Common Stock, other than Stock
Electing Shares and Appraisal Shares, will be converted into the right to
retain Stock Electing Shares, which number of additional shares shall be
determined by multiplying the total number of shares, other than Stock
Electing Shares and Appraisal Shares, by a proration factor determined by
dividing (x) the difference between the Stock Election Number and the number
of Stock Electing Shares by (y) the total number of shares of Company Common
Stock, other than Stock Electing Shares and Appraisal Shares, and (iii) such
additional shares of Company Common Stock shall be converted into the right
to retain Stock Electing Shares in accordance with the Merger Agreement.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that neither the Company nor any of its
subsidiaries may (whether directly or indirectly through advisors, agents or
other intermediaries), (a) solicit, initiate or take any action knowingly to
facilitate the submission of inquiries, proposals or offers from any third
party (other than MergerSub) relating to (i) any acquisition or purchase of
20% or more of the consolidated assets of the Company and its subsidiaries or
of over 20% of any class of equity securities of the Company or any of its
subsidiaries, (ii) any tender offer (including a self tender offer) or
exchange offer that if consummated would result in any third party
beneficially owning 20% or more of any class of equity securities of the
Company or any of its subsidiaries, (iii) any merger, consolidation, business
combination, sale of substantially all assets, recapitalization, liquidation,
dissolution or similar transaction involving the Company, or any of its
subsidiaries whose assets, individually or in the aggregate, constitute more
than 20% of the consolidated assets of the Company, other than the
transactions contemplated by the Merger Agreement, or (iv) any other
transaction the consummation of which would, or could reasonably be expected
to impede, interfere with, prevent or materially delay the Merger or which
would, or could reasonably be expected to, materially dilute the benefits to
MergerSub of the transactions contemplated thereby, or agree to or endorse
any acquisition proposal, or (b) enter into or participate in any discussions
or negotiations regarding any of the foregoing, or furnish to any third party
any information with respect to its business, properties or assets or any of
the foregoing, or otherwise cooperate in any way with, or knowingly assist or
participate in, facilitate or encourage, any effort or attempt by any third
party (other than MergerSub) to do or seek any of the foregoing; provided,
however, that the foregoing provisions do not prohibit the Company (either
directly or indirectly through advisors, agents or other intermediaries) from
(i) publicly disclosing in a press release, in a general manner, the
Company's permitted activities under the Merger Agreement, (ii) furnishing
information pursuant to an appropriate confidentiality letter (which letter
may not be less favorable to the Company in any material respect than the
confidentiality agreement between DLJ Merchant Banking II, Inc. and the
Company, and a copy of which will be provided for informational purposes only
to MergerSub) concerning the Company and its businesses, properties or assets
to a third party who has made a bona fide acquisition proposal, (iii)
engaging in discussions or negotiations with a third party who has made a
bona fide acquisition proposal, (iv)
5
<PAGE>
following receipt of a bona fide acquisition proposal, taking and disclosing
to its stockholders a position as contemplated by Rule 14d-9 or Rule 14e-2(a)
under the Exchange Act or otherwise making disclosure to its stockholders,
(v) following receipt of a bona fide acquisition proposal, failing to make or
withdrawing or modifying its recommendation and/or (vi) taking any
non-appealable, final action ordered to be taken by the Company by any court
of competent jurisdiction but in each case referred to in the foregoing
clauses (ii) through (vi) only to the extent that the Board of Directors of
the Company has concluded in good faith on the basis of advice from counsel
that such action is required to prevent the Board of Directors of the Company
from breaching its fiduciary duties to the stockholders of the Company under
applicable law. See "Certain Provisions of the Merger Agreement--No
Solicitation of Transactions."
CERTAIN FEES AND EXPENSES
If a Payment Event (as hereinafter defined) occurs, the Company will pay
to MergerSub, within two business days following such Payment Event, a fee of
$20,947,000. A "Payment Event" will be deemed to have occurred at such time
as: (i) a third party shall have made an acquisition proposal prior to the
Special Meeting, (ii) the Merger Agreement shall have been terminated
pursuant to certain specified termination provisions and (iii) any
acquisition proposal (whether or not proposed prior to the Special Meeting
and whether or not it involves the third party making the acquisition
proposal referred to above) shall have been consummated within twelve months
following the termination of the Merger Agreement. See "Certain Provisions of
the Merger Agreement--No Solicitation of Transactions." In addition, the
Merger Agreement provides, subject to various exceptions and limitations, for
reimbursement of expenses of MergerSub in an aggregate amount not to exceed
$8,250,000 in the event of certain terminations of the Merger Agreement;
provided that if a Payment Event has occurred and in certain other
circumstances, reimbursement of expenses of MergerSub shall not exceed
$5,750,000. See "Certain Provisions of the Merger Agreement--Expenses."
The Company estimates that the costs that will be incurred in connection
with the Merger will range between approximately $95 million and $105
million. These costs consist primarily of compensation costs ($59.3 million),
underwriting discounts and commissions ($22.3 million), professional and
advisory fees ($15.8 million), and printing expenses ($.8 million).
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of the Company and MergerSub to consummate the
Merger are subject to the satisfaction of a number of conditions, including:
the Merger Agreement shall have been adopted by the stockholders of the
Company in accordance with the DGCL; any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act") relating to the Merger shall have expired or been terminated; no
provision of any applicable law or regulation and no judgment, order, decree
or injunction shall prohibit or restrain the consummation of the Merger;
provided, however, that the Company and MergerSub will each use its
reasonable best efforts to have any such judgment, order, decree or
injunction vacated; all consents, approvals and licenses of any governmental
or other regulatory body required in connection with the execution, delivery
and performance of the Merger Agreement and for the Surviving Corporation to
conduct the business of the Company in substantially the manner now
conducted, shall have been obtained, unless the failure to obtain such
consents, authorizations, orders or approvals would not have a material
adverse effect on the Company and its subsidiaries after giving effect to the
transactions contemplated by the Merger Agreement (including the Merger
Financing (as defined in the Merger Agreement)); the funds for the Merger
Financing shall have been made available to MergerSub and/or Operating Co.
(as defined below); and the registration statement of which this Proxy
Statement/Prospectus is a part shall have been declared effective and no stop
order suspending the effectiveness of the registration statement shall be in
effect and no proceedings for such purpose will be pending before or
threatened by the Commission. The obligation of MergerSub to consummate the
Merger is subject to satisfaction of certain additional conditions,
6
<PAGE>
including: holders of not more than 3% of the outstanding Shares shall have
demanded appraisal of their Shares in accordance with Delaware law; MergerSub
shall be reasonably satisfied that the Merger will be recorded as a
"recapitalization" for financial accounting purposes; and total indebtedness
(as defined in the Merger Agreement) of the Company shall not exceed $240
million (excluding certain defined indebtedness) and $255 million (including
such indebtedness). The obligation of the Company to consummate the Merger is
subject to the satisfaction of certain additional conditions, including
receipt by the Board of Directors of advice, reasonably satisfactory to the
Board, from an independent advisor confirming the belief of MergerSub that
upon consummation of the Merger and the Merger Financing, (i) the Company
will not become insolvent, (ii) the Company will not be left with
unreasonably small capital, (iii) the Company will not have incurred debts
beyond its ability to repay such debts as they mature and (iv) the capital of
the Company will not become impaired. See "Certain Provisions of the Merger
Agreement--Conditions to the Consummation of the Merger."
AMENDMENT AND WAIVER
Any provision of the Merger Agreement may be amended or waived by the
Company and MergerSub; provided, however that after the approval and adoption
of the Merger Agreement by the stockholders of the Company, no such amendment
or waiver may, without the further approval of such stockholders, alter or
change the amount or kind of consideration to be received in exchange for any
shares of capital stock of the Company, any term of the certificate of
incorporation of the Surviving Corporation or any of the terms or conditions
of the Merger Agreement if such alteration or change would adversely affect
the holders of any shares of capital stock of the Company. See "Certain
Provisions of the Merger Agreement--Amendment and Waiver."
EXPENSES
Except as otherwise provided, all costs and expenses incurred in
connection with the Merger will be paid by the party incurring such cost or
expense. See "Certain Provisions of the Merger Agreement--Expenses."
VOTING AGREEMENT
The Significant Stockholders currently own approximately 14,837,936 shares
of Company Common Stock as well as Existing Warrants to purchase an
additional 468,750 shares of Company Common Stock at $.10 per share. Pursuant
to the Voting Agreement, until the earlier of (i) the Effective Time or (ii)
the later of the termination of the Merger Agreement or, under certain
circumstances, a date which is four months after the termination of the
Merger Agreement, the Significant Stockholders have agreed not to dispose of
8,345,349 shares, or approximately 30% of the outstanding shares of Company
Common Stock (without giving effect to the exercise of any Options or
Existing Warrants), to vote such shares to approve and adopt the Merger
Agreement, and not to vote such shares in favor of certain competing
transactions. See "Certain Provisions of the Voting Agreement."
MERGER FINANCING
In order to fund the payment of the cash portion of the Merger
Consideration, the Option Cash Proceeds and Warrant Cash Proceeds, refinance
outstanding indebtedness of the Company, and pay expenses incurred in
connection with the Merger, MergerSub expects to raise $85 million through
the issuance of Senior Discount Notes due 2008 (the "Discount Notes"), which
may be sold together with warrants to purchase shares of MergerSub common
stock (the "Public Warrants"), in the public markets (or, alternatively,
through the issuance of preferred stock to the DLJMB Funds and the
Institutional Investors). The transaction is estimated to have an aggregate
cash value of $957 million, including refinancing of the Company's existing
credit facility. At the Effective Time, the Company will succeed to the
obligations of MergerSub with respect to the Discount Notes and any Public
Warrants issued together with the Discount Notes, and the Public Warrants
will, by their terms, become exercisable for an equal
7
<PAGE>
number of shares of Company Common Stock. In addition, DecisionOne
Corporation, a wholly-owned and the principal operating subsidiary of the
Company ("Operating Co."), expects to issue Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes") for approximately $150 million of
gross proceeds, and expects to enter into a syndicated, senior secured loan
facility providing for term loan borrowings in the aggregate principal amount
of approximately $470 million and revolving loan borrowings of $105 million
(the "New Credit Facility"). At the Effective Time, Operating Co. is expected
to borrow all term loans available thereunder and approximately $8.3 million
of revolving loans. The remaining revolving loans will, subject to a
borrowing base, be available to fund the working capital requirements of
Operating Co. after the Merger. The proceeds of such financings will, in
part, be distributed to the Company in the form of a dividend and, in part,
lent to the Company pursuant to an intercompany note. Each financing is
subject to customary conditions, including the negotiation, execution and
delivery of definitive documentation with respect to such financing.
The DLJMB Funds and the Institutional Investors also expect to purchase
approximately 9,782,508 shares of common stock of MergerSub and may acquire
up to 1,417,180 warrants to purchase shares of common stock of MergerSub at
an exercise price of not less than $.01 per share (the "DLJMB Warrants") for
approximately $225 million. In lieu of acquiring the DLJMB Warrants, the
DLJMB Funds and the Institutional Investors may acquire directly those shares
of MergerSub common stock (up to 1,417,180 shares) for which such DLMB
Warrants would have been exercisable, at a price that would be equivalent to
the exercise price of the DLJMB Warrants (the "Direct Shares"). The number of
DLJMB Warrants issued or Direct Shares purchased will be reduced by the
number of Public Warrants issued (if any). Upon the effectiveness of the
Merger, the proceeds of such purchase will become an asset of the Company,
each share of MergerSub common stock, including the Direct Shares if any,
will become a share of Company Common Stock, and each warrant to acquire
MergerSub common stock will by its terms become exercisable for an equal
number of shares of Company Common Stock.
APPRAISAL RIGHTS
Under Section 262 of the DGCL, holders of Company Common Stock who: (i)
hold shares of Company Common Stock on the date of making a demand for
appraisal; (ii) continuously hold such shares through the Effective Time;
(iii) deliver a properly executed written demand for appraisal to the Company
prior to the Special Meeting; (iv) do not vote in favor of the Merger or
consent thereto in writing; (v) file any necessary petition in the Delaware
Court of Chancery within 120 days after the Effective Time; and (vi)
otherwise satisfy all procedural requirements, are entitled, if the Merger is
consummated, to receive payment of the fair value of their shares of Company
Common Stock as appraised by the Delaware Court of Chancery; provided,
however, that if any such holder of Appraisal Shares shall have failed to
establish an entitlement to appraisal rights as provided in Section 262 of
the DGCL, if any such holder of Appraisal Shares shall have effectively
withdrawn a demand for appraisal of such Shares or lost the right to
appraisal and payment for his Shares under Section 262 of the DGCL or if
neither any holder of Appraisal Shares nor the Surviving Corporation shall
have filed a petition demanding a determination of the value of all Appraisal
Shares within the time provided in Section 262 of the DGCL, such holder will
forfeit the right to appraisal of such Shares and each such Share will be
treated as if it had been a Share with respect to which no election has been
made and had been converted, as of the Effective Time, into a right to
receive the Merger Consideration, without interest thereon, from the
Surviving Corporation. See "Dissenting Stockholders' Rights."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of the Company may have
interests, described herein, that present them with potential conflicts of
interest in connection with the Merger. The Board is aware of the conflicts
described below and has considered them in addition to the other matters
described under "The Merger--Recommendation of the Board of Directors;
Reasons for the Merger."
Certain officers of the Company, including the Chairman of the Board, have
severance agreements with the Company that could provide them with certain
benefits in the event their employment is
8
<PAGE>
terminated after consummation of the Merger. In addition, under his existing
employment agreement with the Company, the Chairman is entitled to receive
significant compensation if the Merger is consummated. It is also expected
that certain officers of the Company will enter into new employment
agreements with the Company as of the Effective Time. See "Interests of
Certain Persons in the Merger" and "Management Following the Merger."
At the Effective Time, all Options will be canceled and the holders
thereof will receive the Option Cash Proceeds in lieu of the Merger
Consideration. Alternatively, a portion of the Options may be converted into
options to purchase common stock of the Surviving Corporation. Accordingly,
holders of Options will not be subject to proration. As of June 30, 1997,
approximately 2,922,014 Options were outstanding. The Company estimates that
the aggregate amount of the Option Cash Proceeds, assuming all Options are
cancelled, will be approximately $45,308,856. In addition, DLJMB has proposed
that certain officers of the Company be offered the opportunity to purchase
shares of Company Common Stock, using a portion of the Option Cash Proceeds
received by them, the proceeds of non-recourse loans from the Company or
other sources of funds. DLJMB has proposed that management purchase up to
347,826 shares of Company Common Stock for $8.0 million. Also, at the
Effective Time, the Company expects to establish a new stock option plan
under which up to approximately 1,444,469 shares of Company Common Stock will
be reserved for issuance upon exercise of options which may be granted to
certain officers and employees.
The Significant Stockholders collectively own Existing Warrants to
purchase 468,750 shares of Company Common Stock at $.10 per share, and at the
Effective Time such Existing Warrants will be converted into the right to
receive the Warrant Cash Proceeds. Accordingly, holders of Existing Warrants
will not be subject to proration. The Company estimates that the amount of
the Warrant Cash Proceeds to be paid to the Significant Stockholders will be
$10,734,375. Three of the five members of the Board are partners of Welsh
Carson or J.H. Whitney. See "Interests of Certain Persons in the Merger."
Pursuant to the Merger Agreement, the Company has agreed for six years
after the Effective Time to indemnify all present directors and officers of
the Company and, subject to certain limitations, to maintain for six years a
directors' and officers' insurance and indemnification policy containing
terms and conditions which are not less advantageous to the directors and
officers than any such policy which may be in effect prior to the Effective
Time. See "Certain Provisions of the Merger Agreement--Indemnification and
Insurance."
REGULATORY CONSIDERATIONS
Under the HSR Act and the rules that have been promulgated thereunder (the
"Rules") by the Federal Trade Commission (the "FTC"), certain merger
transactions may not be consummated unless certain information has been
furnished to the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the FTC and certain applicable waiting periods have
expired. The Merger is subject to the requirements of the HSR Act and the
Rules. Pursuant to the requirements of the HSR Act, DLJMB filed Notification
and Report Forms with respect to the Merger with the Antitrust Division and
the FTC on June 25, 1997. The Company filed a Notification and Report Form
with respect to the Merger on June 27, 1997. The waiting period applicable to
the Merger was terminated on July 15, 1997.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For a summary of the material U.S. federal income tax consequences of the
Merger, see "The Merger--Certain Federal Income Tax Consequences."
EACH STOCKHOLDER IS URGED TO CONSULT HIS OWN TAX ADVISOR CONCERNING THE
FEDERAL (AND ANY STATE, LOCAL AND FOREIGN) TAX CONSEQUENCES OF THE MERGER.
9
<PAGE>
RISK FACTORS
Holders of Company Common Stock should carefully consider the following
factors, which are described in more detail beginning on page 16, related to
the retention of Company Common Stock in connection with their consideration
of the Merger. As a result of the Merger (i) the DLJMB Funds will have
control of the Company, including the ability to elect a majority of its
directors, (ii) there will be a substantial decrease in the liquidity of the
Company Common Stock and (iii) the terms of the Merger Financings are
expected to subject the Company to significant operating and financial
restrictions and to increase substantially the leverage of the Company. The
exercise of any Public Warrants or DLJMB Warrants and any future grant or
sale by the Company of shares of Company Common Stock or options to purchase
Company Common Stock to management will dilute the equity percentage
ownership of Company stockholders and may result in a decrease in the Company
Common Stock book value per share. The risk of proration, as described in
greater detail herein, may subject holders of Company Common Stock to
dividend treatment for tax purposes with respect to cash received in the
Merger. The effects of proration may also result in stockholders receiving
consideration which is different from the consideration specified in their
respective elections. In addition, the Company's business entails certain
risks relating to (i) losses of contract based revenue as customers cancel or
elect not to renew their contracts; (ii) uncertainty of generating sufficient
cash flow or obtaining financing to fund the Company's future growth; (iii)
intense competition; (iv) integration of acquired businesses and contracts;
(v) obsolescence of inventory; (vi) potential copyright litigation; (vii)
dependence on continuation of current trends in the computer industry; (viii)
dependence on key personnel; and (ix) potential environmental liabilities.
See "Risk Factors" for a more detailed discussion of the above mentioned risk
factors.
10
<PAGE>
SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data for and as of the end
of each of the years in the five-year period ended June 30, 1996 set forth
below have been derived from the audited consolidated financial statements of
the Company. The summary historical consolidated financial data set forth
below for and as of the end of the nine-month and the three-month periods
ended March 31, 1996 and March 31, 1997 have been derived from the unaudited
condensed consolidated financial statements of the Company. The historical
condensed consolidated results of operations of the Company for the nine
months and three months ended March 31, 1996 and 1997 are unaudited and not
necessarily indicative of the Company's results of operations for the full
year. The unaudited historical consolidated financial data reflects all
adjustments (consisting of normal, recurring adjustments) which are, in the
opinion of management, necessary for a fair summary of the Company's
financial position, results of operations and cash flows for and as of the
end of the periods presented.
The unaudited summary consolidated pro forma financial data of the Company
set forth below are based on historical consolidated financial statements of
the Company as adjusted to give effect to the Company's acquisition of Bell
Atlantic Business Services Systems, Inc. ("BABSS") which occurred on October
20, 1995 and the Merger, including the Merger Financings and the application
of the proceeds thereof. The pro forma statement of operations for the year
ended June 30, 1996 gives effect to the BABSS acquisition and the Merger,
including the Merger Financings and the application of the proceeds thereof,
as if they had occurred as of July 1, 1995. The pro forma balance sheet gives
effect to the Merger, including the Merger Financings and the application of
the proceeds thereof, as if they had occurred at March 31, 1997. The pro
forma statements of operations for the nine-month and three-month periods
ended March 31, 1997 give effect to the Merger, including the Merger
Financings and the application of the proceeds thereof, as if it had occurred
as of July 1, 1996. The pro forma adjustments are based upon available
information and upon certain assumptions that management believes are
reasonable under the circumstances. The pro forma financial data do not
purport to represent what the Company's actual results of operations or
actual financial position would have been if the BABSS acquisition and the
Merger, including the Merger Financings and the application of the proceeds
thereof, had occurred on such dates or to project the Company's results of
operations or financial position for any future period or date.
11
<PAGE>
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Condensed Consolidated Pro Forma Financial Data," and the
Company's Consolidated Financial Statements and Notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-------------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................. $112,773 $114,060 $108,416 $163,020 $ 540,191 $697,676
Gross profit......................... 27,753 27,575 31,436 49,537 137,875 180,432
Operating income(2)(3)............... 11,288 4,406 15,983 20,779 49,373 68,687
Interest expense..................... (9,881) (9,353) (4,979) (2,521) (14,953) (71,504)
Interest income...................... 178 25 132 53 239 291
Income (loss) from continuing
operations(4)(5) ................... 1,441 (5,234) 10,112 41,415 20,789 (1,516)
Net income (loss).................... 2,524 (10,590) 10,112 42,528 18,862 (3,443)
Primary income (loss) per common
share:
Continuing operations............... $ 0.11 $ (0.25) $ 0.45 $ 1.81 $ 0.83 $ (0.12)
Net income (loss)................... 0.19 (0.50) 0.45 1.86 0.75 (0.27)
Weighted average number of common
and common equivalent shares
outstanding......................... 13,544 21,215 22,595 22,843 25,196 12,674
Fully diluted income (loss) per
common share:
Continuing operations............... $ 0.11 $ (0.25) $ 0.45 $ 1.79 $ 0.82 $ (0.12)
Net income (loss)................... 0.19 (0.50) 0.45 1.84 0.74 (0.27)
Weighted average number of common
and common equivalent shares
outstanding......................... 13,544 21,215 22,595 23,149 25,430 12,674
Ratio of earnings to fixed
charges(6)(7)....................... 1.13x -- 2.67x 5.09x 2.79x --
CONSOLIDATED BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents............ $ 737 $ 550 $ 978 $ 2,659 $ 8,221
Inventory............................ 14,787 7,146 4,459 4,024 30,130
Repairable parts(8).................. 19,657 13,545 9,473 27,360 154,970
Total assets......................... 84,846 44,721 35,496 135,553 514,510
Total debt(9)........................ 72,972 51,530 4,539 25,571 190,903
Total stockholders' equity
(deficit)........................... (47,477) (58,146) (27,627) 14,677 180,793
CONSOLIDATED CASH FLOW DATA:
Net cash provided by operations ..... $ 16,550 $ 17,137 $ 28,722 $ 38,415 $ 51,894
Net cash (used in) provided by
investing activities................ (8,226) 11,779 (3,348) (54,271) (346,354)
Net cash (used in) provided by
financing activities................ (8,905) (29,103) (24,946) 17,537 300,022
OTHER DATA:
EBITDA(10)........................... $ 27,871 $ 24,361 $ 22,672 $ 37,021 $ 114,816 $147,805
Amortization of repairable parts .... 12,016 9,375 5,929 7,688 37,869 48,467
---------- ---------- ---------- ---------- ----------- -----------
Adjusted EBITDA(10).................. 15,855 14,986 16,743 29,333 76,947 99,338
Adjusted EBITDA margin(11)........... 14.1% 13.1% 15.4% 18.0% 14.2% 14.2%
Depreciation and amortization of
intangibles......................... $ 4,567 $ 4,769 $ 7,161 $ 8,554 $ 23,982 $ 30,651
Repairable parts purchases........... 4,939 3,263 1,857 12,154 63,514 74,287
Capital expenditures................. 1,752 681 304 2,786 7,278 11,243
Cash interest expense................ 4,474 3,428 1,232 2,314 14,743 58,094
Total interest expense............... 9,881 9,353 4,979 2,521 14,953 71,504
Revenue per average number of
employees(12)....................... 70.9 82.3 105.8 113.8 119.6 120.0
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31, PRO FORMA
----------------------- --------------------- -----------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED
1996 1997 1996 1997 MARCH 31, 1997 MARCH 31, 1997
----------- ----------- ---------- ---------- -------------- --------------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................. $ 369,167 $ 572,749 $172,673 $205,070 $572,749 $ 205,070
Gross profit......................... 96,459 144,780 42,711 54,698 144,780 54,698
Operating income(2)(3)............... 29,323 45,041 15,536 20,080 45,041 20,080
Interest expense..................... (11,289) (11,097) (5,855) (4,005) (53,334) (17,804)
Interest income...................... 69 393 54 316 393 316
Income (loss) from continuing
operations(5) ...................... 10,866 19,916 5,842 9,507 (4,582) 1,503
Net income (loss).................... 10,866 19,916 5,842 9,507 (4,582) 1,503
Primary income (loss) per common
share:
Continuing operations............... $ 0.46 $ 0.66 $ 0.25 $ 0.32 $ (0.36) $ 0.12
Net income (loss)................... 0.46 0.66 0.25 0.32 (0.36) 0.12
Weighted average number of common
and common equivalent shares
outstanding........................ 23,424 30,066 23,469 30,062 12,674 12,674
Fully diluted income (loss) per
common share:
Continuing operations............... $ 0.46 $ 0.66 $ 0.25 $ 0.32 $ (0.36) $ 0.12
Net income (loss)................... 0.46 0.66 0.25 0.32 (0.36) 0.12
Weighted average number of common
and common equivalent shares
outstanding........................ 23,483 29,958 23,527 29,976 12,674 12,674
Ratio of earnings to fixed
charges(6)(7)....................... 2.34x 3.17x 2.31x 3.90x -- 1.13x
CONSOLIDATED BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents............ $ 12,886 $ 12,886
Inventory............................ 35,186 35,186
Repairable parts(8).................. 195,656 195,656
Total assets......................... 641,677 670,716
Total debt........................... 246,671 738,771
Total stockholders' equity (deficit). 201,095 (261,966)
CONSOLIDATED CASH FLOW DATA:
Net cash provided by operations ..... $ 35,489 $ 57,654 $ 20,590 $ 36,667
Net cash used in investing
activities.......................... (308,771) (105,329) (20,713) (34,569)
Net cash provided by financing
activities.......................... 276,032 52,388 4,933 2,510
OTHER DATA:
EBITDA(10)........................... $ 75,568 $ 121,680 $ 34,308 $ 46,419 $121,680 $ 46,419
Amortization of repairable parts ... 23,017 45,642 11,214 16,356 45,642 16,356
----------- ----------- ---------- ---------- -------------- --------------
Adjusted EBITDA(10).................. 52,551 76,038 23,094 30,063 76,038 30,063
Adjusted EBITDA margin(11)........... 14.2% 13.3% 13.4% 14.7% 13.3% 14.7%
Depreciation and amortization of
intangibles......................... $ 16,228 $ 26,697 $ 7,558 $ 9,983 $ 26,697 $ 9,983
Repairable parts purchases........... 31,715 64,803 19,560 28,815 64,803 28,815
Capital expenditures................. 3,331 6,093 1,153 2,261 6,093 2,261
Cash interest expense................ 11,134 10,578 5,803 3,642 42,916 14,141
Total interest expense............... 11,289 11,097 5,855 4,005 53,334 17,804
Ratio of Adjusted EBITDA to cash
interest expense.................... 4.72x 7.19x 3.98x 8.25x 1.77x 2.13x
Ratio of Adjusted EBITDA to total
interest expense.................... 4.66 6.85 3.94 7.51 1.43 1.69
Revenue per average number of
employees(12)....................... $ 90.3 $ 94.7 $ 29.8 $ 32.4 $ 94.7 $ 32.4
</TABLE>
13
<PAGE>
- ------------
(1) The Summary Statement of Operations Data excludes the effects of
discontinued operations. See Note 3 of the Notes to the Company's
Consolidated Financial Statements.
(2) Operating income includes a $5.8 million charge and a $6.4 million
credit arising from unused lease liabilities for the years ended June
30, 1993 and 1994. During the nine months ended March 31, 1997 the
Company recorded a $4.3 million charge for estimated future employee
severance costs of $3.4 million and unutilized lease costs of $0.9
million.
(3) Operating income includes a $7.0 million charge for future employee
severance costs and unutilized lease costs, incurred in connection
with the BABSS acquisition, for the nine months ended March 31, 1996.
The year ended June 30, 1996 includes a reversal of $3.4 million of
this charge due to the Company's ability to utilize and sublease
various facilities identified in the original charge. See Note 17 of
the Notes to the Company's Consolidated Financial Statements.
(4) Income (loss) from continuing operations for the years ended June 30,
1992 through 1994 reflects interest expense arising from the
Company's senior and junior subordinated debt which was refinanced as
a part of the 1994 Restructuring. See Note 10 of the Notes to the
Company's Consolidated Financial Statements.
(5) Income (loss) from continuing operations for the years ended June 30,
1992 through 1994 include income taxes based on an effective tax rate
substantially less than the effective tax rates used for the years
ended June 30, 1995 and 1996, and the three and nine months ended
March 31, 1996 and 1997. The year ended June 30, 1995 includes a
$23.1 million net benefit arising from the recognition of future tax
benefits of tax loss carryforwards and temporary timing differences.
See Note 11 of the Notes to the Company's Consolidated Financial
Statements.
(6) In calculating this ratio, "earnings" represents income from
continuing operations before provision for income taxes and
extraordinary items plus fixed charges. Fixed charges consist of
interest and amortization of discounts and capitalized expenses
related to indebtedness and one-third of rent expense, which is
representative of the interest factor.
(7) For the year ended June 30, 1993, earnings were insufficient to cover
fixed charges by $4.9 million. On a pro forma basis, for the year
ended June 30, 1996 and nine months ended March 31, 1997, earnings
were insufficient to cover fixed charges by $2.5 million and $7.9
million, respectively. Accordingly, such ratios have not been
presented.
(8) Repairable parts represent parts that can be repaired and reused and
are required in order to meet the requirements of the contracts with
the Company's maintenance customers. These parts are principally
purchased from equipment manufacturers and other third parties. As
these parts are purchased, they are capitalized at cost and amortized
using the straight-line method over three to five years, the
estimated useful life of these repairable parts. Costs to refurbish
these parts are charged to expense as incurred.
(9) Total debt excludes redeemable preferred stock of $6.4 million and
$6.8 million at June 30, 1994 and 1995, respectively.
(10) "EBITDA" represents income (loss) from continuing operations before
interest expense, interest income, income taxes, depreciation,
amortization of repairable parts, amortization of intangibles,
amortization of discounts and capitalized expenses related to
indebtedness and non-recurring employee severance charges and
provisions for unutilized leases. The Company's historical results
include amortization of repairable parts which is unique to the
industry in which the Company competes. "Adjusted EBITDA" represents
EBITDA reduced by amortization of repairable parts. Neither EBITDA
nor Adjusted EBITDA is intended to represent cash flow from
operations as defined by generally accepted accounting principles and
should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as
a measure of liquidity and may not be comparable to similarly titled
measures of other companies. Adjusted EBITDA is presented because it
is relevant to certain covenants expected to be contained in the
agreements relating to the Merger Financings and the Company believes
that Adjusted EBITDA is a more consistent indicator of the Company's
ability to meet its debt service, capital expenditure and working
capital requirements than EBITDA.
(11) Adjusted EBITDA margin measures Adjusted EBITDA as a percentage of
revenues.
(12) Revenue per average number of employees is calculated by dividing
revenues for applicable periods by the average number of employees
during the respective periods.
14
<PAGE>
PRICE OF THE COMMON STOCK
The Company Common Stock is listed and traded on the NASDAQ National
Market System under the symbol "DOCI". The following table shows, for the
periods indicated, the high and low sale prices of a share of the Company
Common Stock as reported by Bloomberg Financial Markets.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
Second Quarter*......................................... 29 3/4 19 1/2
Third Quarter........................................... 26 1/2 12 1/2
Fourth Quarter.......................................... 16 3/4 13 1/4
1997
First Quarter........................................... 19 1/2 14 3/4
Second Quarter.......................................... 22 3/4 14 1/4
Third Quarter** ....................................... 22 13/16 22 3/8
</TABLE>
- ------------
* The Common Stock has been listed and traded on the NASDAQ National
Market System since April 4, 1996.
** Through July 14, 1997.
On May 2, 1997, the last trading day before public announcement of the
execution of the Merger Agreement, the closing price of the Company Common
Stock on the NASDAQ National Market System was $161/2 per share.
On July 14, 1997, the closing price of the Company Common Stock as
reported on the NASDAQ National Market System was $22 11/16 per share.
Stockholders should obtain current market price quotations for the Company
Common Stock in connection with voting their shares.
Since its initial public offering in 1996, the Company has not paid any
cash dividends on its Common Stock and it does not have any present intention
to commence payment of any cash dividends. The Company intends to retain
earnings to provide funds for the operation and expansion of the Company's
business and to repay outstanding indebtedness. The Company's debt agreements
contain, and the agreements related to the Merger Financings are expected to
contain, certain covenants restricting the payment of dividends on, or
repurchases of, Company Common Stock.
15
<PAGE>
RISK FACTORS
In addition to the other information set forth herein, stockholders should
carefully consider the following information in evaluating the Company and
its business before voting on the Merger and making a Stock Election.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The information herein contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve
a number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors
include, but are not limited to, the competitive environment in the computer
maintenance and technology support services industry in general and in the
Company's specific market areas; changes in prevailing interest rates and the
availability of and terms of financing to fund the anticipated growth of the
Company's business; inflation; changes in costs of goods and services;
economic conditions in general and in the Company's specific market areas;
demographic changes; changes in or failure to comply with federal, state
and/or local government regulations; liability and other claims asserted
against the Company; changes in operating strategy or development plans; the
ability to attract and retain qualified personnel; the significant
indebtedness of the Company; labor disturbances; changes in the Company's
acquisition and capital expenditure plans; and other factors referenced
herein. In addition, such forward-looking statements are necessarily
dependent upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risks uncertainties and other
factors. Accordingly, any forward-looking statements included herein do not
purport to be predictions of future events or circumstances and may not be
realized. Forward-looking statements can be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma" or "anticipates," "intends" or
the negative of any thereof, or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. Given these
uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligations to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
CONTROL BY THE DLJMB FUNDS
Following the Merger, up to 86.9% of the outstanding shares of Company
Common Stock (or 77.2% on a fully diluted basis) (or, if the Direct Shares
are purchased, 88.4% of the outstanding shares of Company Common Stock) will
be held by the stockholders of MergerSub. As of the date hereof, all of the
outstanding capital stock of MergerSub is owned in the aggregate by the DLJMB
Funds. While the DLJMB Funds expect that the Institutional Investors may
acquire a portion of the securities of MergerSub that would otherwise be
purchased by the DLJMB Funds as described in this Proxy Statement/Prospectus,
in no event would any such purchases reduce the fully diluted ownership by
the DLJMB Funds of Company Common Stock after the Effective Time to below a
majority, or limit the rights of the DLJMB Funds as described in "The Merger
- -- Investors Agreement."
It is expected that at the Effective Time, the DLJMB Funds, the
Institutional Investors and any members of the Company's management who
choose to purchase shares of the Company Common Stock will enter into a
stockholders' agreement (the "Investors' Agreement") which will contain
provisions that, among other things, will entitle the DLJMB Funds to appoint
a majority of the members of the Board of Directors. As a result of its stock
ownership and the Investors' Agreement, following the Effective Time the
DLJMB Funds will control the Company and have the power to elect a majority
of its directors, appoint new management and approve any action requiring the
approval of the holders of Company Common Stock, including adopting certain
amendments to the Company's certificate of incorporation and approving
mergers or sales of all or substantially all of the Company's assets. The
directors elected by the DLJMB Funds will have the authority to effect
decisions affecting the capital structure of the Company, including the
issuance of additional capital stock, the implementation of stock repurchase
programs and the declaration of dividends.
16
<PAGE>
The general partners of each of the DLJMB Funds and the members of DLJ
First are affiliates or employees of Donaldson, Lufkin & Jenrette, Inc.
("DLJ, Inc."). DLJ Capital Funding Inc., which has committed to DLJMB to
provide the New Credit Facility in connection with the Merger, is also an
affiliate of DLJ, Inc. Donaldson, Lufkin & Jenrette Securities Corporation,
which is expected to underwrite the Discount Notes and Senior Subordinated
Notes, is also an affiliate of DLJ, Inc.
The existence of a controlling stockholder of the Company is likely to
have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from seeking to acquire, a majority of the
outstanding Company Common Stock. A third party would be required to
negotiate any such transaction with the DLJMB Funds and the interests of the
DLJMB Funds may be different from the interests of other Company
stockholders.
POTENTIAL DELISTING AND LOSS OF LIQUIDITY
As a result of the Merger, the Company Common Stock will no longer meet
the listing requirements of The NASDAQ National Market System ("NASDAQ"), and
NASDAQ may unilaterally act to delist the Company Common Stock. Pursuant to
NASDAQ rules, the Company will seek a dispensation from such listing
requirements to permit the Company Common Stock to continue to be listed on
NASDAQ, or, alternatively, the Company may seek to be listed on a national
exchange. No assurance can be given that such dispensation will be granted or
that such listing will be achieved. Whether or not the Company Common Stock
is delisted, the volume of Shares traded is expected to decline substantially
because of the significant ownership by the DLJMB Funds.
Upon any delisting, Shares would trade only in the over-the-counter
market. Although prices in respect of trades would be published by the
National Association of Securities Dealers, Inc. periodically in the "pink
sheets," quotes for such Shares would not be readily available. As a result,
it is anticipated that the Shares would trade much less frequently relative
to the trading volume of Company Common Stock prior to the Merger and
stockholders may experience difficulty selling Shares or obtaining prices
that reflect the value thereof.
SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT; LIQUIDITY
In connection with consummating the transactions contemplated by the
Merger Agreement, MergerSub and Operating Co. will enter into the Merger
Financings (described under "The Merger--Merger Financing") to (i) fund
payment of the cash portion of the Merger Consideration, (ii) pay the Option
Cash Proceeds and the Warrant Cash Proceeds, (iii) repay or repurchase
certain indebtedness of the Company, (iv) pay the fees and expenses incurred
by the Company, Operating Co., MergerSub and DLJMB in connection with the
Merger and the Merger Financing and (v) provide for working capital
requirements. Although the definitive terms of the Merger Financings have not
been finalized as of the date of this Proxy Statement/Prospectus, the Company
expects that such terms will include significant operating and financial
restrictions, such as limits on the Company's ability to incur indebtedness,
create liens, sell assets, engage in mergers or consolidations, make
investments and pay dividends. In addition, the New Credit Facility is
expected to require the Company to maintain certain debt-to-equity and other
financial ratios.
As of March 31, 1997, after giving pro forma effect to the Merger,
including the Merger Financing and the application of the proceeds thereof,
the Company would have had (i) total consolidated indebtedness of
approximately $738.8 million, (ii) $78.0 million of additional borrowings
available under the New Credit Facility and (iii) a stockholder's deficit of
$262.0 million. In addition, subject to the restrictions in the New Credit
Facility and the indentures governing the Discount Notes and the Senior
Subordinated Notes, the Company may incur additional indebtedness from time
to time.
The level of the Company's indebtedness could have important consequences
to the Company, including: (i) limiting cash flow available for general
corporate purposes including acquisitions because a substantial portion of
the Company's cash flow from operations must be dedicated to debt service;
(ii) limiting the Company's ability to obtain additional debt financing in
the future for working capital, repairable parts purchases, capital
expenditures or acquisitions; (iii) limiting the Company's flexibility in
17
<PAGE>
reacting to competitive and other changes in the industry and economic
conditions generally; and (iv) exposing the Company to risks inherent in
interest rate fluctuations because certain of the Company's borrowings may be
at variable rates of interest, which could result in higher interest expense
in the event of increases in interest rates.
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness and to satisfy its other debt
obligations will depend upon its future operating performance, which will be
affected by general economic, financial, competitive, legislative,
regulatory, business and other factors beyond its control. The Company
anticipates that its operating cash flow, together with borrowings under the
New Credit Facility, will be sufficient to meet its anticipated future
operating expenses, capital expenditures and to service its debt requirements
as they become due. However, if the Company's future operating cash flows are
less than currently anticipated it may be forced, in order to meet its debt
service obligations, to reduce or delay acquisitions, purchases of repairable
parts or capital expenditures, sell assets or reduce operating expenses,
including, but not limited to, investment spending such as selling and
marketing expenses, expenditures on management information systems and
expenditures on new products. If the Company were unable to meet its debt
service obligations, it could attempt to restructure or refinance its
indebtedness or to seek additional equity capital. There can be no assurance
that the Company will be able to effect any of the foregoing on satisfactory
terms, if at all. In addition, subject to the restrictions and limitations
contained in the agreements relating to the Merger Financing, the Company may
incur significant additional indebtedness to finance future acquisitions,
which could adversely affect the Company's operating cash flows and its
ability to service its indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
POTENTIAL DILUTION OF COMPANY STOCKHOLDERS
Following the Merger, the Company intends to grant or sell, or grant
options to purchase, additional shares of Company Common Stock to members of
the Company's management. The maximum aggregate number of shares of Company
Common Stock expected to be reserved for issuance pursuant to stock option
plans following the Merger is approximately 1,444,469. The exercise price of
any options granted pursuant to any such stock option plans may be less than
the fair market value of the shares of Company Common Stock. Any such grant,
or sale, or exercise of any stock option, will dilute the equity ownership
percentage of Company stockholders and the DLJMB Funds (and the Institutional
Investors) and may result in a decrease of the book value of the Company
Common Stock per share. It is expected that certain members of management
will purchase shares of Company Common Stock at the time of the Merger. Any
such purchases would also dilute the equity ownership percentage of the DLJMB
Funds (and the Institutional Investors) and the Company stockholders. See
"The Merger--Interests of Certain Persons in the Merger." In connection with
the Merger, MergerSub may issue the DLJMB Warrants and the Public Warrants
which will be exercisable for an aggregate amount of up to 1,417,180 shares
of Company Common Stock (or approximately 11% of the Company Common Stock on
a fully diluted basis). See "The Merger--Merger Financing." Exercise of the
DLJMB Warrants and the Public Warrants would also dilute the equity
percentage ownership of the Company stockholders and may result in a decrease
of book value of the Company Common Stock per share. If the Direct Shares
were issued in lieu of the DLJMB Warrants, the dilution of the Company's
stockholders' equity ownership percentage would be immediate, as of the
Effective Time. Finally, if the Options are converted into options to
purchase Company Common Stock following the Merger, exercises of such options
would dilute the equity ownership percentage of the DLJMB Funds (and the
Institutional Investors) and the Company stockholders.
TAXATION OF STOCKHOLDERS RECEIVING CASH--POSSIBLE DIVIDEND TREATMENT
A stockholder may make a Stock Election and thereby elect to retain shares
of Company Common Stock in the Merger. However, if the number of Electing
Shares exceeds the Stock Election Number, such electing stockholder may
receive some cash for a portion of his or her Company Common Stock as a
result of the proration procedures described herein under "The Merger--Stock
Election." In such event, a stockholder may receive dividend treatment
(rather than the generally more favorable capital gain
18
<PAGE>
treatment) for any cash received in the Merger as a result of such proration
procedures. See "The Merger--Certain Federal Income Tax Consequences" for a
more detailed discussion of the tax consequences of receiving cash. No such
dividend treatment should generally be applicable in the case of a
stockholder who exchanges all of his Shares for cash in the Merger or who
retains shares of Company Common Stock solely as a result of proration.
CERTAIN PRORATION RISKS
The election of record holders of Company Common Stock to retain the Stock
Election Price or to receive the Cash Election Price pursuant to the Merger
is subject to the proration procedures of the Merger Agreement. Accordingly,
if the Merger is consummated, stockholders will not necessarily receive the
type of consideration specified in their respective elections.
AUTHORIZATION OF PREFERRED STOCK
Following the Merger, the Board of Directors of the Company will have the
authority under the Company's Amended and Restated Certificate of
Incorporation to issue shares of the Company's authorized preferred stock
(the "Preferred Stock") in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any
unissued shares of Preferred Stock. One such series of Preferred Stock has
been designated and is described under "Description of Company Capital
Stock." The issuance of Preferred Stock may adversely affect the voting and
dividend rights, rights upon liquidation and other rights of the holders of
Company Common Stock. In the event of issuance, the Preferred Stock could be
utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the Company. Although the Company has no
present intention to issue any shares of its Preferred Stock, other than the
Preferred Stock which may be issued to the DLJMB Funds and the Institutional
Investors at the Effective Time if no Discount Notes are issued as part of
the Merger Financing as described under "The Merger--Merger Financings,"
there can be no assurance the Company will not do so in the future. See
"Description of Company Capital Stock--Preferred Stock." Furthermore, the
Company is subject to Section 203 of the DGCL. The existence of this
provision, as well as the control of the Company by the DLJMB Funds following
the Effective Time, would be expected to have an anti-takeover effect,
including possibly discouraging takeover attempts that might result in a
premium over the market price for the shares of Company Common Stock. See
"Description of Company Capital Stock--Section 203 of Delaware General
Corporation Law."
LOSS OF CONTRACT-BASED REVENUE; FIXED FEE CONTRACTS
Over 85% of the Company's revenues during fiscal 1996 were contract-based.
As is customary in the computer services industry, the Company experiences
reductions in its contract-based revenue as customers may eliminate certain
equipment or services from coverage under the contracts, typically upon 30
days' notice, or either cancel or elect not to renew their contracts upon 30,
60 or 90 days' notice. The Company believes the principal reasons for the
loss of contract-based revenue are the replacement of the equipment being
serviced with new equipment covered under a manufacturer's warranty, the
discontinuance of the use of equipment being serviced for a customer due to
obsolescence or a customer's determination to utilize a competitor's services
or to move technical support services in-house. While the Company
historically has been able to offset the reduction of contract-based revenue
and maintain revenue growth through acquisitions and new contracts,
notwithstanding the reduction in contract based revenue, there can be no
assurance it will continue to do so in the future, and any failure to
consummate acquisitions, enter into new contracts or add additional services
and equipment to existing contracts could have a material adverse effect on
the Company's profitability.
Under many of the Company's contracts, the customer pays a fixed fee for
customized bundled services which are priced by the Company based on its best
estimates of various factors, including estimated future equipment failure
rates, cost of spare parts and labor expenses. While the Company believes it
has historically been able to estimate these factors accurately enough to be
able to price these fixed-fee contracts on terms favorable to the Company,
there can be no assurance the Company will be able to continue to do so in
the future.
19
<PAGE>
MANAGEMENT AND FUNDING OF GROWTH
Any future growth of the Company will require the Company to manage its
expanding domestic operations and international affiliations and to adapt its
operational and financial systems to respond to changes in its business
environment, while maintaining a competitive cost structure. The acquisition
strategy of the Company and the expansion of the Company's service offerings
have placed and will continue to place significant demands on the Company and
its management to improve the Company's operational, financial and management
information systems, to develop further the management skills of the
Company's managers and supervisors, and to continue to retain, train,
motivate and effectively manage the Company's employees. For example, the
Company's acquisition and integration of BABSS resulted in the loss of
certain members of its finance and accounting organization which resulted in
a difficulty in the timely performance of certain internal reconciliations
and account analyses. In response to these difficulties, the Company has
taken various personnel and procedural actions including, among other things,
increasing the size of, and restructuring its accounting staff, instituting
an internal audit function and enhancing its accounting systems, policies and
procedures. The failure of the Company to manage its prior or any future
growth effectively could have a material adverse effect on the Company.
Additionally, the Company's ability to maintain and increase its revenue
base and to respond to shifts in customer demand and changes in industry
trends will be partially dependent on its ability to generate sufficient cash
flow or obtain sufficient capital for the purpose of, among other things,
financing acquisitions, satisfying customer contractual requirements and
financing infrastructure growth, including a significant investment in
repairable parts, which are classified as non-current assets. There can be no
assurance the Company will be able to generate sufficient cash flow or that
financing will be available on acceptable terms (or permitted to be incurred
under the terms of the Merger Financing and any future indebtedness) to fund
the Company's future growth.
ACQUISITION GROWTH STRATEGY
The Company has historically pursued an aggressive acquisition strategy,
acquiring certain contracts and assets in 35 transactions from the beginning
of fiscal 1993 through March 31, 1997. Future acquisitions and/or internal
revenue growth will be necessary to offset expected declines in
contract-based revenues. As a result, the Company expects to continue to
evaluate acquisitions that can provide meaningful benefits by expanding the
Company's existing and future hardware maintenance and technology support
capabilities and leveraging its existing and future infrastructure. However,
there are various risks associated with pursuing an acquisition strategy of
this nature. The risks include problems inherent in integrating new
businesses, including potential loss of customers and key personnel and
potential disruption of operations. There can be no assurance that contracts
acquired by the Company will generate significant revenues or that customers
covered by such acquired contracts will not choose to terminate such
contracts. The rate at which any such contracts are terminated may be higher
than the rates at which the Company's contracts have historically been
terminated. There also can be no assurance that suitable acquisition
candidates will be available, that acquisitions can be completed on
reasonable terms, that the Company will successfully integrate the operations
of any acquired entities or that the Company will have access to adequate
funds to effect any desired acquisitions. Future acquisitions may be limited
by restrictions in the Company's indebtedness.
COMPETITION; COMPETITIVE ADVANTAGES OF OEMS
Competition among computer support service providers, both original
equipment manufacturer and independent service organizations, is intense. The
Company believes approximately 80% of that portion of industry hardware
maintenance services related to mainframes and stand-alone midrange systems
is currently serviced by OEM service organizations. In addition, the Company
believes that OEM service organizations provide a smaller, but still
significant, portion of the computer maintenance services related to
distributed systems, workgroups and PCs. The remainder of the market is
serviced by a small number of larger, independent companies, such as the
Company, offering a broader range of service capabilities, as well as
numerous small companies focusing on narrower areas of expertise or serving
limited geographic areas.
20
<PAGE>
In many instances, OEM service organizations have greater resources than
the Company, and, because of their access to the OEM's engineering data, may
be able to respond more quickly to servicing equipment that incorporates new
or emerging technologies. Moreover, some OEMs, especially in the mainframe
environment, do not make available to end-users or independent service
organizations the technical information, repairable parts, diagnostics,
engineering changes and other support items required to service their
products, and design and sell their products in a manner so as to make it
virtually impossible for a third party to perform maintenance services
without potentially infringing upon certain proprietary rights of the OEM. In
addition OEMs are sometimes able to develop proprietary remote diagnostic or
monitoring systems which the Company may not be able to offer. Therefore, OEM
service organizations sometimes have a cost and timing advantage over the
Company because the Company must first develop or acquire from another party
the required support items before the Company can provide services for that
equipment. An OEM's cost advantage, the unavailability of required support
items or various proprietary rights of the OEM may preclude the Company from
servicing certain products. Furthermore, OEMs usually provide warranty
coverage for new equipment for specified periods, during which it is not
economically feasible for the Company to compete for the provision of
maintenance services. To the extent OEMs choose, for marketing reasons or
otherwise, to expand their warranty periods or terms, the Company's business
may be adversely affected.
In June 1994, International Business Machines Corporation ("IBM") filed in
the United States District Court for the Southern District of New York (the
"Court") a motion to terminate a 1956 consent decree (the "IBM Consent
Decree") that, among other things, requires IBM to provide repairable parts,
documentation and other support items for IBM electronic data processing
systems to third parties on reasonable terms and places other restrictions on
IBM's conduct. On January 18, 1996, the Court entered an order approving a
modification of the IBM Consent Decree that, among other things, terminated
the IBM Consent Decree except insofar as it applies to the System 360/370/390
(mainframes) and AS/400 (midrange) families of IBM products. In July 1996,
IBM and the U.S. Department of Justice ("DOJ") reached an agreement in
tentative settlement of the remainder of IBM's motion and jointly moved to
terminate on a phased basis, the remaining provisions of the IBM Consent
Decree (the "Joint Motions"). On May 1, 1997 the Court granted the Joint
Motion. The order granting the Joint Motion is subject to appeal.
Consequently, certain of the remaining provisions of the IBM Consent Decree
(primarily relating to sales and marketing restrictions on IBM) terminate
either immediately upon, or within six months of, entry of the Court order;
all of the other remaining provisions (including those requiring IBM to
provide parts and other support items to third parties) terminate on July 2,
2000 with respect to AS/400 systems and on July 2, 2001 with respect to
System 360/370/390 mainframes. The impact, if any, upon the Company of the
termination of such sales and marketing restrictions is impossible to predict
because it depends upon what changes, if any, IBM will make in its sales and
marketing policies and practices. As a result of the termination of the IBM
Consent Decree, the Company's ability to service midrange and mainframe
products may be adversely affected. Furthermore, as the Company's business is
highly dependent upon its ability to service a wide variety of equipment in a
multivendor environment, the inability to compete effectively for the service
of IBM mainframes and midrange products could cause the loss of a substantial
portion of the Company's customer base to IBM or an IBM affiliate, which
would have a material adverse effect on the Company's business.
INVENTORY AND REPAIRABLE PARTS MANAGEMENT
In order to service its customers, the Company is required to maintain a
high level of inventory and repairable parts for extended periods of time.
Any decrease in the demand for the Company's maintenance services could
result in a substantial portion of the Company's inventory and repairable
parts becoming excess, obsolete or otherwise unusable. In addition, rapid
changes in technology could render significant portions of the Company's
inventory and repairable parts obsolete, thereby giving rise to write-offs
and a reduction in profitability. The inability of the Company to manage its
inventory and repairable parts or the need to write them off in the future
could have a material adverse effect on the Company's business, financial
results and results of operations.
Inventory and repairable parts purchases are made from OEMs and other
vendors. The Company typically has more than a single source of supply for
each part and component, but from time to time it
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will have only a single supplier for a particular part. In some cases, the
Company's OEM customer may be the only source of supply for a repair part or
component. Should a supplier be unwilling or unable to supply any part or
component in a timely manner, the Company's business could be adversely
affected. In addition, the Company is dependent upon IBM for obtaining
certain parts that are critical to the maintenance of certain IBM mainframe
and midrange systems that IBM is currently required to make available to
third parties pursuant to the IBM Consent Decree. There can no assurance that
IBM will continue to make parts available for AS/400 Systems after July 2,
2000 and for System 360/370/390 mainframes after July 2, 2001. Even if such
parts or components are available, a shortage of supply could result in an
increase in procurement costs which, if not passed on to the customer, may
adversely affect the Company's profitability.
COPYRIGHT ISSUES
In connection with the Company's performance of most hardware maintenance,
the computer system which is being serviced must be turned on for the purpose
of service or repair. When the computer is turned on, the resident operating
system software and, in some cases diagnostic software, is transferred from a
peripheral storage device or a hard disk drive into the computer's random
access memory. Within the past several years, several OEMs have been involved
in litigation with independent service organizations, including the Company,
in which they have claimed such transfer constitutes the making of an
unauthorized "copy" of such software by the independent service organization
which infringes on the software copyrights held by the OEMs. The Company is
aware of three cases in this area which have been decided in favor of the
OEM. Although the Company was not a party in any of these cases, three
similar claims have been asserted against the Company, each of which has been
resolved. Litigation of this nature can be time consuming and expensive, and
there can be no assurance the Company will not be a party to similar
litigation in the future, or that such litigation would be resolved on terms
that do not have a material adverse effect on the Company.
DEPENDENCE ON COMPUTER INDUSTRY TRENDS; RISK OF TECHNOLOGICAL CHANGE
The Company's future success is dependent upon the continuation of a
number of trends in the computer industry, including the migration by
information technology end-users to multivendor and multisystem computing
environments, the overall increase in the sophistication and interdependency
of computing technology, and a focus by information technology managers on
cost-efficient management. The Company believes these trends have resulted in
a movement by both end-users and OEMs towards outsourcing and an increased
demand for support service providers that have the ability to provide a broad
range of multivendor support services. There can be no assurance these trends
will continue into the future.
Additionally, rapid technological change and compressed product life
cycles are prevalent in the computer industry, which may lead to the
development of improved or lower cost technologies, higher quality hardware
with significantly reduced failure rates and maintenance needs, or customer
decisions to replace rather than continue to maintain aging hardware, and
which could result in a reduced need for the Company's services in the
future. Moreover, such rapid technological changes could adversely affect the
Company's ability to predict equipment failure rates, and, therefore, to
establish prices that provide adequate profitability. Similarly, new computer
systems could be built based upon proprietary, as opposed to open, systems
that could not be serviced by the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends, to a large extent, upon the
efforts and abilities of key managerial employees, particularly the Company's
executive officers. See "Directors and Executive Officers of the Company."
There are not currently any employment contracts which would ensure the
continued employment of any executive officer following the Merger.
Competition for qualified management personnel in the industry is intense.
The loss of the services of certain of these key employees or the failure to
retain qualified employees when needed could have a material adverse effect
on the Company's business. The Company does not currently maintain key man
insurance.
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POTENTIAL ENVIRONMENTAL 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 of three 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 fourth, related site, but has
not received any other communication with respect to that site. 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 currently has
sufficient reserves for its share, if any, of the cost of clean-up of these
sites and to the extent current reserves prove inadequate, any payments in
excess of the reserved amounts will not be material to the consolidated
financial position, results of operations or liquidity of the Company. See
"The Company--Legal Proceedings" and Note 18 of the Notes to the Company's
Consolidated Financial Statements.
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THE COMPANY
OVERVIEW
The Company is the largest independent provider of multivendor computer
maintenance and technology support services in the United States, based on
Dataquest estimates for calendar year 1996. The Company offers its customers
a single source solution for virtually all of their computer maintenance and
technology support requirements, including hardware maintenance services,
software support, end-user/help desk services, network support and other
technology support services. The Company believes it is the most
comprehensive independent (i.e., not affiliated with an OEM) provider of
these services across a broad range of computing environments, including
mainframes, midrange and distributed systems, workgroups, PCs and related
peripherals. The Company provides support for over 15,000 hardware products
manufactured by more than 1,000 OEMs. The Company also supports most major
operating systems and over 150 off-the-shelf ("shrink-wrapped") software
applications. The Company delivers its services through an extensive field
service organization of approximately 4,000 field technicians in over 150
service locations throughout the United States and Canada and strategic
alliances in selected international markets.
DecisionOne has emerged as the leading independent, multivendor provider
of computer maintenance and technology support services by (i) consummating
over 35 complementary acquisitions since the beginning of fiscal 1993, (ii)
expanding maintenance capabilities and introducing new technology support
services, (iii) increasing sales to existing customers by increasing
equipment under contract and by selling existing customers new technology
support services, (iv) adding new corporate customers and (v) providing
outsourcing services for OEMs, software publishers, system integrators and
other independent service organizations. As a result, the Company's revenues
have grown at a compound annual rate of 69.2% to approximately $820.4 million
for the annualized quarter ended March 31, 1997 from $114.1 million in fiscal
1993. Over the same period, the Company's Adjusted EBITDA has grown at a
74.2% compound annual rate to approximately $120.3 million for the annualized
quarter ended March 31, 1997 from $15.0 million in fiscal 1993.
In 1996, based on Dataquest projections, the Company estimates it had a 9%
market share of the $8.8 billion independent, multivendor segment of the
$40.5 billion U.S. hardware maintenance and technology support services
market. The independent, multivendor segment is projected by Dataquest to
grow at a 14% compound annual rate from $8.8 billion in 1996 to $14.8 billion
in 2000. The Company believes this growth is being driven by the
proliferation of computer equipment as well as outsourcing trends, including:
(i) the outsourcing by corporate customers of hardware maintenance and
technical support requirements and (ii) the outsourcing by major hardware
OEMs and software publishers of maintenance services (including warranty and
post-warranty services) and end-user technical support requirements. In
addition, the Company believes that demand for its services is being driven
by the increasing complexity of computing environments which has resulted
from the migration of computer systems from single OEM, centralized systems
to multivendor, decentralized systems. The Company believes that this
increased complexity has generally surpassed the technical capabilities of
many in-house support staffs and has accelerated the pace of outsourcing. The
Company believes that customers are increasingly turning to independent
service providers when outsourcing due to the increased use of multiple
vendors for hardware and the perception that OEM service providers are biased
toward specifying their own equipment as computer purchase requirements
arise. Furthermore, many OEMs such as Sun Microsystems, Inc. ("Sun") and
Compaq Computer Corporation ("Compaq") are outsourcing certain non-core
customer service activities, including maintenance services (including
warranty and post-warranty services) and product support services (such as
end-user help desk services) to independent service organizations such as the
Company.
COMPETITIVE STRENGTHS
The Company believes that it possesses a number of competitive strengths
that have allowed it to become the leading independent provider of
multivendor computer maintenance and technology support services, including:
EXTENSIVE SERVICE INFRASTRUCTURE. The Company provides customers with
high quality service through an extensive infrastructure including: (i)
approximately 4,000 highly trained field technicians, (ii) over 150
geographic locations throughout the United States and Canada, (iii) a
substantial spare parts inventory to ensure supply and rapid response times,
(iv) a broad service offering which enhances the Company's ability to provide
customers with a single source solution, (v) an extensive proprietary
database of historical failure rates for over 15,000 hardware products
manufactured by over 1,000 OEMs, (vi) a detailed record of major customers'
hardware and software assets and a record of such customers' maintenance
patterns and (vii) proprietary dispatch systems to ensure rapid customer
response times.
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INDEPENDENT, MULTIVENDOR SERVICE PROVIDER. The Company provides customers
with an independent, multivendor solution for their computer maintenance and
technology support needs. As an independent service provider, the Company
believes it is viewed by customers as impartial to any particular OEM's
products. As a multivendor service provider, the Company supports over 15,000
hardware products manufactured by more than 1,000 OEMs as well as most major
operating systems and over 150 shrink-wrapped software applications. OEM,
specialty and local service providers do not offer either the breadth of
services or the geographic presence throughout the United States and Canada
provided by the Company.
CONTRACT-BASED REVENUES. Approximately 85% of the Company's revenues in
fiscal 1996 were derived from contracts, under which equipment and services
may be added and deleted. Although many of the Company's existing customer
contracts are currently terminable on short notice, 49 out of the Company's
top 50 customers in fiscal 1994 are still customers today. Furthermore, the
Company believes that its extensive service infrastructure and its unique
knowledge of its customers' hardware and software service requirements
enhance the Company's ability to provide superior service. The Company
believes that the resulting track record of service to existing customers
affords it a competitive advantage in renewing existing contracts and winning
new contracts. Although many of the Company's existing customer contracts are
currently terminable on short notice, 49 out of the Company's top 50
customers in fiscal 1994 are still customers today.
DIVERSIFIED AND STABLE FORTUNE 1000 CUSTOMER BASE. The Company services
over 51,000 customers at over 182,000 sites across the United States and
Canada. In fiscal 1996, the Company's top 10 customers represented 23% of
revenues and the top 100 customers represented 47% of revenues. The Company's
customers include a diverse group of national and multinational corporations,
including SABRE Group, Inc. (an affiliate of American Airlines, Inc.), Sun,
Compaq, NationsBank, DuPont Company ("DuPont"), Chevron Corporation and
Netscape Communications Corporation ("Netscape"). The Company believes that
the scope of its service offerings and the breadth of its geographic presence
in the United States and Canada allow it to serve this diverse group of
national and multinational customers as well as thousands of smaller
customers who also require customized services.
MITIGATED TECHNOLOGY AND RECESSION RISKS. The Company provides services
across a broad range of computing environments, including mainframes,
midrange and distributed systems, workgroups, PCs and related peripherals.
Consequently, although each segment of the computer hardware and software
industry is subject to shifts in technology, the Company believes that the
diversity of computing environments for which it provides services mitigates
the potential adverse effects of technological changes in any one segment.
Furthermore, the Company believes that because computer maintenance
requirements are based primarily on usage, the Company's hardware maintenance
business may be insulated from the adverse effects of declines in spending
during recessionary periods, so long as computer usage continues to
necessitate maintenance spending.
BUSINESS STRATEGY
DecisionOne has developed a business strategy which it believes will
enable it to profitably grow future revenue and cash flow and which includes
the following elements:
PROVIDE A SINGLE SOURCE TECHNOLOGY SUPPORT SOLUTION. The Company intends
to continue its strategy of offering its customers a broad and expanding
range of computer technology support services in a single interface format.
The Company believes it meets the customer's preference for a single
interface by offering maintenance and technology support services across most
leading brands of hardware and software within virtually all computing
environments. In addition, the Company's single source solution enables the
Company to retain customers when customers change, substitute or upgrade
their computing environments.
OFFER ADDITIONAL SERVICES TO EXISTING CUSTOMERS. The Company generates new
revenues from existing customers by adding new equipment to existing hardware
maintenance contracts and by providing existing customers with additional
support services. Recent revenue growth attributable to the expansion of
additional support services has been derived primarily from (i) end-user
support services
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such as help desk services, (ii) network support services such as LAN
administration, security management and fault management, (iii) logistics
services such as parts repair, inventory and asset management, and warranty
parts management and (iv) program management services such as technology
deployment and computer and software moves, adds and changes. The Company
believes that the breadth of its additional support services has permitted,
and will continue to permit, the Company to leverage its historic strength in
hardware maintenance to increase revenues from existing customers and has
enabled the Company to grow sales to its top 50 customers in fiscal 1994 by
33.3% through fiscal 1996.
LEVERAGE EXISTING SERVICE INFRASTRUCTURE. The Company believes that, due
to the large scale of the Company's service infrastructure, the Company
enjoys substantial operating leverage and has positioned itself to increase
productivity and profitability whether the Company grows internally or
through acquisitions. The principal areas in which the Company expects to
realize the benefits of operating leverage include: (i) increased customer
call density in a region permitting field service technicians in the region
to complete a greater number of service calls per day, (ii) increased
comparable equipment density allowing the Company to operate with
proportionally lower inventory of spare parts and (iii) productivity gains
driven by new services such as end-user support services which reduce
unnecessary trips by field technicians to existing customers and by the
addition of new equipment under existing maintenance contracts. The Company
intends to further improve the productivity of its existing infrastructure by
investing in upgrades of its management information systems.
PURSUE COMPLEMENTARY ACQUISITIONS. The Company believes it is well
positioned strategically to participate in the further consolidation of the
computer maintenance and technology support services market and expects to
continue to evaluate complementary acquisitions. Further, the Company
believes that pursuing complementary acquisitions is an attractive growth
strategy due to the significant synergies which the Company may achieve when
it successfully consolidates acquisitions into its service infrastructure.
Since the beginning of fiscal 1993, the Company has successfully completed
over 35 acquisitions. The Company's typical acquisition consists principally
of customer maintenance and support contracts as well as the accompanying
spare parts inventory. The Company generally reduces the cost structure
necessary to service the acquired customer contracts by leveraging
DecisionOne's extensive service infrastructure, spare parts inventory and
administrative function. For example, the Company was able to service the
contracts acquired from Memorex Telex Corporation and certain of its
affiliates ("Memorex Telex") in November 1996 with approximately 36% fewer
employees than previously required by Memorex Telex. In addition, the Company
seeks to increase sales and profitability by offering acquired customers
additional services.
CAPITALIZE ON OUTSOURCING TREND AMONG OEMS, SOFTWARE PUBLISHERS AND
SYSTEMS INTEGRATORS. The Company expands its marketing reach by offering its
services through outsourcing arrangements and indirect channels. For fast
growing hardware OEMs and software publishers concerned with cost savings and
time-to-market issues such as Sun, Netscape and Compaq, the Company provides
outsourced customer support services such as help desk services, warranty and
post-warranty maintenance services, and technical product support services.
For systems integrators, the Company provides maintenance and technology
support services on a subcontract basis to several large outsourcing clients
of Electronic Data Systems Corp. ("EDS") and Computer Sciences Corp.
INDUSTRY BACKGROUND
The United States market for computer hardware maintenance and technology
support services is large and growing. According to Dataquest projections,
the hardware maintenance and technology support services market was
approximately $40.5 billion in 1996 and is projected to grow at a compound
annual rate of 5.6% to $50.3 billion by the year 2000. Within the market
surveyed by Dataquest, Dataquest estimates that the independent, multivendor
segment was approximately $8.8 billion in 1996 and projects the segment to
grow at a 14% compound annual rate to $14.8 billion by the year 2000.
According to Dataquest, independent, multivendor service providers such as
the Company are taking market share from the OEM service providers faster
than OEMs are contracting new business. The Company believes that this is
occurring for several reasons including: (i) customers are looking for
single-source providers who support multiple computer hardware and software
platforms, (ii) independent service providers are
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viewed as being unbiased toward computer purchase decisions and (iii) OEMs
are increasingly outsourcing customer maintenance service (including warranty
and post-warranty services) and technical customer support such as help desk
services to independents in order to focus on their core design, technology
and marketing competencies. According to Dataquest, within the independent,
multivendor segment, hardware maintenance was the dominant service,
accounting for approximately 71% of 1996 revenues, with technology support
services, including software support, network support and end-user training,
comprising the remaining 29% of 1996 revenues.
The independent, multivendor segment is also fragmented and consolidating.
According to Dataquest, the top 10 participants accounted for less than 50%
of the market in 1995. Participants in the independent multivendor segment
include: (i) several large independent service providers, (ii) the
multivendor segments of OEM service organizations and (iii) hundreds of
smaller independent companies servicing either product niches or limited
geographical areas of the United States. The significant market position of
OEMs is due largely to their traditional role of servicing their own
installed base of equipment and their customers' former reliance on
centralized, single vendor solutions (i.e. mainframe systems).
COMPANY SERVICES
The Company provides a comprehensive range of core technology support
services to customers across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, PCs and
related peripherals. The Company customizes its service offerings to the
individual customer's needs in response to the nature of the customer's
requirements, the term of the contract and the combination of services that
are provided. Services are bundled to match the support requirements of
customers and include hardware support, end-user and software support,
network support, management information services, program management,
planning support and ancillary support services.
Hardware Support
Hardware support services consist of remedial and preventive maintenance
for computers and computer peripheral devices. The Company supports over
15,000 different hardware products manufactured by more than 1,000 OEMs. The
Company's customer support centers ("CSCs") handle over 330,000 calls per
month regarding hardware support. The Company maintains and manages an
inventory of over 3.5 million parts representing more than 300,000 part
numbers. The Company also has access to a network of computer equipment
vendors, brokers and highly skilled repair suppliers, as well as access to
certain IBM Designated Parts Sales Locations.
In addition to its on-site diagnostic tools, the Company uses industry and
proprietary software diagnostic capabilities to monitor system performance on
a remote basis. Also, large customers are provided remote, on-line access to
certain of the Company's systems to log service requests and track service
delivery.
The Company prices its products and services on either a fixed fee or per
incident basis. Pricing is based on various factors including equipment
failure rates, cost of repairable parts and labor expenses.
End-User and Software Support
The Company's CSCs handle over 90,000 calls per month for help desk and
software support. Levels of support range from basic and network support for
corporate end-users to advanced operating system support for systems
administrators. Customized support also is available for vertical market
applications and OEM accounts. Operational services are available seven days
per week, twenty-four hours a day.
The Company currently provides support for PC/workstation operating
systems such as Windows(Registered Trademark) 95, Windows(Registered
Trademark), MS-DOS(Registered Trademark), and Sun Microsystems'
Solaris(Registered Trademark), as well as support on network operating
systems such as Novell Netware(Registered Trademark) and Windows(Registered
Trademark) NT. Groupware products like Lotus Notes and Internet browsers such
as Netscape also are fully supported. Additionally, over 100 PC software
products ranging from spreadsheets and word processing to communications and
graphics are supported, as are numerous on-line services.
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The Company is a Microsoft Authorized Support Center, providing help desk
support for a broad range of Microsoft business software applications and
operating systems. Technical support is delivered through the Company's
network of CSCs and ranges from basic end-user software support to second
level professional support, and work in conjunction with Microsoft desktop
applications and operating systems, like Microsoft Windows(Registered
Trademark) 95 and Windows(Registered Trademark) NT.
Network Support
The Company provides support services for networked computing
environments, including management, administration, and operations support
for both local area networks and wide area networks ("WANs"). Network support
services are designed to reduce the cost of ownership of networked computing,
improve productivity of network users, and supplement customers' internal
support staffs. The Company's remote network management services provide
monitoring of fault and performance data in customers' networks and problem
resolution from the Company's network management center. The Company also
provides on-site network services to assist customers with network
administration, operations, and remedial support. Network specialists may be
resident at the customer site or dispatched as necessary.
Logistics Services
The Company also repairs and refurbishes computer parts and assemblies at
seven depot repair centers in the United States. In addition to supporting
its own business, these services are provided primarily for OEMs,
distributors and other third-party maintenance companies. Subassemblies
repaired include system logic boards, hard disk drive assemblies,
peripherals, power supplies and related equipment. The Company's depot repair
facilities located in Malvern, Pennsylvania; Boston, Massachusetts;
Milwaukee, Wisconsin; and San Francisco, California are certified to ISO-9002
standards.
The Company also provides logistics services, including the planning and
forecasting of parts requirements and parts sourcing, inventory and warranty
management, for Compaq and other manufacturers. Under terms of the Compaq
logistics service contract, the Company handles orders from customers,
dealers and distributors in North America for parts that are no longer
produced by Compaq. The parts are used to repair Compaq desktops, laptops and
servers and include such components as flat panels (LCDs), motherboards,
monitors, power supplies and related parts. In addition to repair and
replacement work, the Company manages the program's logistics requirements
and parts warranty reimbursement activities.
Program Management
The Company provides ongoing management services for companies that wish
to outsource all or a portion of their services management requirements.
Typical services include third-party vendor management, on-site personnel
support and program evaluation, as well as a variety of support capabilities
required to prepare a system for operation and improve its efficiency. These
support capabilities include support for system installation,
de-installation, moves, upgrades, reconfigurations, system configuration
audits, inventory tracking services and data restoration assistance.
Planning Support
The Company assists customers in defining their enterprise service
requirements, establishing service delivery benchmarks, recommending process
improvements and auditing the results of implemented programs over time. The
objective of these consulting services is to assist customers in reducing the
total cost of ownership and improving operating efficiency in their service
environments.
Information Services
The Company makes service improvement recommendations to customers based
on information accumulated from its hardware, network and end-user support
services. Management information
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services allow customers to make informed decisions relating to hardware and
software procurements as well as the need for increased employee training.
The Company believes these services differentiate it from OEMs and software
developers that may favor their own products.
The Company's AssetOne(Trademark) service tracks customers' desktop assets
and provides information on hardware configuration, software utilization,
warranty status, equipment location and user profiles. This information can
then be used to improve the way customers' assets are deployed, serviced, and
used in order to reduce costs and increase end-user productivity.
Support Partner Programs
The Company maintains strategic alliances with several significant
companies in order to provide customers with comprehensive technology support
solutions. The Company does not receive revenues for services provided by its
strategic partners. Key relationships include: General Electric Computer
Leasing Corp., which provides computer acquisition, disposition and financing
services; SunGard Recovery Services Inc., which provides disaster recovery
services; and MicroAge, Inc., which supplies hardware products such as
personal computers, peripherals, network products and related devices.
SALES AND MARKETING
The Company's core product capabilities are bundled to match the support
requirements of customers. Individual service portfolios exist for data
center, mid-range and desktop environments. In addition, a product portfolio
exists for OEMs who seek support for parts sourcing and repair, inventory
management and related logistics services.
The Company sells its services through both direct and indirect sales
channels. The Company's direct sales force consists of approximately 275
sales professionals who are organized into a general commercial sales group
as well as into several dedicated groups including: a Federal Group, which
sells to the Federal Government; a National Accounts Group, which focuses on
large and multinational corporate customers; and a Telesales Group, which
focuses on small accounts.
The Company also sells its services through its indirect sales force
comprised of approximately 25 sales professionals. Product support
relationships exist with OEMs such as Sequent Computer Corporation, EMC(2)
Corporation ("EMC"), Sun and Compaq, and software developers such as
Netscape, Novell, Inc., Microsoft Corporation and SunSoft, Inc.
INTERNATIONAL BUSINESS PARTNERS
In order to provide international service to its multinational customers,
the Company supplements its broad North American infrastructure with
strategic alliances in selected international markets. The Company maintains
relationships with International Computers Limited ("ICL") and FBA Computer
Technology Services ("FBA"). The Company licenses many of its proprietary
multivendor support tools to FBA and to ICL Sorbus Ltd. ("ICL Sorbus"), which
is ICL's multivendor services group in Western Europe. As a result, the
Company is able to offer its multinational customers service in Western
Europe, Asia and Australia.
ICL is a leading information technology company that has approximately
23,000 employees operating in about 80 countries around the world. In Western
Europe, the ICL Sorbus companies provide multivendor services in 17 countries
with approximately 250 service locations and about 5,000 employees. Several
of the Company's major customers, including SABRE Group, Inc. and DuPont
benefit from the agreement between the Company and ICL Sorbus, whereby ICL
Sorbus agrees to provide services at the European locations of the Company's
multinational customers. Through ICL Sorbus, the Company utilizes the service
branches of both ICL and ICL's parent company, Fujitsu Ltd., to provide
worldwide multivendor support throughout Asia, the Pacific Rim, the Middle
East and Africa.
FBA, an affiliate of Fujitsu Ltd., provides multivendor services in
Australia and New Zealand from 21 locations with 150 employees. In addition
to providing technical support to FBA, the Company has supplied various
management and sales support personnel to FBA. FBA also provides services to
certain of the Company's multinational customers, including Sun.
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SERVICE INFRASTRUCTURE
Centralized Dispatch. When a customer places a call for remedial
maintenance, the Company uses its Dispatch Data Gathering system ("DDG") to
manage the process. When a customer is identified, the DDG system displays
the customer's service level requirements and covered equipment. Specific
information on the symptoms of the problem and the products that are
malfunctioning are entered into the system to begin tracking the service
event. The Company's Customer Support Representative ("CSR") selects, based
upon the requirements of the service event, the appropriate Customer Service
Engineer ("CSE") from a list of pre-assigned primary and back-up personnel
and passes this information to the selected CSE.
The Company maintains three CSCs in Malvern, Pennsylvania; Bloomington,
Minnesota; and Tulsa, Oklahoma. Customers can reach the CSCs by calling one
toll-free telephone number. The CSCs currently are staffed with over 575 CSRs
and 29 staff/operations managers. There is a duty manager on call in each
center at all times. CSCs are available on a 24 hour, 7 day per week basis.
Redundancy for disaster recovery purposes is designed into the CSC system
through the three locations' use of automatic telecommunications switching.
Inventory Logistics. In order to meet customer computer repair
requirements, the Company maintains a tiered approach to inventory
management. Parts or assemblies with low failure rates are stocked in either
the Company's central distribution center located in Malvern, Pennsylvania or
in its critical parts center in Dallas, Texas. The Company also maintains six
regional distribution centers in Atlanta, Georgia; Newark, New Jersey; Los
Angeles, California; San Francisco, California; Chicago, Illinois; and
Wilmington, Ohio for critical parts needed more frequently throughout the
United States. In order to service customers whose response time requirements
are two to four hours, higher usage parts are maintained at the Company's
branch offices or local attended stocking locations. Customer site parts
storage is arranged when customer response time requirements are two hours or
less.
The Company's field inventory system ("FIS") is a real-time system which
tracks the inventory and repairable parts assigned to its field workforce and
located at seven distribution centers, field offices or at customer sites.
Parts information processed through FIS is integrated with the Company's
other key systems, including DDG and International Support Information System
("ISIS").
SERVICE TECHNOLOGY
The Company has developed several proprietary technologies for use in
service planning, support and delivery. These service tools include
proprietary databases, remote diagnostic and system monitoring software, and
instructional documentation. These technical support tools not only provide
remote and on-site predictive and remedial service support, but also enable
the Company to collect extensive, objective systems performance measurement
information (on the customer's environment as well as benchmarking against
the Company's database) which its customers can use to identify potential
efficiencies, evaluate competing products and technologies, and determine
whether its requirements are being met.
The Company's proprietary service technologies include ISIS, SERVICE EDGE
and MAXwatch(Trademark). The Company licenses certain of these technologies
and provides other technical support to certain foreign multivendor service
providers, including ICL Sorbus in Europe, FBA in Australia and New Zealand,
and PT Metrodata Electronics in Indonesia.
International Support Information Systems. ISIS is a database accessible
to the Company's customer service engineers that is comprised of diagnostic
and symptom fix data for thousands of products, service updates, and service
planning information, such as machine performance and parts usage
information, and remote support capabilities for large IBM systems, including
automatic "call home" to the Company. The Company believes that ISIS is the
most comprehensive service-related database of any independent computer
service organization.
SERVICE EDGE. SERVICE EDGE is a PC-based system installed at the
customer's site which monitors error messages and collects and reports
service data to help customers predict potential system failures and provide
customers with system performance information.
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MAXwatch(Trademark). MAXwatch(Trademark) is an on-site program for
products of Digital Equipment Corporation ("Digital") which monitors system
integrity, proactively detects and corrects certain system errors, and
automatically "calls home" for remote technical support when pre-defined
error thresholds are exceeded. A similar product, MAX400, is available for
IBM AS/400 systems.
DecisionOne, AssetOne(Trademark), ISIS, SERVICE EDGE and
MAXwatch(Trademark) are service marks or trademarks owned by the Company. All
other brand names, service marks or trademarks appearing herein are the
property of their respective owners.
TRAINING
The Company maintains the technical expertise of its engineers through
training programs designed to teach the various techniques for determining
the status of a customer's total computer operations. The Company's training
offers support professionals a broad exposure to various computer system
technologies.
The Company's training facilities include 26 classrooms, 23,000 square
feet of hands-on lab space, 26 full-time instructors and video specialists
and a curriculum of over 80 courses. The Company has five training centers
and labs located in Frazer, Pennsylvania; Malvern, Pennsylvania; Bloomington,
Minnesota; Milwaukee, Wisconsin; and Phoenix, Arizona. Six months following
course work, the Company surveys the engineers to gauge the effectiveness and
applicability of its training curriculum.
CUSTOMERS
The Company services over 51,000 customers at over 182,000 sites across
the United States and Canada. The Company sells services to five types of
customers: large businesses that have complex computing support needs and
typically maintain a data center, distributed computing and work group
environments; medium-sized businesses that rely primarily on distributed
systems for their computing needs; small businesses that principally use LANs
and WANs for computing; individuals who use stand-alone computing systems;
and OEMs and software developers that contract with the Company for warranty
services, logistic support services or help desk support. A significant
portion of the Company's revenues are attributable to large businesses with
complex computing support needs.
COMPETITION
Competition among computer support service providers, both OEM and
independent service organizations, is intense. The Company believes that
approximately 80% of that portion of the hardware maintenance services market
that is related to mainframes and stand-alone midrange systems is currently
serviced by OEM service organizations. In addition, the Company believes that
OEM service organizations provide a smaller, but still significant, portion
of the computer maintenance services related to distributed systems,
workgroups and PCs. The remainder of the market is serviced by a small number
of larger, independent companies, such as the Company, offering a broader
range of service capabilities, as well as numerous small companies focusing
on narrower areas of expertise.
The Company considers its principal competitors to include: IBM and its
affiliate Technology Service Solutions, Digital, and Wang Laboratories, Inc.,
the multivendor service divisions of certain other OEMs, other national
independent service organizations that are not affiliated with OEMs such as
Vanstar Corporation, Entex Corporation and Stream International, Inc., and
various regional service providers.
The Company believes that the primary competitive factors in the computer
services industry are the quality of a company's services, the ability to
service a wide range of products supplied by a variety of vendors, the
geographic coverage of a company's services and the cost to the customer of
those services. The Company believes that customers are increasingly looking
for service providers capable of providing a single-source solution for their
increasingly complex multivendor systems. See "Risk Factors--Competition;
Competitive Advantages of OEMs."
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FACILITIES
The Company leases certain office and warehouse facilities under operating
leases and subleases that expire at various dates through November 30, 2005.
The Company's executive offices are located at the Frazer, Pennsylvania
facilities listed below. The principal facilities currently leased or
subleased by the Company are as follows:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE LEASE EXPIRATION
- -------- ------- ----------------
<S> <C> <C>
Frazer, Pennsylvania (Office) ............. 109,800 November 2005
Frazer, Pennsylvania (Office) ............. 35,968 April 2003
Malvern, Pennsylvania (Depot/Call Center) 200,000 May 2000
Horsham, Pennsylvania (Warehouse) ........ 100,000 December 1999
Bloomington, Minnesota (Call Center) ...... 66,000 March 1998
Hayward, California (Depot) ............... 91,000 September 1999
Northborough, Massachusetts (Depot) ...... 52,778 July 1998
Wilmington, Ohio (Warehouse)............... 83,000 January 2001
Grove City, Ohio (Depot)................... 118,500 January 2002
</TABLE>
In addition, the Company owns two facilities located in Tulsa, Oklahoma
(multi-purpose) and the suburbs of Milwaukee, Wisconsin (logistics services).
The Company's management believes that its current facilities will be
adequate to meet its projected growth for the foreseeable future.
EMPLOYEES
As of June 30, 1997, the Company had approximately 6,500 full-time and 60
part-time employees. None of the Company's employees is currently covered by
collective bargaining agreements. Management considers employee relations to
be good.
LEGAL PROCEEDINGS
The Company is a party, from time to time, to lawsuits arising in the
ordinary course of business. The Company believes it is not currently a party
to any material legal proceedings. However, within the past several years,
several OEMs have been involved in litigation with independent service
organizations, including the Company, in which such OEMs have claimed
infringement of software copyrights held by the OEMs. The Company currently
is not involved in any such litigation. See "Risk Factors--Copyright Issues."
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 of three waste disposal sites that have been identified by
the United States Environmental Protection Agency as Superfund Sites: (i) PAS
Irwin Dump Site, Oswego, New York (and six satellite sites, including the
Fulton Terminals Site, Fulton, New York); (ii) North Penn Area 6 Site,
Lansdale, Pennsylvania; and (iii) Revere Chemical Site, Nockamixon,
Pennsylvania. In addition, the Company received a notice several years ago
that it may be a potentially responsible party with respect to the Boarhead
Farms Site, Bridgeton, Pennsylvania, at a site related to the Revere Chemical
site, but has not received any additional 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 has estimated that its share of the costs of the clean-up
of one of the sites will be approximately $500,000, which has been provided
for in liabilities related to the discontinued products division in the
accompanying consolidated balance sheets as of June 30, 1996, 1995 and 1994.
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 share, if any, of 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. See Note 18 of the Notes to the Company's
Consolidated Financial Statements.
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THE SPECIAL MEETING
MATTERS TO BE CONSIDERED
The primary purpose of the Special Meeting is to vote upon a proposal to
approve and adopt the Merger Agreement. If the Merger Agreement is approved
by the stockholders of the Company, MergerSub will merge with and into the
Company and approximately 26.3 million shares of Company Common Stock
currently held by Company stockholders (representing approximately 94.7% of
the shares of Company Common Stock presently issued and outstanding) will be
converted into cash. The remaining 1,474,345 shares of Company Common Stock
currently held by stockholders (plus 5.3% of any Shares issued upon exercise
of options and warrants after April 21, 1997 and prior to the Effective Time
of the Merger) will be retained by existing stockholders of the Company. The
shares which are to be retained represent approximately 5.3% of the shares of
Company Common Stock issued and outstanding prior to the Merger and will
represent approximately 13.1% of the shares of Company Common Stock expected
to be issued and outstanding immediately after the Merger (or 11.6% on a
fully diluted basis).
If the Merger is approved, 9,782,609 shares of common stock of MergerSub
will be converted into 9,782,609 shares of Company Common Stock, which will
represent approximately 86.9% of the Company Common Stock (or 77.2% on a
fully diluted basis) after the Merger. In addition, in connection with the
offering of the Discount Notes and the issuance of shares of common stock of
MergerSub referred to above, MergerSub will issue the Public Warrants and the
DLJMB Warrants, respectively, in relative amounts to be determined. Such
warrants will be exercisable to purchase up to 1,417,180 shares of common
stock of MergerSub at prices yet to be determined, but which will be not less
than $.01 per share. All such warrants will, by their terms, become warrants
to purchase shares of Company Common Stock on identical terms following the
Effective Time. As a result, following the Effective Time, the DLJMB Warrants
and Public Warrants will permit the holders thereof to purchase up to an
additional 1,417,180 shares of Company Common Stock which would represent,
when exercised, approximately 11.2% of the Company Common Stock (on a fully
diluted basis) after the Merger (see "The Merger--Conversion of MergerSub
Stock"). In lieu of acquiring the DLJMB Warrants, the DLJMB Funds (and the
Institutional Investors) may acquire the Direct Shares. The DLJMB Funds (and
the Institutional Investors) may also purchase Preferred Stock of the Company
if the Discount Notes are not issued as part of the Merger Financing. See
"The Merger--Merger Financing." In addition, DLJMB has proposed that certain
members of the Company's management be offered the opportunity to purchase
shares of Company Common Stock following the Effective Time. DLJMB has
proposed that management of the Company purchase up to 347,826 shares of
Company Common Stock for $8.0 million. The DLJMB Funds expect that the
Institutional Investors may acquire a portion of the securities of MergerSub
that would otherwise be purchased by the DLJMB Funds as described in this
Proxy Statement/Prospectus. In no event would any such purchases reduce the
fully diluted ownership by the DLJMB Funds of Company Common Stock after the
Effective Time to below a majority, or limit the rights of the DLJMB Funds as
described in "The Merger--Investors Agreement."
If the Merger is approved, the Certificate of Incorporation of the Company
will be amended in a form consistent with Exhibit A to the Merger Agreement
included as Annex A hereto. Thus a vote in favor of the approval and adoption
of the Merger Agreement will constitute a vote in favor of amending such
certificate of incorporation. If the Merger is approved by the stockholders
of the Company, the stockholders will also be asked to transact such other
business as properly may come before the meeting. The Board of Directors of
the Company is not presently aware of any such other business.
Immediately after the Effective Time, assuming full exercise of the DLJMB
Warrants and Public Warrants, there will be approximately 12,674,134 shares
of Company Common Stock issued and outstanding (subject to any adjustments
which may be required if any of the Options or Existing Warrants are
exercised prior to the Effective Time). The Merger Agreement (including
Exhibit A thereto) is attached to this Proxy Statement/Prospectus as Annex A.
See "The Merger" and "Certain Provisions of the Merger Agreement." THE BOARD
OF DIRECTORS OF THE COMPANY HAS, BY UNANIMOUS VOTE, APPROVED THE MERGER
AGREEMENT AND RECOMMENDS A VOTE FOR ADOPTION AND APPROVAL OF THE MERGER
AGREEMENT.
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REQUIRED VOTES
The affirmative vote of the holders of a majority of the shares of Company
Common Stock entitled to vote thereon is required to approve and adopt the
Merger Agreement.
Pursuant to the Voting Agreement, certain partnerships associated with
Welsh Carson and J.H. Whitney have agreed to vote approximately 56% of the
shares of Company Common Stock owned by them in the aggregate, or
approximately 30% of the outstanding shares of Company Common Stock, to
approve and adopt the Merger Agreement, the Merger, and any other
transactions or agreements related to the Merger. Additionally, Welsh Carson
and J.H. Whitney have each irrevocably appointed MergerSub as proxy for and
on behalf of each of them to vote such shares of Company Common Stock for all
matters related to the Merger Agreement and the Merger. A conformed copy of
the Voting Agreement and Irrevocable Proxy appears as Annex B to this Proxy
Statement/Prospectus. See "The Merger--Certain Provisions of the Voting
Agreement."
As of June 30, 1997, Directors and Executive Officers of the Company and
their affiliates were beneficial owners of an aggregate of 16,893,715 shares
(approximately 60.7%) of the outstanding shares of Company Common Stock. The
directors and executive officers of the Company have indicated that they
intend to vote their shares of Company Common Stock in favor of the approval
and adoption of the Merger Agreement. See "Security Ownership of Certain
Beneficial Owners and Management."
VOTING AND REVOCATION OF PROXIES
Shares of Company Common Stock that are entitled to vote and are
represented by a Proxy properly signed and received at or prior to the
Special Meeting, unless subsequently properly revoked, will be voted in
accordance with the instructions indicated thereon. If a Proxy is signed and
returned without indicating any voting instructions, shares of Company Common
Stock represented by such Proxy will be voted FOR the proposal to approve and
adopt the Merger Agreement. The Board of Directors of the Company is not
currently aware of any business to be acted upon at the Special Meeting other
than as described herein. If, however, other matters are properly brought
before the Special Meeting or any adjournments or postponements thereof, the
persons appointed as proxies will have the discretion to vote or act thereon
in accordance with their best judgment, unless authority to do so is withheld
in the Proxy. The persons appointed as proxies may not exercise their
discretionary voting authority to vote any such Proxy in favor of any
adjournments or postponements of the Special Meeting if instruction is given
to vote against the approval and adoption of the Merger Agreement.
Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the shares of Company Common Stock represented
by such Proxy are voted at the Special Meeting by (i) by attending and voting
in person at the Special Meeting, (ii) by giving notice of revocation of the
Proxy at the Special Meeting, or (iii) delivering to the Secretary of the
Company (a) a written notice of revocation or (b) a duly executed Proxy
relating to the same Shares and matters to be considered at the Special
Meeting, bearing a date later than the Proxy previously executed. Attendance
at the Special Meeting will not in and of itself constitute a revocation of a
Proxy. All written notices of revocation and other communications with
respect to revocation of proxies should be addressed as follows: DecisionOne
Holdings Corp., 50 East Swedesford Road, Frazer, Pennsylvania 19355
Attention: Secretary, and must be received before the taking of the votes at
the Special Meeting.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only holders of Company Common Stock at the close of business on July 14,
1997 will be entitled to receive notice of (except adjournments and
postponements thereof) and to vote at the Special Meeting. At the close of
business on the Record Date, there were outstanding and entitled to vote
27,911,185 shares of Company Common Stock, and there were 124 holders of
record. The presence, in person or by proxy, at the Special Meeting of the
holders of at least a majority of the votes entitled to be cast at the
Special Meeting is necessary to constitute a quorum for the transaction of
business. Abstentions and broker non-votes will be counted as present for the
purposes of determining whether a quorum is present but will not be counted
as votes cast in favor of approval and adoption of the Merger Agreement.
Because the
34
<PAGE>
vote on the Merger Agreement requires the approval of the majority of the
votes entitled to be cast by the stockholders of the outstanding shares of
Company Common Stock, abstentions and broker non-votes will have the same
effect as a negative vote on these proposals.
APPRAISAL RIGHTS
Each holder of Company Common Stock has a right to dissent from the
Merger, and, if the Merger is consummated, to receive "fair value" for his or
her shares in cash by complying with the provisions of Delaware law,
including Section 262 of the DGCL. The dissenting stockholder must deliver to
the Company, prior to the vote being taken on the Merger Agreement at the
Special meeting, written notice of his or her intent to demand payment for
his or her shares if the Merger is effected and must not vote in favor of
approval and adoption of the Merger Agreement. The full text of Section 262
of the DGCL is attached as Annex D hereto. See "Dissenting Stockholders'
Rights" for a further discussion of such rights and the legal consequences of
voting shares of Company Common Stock in favor of the approval and adoption
of the Merger Agreement.
SOLICITATION OF PROXIES
The cost of solicitation of proxies will be borne by the Company. In
addition to the use of the mails, proxies may be solicited by telephone by
officers and directors and a small number of regular employees of the Company
who will not be specially compensated for such services. The Company also
will request banks and brokers to solicit proxies from their customers, where
appropriate, and will reimburse such persons for reasonable expenses incurred
in that regard.
ONLY HOLDERS OF COMPANY COMMON STOCK WHO WISH TO MAKE A STOCK ELECTION ARE
REQUIRED TO SEND STOCK CERTIFICATES WITH THEIR FORM OF ELECTION (AS DEFINED
BELOW). HOLDERS OF COMPANY COMMON STOCK WHO DO NOT MAKE A STOCK ELECTION WILL
RECEIVE, BY MAIL, LETTERS OF TRANSMITTAL WITH WHICH SUCH STOCK CERTIFICATES
SHOULD BE RETURNED AFTER THE EFFECTIVE TIME. HOLDERS WHO DO NOT MAKE A STOCK
ELECTION SHOULD THEREFORE NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
SEE "THE MERGER--STOCK ELECTION" AND "--STOCK ELECTION PROCEDURE."
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THE MERGER
BACKGROUND OF THE MERGER
Early in 1997, DLJMB began to explore the possibility of investments in
the technology services sector and evaluated a number of companies as
potential investment candidates, including the Company. As a result of such
evaluation, DLJMB concluded that the Company might be an attractive candidate
for a possible investment by the DLJMB Funds, and Mr. Grauer contacted Mr.
Brooks to discuss the possibility of such an investment.
During the week of February 10, 1997, Mr. Grauer, a managing director of
DLJMB, and Mr. Brooks, a general partner of J.H. Whitney and a director of
the Company, discussed the possibility that DLJMB might have an interest in
acquiring the Company. On February 19, Mr. Brooks conveyed this interest to
the Directors of the Company at a regularly scheduled Board meeting in New
York, and on March 5, 1997, Messrs. Grauer, Wortman, a principal of DLJMB,
and Brooks met in New York to discuss the Company and the industry in
general.
On March 14, representatives of DLJMB met with representatives of Welsh
Carson and J.H. Whitney concerning a possible transaction between DLJMB and
the Company. A number of possible transactions were discussed on a
preliminary basis and the DLJMB representatives suggested that they would
have to perform detailed due diligence before a determination could be made
as to whether a transaction made sense. DLJMB also stated that it would not
participate in any "auction" of the Company and would only be willing to meet
and discuss the subject on an exclusive and confidential basis.
On March 20, DLJMB executed a confidentiality agreement with the Company
and commenced its due diligence investigations of the Company by holding
meetings with the Company's senior management. During a telephonic meeting of
the Board of Directors of the Company held on March 27, the Board discussed a
possible transaction with DLJMB and authorized continued due diligence. It
was the view of the Board of Directors that pursuing an auction of the
Company would terminate DLJMB's interest and expose the Company to
competitive harm without assuring that any acceptable offer would emerge. For
approximately the next month, DLJMB continued its due diligence which
included additional meetings with management of the Company, site visits and
legal and accounting due diligence.
On April 19, representatives of DLJMB met with Messrs. McInerney, Brooks
and Draeger in New York. At these discussions, DLJMB proposed a transaction
of the nature described in this Proxy Statement/Prospectus in which all
stockholders of the Company would have the right to receive a certain cash
price per share of Company Common Stock estimated by DLJMB to be in the range
of $21 to $23, but with the condition that at least a minimum number of
shares of Common Stock be retained by existing stockholders of the Company.
DLJMB indicated that an essential element of any transaction would be that
the transaction qualify as a recapitalization for accounting purposes. DLJMB
also indicated that one condition of its willingness to proceed, among other
things, would be the full voting support of Welsh Carson and J.H. Whitney for
a transaction.
On April 20, DLJMB's legal counsel circulated a draft of a merger
agreement and a voting agreement for discussion purposes while DLJMB
continued its due diligence investigations. Following April 20 there were
substantial disagreements between the parties concerning issues relating to
the price range of a possible transaction, the proposed voting agreement and
the general structure of a transaction including conditions to consummation.
In an attempt to resolve some of these issues, representatives of DLJMB and
their legal counsel and Messrs. Brooks and McInerney and representatives of
the Company's legal counsel met in New York on April 21 and 22.
At the April 21 meeting, representatives of the Company indicated concern
with the financing condition contained in the draft agreement. In addition,
they raised concerns over the broad circumstances under which DLJMB had
proposed that it receive a termination fee and the reimbursement of its
expenses. Finally, Mr. McInerney and Mr. Brooks indicated their opposition to
the proposed voting agreement which requested that Welsh Carson and J.H.
Whitney agree to vote all of their shares, approximately 55% of the primary
shares of Company Common Stock outstanding, in favor of the merger and to
prohibit the voting of those shares for a competing transaction or the sale
of those shares for a
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period of one year after termination of a merger agreement. They requested
that DLJMB reconsider its proposal and suggested a meeting the next day to
readdress these issues.
At the April 22 meeting, representatives of the Company reiterated their
opposition to the broad circumstances under which fees would be paid and
expenses reimbursed and their discomfort with the conditions to closing,
including the financing condition. Representatives of DLJMB indicated that
DLJMB would not pursue a transaction without a financing condition and
indicated that DLJMB had never previously failed to consummate a transaction
because of lack of sufficient financing. Representatives of DLJMB further
indicated that DLJMB would be unwilling to pursue a transaction without a
voting agreement covering a significant number of the shares of Company
Common Stock owned by Welsh Carson and J.H. Whitney. Messrs. McInerney and
Brooks agreed to consider DLJMB's position, but indicated that in light of
DLJMB's position, a potential transaction could occur only at the top end of
the price range suggested by DLJMB at the April 19th meeting.
During April 23 and 24 Messrs. McInerney and Brooks continued discussions
with Mr. Grauer in an attempt to reach a compromise, and a meeting was held
in New York on April 25 where it was generally decided that the voting
agreement would cover 8,345,349 of the 14,837,936 shares of Company Common
Stock held by the Significant Stockholders, or approximately 30% of the
Company Common Stock outstanding (without giving effect to the exercise of
Options and Existing Warrants), and that restrictions on the transfer and
voting of such stock would survive for no more than four months after
termination of the Merger Agreement. Both Messrs. McInerney and Brooks felt
that because the Significant Stockholders would be able to vote the remaining
6,492,587 shares held by them (approximately 25% of the Company Common Stock
outstanding, assuming exercise of warrants held by them) for any competing
transaction, such restrictions would not materially impact the Company's
ability to support an alternative transaction in the event the proposed
agreement with DLJMB were to terminate. In addition, it was generally agreed
that the instances in which a termination fee was paid and expenses
reimbursed would be substantially limited.
On April 25, Smith Barney was asked to begin preparations to advise the
Board as to whether the consideration to be received by the holders of
Company Common Stock in the Merger was fair to such holders from a financial
point of view in the event that the issues referred to above were resolved
and agreement with respect to a proposed transaction was otherwise reached.
From April 25 through April 30 representatives of the respective legal
counsel of DLJMB and the Company negotiated the terms of a revised draft
merger and voting agreement, and Smith Barney conducted interviews with
management of the Company and had discussions with representatives of DLJMB.
On May 1, a special meeting of the Board of Directors of the Company was
convened to discuss the current status of negotiations. All members of the
Board participated either in person or by conference call. Representatives of
the Company's legal counsel advised the Board of its fiduciary duties under
Delaware law with respect to a transaction that would result in a change of
control of the Company. Mr. Draeger informed the Board that he would likely
be an interested party in the transaction in light of his proposed role with
the Surviving Corporation and would not participate in deliberations about
the contemplated transaction. The Board then reviewed basic features of the
proposed transaction with DLJMB, including the capital structure of the
post-transaction entity, the probable conditions to closing and transaction
protection features of the proposed merger. Messrs. McInerney and Brooks
outlined in detail the discussions with DLJMB described above.
Members of the Board also discussed the condition that required the
transaction to be characterized as a recapitalization for accounting purposes
and discussed the nature and requirements of a recapitalization transaction
with their financial consultants.
The Board then focused on the probable transaction protection features and
discussed the difficulty in balancing the need to provide sufficient
transactional protections to induce DLJMB to make its highest bid and to also
permit other bidders a meaningful opportunity to emerge and compete with that
bid.
At the Board's May 1 meeting, the engagement of Smith Barney as the
Company's financial advisor was approved by the Board and representatives of
Smith Barney presented the Board with such firm's preliminary analysis of the
proposed transaction.
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As part of the above discussions, members of the Board asked Messrs.
Draeger and Fitzpatrick, the Company's chief financial officer, for
management's views as to the reasonableness of the estimated financial
information as to possible future performance developed by management and
used by Smith Barney and inquired regarding the impact of a leveraged
transaction on the Company's ability to retain customers. Messrs. Draeger and
Fitzpatrick responded by indicating that in their respective opinions such
estimates were reasonable, based on the best currently available information,
and generally conformed with shorter-term projections of management that
would have been presented to the Board in the regular course. Mr. Draeger
also indicated that, historically, balance sheet strength had not been as
important as quality of service to existing and potential customers.
Members of the Board then asked Smith Barney and Mr. Draeger if the
Company had been recently approached by any other bidders. Representatives of
Smith Barney indicated that while they were unaware of any recent indications
of interest, prior to the filing of a registration statement with the
Commission in February of 1996 in connection with the Company's initial
public offering, Smith Barney explored the possibility of a sale of the
Company and made selected inquiries with parties having a potential interest
in connection therewith, but no bidders had emerged that were willing to pay
the expected public offering price per share at that time. Furthermore, it was
indicated that no bidders had emerged after the filing and prior to the
effectiveness of the registration statement registering such offering in
April 1996. Smith Barney had not been authorized to seek any indications of
interest following the Company's initial public offering. Mr. Draeger indicated
that during the first calendar quarter of 1997 there had been casual
conversations with two potential strategic parties, but that no proposals had
arisen therefrom.
At 5:00 p.m. on May 2, Messrs. Grauer and Wortman contacted Mr. McInerney
and offered a transaction in which stockholders would be required to retain
stock representing 5.3% of the shares of Company Common Stock outstanding.
After negotiations on price, a price of $23 per share for the cash portion of
the consideration to be paid in the proposed merger was proposed by Mr.
Grauer, and Messrs. McInerney and Brooks agreed to present this transaction
to the Board.
On May 4, the Board of the Company reconvened to review the terms of a
draft merger agreement that had been received by them on May 3 which included
the $23 price that had been offered by Mr. Grauer on May 2. At this meeting,
representatives of Smith Barney delivered to the Board an opinion to the
effect that as of the date of such opinion and based upon and subject to
certain matters stated therein, the Consideration (as defined below) to be
received by holders of Company Common Stock in the Merger was fair to such
holders from a financial point of view. See "--Opinion of Financial Advisor."
For purposes of their presentation, Smith Barney used a range of $22.38 to
$22.85 per share of Company Common Stock because of a discount value applied
to the 5.3% of the consideration that was to be received in the form of
equity in the surviving entity.
Messrs. McInerney and Brooks commented separately as to their respective
beliefs that the proposed transaction was very attractive. They also noted
that the Company's stock price had been negatively impacted in February 1997
after both Welsh Carson and J.H. Whitney had made distributions (the
"Distributions") of Company Common Stock to the limited partners of their
respective partnerships, and cautioned the Board that future distributions
could have a similar impact. The Board acknowledged that resales of
distributed stock could have a depressing effect on the trading price of the
Company Common Stock.
The Board considered the reasonableness of the financial estimates that
management had provided to Smith Barney and DLJMB and the ability of the
post-transaction company to fund its obligations as they came due. Mr.
Draeger restated his belief that such estimates were reasonable, based on the
best currently available information, and generally conformed with
shorter-term projections of management. Representatives of Smith Barney
concurred with Mr. Draeger and indicated that those financial estimates
resulted in sustainable interest coverage ratios.
The Board then considered the transaction protection features described in
the draft agreement, and Mr. McInerney suggested that the proposed limitation
on expenses was too high. Representatives of Smith Barney stated their belief
that payments aggregating no more than $1 per share would not, in their view,
present a material impediment to another bidder. The Board determined, based
in part on the view
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of Smith Barney, that transaction protection features that represented no
more than $1 per share if certain conditions were satisfied would not deter
an offer that was materially better to the Company's stockholders, and that
the proposed transaction satisfied such conditions.
It was also noted that the draft merger agreement provided that all
Existing Warrants and Options receive cash representing the difference
between their exercise prices and the transaction price. Messrs. McInerney
and Brooks noted that this treatment created a relative benefit to the
holders of Options and Existing Warrants as compared to the holders of
outstanding stock because the Option and Existing Warrant holders would
receive cash for 100% of the economic value of such Options and Existing
Warrants rather than cash for 94.7% of the outstanding shares of Company
Common Stock and a continuing ownership interest for the balance. Messrs
McInerney and Brooks advised the Board that their funds collectively owned
Existing Warrants to purchase 468,750 shares of Company Common Stock.
Mr. Draeger then disclosed the current state of his negotiations with
DLJMB regarding his continued employment and indicated that he was entitled
under his employment agreement to compensation equal to 2% of the equity
value of the proposed transaction if such transaction were consummated. Mr.
Draeger also explained that DLJMB had suggested that stock options would be
made available to certain key employees. Mr. Draeger was then excused from
the meeting.
Mr. Anderson asked the representatives of Smith Barney if they concurred
with Mr. Draeger's analysis of the Company and the estimated financial
information prepared by management and Smith Barney reaffirmed their
concurrence. Mr. Anderson then asked Smith Barney if they were aware of any
other bidders at the price proposed, and Smith Barney indicated that although
it was not authorized by the Company or the Board to make any inquiries and
did not make any inquiries, it was not aware of any other bidders. However,
Smith Barney indicated its view that the announcement of the transaction
would provide a reasonable opportunity for other bidders to come forward.
After further discussion, the Board of Directors (other than Mr. Draeger)
unanimously approved the transaction. Soon thereafter, the Company and
MergerSub entered into the Merger Agreement, and the Company, Welsh Carson,
J.H. Whitney and MergerSub entered into the Voting Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
At its meeting on May 4, 1997, the Board of Directors determined that the
Merger Agreement and the Voting Agreement, taken together, are fair to the
stockholders of the Company and recommended that holders of Company Common
Stock approve and adopt the Merger Agreement. This determination was made by
all members of the Board at such meeting, except for Mr. Draeger who did not
participate in such Board action. Mr. Draeger, however, concurs with the
determination of the Board of Directors. As described under "--Background of
the Merger," the Board was confronted with an attractive offer which provided
stockholders of the Company with a significant premium to the current value
of their stock. The Board received an opinion from Smith Barney to the effect
that as of the date of such opinion and based upon and subject to certain
matters stated therein, the Consideration (as defined below) to be received
by holders of Company Common Stock in the Merger was fair to such holders
from a financial point of view. In addition, Smith Barney presented its view
that the estimated financial information prepared by management for Smith
Barney was reasonable. The Board's decision to enter into the Merger
Agreement and the Voting Agreement was based in part on the Board's view that
while no solicitation of other bids had been attempted, the transaction
protection features offered to MergerSub would not deter competing bids that
were materially better to the Company's stockholders. Ultimately, the Merger
was deemed by the Board to be the alternative which would yield the best
results to the stockholders of the Company from a financial point of view.
See "--Background of the Merger."
The recommendation by the Board that the Company's stockholders approve
and adopt the Merger Agreement is not, and should not be considered to be, a
recommendation by such Board that the stockholders elect to retain or,
alternatively, that the stockholders sell shares, of Company Common Stock
held by them in the Merger.
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In its deliberations, the Board considered a number of factors including,
without limitation, the following:
1. The Board's knowledge of the business, operations, properties, assets,
financial condition, operating results and prospects including, without
limitation, the expected growth of the Company and industry growth, and
the Board's belief that (i) the value of the Merger Consideration was
within the range of values determined by Smith Barney using a discounted
cash flow analysis of management's own estimates and (ii) the Merger
Consideration therefore permitted stockholders of the Company to recognize
with certainty the present value of those estimates for at least 94.7% of
their shares, whereas without the Merger, the Company's ability to realize
such estimates would inherently be subject to significant economic and
competitive uncertainties and contingencies beyond the Company's control.
(See "--Background of the Merger");
2. The oral and written presentations of Smith Barney, the fact that no
bidders willing to pay the then expected initial public offering price of
$16-$18 per share had emerged as a result of selected inquiries made by
Smith Barney with parties having a potential interest in connection with
the sale of the Company prior to filing a registration statement with the
Commission in connection with the Company's initial public offering, and
the opinion of Smith Barney described below. See "--Opinion of Financial
Advisor" for a discussion of the factors considered in rendering the
opinion. Such opinion, which is subject to limitations, qualifications and
assumptions, is included as Annex C hereto, and should be read in its
entirety. The Merger Consideration was either within or above the range of
values presented by Smith Barney in its various analyses performed in
rendering the Opinion (as defined below), and the Board did not give any
weight to any particular analysis. While in some analyses performed in
rendering the Opinion, the high end of the valuation range was higher than
the Merger Consideration, based on the Opinion of Smith Barney and in
light of all of the analyses performed by Smith Barney in rendering such
Opinion, the Board believed that the Merger Consideration was fair to
holders of Company Common Stock from a financial point of view;
3. The terms and conditions of the Merger Agreement and the Voting
Agreement. The Board considered in particular the "no solicitation"
provision of the Merger Agreement, the fees and expense reimbursements
payable to DLJMB (which could require payments of up to approximately
$26.7 million in the aggregate and which provisions were negotiated at
arm's length between the parties), the conditions precedent to the payment
of such fees, and the termination provisions of the Merger Agreement and
the Voting Agreement. The Board sought to balance the interests of DLJMB,
which the Board believed had made an attractive acquisition offer for the
Company, in limiting the Company's right to consider other offers, against
the Company's ability to obtain a better price for the Company's
stockholders. The Board sought to negotiate provisions in the Merger
Agreement that would allow it to fulfill its fiduciary duties in the event
an unsolicited offer from a third party was received. While the Merger
Agreement prohibits the Company from soliciting third-party offers, it
does not prohibit the Company from considering unsolicited third-party
offers, negotiating with such third parties or furnishing such third
parties with information about the Company. Also, the Board negotiated
provisions in the Merger Agreement that would permit the termination
thereof in the event an offer more favorable from a financial point of
view than the DLJMB offer is received from a third-party. Only in the
event that each of the following is satisfied, (i) the Company received
such an offer prior to the Company Stockholder Meeting, (ii) either the
Board withdraws or modifies its recommendation to stockholders or the
Company's stockholders fail to vote to approve the Merger Agreement and
(iii) a transaction is consummated during the twelve month period
following termination of the Merger Agreement, would the Company be
required to pay DLJMB a termination fee of $20,947,000. Expense
reimbursement is limited to $8,250,000 and is payable only if the Merger
Agreement is terminated for reasons other than (i) a termination by the
Company in the event of a breach of the Merger Agreement by MergerSub,
(ii) a mutual termination, (iii) a termination because DLJMB has been
unable to obtain the requisite financing, (iv) a termination after DLJMB
is unable to receive comfort that the transaction would be accounted for
as a recapitalization and (v) a termination following inability of the
Company to make certain representations covering absence of certain
material adverse events. Moreover, in the event that a
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termination fee is paid, or in the event that certain injunctions are
issued or litigation arises that result in MergerSub's refusal to
consummate the Merger, expense reimbursement is capped at $5,750,000.
Based in part on Smith Barney's advice that aggregate termination fees and
expenses of $1.00 per share or less would not, in their view, present a
material impediment to another bidder, the Board concluded that the
aggregate amount of such fees and expense reimbursements, which amount to
a maximum of approximately 96 cents per primary share, would not deter a
third-party from making an offer that was materially more favorable to the
Company's stockholders;
4. The belief that conducting an auction after receipt of DLJMB's offer
would (i) expose the Company to competitive harm, (ii) cause DLJMB to
withdraw its offer and (iii) as was the case in February 1996, not assure
the Company of receiving any acceptable offers;
5. The fact that Welsh Carson and J.H. Whitney as the holders of a
majority of the outstanding shares of Company Common Stock believed that
DLJMB's proposal and the consideration to be received thereunder were
attractive and in the best interest of the Company and its stockholders;
6. The $16.7 million to $29.8 million aggregate value of equity to be
retained by stockholders as determined by Smith Barney as part of its
analysis in rendering the Opinion (see "Opinion of Financial Advisor"),
despite the potential for the DLJMB Warrants and the Public Warrants to be
issued, and the expected decline in the volume of Shares traded following
the Merger (see "Risk Factors--Potential Delisting and Loss of
Liquidity"). The Board determined that liquidity issues and the issuance
of the DLJMB Warrants and the Public Warrants by the Company would not
materially affect the value of the consideration to be received by the
Company's stockholders because approximately 94.7% of that consideration
would be in cash;
7. The Board's consideration the conditions to closing included in the
Merger Agreement and the commitment letters circulated by DLJMB, including
the financing contingency, and conclusion that DLJMB was a significant
participant in the capital markets with an established record of
completing transactions;
8. The historical market price of Company Common Stock, which had ranged
from $14.75 per share to $19.50 per share from January 1, through May 2,
1997, the last trading day prior to the announcement of the signing of the
Merger Agreement. The Board also considered the fact that while on the
first day of trading following the Company's initial public offering in
April, 1996 the Company's stock had traded as high as $21.75 per share and
for a period of time thereafter had traded in a price range of $16.25 to
$29.75 per share, from September 4, 1996, the trading day after the
Company announced (the "Announcement") earnings estimates for the fiscal
year ending June 30, 1997 that it believes were below analysts'
expectations, as a result of start-up costs associated with certain new
contracts and additional investments in infrastructure to improve customer
satisfaction, through May 2, 1997, the Company's stock had traded in a
price range of $12.50 to $19.50 per share with an average daily trading
price of $15.61. The Board also considered the impact on the Company's
stock price from the Distributions and that future distributions could
have a similar impact;
9. The fact that the consideration to be received by the Company's
stockholders in the Merger represents an approximately 36% premium over
the closing price of Company Common Stock of $16.50 per share on May 2,
1997, the last trading day prior to the announcement of the signing of the
Merger Agreement, which is substantially above the comparative premiums of
20.6% to 30.6% presented by Smith Barney (see "Opinion of Financial
Advisor--Selected Precedent Transactions"), and an approximately 47%
premium over the previous trading month's average and an approximately 47%
premium over the average daily trading price of Company Common Stock from
the day after the Announcement to May 2, 1997;
10. The fact that the consideration to be received by the stockholders of
the Company in the Merger will consist, in the aggregate, of approximately
94.7% cash and the Board's beliefs that (i) the projections provided by
management of the Company to Smith Barney and DLJMB were reasonable, (ii)
the $16.7 million to $29.8 million aggregate value of the equity to be
retained by the
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Company's stockholders, as determined by Smith Barney as part of their
analysis in rendering the Opinion (see "Opinion of Financial Advisor") was
reasonable to stockholders, and (iii) the Surviving Corporation would be
solvent, would not be left with unreasonably small capital, and would not
have incurred debts beyond its reasonable ability to pay them as they
mature; and
11. The fact that the Merger Agreement requires that the Merger be
submitted to the Company's stockholders for approval and the practical
effect of the Voting Agreement which only relates to shares representing
approximately 30% of the Company's shares outstanding and therefore
permits the Company's two largest stockholders to vote approximately 24%
(assuming exercise of warrants) of the shares of Company Common Stock
outstanding in favor of another transaction if one were to arise.
The foregoing discussion of the information and factors considered and
given weight by the Board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the
Merger, the Board did not find it practicable to, and did not, quantify or
otherwise assign relative weights to the specific factors considered in
reaching its determination. The Board did not consider the "liquidation
value" of the Company in its analysis nor did it consider the book value of
the Company Common Stock, which as of March 31, 1997 was approximately $6.70
per share (substantially less than the value of the Merger Consideration). In
that regard, the Board also noted that Smith Barney, the Company's financial
advisor, did not consider the "liquidation value" or "book value" of the
Company Common Stock in performing their analysis in rendering the Opinion.
The Company does not believe that the "liquidation value" of the Company
would exceed the Merger Consideration. In addition, individual members of the
Board may have given different weights to different factors.
Mr. Draeger, in arriving at the conclusion that he concurs with the Board
of Directors, considered the same factors as the Board of Directors
enumerated above.
OPINION OF FINANCIAL ADVISOR
Smith Barney was retained by the Company to evaluate the fairness, from a
financial point of view, to the holders of Company Common Stock of the
Consideration to be received by such holders in the Merger. On May 4, 1997,
at a meeting of the Board of Directors of the Company held to evaluate the
proposed Merger, Smith Barney delivered an oral opinion, subsequently
confirmed by delivery of a written opinion dated May 4, 1997 (the "Opinion"),
and a supplemental confirmation dated July 16, 1997 (the "Supplemental
Confirmation"), to the Board of Directors of the Company to the effect that, as
of the date of the Opinion and based upon and subject to certain matters stated
therein, the Consideration to be received by holders of Company Common Stock
(other than MergerSub and its affiliates) was fair to such holders from a
financial point of view. For purposes of the Opinion and the Supplemental
Confirmation, and the summary thereof set forth below, the term "Consideration"
means the aggregate amount of cash to be received and shares of Company Common
Stock to be retained by holders of Company Common Stock pursuant to the Merger.
In arriving at the Opinion, Smith Barney reviewed the Merger Agreement and
Voting Agreement and held discussions with certain senior officers, directors
and other representatives and advisors of the Company concerning the
business, operations and prospects of the Company. Smith Barney examined
certain publicly available business and financial information relating to the
Company as well as certain financial forecasts and other data for the Company
which were provided to Smith Barney by the management of the Company,
including certain pro forma effects on the Company's capital structure after
giving effect to the Merger. Smith Barney reviewed the financial terms of the
Merger as set forth in the Merger Agreement in relation to, among other
things: current and historical market prices and trading volumes of the
Company Common Stock; historical and projected earnings of the Company; and
the capitalization and financial condition of the Company. Smith Barney also
considered, to the extent publicly available, the financial terms of certain
other similar transactions recently effected which Smith Barney considered
comparable to the Merger and analyzed certain financial, stock market and
other publicly available information relating to the businesses of other
companies whose operations Smith Barney considered relevant in evaluating
those of the Company. In addition to the foregoing, Smith Barney conducted
such other analyses and examinations and considered such other financial,
economic and market criteria as Smith Barney deemed appropriate in arriving
at the Opinion. Smith Barney noted
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that the Opinion was necessarily based upon information available, and
financial, stock market and other conditions and circumstances existing and
disclosed, to Smith Barney as of the date of the Opinion.
In rendering the Opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to and provided to or
otherwise reviewed by or discussed with Smith Barney. With respect to
financial forecasts and other information furnished to or otherwise reviewed
by or discussed with Smith Barney, the management of the Company advised
Smith Barney that such forecasts and other information were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Company as to the expected future
financial performance of the Company, including the pro forma financial
impact of the Merger on the Company. Smith Barney did not make and was not
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Company nor did Smith Barney
make any physical inspection of the properties or assets of the Company. In
connection with its engagement, Smith Barney was not authorized by the
Company or its Board of Directors to solicit, nor did Smith Barney solicit,
third-party indications of interest for the acquisition of all or any part of
the Company. In addition, Smith Barney expressed no opinion as to what the
trading price of the Company Common Stock will be after the consummation of
the Merger. In addition, Smith Barney was not asked to consider, and the
Opinion does not address, the relative merits of the Merger as compared to
any alternative business strategies that might exist for the Company or the
effect of any other transaction in which the Company might engage. Smith
Barney was not asked to and did not recommend the specific consideration
payable in the Merger, which was determined through negotiation between the
Company and DLJMB. No other limitations were imposed by the Company on Smith
Barney with respect to the investigations made or procedures followed by
Smith Barney in rendering the Opinion.
THE FULL TEXT OF THE OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, AND THE SUPPLEMENTAL
CONFIRMATION ARE ATTACHED HERETO AS ANNEX C AND IS INCORPORATED HEREIN BY
REFERENCE. HOLDERS OF COMPANY COMMON STOCK ARE URGED TO READ THE OPINION
CAREFULLY IN ITS ENTIRETY. THE OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE
CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF COMPANY COMMON STOCK FROM A
FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR
RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE
SUMMARY OF THE OPINION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In preparing the Opinion, Smith Barney performed a variety of financial
and comparative analyses, including those described below. The summary of
such analyses does not purport to be a complete description of the analyses
underlying the Opinion. The preparation of a fairness opinion is a complex
analytic process involving various determinations as to the most appropriate
and relevant methods of financial analyses and the application of those
methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Accordingly, Smith Barney
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and the Opinion. In its analyses, Smith Barney made
numerous assumptions with respect to the Company, the computer services
industry, performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of the
Company. The estimates contained in such analyses and the valuation ranges
resulting from any particular analysis are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do
not purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. The Opinion and Smith Barney's
related analyses were only one of many factors considered by the Board of
Directors of the Company in its evaluation of the Merger and should not be
viewed as determinative of the views of the Company's Board of Directors or
management with respect to the Consideration to be received by the holders of
shares of Company Common Stock or the proposed Merger.
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Valuation of the Common Stock
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples
of the Company and seven selected publicly traded companies in the computer
services industry: BancTec, Inc., Computer Sciences Corporation, Data General
Corporation, Electronic Data Systems Corp., Unisys Corporation, VanstarCorp.,
and Wang Laboratories, Inc. (the "Selected Companies"). Smith Barney compared
market values as multiples of, among other things, latest 12 months ("LTM")
net income and estimated calendar 1997 and calendar 1998 net income, and
adjusted market values (equity market value, plus total debt and the book
value of preferred stock, less cash and cash equivalents) as multiples of LTM
and projected calendar 1997 earnings before interest, taxes, depreciation and
amortization ("EBITDA") and projected calendar 1997 earnings before interest
and taxes ("EBIT"). Smith Barney also compared the debt to capitalization
ratios, historical and projected profit margins, historical revenue, EBITDA
and EBIT growth and projected earnings per share ("EPS") growth of the
Company and the Selected Companies. Revenue and EBIT projections were based
on research reports from selected investment banking firms. Net income
projections for the Selected Companies were based on estimates from
Institutional Brokers Estimate System ("IBES"), and net income projections
for the Company were based on internal estimates of the management of the
Company. All multiples were based on closing stock prices as of May 2, 1997.
Applying selected multiples from the Selected Companies of LTM net income and
projected calendar 1997 and projected calendar 1998 net income of 17.1x to
20.9x, 16.0x to 19.6x, and 10.3x to 12.5x, respectively, and LTM and
projected calendar 1997 EBITDA of 6.0x to 7.4x and 5.0x to 6.1x,
respectively, and LTM and projected calendar 1997 EBIT of 11.7x to 14.3x and
8.4x to 10.2x, to corresponding financial data for the Company resulted in a
median equity reference range for the Company of approximately $15.35 to
$19.79 per share.
Selected Precedent Transaction Analysis. Using publicly available
information, Smith Barney analyzed the purchase prices and implied
transaction multiples paid in 14 selected transactions in the computer
services industry, consisting of (target/acquiror): Triad Systems
Corp./Hicks, Muse, & Cooperative Computing, I-Net/Wang Laboratories, The
Genix Group/Affiliated Computer Services, AmeriData Technologies Inc./GE
Capital Services, NCS Financial Systems/SunGuard Data Systems Inc.,
Dataflex/Vanstar Corp., Dataserv Inc./Wang Laboratories, Inc., Trecom
Business Systems, Inc./Amdahl Corporation, Decision Servcom Inc./Business
Systems Services (Bell Atlantic), DMR Group Inc./Amdahl Corporation, GE
Capital Systems Support Services/IBM, Assets of Groupe Bull S.A./ Wang
Laboratories, Inc., Future Now Inc./Intelligent Electronics Inc., and TRW
Inc. (Customer Service)/ComputerLand Corp. (the "Selected Transactions").
Smith Barney compared, among other things, the transaction values of such
transactions as multiples of LTM EBITDA and EBIT (8.7x to 10.7x and 14.5x to
17.7x, respectively). All multiples for the Selected Transactions were based
on information available at the time of announcement of the transaction.
Smith Barney also reviewed the premiums paid for selected recent merger and
acquisition transactions with a total transaction value of between $800
million and $1.0 billion and it noted that the median and mean premium paid
over the trading price of the target one day prior to announcement was 20.6%
and 30.6%, respectively. Smith Barney determined a median equity reference
range for the Company based on selected precedent transactions by (i)
applying the selected multiples for the Selected Transactions of LTM EBITDA
and EBIT set forth above to corresponding financial data for the Company; and
(ii) applying a 25% to 35% premium to the Company's closing stock price on
May 2, 1997, resulting in an equity reference range for the Company of
approximately $21.68 to $26.72 per share.
No company, transaction or business used in the "Selected Company
Analysis" or "Selected Precedent Transaction Analysis" as a comparison is
identical to the Company or the Merger. Accordingly, an analysis of the
results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the
acquisition, public trading or other values of the Selected Companies,
Selected Transactions or the business segment, company or transaction to
which they are being compared.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash
flow analysis of the projected free cash flow of the Company for the fiscal
years 1998 through 2002, based on internal estimates of the management of the
Company. The discounted cash flow analysis of the Company was
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determined by (i) adding (x) the present value of projected free cash flows
over the five-year period from 1998 to 2002 and (y) the present value of the
Company's terminal value in year 2002 and (ii) subtracting the projected June
30, 1997 net debt of the Company. The range of terminal values for the
Company at the end of the five-year period was calculated by applying
terminal value multiples ranging from 5.0x to 7.0x to the Company's projected
2002 EBITDA. The cash flows and terminal values of the Company were
discounted to present value using discount rates ranging from 14.0% to 16.0%.
Utilizing such discount rates and terminal value multiples, this analysis
resulted in an equity reference range for the Company of approximately $21.88
to $32.17 per share.
Valuation of the Consideration to be Received in the Merger
In the Merger, holders of Company Common Stock will receive in the
aggregate, cash for 94.7% of the shares of Company Common Stock outstanding
at the Effective Time, and will retain, in the aggregate, 5.3% of the Company
Common Stock outstanding at the Effective Time (1,474,345 shares as of April
21, 1997, the "Retained Equity"). In order to arrive at the effective per
share value to be received by holders of Company Common Stock in the Merger,
Smith Barney made certain assumptions and determined on an estimated per
share basis the value of cash and equity to be received.
Cash Consideration. For purposes of calculating the amount of cash to be
received per share, Smith Barney assumed that no holder of Company Common
Stock would make a Stock Election (requiring full proration of the Retained
Equity and thereby reducing the per share cash amount to be received by the
maximum amount). Assuming no Stock Elections, Smith Barney determined that
for each share of Company Common Stock not retained, each holder of Company
Common Stock would effectively receive $21.78 per share in cash (94.7%
multiplied by $23 per share).
Valuation of Retained Equity. In order to determine the per share value of
the Retained Equity, Smith Barney determined a range of equity values for the
Surviving Corporation. Smith Barney assumed that (i) the DLJMB Warrants and
Public Warrants were fully exercised at not less than $.01 per share and (ii)
based on discussions with DLJMB, members of Company management would purchase
up to $10 million worth of Surviving Corporation equity at $23 per share.
Based on these assumptions, Smith Barney calculated that the Retained Equity
would represent 11.25% of the equity of the Surviving Corporation. Based on
the foregoing, Smith Barney then estimated the equity value of the 88.75% of
the Surviving Corporation that would be owned by a combination of DLJMB and
management of the Company to be $235 million ($225 million purchased by DLJMB
pursuant to the Merger Agreement plus $10 million assumed to be purchased by
management). Accordingly, Smith Barney calculated the equity value of the
Surviving Corporation to be $264.8 million and the value of the Retained
Equity to be $29.8 million ($264.8 million less $235 million). To determine
the per share value of the Retained Equity, Smith Barney divided the $29.8
million by the shares of Company Common Stock outstanding on April 21, 1997
and determined that, on an effective per share basis, the value of the
Retained Equity was $1.07. Smith Barney also estimated the pro forma
valuation for the Surviving Corporation by applying the mean LTM EBIT
multiple of the Selected Companies of 13.0x to the Company's LTM EBIT of
$66.0 million to arrive at an implied pro forma enterprise value for the
Surviving Corporation of $858.0 million. After subtracting the debt and
Preferred Stock or Discount Notes of the Surviving Corporation to be
outstanding after the Merger of $710.0 million, Smith Barney estimated that
the Surviving Corporation's pro forma common equity value would be $148.0
million. The value of the Retained Equity was then calculated to be $16.7
million, or $0.60 per share of Company Common Stock. Applying the two
valuation methodologies described above resulted in a reference range for the
Retained Equity of approximately $0.60 to $1.07 per existing share of Company
Common Stock. Adding the per share values determined for the Retained Equity
to the $21.78 cash to be received, Smith Barney arrived at a range of values
for the per share consideration to be received by holders of Company Common
Stock of $22.38 to $22.85. For analysis purposes, Smith Barney used $22.50
per share of Company Common Stock.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of the
historical stock price and trading volumes of the Company's Common Stock for
the period commencing on April 4, 1996 (the first trading day after the
Company's initial public offering) through
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May 2, 1997, and the relationship between movements of the Company's Common
Stock, movements of the common stock of the Selected Companies and movements
in the S&P 500 Index. Smith Barney also compared the estimated value of the
Consideration to be received in the Merger to the (i) latest public trading
price one day prior to the announcement of the transaction of $ 16.50; (ii)
one week average trading price for the period ended May 2, 1997 of $15.43,
(iii) one month average trading price for the period ended May 2, 1997 of
$15.31; and (iv) two month average trading price for the period ended May 2,
1997 of $15.48. Smith Barney noted that the estimated total consideration of
$22.50 per share of Company Common Stock represented a premium to the average
stock prices for the above periods of(i) 36.4%; (ii) 45.8%; (iii) 47.0%; and
(iv) 45.4%, respectively.
Information Concerning the Company's Financial Advisor
The Company entered into an engagement letter with Smith Barney on May 1,
1997 pursuant to which the Company agreed to pay Smith Barney a fee of
$875,000, which fee became payable upon delivery of the Opinion. The Company
also agreed to reimburse Smith Barney for reasonable out-of-pocket expenses
incurred by Smith Barney in performing its services, including the reasonable
fees and expenses of its legal counsel, such fees not to exceed $25,000
without the prior written consent of the Company, which consent may not be
unreasonably withheld, and to indemnify Smith Barney and related persons
against certain liabilities, including liabilities under the federal
securities laws, arising out of Smith Barney's engagement.
Smith Barney has advised the Company that, in the ordinary course of
business, Smith Barney and its affiliates may actively trade and hold the
securities of the Company for their own account or for the account of
customers and, accordingly, may at any time hold a long or short position in
such securities. Smith Barney has, in the past, provided financial advisory
and financing services to the Company and certain of its Significant
Stockholders and has received fees for the rendering of such services. In
particular, Smith Barney was the lead-managing underwriter in the Company's
initial public offering. The underwriters received an underwriting discount
of approximately $8.4 million in such offering, a portion of which was
allocated to Smith Barney. In addition, Smith Barney and its affiliates
(including Travelers Group Inc. and its affiliates) maintain relationships
with the Company in the ordinary course of business. In preparation of the
Company's initial public offering Smith Barney made certain investigations of
the Company and became generally familiar with its business. Prior to the
filing of the registration statement with the Commission in February 1996 in
connection with the Company's initial public offering, Smith Barney explored
the possibility of a sale of the Company and made selected inquiries with
parties having a potential interest in connection therewith.
Smith Barney is a nationally recognized investment banking firm and was
selected by the Company based on Smith Barney's experience, expertise and
familiarity with the Company and its business. Smith Barney regularly engages
in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes.
CERTAIN ESTIMATES OF FUTURE OPERATIONS AND OTHER INFORMATION
At the request of DLJMB the Company prepared certain nonpublic estimates
reflecting management's views as to the possible future performance of the
Company over the five fiscal years ending in fiscal 2002. This information
was provided to both DLJMB and to Smith Barney on a confidential basis. These
estimates were (a) the Company's revenue would increase by 10% per year from
the end of fiscal 1997 through the end of fiscal 2002 and (b) the Company's
EBIT would grow from 10% of revenue in fiscal 1998, to 11.6% in fiscal 1999,
12.8% in fiscal 2000, 13.7% in fiscal 2001 and 14.3% in fiscal 2002 as the
Company realized cost efficiencies related to economies of scale (the
"Company Estimates"). In addition, certain alternate estimates were prepared,
which reflected lower revenue growth estimates and EBIT margins than the
Company Estimates (the "Alternate Estimates"). The Alternate Estimates were
not relied upon by Smith Barney or presented to the Board of Directors
because they were not reviewed by management of the Company. Nevertheless,
because such Alternate Estimates were delivered to certain members of
management of the Company and to Smith Barney and are based in part on
discussions with
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members of management, they are set forth herein. These estimates were (a)
the Company's revenues would increase by 5% per year from the end of fiscal
1997 through the end of fiscal 2002 and (b) the Company's EBIT would grow
from 9.6% in fiscal 1998 to 10.6% in fiscal 1999, 11.2% in fiscal 2000, 11.6%
in fiscal 2001, and 11.8% in fiscal 2002.
THE ESTIMATES REFERRED TO ABOVE WERE NOT PREPARED WITH A VIEW TO PUBLIC
DISCLOSURE OR COMPLIANCE WITH PUBLISHED GUIDELINES ESTABLISHED BY THE SEC OR
THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING PROJECTIONS.
THE COMPANY ESTIMATES AND THE ALTERNATE ESTIMATES ARE INCLUDED IN THIS PROXY
STATEMENT/PROSPECTUS SOLELY BECAUSE SUCH INFORMATION WAS PROVIDED TO DLJMB
AND SMITH BARNEY. NONE OF THE COMPANY, DLJMB, MERGERSUB OR SMITH BARNEY OR
THE COMPANY'S INDEPENDENT AUDITORS ASSUME ANY RESPONSIBILITY FOR THE ACCURACY
OF SUCH INFORMATION. IN ADDITION, BECAUSE THE ESTIMATES ARE INHERENTLY
SUBJECT TO SIGNIFICANT ECONOMIC AND COMPETITIVE UNCERTAINTIES AND
CONTINGENCIES BEYOND THE COMPANY'S CONTROL, THERE CAN BE NO ASSURANCE THAT
THE ESTIMATES WILL BE REALIZED; ACTUAL RESULTS MAY BE HIGHER OR LOWER THAN
THOSE ESTIMATED. SEE "RISK FACTORS." NEITHER THE COMPANY'S AUDITORS NOR ANY
OTHER INDEPENDENT ACCOUNTANTS HAVE COMPILED, EXAMINED OR PERFORMED ANY
PROCEDURES WITH RESPECT TO THE FOREGOING ESTIMATES, NOR HAVE THEY EXPRESSED
ANY OPINION OR ANY OTHER FORM OF ASSURANCE ON SUCH INFORMATION OR ITS
ACHIEVABILITY, AND ASSUME NO RESPONSIBILITY FOR, AND DISCLAIM ANY ASSOCIATION
WITH, THE PROSPECTIVE FINANCIAL INFORMATION.
These estimates do not give effect to the Merger and should be read
together with the sections regarding Risk Factors, Pro Forma Financial
Information and Management's Discussion and Analysis of Financial Condition
and Results of Operations.
MERGER CONSIDERATION
Subject to certain provisions of the Merger Agreement as described herein
with respect to shares of Company Common Stock held by the Company as
treasury stock, or owned by MergerSub, and with respect to fractional shares
and Appraisal Shares, (i) each issued and outstanding share of Company Common
Stock (other than Stock Electing Shares) will be converted into the right to
receive from the Company following the Merger an amount equal to $23.00 in
cash and (ii) each issued and outstanding share of Company Common Stock with
respect to which an election to retain Company Common Stock has been made and
not withdrawn in accordance with the Merger Agreement will be converted into
the right to retain one fully paid and nonassessable share of Company Common
Stock; provided, that the aggregate number of shares of Company Common Stock
to be converted into the right to receive the Stock Election Price at the
Effective Time shall be equal to the sum of (i) 1,474,345 plus (ii) 5.3% of
the number of Shares, if any, issued after April 21, 1997 but prior to the
Effective Time in respect of Options and Existing Warrants (excluding the
DLJMB Warrants and Public Warrants) to acquire shares of Company Common
Stock. With respect to certain risks related to continuing to hold Company
Common Stock, see "Risk Factors."
The Merger contemplates that approximately 94.7% of the presently issued
and outstanding shares of Company Common Stock will be converted into cash
and that approximately 5.3% of such shares will be retained by existing
stockholders. Because 5.3% (or 1,474,345 (as of April 21, 1997)) of the
Shares must be retained by stockholders in the Merger, stockholders who do
not elect to retain any Shares may, due to proration, be required to retain
some shares of Company Common Stock. In addition, stockholders who elect to
retain Shares may receive a lesser, prorated number of shares of Company
Common Stock than such stockholders elected to retain, plus cash, if the
aggregate number of Shares elected to be retained exceeds the Stock Election
Number.
STOCK ELECTION
Record holders of Shares will be entitled to make an unconditional Stock
Election on or prior to the Election Date (as defined below) to retain the
Stock Election Price. If the number of Stock Electing Shares exceeds the
Stock Election Number, however, then (i) the number of Stock Electing Shares
covered by a holder's Stock Election to be converted into the right to retain
Stock Electing Shares will be determined by multiplying the total number of
Stock Electing Shares covered by such Stock Election by
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Stock Proration Factor and (ii) such number of Stock Electing Shares will be
so converted. All Stock Electing Shares, other than those Shares converted
into the right to retain Stock Electing Shares as described in the
immediately preceding sentence, will be converted into the right to receive
Cash Election Price as if such shares were not Stock Electing Shares.
If the number of Stock Electing Shares is less than the Stock Election
Number, then (i) all Stock Electing Shares will be converted into the right
to retain Stock Electing Shares in accordance with the Merger Agreement, (ii)
additional shares of Company Common Stock, other than Stock Electing Shares
and Appraisal Shares, will be converted into the right to retain Stock
Electing Shares, which number of additional shares shall be determined by
multiplying the total number of shares, other than Stock Electing Shares and
Appraisal Shares, by a proration factor (the "Cash Proration Factor")
determined by dividing (x) the difference between the Stock Election Number
and the number of Stock Electing Shares by (y) the total number of shares of
Company Common Stock, other than Stock Electing Shares and Appraisal Shares,
and (iii) such additional shares of Company Common Stock shall be converted
into the right to retain Stock Electing Shares in accordance with the Merger
Agreement (on a consistent basis among stockholders who held shares of
Company Common Stock as to which they did not make the Stock Election, pro
rata to the number of shares as to which they did not make such election).
Examples of the effects of the result of a Stock Election are set forth
below.
If a stockholder elects to make a Stock Election and receives cash as a
result of the proration procedures described above, such stockholder may
receive dividend treatment (rather than capital gain treatment) for any cash
received in the Merger as a result of such proration procedures. See "Risk
Factors--Stock Election and Proration into Cash--Possible Dividend
Treatment." See also "The Merger--Federal Income Tax
Consequences--Stockholders Receiving Cash."
With respect to certain risks related to continuing to hold Company Common
Stock, see "Risk Factors."
POSSIBLE EFFECTS OF PRORATION
The following examples illustrate the potential effects of proration. No
fractional shares will be issued; in lieu of fractional shares, stockholders
will receive cash.
A. HOLDER A OWNS 100 SHARES AND DOES NOT ELECT TO RETAIN ANY SHARES.
1 If other stockholders elect to retain a number of shares of Company
Common Stock that equals or exceeds the Stock Election Number or more
shares in the aggregate, then Holder A will receive $2,300 in cash (100
shares at $23 per share).
2 If other stockholders elect to retain fewer Shares than the Stock
Election Number in the aggregate, then Holder A will not receive cash for
all of its 100 Shares and will be required to retain some shares. In such
a case, every stockholder must retain a small number of Shares in order to
increase the number of retained Shares to the Stock Election Number.
However, even in the case of maximum proration (i.e., no stockholders
elect to retain Shares), Holder A will still be assured of receiving at
least $2,178.10 in cash (94.7 shares at $23 per share) and will retain 5.3
shares of Company Common Stock.
B. HOLDER B OWNS 100 SHARES AND ELECTS TO RETAIN ALL ITS SHARES.
1 If the stockholders (including Holder B) elect to retain a number of
Shares equal to or less than the Stock Election Number, then Holder B will
be able to retain all 100 of its Shares.
2 If the stockholders (including Holder B) elect to retain more Shares
than the Stock Election Number in the aggregate, then Holder B will not be
able to retain all its Shares and will receive some cash. For example, if
stockholders elected to retain 10,000,000 Shares in the aggregate, then
each holder, including Holder B, would be able to retain only 14.74%
(assuming the Stock Election Number is 1,474,345) of its Shares in order
to reduce the number of retained Shares to the Stock Election Number.
Therefore, Holder B would be able to retain only 14.74 shares (or 14.74%
of his 100 Shares) and would receive $1,960.98 in cash (85.26 Shares at
$23 per share). In the case of
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maximum proration (i.e., all stockholders elect to retain their Shares),
Holder B would be able to retain only 5.3 shares and would receive
$2,178.10 in cash.
C. HOLDER C OWNS 100 SHARES AND ELECTS TO RETAIN 50 SHARES AND
CONVERT 50 SHARES TO CASH.
1 In the unlikely event that stockholders (including Holder C) elect to
retain exactly 1,474,345 Shares in the aggregate, then Holder C will be
able to retain its 50 Shares and will receive $1,150 in cash (50 Shares at
$23 per share).
2 If the stockholders (including Holder C) elect to retain more Shares
than the Stock Election Number in the aggregate, then Holder C will not be
able to retain all of its 50 Shares. For example, if stockholders elected
to retain 10,000,000 shares in the aggregate, then each holder, including
Holder C, would be able to retain only 14.74% of its Shares in order to
reduce the number of retained shares to the Stock Election Number.
Therefore, Holder C would be able to retain only 7.37 shares (or 14.74% of
its 50 Shares) and would receive $2,130.49 in cash (92.63 Shares at $23
per Share). If the stockholders elected to retain more than 10,000,000
Shares in the aggregate, Holder C would receive fewer shares than in the
example above, but would receive a commensurately greater amount of cash.
3 If the stockholders (including Holder C) elect to retain fewer Shares
than the Stock Election Number in the aggregate, then Holder C would be
required to retain more than 50 shares. For example, if stockholders
elected to retain 50,000 Shares in the aggregate, then all stockholders
must collectively retain an additional 1,424,345 Shares in order to meet
the Stock Election Number. In this example, Holder C would be required to
retain an additional 2.56 Shares (for a total of 52.56 Shares) and would
receive $1,091.12 in cash (47.44 shares at $23 per share). The additional
2.56 Shares is calculated by multiplying the 50 Shares Holder C wants to
convert to cash by a fraction the numerator of which is the 1,424,345
additional Shares and the denominator of which is the total number of
outstanding shares less the 50,000 Electing Shares. If the stockholders
elected to retain fewer than 50,000 Shares in the aggregate, Holder C
would receive more shares than in the example above, but would receive
commensurately less cash.
Fractional Shares of Company Common Stock will not be issued in the
Merger. Holders of Company Common Stock otherwise entitled to a fractional
share of Company Common Stock following the Merger will be paid cash in lieu
of such fractional Share determined and paid as described under "--Fractional
Shares" below.
STOCK ELECTION PROCEDURE
The form for making a Stock Election (the "Form of Election") is being
mailed to holders of record of Company Common Stock together with this Proxy
Statement/Prospectus.
FOR A FORM OF ELECTION TO BE EFFECTIVE, HOLDERS OF COMPANY COMMON STOCK
MUST PROPERLY COMPLETE SUCH FORM OF ELECTION, AND SUCH FORM OF ELECTION,
TOGETHER WITH ALL CERTIFICATES FOR SHARES OF COMPANY COMMON STOCK HELD BY
SUCH HOLDER, DULY ENDORSED IN BLANK OR OTHERWISE IN FORM ACCEPTABLE FOR
TRANSFER ON THE BOOKS OF THE COMPANY (OR BY APPROPRIATE GUARANTEE OF DELIVERY
AS SET FORTH IN SUCH FORM OF ELECTION), MUST BE RECEIVED BY CHASE MELLON
SHAREHOLDER SERVICES, L.L.C. (THE "EXCHANGE AGENT") AT ONE OF THE ADDRESSES
LISTED ON THE FORM OF ELECTION AND NOT WITHDRAWN, BY 5:00 P.M., EASTERN TIME,
ON THE BUSINESS DAY NEXT PRECEDING THE DATE OF THE SPECIAL MEETING (THE
"ELECTION DATE").
ONLY HOLDERS OF COMPANY COMMON STOCK WHO WISH TO MAKE A STOCK ELECTION ARE
REQUIRED TO SEND STOCK CERTIFICATES WITH THEIR FORM OF ELECTION (AS DEFINED
BELOW). HOLDERS OF COMPANY COMMON STOCK WHO DO NOT MAKE A STOCK ELECTION WILL
RECEIVE, BY MAIL, LETTERS OF TRANSMITTAL WITH WHICH SUCH STOCK CERTIFICATES
SHOULD BE RETURNED AFTER THE EFFEC-
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TIVE TIME. HOLDERS WHO DO NOT MAKE A STOCK ELECTION SHOULD THEREFORE NOT SEND
STOCK CERTIFICATES WITH THEIR PROXY CARDS.
The determinations of the Exchange Agent as to whether or not Stock
Elections have been properly made or revoked, and when such election or
revocations were received, will be binding.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware or at such later
time as is specified in the Certificate of Merger. The filing of the
Certificate of Merger will occur as soon as practicable on or after the
closing of the Merger unless another date is agreed to in writing by the
Company and MergerSub. Subject to certain limitations, the Merger Agreement
may be terminated by either party if, among other reasons, the Merger has not
been consummated on or before the later of (a) the earlier of September 15,
1997 and ten business days after the date of the stockholders meeting to
approve the Merger or (b) August 15, 1997. See "Certain Provisions of the
Merger Agreement--Conditions to the Consummation of the Merger" and
"--Termination."
CONVERSION/RETENTION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of shares of Company Common Stock (other than Appraisal
Shares) into the right to receive cash or the right to retain shares of
Company Common Stock following the Merger will occur at the Effective Time.
As soon as practicable as of or after the Effective Time, the Exchange
Agent will send a letter of transmittal to each holder of Company Common
Stock (other than holders of Company Common Stock making a Stock Election
with respect to all of such holders' shares, who have properly submitted
Forms of Election and share certificates to the Exchange Agent). The letter
of transmittal will contain instructions with respect to the surrender of
certificates representing shares of Company Common Stock in exchange for cash
and, under certain circumstances, certificates representing shares of Company
Common Stock to be retained in the Merger, or the amount of cash in lieu of
any fractional interest in a share of Company Common Stock for which the
shares represented by the certificates so surrendered are exchangeable
pursuant to the Merger Agreement.
EXCEPT FOR COMPANY COMMON STOCK CERTIFICATES SURRENDERED WITH A FORM OF
ELECTION AS DESCRIBED ABOVE UNDER "--STOCK ELECTION PROCEDURE," STOCKHOLDERS
OF THE COMPANY SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE AGENT
UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
As soon as practicable after the Effective Time, each holder of an
outstanding certificate or certificates at such time which prior thereto
represented shares of Company Common Stock shall, upon surrender to the
Exchange Agent of such certificate or certificates and acceptance thereof by
the Exchange Agent, be entitled to the amount of cash, if any, into which the
number of shares of Company Common Stock previously represented by such
certificate or certificates surrendered shall have been converted pursuant to
the Merger Agreement and a certificate or certificates representing the
number of full shares of Company Common Stock, if any, to be retained by the
holder thereof pursuant to the Merger Agreement. The Exchange Agent will
accept such certificates upon compliance with such reasonable terms and
conditions as the Exchange Agent may impose to effect an orderly exchange
thereof in accordance with normal exchange practices. After the Effective
Time, there will be no further transfer on the records of the Company or its
transfer agent of certificates representing shares of Company Common Stock
which have been converted, in whole or in part, pursuant to the Merger
Agreement into the right to receive cash, and if such certificates are
presented to the Company for transfer, they will be canceled against delivery
of cash and, if appropriate, certificates for retained Company Common Stock.
Until surrendered as contemplated by the Merger Agreement, each certificate
for shares of Company
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Common Stock will be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the consideration contemplated
by the Merger Agreement. No interest will be paid or will accrue on any cash
payable as consideration in the Merger or in lieu of any fractional shares of
retained Company Common Stock.
No dividends or other distributions with respect to retained Company
Common Stock with a record date after the Effective Time will be paid to the
holder of any unsurrendered certificate for shares of Company Common Stock
with respect to the shares of retained Company Common Stock represented
thereby and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to the Merger Agreement until the surrender of such
certificate in accordance with the Merger Agreement. Subject to the effect of
applicable laws, following surrender of any such certificate, there shall be
paid to the holder of the certificate representing whole shares of retained
Company Common Stock issued in connection therewith, without interest, (i) at
the time of such surrender or as promptly after the sale of the Excess Shares
as practicable, the amount of any cash payable in lieu of a fractional share
of retained Company Common Stock to which such holder is entitled pursuant to
the Merger Agreement and the proportionate amount of dividends or other
distributions, if any, with a record date after the Effective Time
theretofore paid with respect to such whole shares of retained Company Common
Stock, and (ii) at the appropriate payment date, the proportionate amount of
dividends or other distributions, if any, with a record date after the
Effective Time but prior to such surrender and a payment date subsequent to
such surrender payable with respect to such whole shares of retained Company
Common Stock.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of retained
Company Common Stock will be issued in connection with the Merger, and such
fractional share interests will not entitle the owner thereof to vote or to
any rights of a stockholder of the Company after the Merger. Each holder of
shares of Company Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of retained
Company Common Stock (after taking into account all shares of Company Common
Stock delivered by such holder) will receive, in lieu thereof, a cash payment
(without interest) representing such holder's proportionate interest in the
net proceeds from the sale by the Exchange Agent (following the deduction of
applicable transaction costs), on behalf of all such holders, of the shares
of retained Company Common Stock representing such fractions. Such sale shall
be made as soon as practicable after the Effective Time.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, the Company has agreed to carry on its
business and that of its subsidiaries prior to the Effective Time in the
ordinary and usual course of business consistent with past practice. See
"Certain Provisions of the Merger Agreement--Certain Pre-Closing Covenants."
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The obligations of the Company and MergerSub to consummate the Merger are
subject to various conditions, including, without limitation, obtaining
requisite stockholder approval, the termination or expiration of the relevant
waiting period under the HSR Act and the absence of any injunction or other
legal restraint or prohibition preventing the consummation of the Merger. See
"Certain Provisions of the Merger Agreement--Conditions to the Consummation
of the Merger" and "Regulatory Approvals."
FEDERAL INCOME TAX CONSEQUENCES
The following are, under currently applicable law, all material United
States federal income tax considerations applicable to the Merger. The tax
treatment described herein may vary depending upon each stockholder's
particular circumstances and tax position. Certain stockholders (including
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers, foreign corporations, persons who are not citizens or
residents of the United States ("U.S."), stockholders who do not hold their
shares as capital assets and stockholders who have acquired their existing
stock upon the exercise of
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options or otherwise as compensation) may be subject to special rules not
discussed below. No ruling from the Internal Revenue Service ("IRS") will be
applied for with respect to the federal income tax consequences discussed
herein and, accordingly, there can be no assurance that the IRS will agree
with the conclusions stated herein. The discussion below is based upon the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
regulations, rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified, possibly on a
retroactive basis, so as to result in U.S. federal income tax consequences
different from those discussed below. In addition, this discussion does not
consider the effect of any applicable foreign, state, local or other tax
laws. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER TAX LAWS, ANY
RECENT CHANGES IN APPLICABLE TAX LAWS AND ANY PROPOSED LEGISLATION.
Characterization of the Merger for U.S. Federal Income Tax Purposes.
For U.S. federal income tax purposes, MergerSub will be disregarded as a
transitory entity, and the Merger of MergerSub with and into the Company will
be treated as if it were a sale of a portion of a stockholder's Company
Common Stock to the DLJMB Funds and a purchase of a portion of the
stockholder's Shares by the Company. It is unclear how the allocation of
proceeds between the two should be determined. The Company intends to take
the position that the percentage of a stockholder's Shares disposed of by the
stockholder pursuant to the Merger which will be treated as if sold to the
DLJMB Funds will be a percentage of such Shares equal to (i) the amount
contributed to MergerSub by the DLJMB Funds in exchange for MergerSub common
stock divided by (ii) the aggregate amount of cash paid to stockholders
pursuant to the Merger. The remainder of the stockholder's Shares disposed of
in the Merger will be treated as purchased by the Company. The IRS could,
however, adopt a different approach in determining the portion, if any, of a
stockholder's Shares which is treated as purchased by the Company. See
"--Stockholders Receiving Cash" below for a discussion of the consequences of
cash being deemed paid for the purchase of Shares by the Company.
Stockholders Receiving Cash.
As described more fully below, the U.S. federal income tax consequences of
the Merger with respect to a particular stockholder will depend upon, among
other things, (i) whether the stockholder received any cash proceeds pursuant
to the Merger, (ii) the extent to which a stockholder is deemed to have sold
its Shares to the DLJMB Funds or is deemed to have had its Shares purchased
by the Company and (iii) whether the deemed purchase of a holder's Shares by
the Company will qualify as a sale or exchange under Section 302 of the Code.
First, to the extent that a stockholder is considered to have sold Shares to
the DLJMB Funds, such stockholder will recognize either capital gain or loss
(assuming the Shares are held by such stockholder as a capital asset) equal
to the difference between the amount realized on its deemed sale of Shares to
the DLJMB Funds (i.e., the cash proceeds properly allocated to such sale) and
the stockholder's adjusted tax basis in such Shares. Such gain or loss
generally will be long-term capital gain or loss if the Shares are held as a
capital asset by the stockholder for more than one year. Second, a
stockholder also will recognize either capital gain or loss equal to the
difference between the cash proceeds allocable to the deemed purchase of such
stockholder's Shares by the Company and the stockholder's adjusted tax basis
in such Shares, to the extent such deemed purchase by the Company is treated
as a sale or exchange under Section 302 of the Code with respect to such
stockholder. Such gain or loss generally will be long-term capital gain or
loss if the Shares are held as a capital asset by the stockholder for more
than one year. Under Section 302 of the Code, a deemed purchase by the
Company of Shares pursuant to the Merger will, as a general rule, be treated
as a sale or exchange if such deemed purchase (a) is "substantially
disproportionate" with respect to the stockholder, (b) results in a complete
termination of the stockholder's interest in the Company as described in
Section 302(b)(3) of the Code or (c) is "not essentially equivalent to a
dividend" with respect to the stockholder.
In determining whether any of these Section 302 tests is satisfied,
stockholders must take into account not only the Shares that they actually
own, but also any Shares they are deemed to own under the constructive
ownership rules set forth in Section 318 of the Code. Pursuant to these
constructive ownership rules, a stockholder is deemed to constructively own
any Shares that are owned by certain
52
<PAGE>
related individuals or entities and any Shares that the stockholder has the
right to acquire by exercise of an option or by conversion or exchange of a
security.
The deemed purchase by the Company of a stockholder's Shares will be
"substantially disproportionate" with respect to such stockholder if, among
other things, the percentage of Shares actually and constructively owned by
such stockholder immediately following the Merger is less than 80% of the
percentage of Shares actually and constructively owned by such stockholder
immediately prior to the Merger. Stockholders should consult their own tax
advisors with respect to the application of the "substantially
disproportionate" test to their particular facts and circumstances.
The deemed purchase by the Company of a stockholder's Shares will result
in a complete termination of a stockholder's interest in the Company
described in Section 302(b)(3) of the Code if either (a) all the Shares
actually and constructively owned by the stockholder are sold in the Merger
or (b) all the Shares actually owned by the stockholder are sold in the
Merger and the stockholder is eligible to waive, and does effectively waive
in accordance with Section 302(c) of the Code, attribution of all Shares
which otherwise would be considered to be constructively owned by such
stockholder.
Even if the deemed purchase by the Company of a stockholder's Shares fails
to satisfy the "substantially disproportionate" test or the complete
termination test described above, the deemed purchase by the Company of a
stockholder's Shares may nevertheless satisfy the "not essentially equivalent
to a dividend" test if the stockholder's sale of Shares in the Merger results
in a "meaningful reduction" in such stockholder's proportionate interest in
the Company Common Stock. Whether the receipt of cash by a stockholder will
be considered "not essentially equivalent to a dividend" will depend upon
such stockholder's facts and circumstances. In certain circumstances, even a
small reduction in a stockholder's proportionate equity interest may satisfy
this test. For example, the IRS has indicated in a published ruling that a
3.3% reduction in the proportionate equity interest of a small (substantially
less than 1%) stockholder in a publicly held corporation who exercises no
control over corporate affairs constitutes such a "meaningful reduction."
Stockholders should consult with their own tax advisors as to the application
of this test in their particular situation.
A tendering stockholder may not be able to satisfy one of the above three
tests because of contemporaneous acquisitions of Shares by such stockholder
or a related party whose Shares would be attributed to such stockholder under
Section 318 of the Code. Stockholders should consult their own tax advisors
regarding the tax consequences of such acquisitions in their particular
circumstances.
If a stockholder cannot satisfy any of the three tests described above and
to the extent the Company has sufficient current and/or accumulated earnings
and profits, such stockholder will be treated as having received a dividend
which will be includible in gross income (and treated as ordinary income) in
an amount equal to the cash received in respect of the purchase by the
Company of such stockholder's Shares (without regard to gain or loss, if
any).
In the case of a corporate stockholder, if the cash paid is treated as a
dividend, such dividend income may be eligible for the dividends-received
deduction. The dividends-received deduction is subject to certain
limitations, and may not be available if the corporate stockholder does not
satisfy certain holding period requirements with respect to the Shares or if
the Shares are treated as "debt financed portfolio Stock" within the meaning
of Section 246A(c) of the Code. Additionally, if a dividends-received
deduction is available, the dividend may be treated as an "extraordinary
dividend" under Section 1059(a) of the Code, in which case a corporate
stockholder's adjusted tax basis in the Shares retained by such stockholder
would be reduced, but not below zero, by the amount of the nontaxed portion
of such dividend. Under current laws, any amount of the nontaxed portion of
the dividend in excess of the corporate stockholder's adjusted tax basis
generally will be subject to tax upon a sale or other taxable disposition of
the Shares. Corporate stockholders should be aware that the Clinton
Administration has proposed legislation, generally applicable to transactions
occurring after May 3, 1995 (or in certain cases, September 13, 1995), which
would amend Section 1059 to require, in certain cases, the immediate
recognition of gain. Corporate stockholders are urged to consult their own
tax advisors as to the proposed legislation and the effect of Section 1059 of
the Code on the treatment of cash received in the Merger.
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<PAGE>
Stockholders Retaining Stock and Receiving No Cash.
The Merger will have no U.S. federal income tax consequences for
stockholders who retain their Shares and receive no cash. Accordingly, a
stockholder will not recognize any gain or loss on any Shares retained by
such stockholder.
Stockholders Retaining a Portion of Their Stock and Receiving Cash.
To the extent that a stockholder elects to retain a portion of his or her
Shares and exchange a portion of his or her Shares for cash, or to the extent
a stockholder is prorated into receiving cash in exchange for some portion of
his or her Shares, the tax treatment of the stockholder's receipt of such
cash will be the same as set forth above under "--Stockholders Receiving
Cash."
As described above under "--Stockholders Retaining Stock and Receiving No
Cash," the Merger will have no tax consequences to a stockholder (and, thus,
a stockholder will not recognize any gain or loss as a result of the Merger),
to the extent such stockholder retains, or is prorated into Shares. However,
as described more fully above under "--Stockholders Receiving Cash," a
stockholder's retention of Shares may, under certain circumstances, cause the
cash received by such stockholder pursuant to the Merger to be treated as a
dividend for U.S. federal income tax purposes.
Foreign Stockholders--Withholding.
The following is a general discussion of certain U.S. federal income tax
consequences of the Merger to foreign stockholders. For this purpose, a
foreign stockholder is any person who is, for U.S. federal income tax
purposes, a foreign corporation, a non-resident alien individual, a foreign
partnership or a foreign estate or trust.
In the case of any foreign stockholder, the Exchange Agent will withhold
30% of the amount treated as paid by the Company to purchase the Shares of
such stockholder in order to satisfy certain U.S. withholding requirements,
unless such foreign stockholder proves in a manner satisfactory to the
Company and the Exchange Agent that either (i) the deemed purchase by the
Company of his or her Shares pursuant to the Merger will qualify as a sale or
exchange under Section 302 of the Code, rather than as a dividend for U.S.
federal income tax purposes, in which case no withholding will be required,
(ii) the foreign stockholder is eligible for a reduced tax treaty rate with
respect to dividend income, in which case the Exchange Agent will withhold at
the reduced treaty rate or (iii) no U.S. withholding is otherwise required.
Foreign stockholders should consult their own tax advisors regarding the
application of these withholding rules.
Information Reporting and Backup Withholding.
The Company must report annually to the IRS and to each stockholder the
amount of dividends paid to such stockholder and the backup withholding tax,
if any, withheld with respect to such dividends. Copies of these information
returns also may be made available to the tax authorities in the country in
which a foreign stockholder resides under the provisions of an applicable
income tax treaty.
Backup withholding (which generally is a withholding tax imposed at the
rate of 31% on certain payments to persons that fail to furnish certain
information under the United States information reporting requirements)
generally will not apply to dividends paid to a foreign stockholder at an
address outside the United States (unless the payor has knowledge that the
payee is a U.S. person).
Payment of the proceeds of a sale of Shares by or through a United States
office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury
that it is a foreign stockholder, and the payor does not have actual
knowledge that such owner is a U.S. person, or otherwise establishes an
exemption. In general, backup withholding and information reporting will not
apply to a payment of the proceeds of a sale of Shares by or through a
foreign office of a broker. If, however, such broker is, for United States
federal income tax purposes, a U.S. person, a controlled foreign corporation,
or a foreign person that derives 50% or more of his or her gross income for
certain periods from the conduct of a trade or business in the United States,
such
54
<PAGE>
payments will be subject to information reporting, but not backup
withholding, unless (1) such broker has documentary evidence in its records
that the beneficial owner is a foreign holder and certain other conditions
are met, or (2) the beneficial owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as
a refund or a credit against the holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
Proposed United States Treasury Regulations were issued on April 15, 1996
(the "Proposed Regulations") which, if adopted, would affect the United
States taxation of dividends paid to a foreign stockholder on Company Common
Stock. The Proposed Regulations are generally proposed to be effective with
respect to dividends paid after December 31, 1997, subject to certain
transition rules. The Proposed Regulations would, if adopted, alter the
foregoing rules in certain respects. Among other things, the Proposed
Regulations would provide certain presumptions under which a foreign
stockholder would be subject to backup withholding and information reporting
unless the Company receives certification from the holder of the holder's
foreign status.
THOUGH THE FOREGOING ARE THE MATERIAL U.S. FEDERAL INCOME TAX
CONSIDERATIONS GENERALLY APPLICABLE TO THE MERGER, THE DISCUSSION DOES NOT
ADDRESS EVERY FEDERAL INCOME TAX CONCERN WHICH MAY BE APPLICABLE TO A
PARTICULAR STOCKHOLDER. EACH STOCKHOLDER IS URGED TO CONSULT SUCH
STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO SUCH
STOCKHOLDER, IN THE LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES, THE
DISPOSITION OF SHARES PURSUANT TO THE MERGER.
ACCOUNTING TREATMENT
The Merger will be accounted for as a recapitalization. Accordingly, the
historical basis of the Company's assets and liabilities will not be affected
by the transaction.
EFFECT ON STOCK OPTIONS AND EMPLOYEE BENEFIT MATTERS
At the Effective Time, all outstanding Options, whether vested or not,
will be canceled. As soon as practicable as of or after the Effective Time,
the holders of Options will receive, with respect to each Option, a cash
payment in an amount equal to the product of (x) the excess, if any, of
$23.00 over the exercise price of such Option multiplied by (y) the number of
Shares subject to such option. Alternatively, a portion of the Options may be
converted into options to purchase common stock of the Surviving Corporation.
Prior to the Effective Time, the Company will (i) obtain any consents from
holders of Options to purchase Shares granted under the Company's option or
compensation plans or arrangements and (ii) make any amendments to the terms
of such stock option or compensation plans or arrangements necessary effect
the cancellation, payment or conversion of the Options. Payment may be
withheld in respect of any Option until necessary consents are obtained.
Following the Effective Time, the Company will honor obligations incurred
prior to the Effective Time under all of the Company's existing employee
benefit plans and arrangements. In addition, for a period of at least one
year after the Effective Time, the Company will continue to provide benefits
to its employees which, in the aggregate, will be comparable to those
provided to the Company's employees prior to the Effective Time.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of the Company may have
interests, described herein, that present them with potential conflicts of
interest in connection with the Merger. The Board of Directors is aware of
the conflicts described below and considered them in addition to the other
matters described under "The Merger--Recommendation of the Board of
Directors; Reasons for the Merger."
Certain officers of the Company, including the Chairman of the Board, have
severance agreements with the Company that could provide them with certain
benefits in the event of termination of their
55
<PAGE>
employment after consummation of the Merger. In addition, under his existing
employment agreement with the Company, the Chairman is entitled to receive
significant compensation if the Merger is consummated. It is also expected
that certain officers of the Company will enter into new employment
agreements with the Company as of Effective Time.
At the Effective Time, all Options will be cancelled and the holders
thereof will receive the Option Cash Proceeds in lieu of the Merger
Consideration. Alternatively, a portion of the Options may be converted into
options to purchase common stock of the Surviving Corporation. Accordingly,
holders of Options will not be subject to proration. As of June 30, 1997,
approximately 2,922,014 Options were outstanding. The Company estimates that
the aggregate amount of the Option Cash Proceeds, assuming all Options are
cancelled, will be approximately $45,308,856. In addition, DLJMB has proposed
that certain officers of the Company be offered the opportunity to purchase
shares of Company Common Stock using a portion of the Option Cash Proceeds
received by them, the proceeds of non-recourse loans from the Company or
other sources of funds. DLJMB has proposed that management purchase up to
347,826 shares of Company Common Stock for $8.0 million. Also, at the
Effective Time, the Company expects to establish a new stock option plan
under which up to approximately 1,444,469 shares of Company Common Stock will
be reserved for issuance upon exercise of options which may be granted to
certain officers and employees.
The Significant Stockholders collectively own Existing Warrants to
purchase 468,750 shares of Company Common Stock, and at the Effective Time
such Existing Warrants will be converted into the right to receive the
Warrants Cash Proceeds. Accordingly, holders of Existing Warrants will not be
subject to proration. The Company estimates that the amount of the Warrant
Cash Proceeds to be paid to the Significant Stockholders will be $10,734,375.
Three of the five members of the Board of Directors are partners of Welsh
Carson or J.H. Whitney.
Pursuant to the Merger Agreement, the Company has agreed for six years
after the Effective Time to indemnify all present directors and officers of
the Company and, subject to certain limitations, to maintain for six years a
directors' and officers' insurance and indemnification policy containing
terms and conditions which are not less advantageous to the directors and
officers than any such policy which may be in effect prior to the Effective
Time. See "Certain Provisions of the Merger Agreement--Indemnification and
Insurance."
INVESTORS' AGREEMENT
DLJMB has proposed that an Investors' Agreement (the "Investors'
Agreement"), at the Effective Time, be entered into between the Company, the
DLJMB Funds, the Institutional Investors and the members of management who
own shares of Company Common Stock (the "Management Shareholders"). It is
expected that the terms of the Investors' Agreement will restrict transfers
of the shares of Company Common Stock by the Management Shareholders and the
Institutional Investors, permit the Management Shareholders and the
Institutional Investors to participate in certain sales of shares of Company
Common Stock by the DLJMB Funds, require the Management Shareholders and the
Institutional Investors to sell shares of Company Common Stock in certain
circumstances should the DLJMB Funds choose to sell any such shares owned by
the DLJMB Funds, permit the Management Shareholders and the Institutional
Shareholders to purchase equity securities proposed to be issued by the
Company on a preemptive basis in the event the DLJMB Funds choose to acquire
any such equity securities, and provide for certain registration rights on
customary terms. It is also expected that the Investors' Agreement will
provide that the DLJMB Funds have the right to appoint a majority of the
members of the Board of Directors.
NASDAQ LISTING
For at least three years after the Effective Time, subject to certain
exceptions, MergerSub has agreed not to take any action to have the Company
Common Stock, which is currently traded on the Nasdaq National Market System,
delisted. There is a possibility that NASDAQ may act to delist the Company
Common Stock after the Merger. See "Risk Factors--Delisting; Loss of
Liquidity."
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<PAGE>
RESALE OF COMPANY COMMON STOCK FOLLOWING THE MERGER
The Company Common Stock to be retained in connection with the Merger will
be freely transferable, except that shares of Company Common Stock retained
by any stockholder who may be deemed to be an "affiliate" (as defined under
the Securities Act and generally including, without limitation, directors,
certain executive officers and beneficial owners of 10% or more of a class of
capital stock) of the Company for purposes of Rule 145 under the Securities
Act will not be transferable except in compliance with the Securities Act.
This Proxy Statement/Prospectus does not cover sales of Company Common Stock
retained by any person who may be deemed to be an affiliate of the Company.
MERGER FINANCING
In order to (i) fund the payment of the cash portion of the Merger
Consideration, the Option Cash Proceeds and the Warrant Cash Proceeds, (ii)
refinance certain outstanding indebtedness of the Company and (iii) pay the
fees and expenses incurred in connection with the Merger, Operating Co. is
expected to issue the Senior Subordinated Notes for approximately $150
million of gross proceeds in either the public or private markets and to
enter into the New Credit Facility. At the Effective Time, the Operating Co.
is expected to borrow all term loans available thereunder and approximately
$8.3 million of revolving loans. The remaining revolving loans will, subject
to a borrowing base, be available to fund the working capital requirements of
Operating Co. after the Merger. MergerSub is expected to raise an additional
$85 million through the issuance of the Discount Notes, which depending on
market conditions and other factors, may be sold together with the Public
Warrants (or, alternatively, through the issuance of Preferred Stock to the
DLJMB Funds and the Institutional Investors). At the Effective Time, the
Company will succeed to the obligations of MergerSub with respect to the
Discount Notes and any Public Warrants issued together with the Discount
Notes, and the Public Warrants will, by their terms, become exercisable for
an equal number of shares of Company Common Stock. The proceeds of the
issuance by Operating Co. from the issuance of the Senior Subordinated Notes
and the borrowings under the New Credit Facility will, in part, be paid to
the Company in the form of a dividend, and in part, as an inter-company loan.
On May 4, 1997, DLJ Merchant Banking II, Inc. received an executed commitment
letter from DLJ Capital Funding, Inc. to provide the New Credit Facility,
which will be syndicated by DLJ Capital Funding, Inc. Additionally, on May 4,
1997, DLJ Merchant Banking II, Inc. received a letter from Donaldson Lufkin &
Jenrette Securities Corporation ("DLJSC") with respect to the underwriting,
purchase or private placement of the Senior Subordinated Notes in which DLJSC
indicated that it was highly confident of its ability to sell the Senior
Subordinated Notes in the market. Each of the commitments or indications is
subject to customary conditions, including the negotiation, execution and
delivery of definitive documentation with respect to such commitment. As of
the date of this Proxy Statement/Prospectus, the terms of the New Credit
Facility, the Senior Subordinated Notes and the Discount Notes have not yet
been agreed.
The DLJMB Funds (and certain Institutional Investors) also expect to
purchase approximately 9,782,508 shares of common stock of MergerSub and may
acquire the DLJMB Warrants immediately prior to the Effective Time for
approximately $225 million. In lieu of acquiring the DLJMB Warrants, the
DLJMB Funds (and certain Institutional Investors) may acquire the Direct
Shares. The number of DLJMB Warrants issued or Direct Shares purchased will
be reduced by the number of Public Warrants issued (if any). Upon the
effectiveness of the Merger, the proceeds of such purchase will become an
asset of the Company, each share of MergerSub common stock, including the
Direct Shares if any, will become a share of Company Common Stock, and each
warrant to acquire MergerSub common stock will by its terms become
exercisable for an equal number of shares of Company Common Stock.
The DLJMB Funds expect that the Institutional Investors may acquire a
portion of the securities of MergerSub that would otherwise be purchased by
the DLJMB Funds as described in this Proxy Statement/Prospectus. In no event
would any such purchases reduce the fully diluted ownership by the DLJMB
Funds of Company Common Stock after the Effective Time to below a majority,
or limit the rights of the DLJMB Funds as described in "The Merger--Investors
Agreement."
CONVERSION OF MERGERSUB STOCK
In the Merger, each share of common stock of MergerSub issued and
outstanding immediately prior to the Effective Time will be converted into
one share Company Common Stock. As a result of the Merger, the DLJMB Funds
will hold 9,782,609 shares, or approximately 86.9% (or 77.2% on fully a
diluted basis) (or, if the DLJMB Funds purchase the Direct Shares, 11,199,789
shares, or approximately 88.4%), of the shares of Company Common Stock
expected to be outstanding after the Merger.
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<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following unaudited condensed consolidated pro forma financial data
(the "Pro Forma Financial Data") of the Company are based on historical
consolidated financial statements of the Company as adjusted to give effect
to the Company's acquisition of BABSS which occurred during the pro forma
period and to the Merger, including the Merger Financings and the application
of the proceeds thereof. The unaudited condensed consolidated pro forma
statement of operations data for the year ended June 30, 1996 gives effect to
the BABSS acquisition and the Merger, including the Merger Financing and the
application of the proceeds thereof, as if they had occurred as of July 1,
1995. The unaudited condensed consolidated pro forma statements of operations
data for the nine-month and three-month periods ended March 31, 1997 give
effect to the Merger, including the Merger Financing and the application of
the proceeds thereof, as if they had occurred as of July 1, 1996. The pro
forma balance sheet gives effect to the Merger, including the Merger
Financing and the application of the proceeds thereof, as if it had occurred
as of March 31, 1997. The acquisition of BABSS is already reflected in the
historical results for the nine-month and three-month periods ended March 31,
1997. The pro forma adjustments are based upon available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The Pro Forma Financial Data and accompanying notes should be
read in conjunction with the historical consolidated financial statements of
the Company, including the notes thereto, and other financial information
pertaining to the Company. The Pro Forma Financial Data do not purport to
represent what the Company's actual results of operations or actual financial
position would have been if the Merger, including the Merger Financing and
the application of the proceeds thereof, and BABSS acquisition in fact
occurred on such dates or to project the Company's results of operations or
financial position for any future period or date. The Pro Forma Financial
Data do not give effect to any transactions other than the BABSS Acquisition
and the Merger, including the Merger Financing and the application of the
proceeds thereof, discussed in the notes to the Pro Forma Financial Data
included elsewhere herein.
As a result of the proposed Merger, the Company and MergerSub will incur
various costs currently estimated to range between $95 million and $105
million (pretax) in connection with consummating the transaction. These costs
consist primarily of professional fees, registration costs, compensation
costs and other expenses. While the exact timing, nature and amount of these
costs are subject to change the Company anticipates that a one-time pretax
charge of approximately $76 million ($68 million after tax) will be recorded
in the quarter in which the Merger is consummated. As a result of the
foregoing, the Company expects to record a significant net loss in the
quarter in which the Merger is recorded. Because this loss will result
directly from the one-time charge incurred in connection with the Merger, and
this charge will be funded entirely through the proceeds of the Merger
Financing, the Company does not expect this loss to materially impact its
liquidity, ongoing operations or market position. For a discussion of the
consequences of the incurrence of indebtedness in connection with the Merger
Financing, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The pro forma adjustments were applied to the respective historical
consolidated financial statements of the Company to reflect and account for
the Merger as a recapitalization; accordingly, the historical basis of the
Company's assets and liabilities has not been impacted thereby.
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<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
-------------------------------------------------------------------------------
HISTORICAL RESULTS BABSS ACQUISITION THE MERGER
------------------------ ------------------------- ----------------------------
PRO FORMA,
THE COMPANY BABSS ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------- ---------- ------------- ----------- -------------- -------------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $540,191 $157,485 -- $697,676 $697,676
Cost of revenues....................... 402,316 127,049 $ (9,549)(1) 517,244 517,244
(1,250)(2)
83 (3)
(1,405)(4)
------------- ---------- ------------- ----------- -------------
Gross profit........................... 137,875 30,436 12,121 180,432 180,432
Operating Expenses:
Selling, general, and administrative
expenses............................. 69,237 27,152 (1,701)(1) 92,211 92,211
(500)(2)
83 (3)
(997)(4)
(1,063)(5)
Amortization and write off of
intangibles.......................... 15,673 625 (625)(6) 19,534 19,534
3,861 (7)
Employee severance and unutilized
lease cost........................... 3,592 (3,592)(8)
------------- ---------- ------------- ----------- -------------- -------------
Operating income....................... 49,373 2,659 16,655 68,687 68,687
Interest expense....................... (14,953) (539) 539 (9) (20,570) (70,547)(12) (71,504)
(5,617)(10) 19,640 (13)
Interest income........................ 239 52 291 291
------------- ---------- ------------- ----------- -------------- -------------
Income (loss) from continuing
operations before income taxes,
and extraordinary item................ 34,659 2,172 11,577 48,408 (50,934) (2,526)
(Provision) benefit for income taxes .. (13,870) 250 (5,743) (11) (19,363) 20,373 (11) 1,010
------------- ---------- ------------- ----------- -------------- -------------
Income (loss) from continuing
operations before extraordinary item . 20,789 2,422 5,834 29,045 (30,561) (1,516)
Extraordinary item--early retirement
of debt............................... (1,927) (1,927) (1,927)
------------- ---------- ------------- ----------- -------------- -------------
Net income (loss)...................... $ 18,862 $ 2,422 $ 5,834 $ 27,118 $(30,561) $ (3,443)
============= ========== ============= =========== ============== =============
Primary income (loss) per common
share:
Continuing operations................. $0.83 $1.15 $(0.12)
Net income............................ 0.75 1.08 (0.27)
Weighted average number of common
and common equivalent shares
outstanding.......................... 25,196 25,196 12,674
Fully diluted income (loss) per common
share:
Continuing operations................. $0.82 $1.14 $(0.12)
Net income............................ 0.74 1.07 (0.27)
Weighted average number of common
and common equivalent shares
outstanding.......................... 25,430 25,430 12,674
OTHER DATA:
EBITDA (14)........................... $114,816 $ 16,524 $147,805 $147,805
Amortization of repairable parts .... 37,869 10,598 48,467 48,467
Adjusted EBITDA (14).................. 76,947 5,926 99,338 99,338
Adjusted EBITDA margin (15)........... 14.2% 3.8% 14.2% 14.2%
Depreciation and amortization of
intangibles.......................... $ 23,982 $ 3,267 $ 30,651 $ 30,651
Repairable parts purchases ........... 63,514 10,773 74,287 74,287
Capital expenditures ................. 7,278 3,965 11,243 11,243
Cash interest expense................. 14,743 539 20,360 58,094
</TABLE>
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<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 1997
--------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C>
Revenues.......................................... $572,749 $572,749
Cost of revenues ................................. 427,969 427,969
------------ -----------
Gross profit...................................... 144,780 144,780
Operating Expenses:
Selling, general, and administrative expenses ... 78,578 78,578
Amortization and write off of intangibles ....... 16,861 16,861
Employee severance and unutilized lease cost .... 4,300 4,300
------------ -----------
Operating income.................................. 45,041 45,041
(52,929)(12)
Interest expense.................................. (11,097) 10,692 (13) (53,334)
Interest income................................... 393 393
------------ ------------- -----------
Income (loss) before income taxes................. 34,337 (42,237) (7,900)
(Provision) benefit for income taxes.............. (14,421) 17,739 (11) 3,318
------------ ------------- -----------
Net income (loss)................................. $ 19,916 $(24,498) $ (4,582)
============ ============= ===========
Primary income (loss) per common share:
Net income....................................... $0.66 $(0.36)
Weighted average number of common and common
equivalent shares outstanding................... 30,066 12,674
Fully diluted income (loss) per common share:
Net income....................................... $0.66 $(0.36)
Weighted average number of common and common
equivalent shares outstanding................... 29,958 12,674
OTHER DATA:
EBITDA (14)...................................... $121,680 $121,680
Amortization of repairable parts................. 45,642 45,642
Adjusted EBITDA (14)............................. 76,038 76,038
Adjusted EBITDA margin (15)...................... 13.3% 13.3%
Depreciation and amortization of intangibles .... $ 26,697 $ 26,697
Repairable parts purchases....................... 64,803 64,803
Capital expenditures............................. 6,093 6,093
Cash interest expense............................ 10,578 42,916
Ratio of Adjusted EBITDA to cash interest
expense......................................... 7.19x 1.77x
</TABLE>
60
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ -------------- -----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C>
Revenues.......................................... $205,070 $205,070
Cost of revenues ................................. 150,372 150,372
------------ -----------
Gross profit...................................... 54,698 54,698
Operating Expenses:
Selling, general, and administrative expenses ... 28,228 28,228
Amortization and write off of intangibles ....... 6,390 6,390
Operating income.................................. 20,080 20,080
Interest expense.................................. (4,005) (17,644)(12) (17,804)
3,845 (13)
Interest income................................... 316 316
------------ -------------- -----------
Income before income taxes........................ 16,391 (13,799) 2,592
(Provision) benefit for income taxes.............. (6,884) 5,795 (11) (1,089)
------------ -------------- -----------
Net income ....................................... $ 9,507 $ (8,004) $ 1,503
============ ============== ===========
Primary income per common share:
Net income....................................... $0.32 $0.12
Weighted average number of common and common
equivalent shares outstanding................... 30,062 12,674
Fully diluted income per common share:
Net income....................................... $0.32 $0.12
Weighted average number of common and common
equivalent shares outstanding................... 29,976 12,674
OTHER DATA:
EBITDA (14)...................................... $ 46,419 $ 46,419
Amortization of repairable parts................. 16,356 16,356
Adjusted EBITDA (14)............................. 30,063 30,063
Adjusted EBITDA margin (15)...................... 14.7% 14.7%
Depreciation and amortization of intangibles .... $ 9,983 $ 9,983
Repairable parts purchases....................... 28,815 28,815
Capital expenditures............................. 2,261 2,261
Cash interest expense............................ 3,642 14,141
Ratio of Adjusted EBITDA to cash interest
expense......................................... 8.25x 2.13x
</TABLE>
61
<PAGE>
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS DATA
(1) To reflect employee-related cost savings associated with the
redundancies created by the combination of the Company and BABSS.
Components of savings include, but are not limited to, salaries,
fringe benefits (except for those separately accounted for in Note 4
to the Pro Forma Combined Financial Data), travel and other.
Personnel reductions, totaling 405 employees, were implemented in the
field (260), operations support (90), sales (10) and administration
(45). These personnel reductions were announced and substantially
effected by December 31, 1995. The reductions were spread throughout
the United States with the only area of concentration being at the
respective headquarters locations in Horsham and Frazer,
Pennsylvania.
(2) To reflect rental expense reductions associated with facilities that
have been deemed "unutilized" as a result of the combination of the
Company and BABSS. See Note 17 of the Notes to the Company's
Consolidated Financial Statements. Included in such facilities are
the Company's former corporate headquarters, several large repair
depots (identified as surplus) as well as numerous duplicate field
offices throughout the United States. All remaining lease liabilities
associated with this unutilized space have either been included in
the purchase accounting of the BABSS acquisition or have been
expensed as part of the Company's net charge of $3.6 million recorded
in the results of operations for the twelve months ended June 30,
1996.
(3) To reflect additional depreciation resulting from a $2 million
increase in property and equipment valuation recorded as part of the
overall purchase price allocation of the BABSS acquisition, assuming
an estimated four-year depreciable life.
(4) To eliminate BABSS benefit expenses associated with pension and
postemployment benefits that are not part of the Company's benefit
package and have not, therefore, been incurred subsequent to the
acquisition. See Notes 3 and 11 of the Notes to DecisionOne
Corporation's Consolidated Financial Statements included elsewhere
herein. Both of these benefit programs ceased to exist as of the
acquisition date.
(5) To eliminate redundant corporate overhead allocations recorded in the
historical BABSS financial statements which have not been incurred
subsequent to the acquisition. BABSS was predominantly a
self-sufficient operation. The parent company of BABSS charged
corporate overhead to BABSS; these charges are not a component of the
ongoing expense structure of the Company.
(6) To eliminate intangible amortization expense recorded in the
historical BABSS financial statements.
(7) To reflect amortization expense resulting from the adjustments to
intangible assets recorded as part of the purchase price allocation
of BABSS. See Note 8 of the Notes to the Company's Consolidated
Financial Statements.
(8) To eliminate the non-recurring charge for employee severance and
unutilized lease costs.
(9) To eliminate intercompany interest expense charged by Bell Atlantic
Corporation, the parent company of BABSS, to BABSS.
(10) To reflect interest expense associated with the financing of the
BABSS acquisition. The assumed borrowing level associated with this
adjustment was $242.0 million, which is comprised of $212.0 million
of term loan debt and $30.0 million of notes to Significant
Stockholders (the "Affiliate Notes"). In April 1996, the Company used
the proceeds of its initial public offering to reduce the term loan
debt by $70.0 million and repay the Affiliate Notes. The interest
rate on the term loan was 8.75% per annum, and the effective interest
rate on the Affiliate Notes was 12.9% per annum. The interest rate
swap agreements entered into by the Company have not been given
effect in the calculation of these adjustments, based on
immateriality.
62
<PAGE>
The pro forma interest adjustment has been computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
---------------
(IN THOUSANDS)
<S> <C>
Term loan interest.............................................. $ 17,019
Affiliate Notes interest:
Stated rate (10.101% per annum)................................ 2,273
Amortization of original issue discount........................ 354
Less actual interest expense included in the historical results (14,029)
------------
Pro forma interest adjustment................................... $ 5,617
============
</TABLE>
(11) To adjust the income tax (provision) benefit for effect of all pro
forma entries above at an effective tax rate of 40% and 42% for the
year ended June 30, 1996 and nine-month and three-month periods ended
March 31, 1997, respectively. Utilization of the Company's net
operating loss ("NOLs") tax carryforwards have not been reflected in
the pro forma income tax expense. The recognition of the Company's
NOLs have been recorded in the historical financials, see Note 11 of
the Notes to the Company's Consolidated Financial Statements.
(12) To reflect the additional interest expense attributable to the Merger
Financings, as follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, 1996 MARCH 31, 1997 MARCH 31, 1997
--------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
New Credit Facility:
Term Loan A and Revolving credit
facility............................... $18,311 $13,733 $ 4,578
Term Loan B .......................... 12,750 9,563 3,188
Term Loan C .......................... 10,938 8,203 2,734
Senior Subordinated Notes ............. 15,375 11,531 3,844
Discount Notes ........................ 10,413 7,809 2,603
Amortization of deferred financing
costs................................ 2,787 2,090 697
--------------- -------------- --------------
$70,574 $52,929 $17,644
=============== ============== ==============
</TABLE>
The amounts and interest rates of the Merger Financings are as follows:
<TABLE>
<CAPTION>
ASSUMED
RATE
AMOUNT PER ANNUM
-------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
New Credit Facility:
Term Loan A and Revolving credit facility $221,950 LIBOR + 2.50%
Term Loan B ............................... 150,000 LIBOR + 2.75%
Term Loan C ............................... 125,000 LIBOR + 3.00%
Senior Subordinated Notes .................. 150,000 10.25%
Discount Notes ............................. 85,000 12.25%
</TABLE>
The effect of a 1/4% change in interest rates on the above Merger
Financings would be $1.8 million, $1.4 million, and $0.5 million for the
year ended June 30, 1996, nine months ended March 31, 1997 and the three
months ended March 31, 1997, respectively.
(13) To reflect the elimination of interest expense (including
amortization of deferred financing costs, which are not considered to
be material) attributable to indebtedness to be paid in connection
with the Merger as follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, 1996 MARCH 31, 1997 MARCH 31, 1997
--------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Existing Revolving Credit Facility
(including BABSS pro forma) ............. $19,640 $10,692 $3,845
</TABLE>
63
<PAGE>
(14) "EBITDA" represents income (loss) from continuing operations before
interest expense, interest income, income taxes, depreciation,
amortization of repairable parts inventory, amortization of
intangibles, amortization of discounts and capitalized expenses
related to indebtedness, and non-recurring employee severance charges
and provisions for unutilized leases. The Company's historical
financial results include amortization of repairable parts which is
unique to the industry in which the Company competes. "Adjusted
EBITDA" represents EBITDA reduced by amortization of repairable
parts. Neither EBITDA nor Adjusted EBITDA is intended to represent
cash flow from operations as defined by generally accepted accounting
principles and should not be considered as an alternative to net
income as an indicator of the Company's operating performance or to
cash flows as a measure of liquidity and may not be comparable to
similarly titled measures of other companies. Adjusted EBITDA is
presented because it is relevant to certain covenants expected to be
contained in the agreements relating to the Merger Financings and the
Company believes that Adjusted EBITDA is a more consistent indicator
of the Company's ability to meet its debt service, capital
expenditure and working capital requirements than EBITDA.
(15) Adjusted EBITDA margin measures Adjusted EBITDA as a percentage of
revenues.
64
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET DATA
AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...........$ 12,886 $ -- (1)$ 12,886
Accounts receivable, net............ 136,401 136,401
Inventories......................... 35,186 35,186
Other............................... 7,637 7,637
------------ -----------
Total current assets................ 192,110 192,110
Repairable parts, net............... 195,656 195,656
Property & equipment, net........... 33,283 33,283
Intangibles, net and other assets... 220,628 7,000 (2) 249,667
22,275 (3)
(236)(4)
------------ -------------- -----------
Total assets.......................$641,677 $ 29,039 $ 670,716
============ ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt...$ 4,756 $ 4,756
Accounts payable and accrued
expenses............................ 101,516 101,516
Deferred revenues................... 72,096 72,096
Other............................... 3,691 3,691
------------ -----------
Total current liabilities........... 182,059 182,059
New Credit Facility:
Revolving credit facility........... -- $ 26,950 (1) 26,950
Term loans.......................... -- 470,000 (1) 470,000
Senior Subordinated Notes .......... -- 150,000 (1) 150,000
Discount Notes...................... -- 85,000 (1) 85,000
Existing revolving credit facility.. 239,850 (239,850)(1) --
Other long term debt................ 2,065 2,065
Other liabilities................... 16,608 16,608
------------ -------------- -----------
Total liabilities.................. 440,582 492,100 932,682
------------ -------------- -----------
Total stockholders' equity
(deficit)........................... 201,095 (463,061)(5) (261,966)
------------ -------------- -----------
$641,677 $ 29,039 $ 670,716
============ ============== ===========
</TABLE>
65
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET DATA
(1) The net effect on cash and cash equivalents of the Merger, including
the Merger Financings and the application of the proceeds thereof as
of March 31, 1997, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
TOTAL SOURCES:
New Credit Facility:
Revolving credit facility(a)...................... $ 26,950
Term loans........................................ 470,000
Senior Subordinated Notes.......................... 150,000
Discount Notes..................................... 85,000
Common stock and warrants purchased by DLJMB
Funds............................................. 225,000
--------------
Total sources.................................... $956,950
==============
TOTAL USES:
Cash Merger Consideration ......................... $605,900
Option Cash Proceeds and Warrant Cash Proceeds ... 58,400
Repayment of existing revolving credit facility .. 239,850
Estimated transaction fees and expenses............ 52,800
--------------
Total uses....................................... $956,950
==============
</TABLE>
(2) Represents the anticipated tax benefit related to the transaction
fees and expenses. The anticipated tax benefit is limited due to the
expected non-deductibility of certain Merger transaction fees and
expenses and limitations on the recognition of deferred tax benefits
resulting from net operating losses expected to be reported in the
fiscal year ended June 30, 1998.
(3) Represents the portion of estimated transaction fees and expenses
attributable to the New Credit Facility, the Senior Subordinated
Notes and the Discount Notes, which will be recorded as deferred debt
issuance costs and will be amortized over the life of the debt to be
issued. Such estimated deferred debt issuance costs include estimated
fees and expenses payable to banks, and advisors and underwriting
discounts and commissions.
(4) The adjustment reflects the write-off deferred debt issuance costs
associated with the existing revolving credit financing.
(5) Represents the net change in stockholders' equity as a result of the
Merger, including the Merger Financings and the application of the
proceeds thereof:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash Merger Consideration ......................... $(605,900)
Common stock and warrants purchased by DLJMB
Funds............................................. 225,000
Transaction fees and expenses(b)................... (30,525)
Write-off of deferred debt issuance costs ......... (236)
Option Cash Proceeds (c) .......................... (45,400)
Warrant Cash Proceeds ............................. (13,000)
Tax benefit of above expense adjustments .......... 7,000
--------------
Total............................................ $(463,061)
==============
</TABLE>
(a) Based on borrowings of $239.9 million that were outstanding
under the existing revolving credit facility as of March 31,
1997. Any variation in the actual borrowings outstanding
under the existing revolving credit facility on the closing
date will result in a corresponding change in borrowings
under the New Credit Facility.
(b) Represents the portion of the total $52.8 million of
estimated transaction fees and expenses which will be
recorded as an expense immediately upon consummation of the
Merger and related transactions; the remainder of such
transaction fees and expenses are recorded in Note (3) above
as deferred debt issuance costs.
(c) Represents compensation costs of the Company resulting from
the cancellation of options which will be recorded as an
expense immediately upon consummation of the Merger and
related transactions.
66
<PAGE>
DESCRIPTION OF COMPANY CAPITAL STOCK
GENERAL
The Company is authorized by its Certificate of Incorporation, as amended,
to issue an aggregate of 100,000,000 shares of Common Stock, par value $.01
per share. The Company is authorized to issue up to 5,000,000 shares of
Preferred Stock, par value $1.00 per share, in one or more series. Currently,
there are no shares of Preferred Stock issued or outstanding. The following
is a summary of certain of the rights and privileges pertaining to Company
Common Stock and Preferred Stock. For a full description of the Company's
capital stock, reference is made to the Company's Certificate of
Incorporation, as amended, currently in effect, a copy of which is on file
with the Commission.
COMMON STOCK
Voting Rights
The holders of Company Common Stock are entitled to one vote per share on
all matters submitted for action by the shareholders. There is no provision
for cumulative voting with respect to the election of directors. Accordingly,
the holders of more than 50% of the shares of Company Common Stock can, if
they choose to do so, approve the Merger.
Dividend Rights
Holders of Company Common Stock are entitled to share equally, share for
share, if dividends are declared on Common Stock, whether payable in cash,
property or securities of the Company.
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, after payment has been made from the funds
available therefore to the holders of Preferred Stock, if any, for the full
amount to which they are entitled, the holders of the shares of Company
Common Stock are entitled to share equally, share for share, in the assets
available for distribution. Holders of Company Common Stock have no
conversion, redemption or preemptive rights.
PREFERRED STOCK
The Board of Directors of the Company has the authority to issue shares of
the Company's Preferred Stock in one or more series, and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any
unissued shares of Preferred Stock.
The Company's Senior Exchangeable Preferred Stock (the "Senior Preferred
Stock"), if issued, will rank senior to (a) all classes of Company Common
Stock and (b) each other class of capital stock or series of preferred stock
issued by the Company the terms of which specifically provide that such
series will rank junior to the Senior Preferred Stock or which do not specify
their rank ("Junior Securities").
Dividends
The certificate of designations for the Senior Preferred Stock provides
that a quarterly dividend will be payable at a 13% annual rate. Prior to the
fifth anniversary of the issuance of the Senior Preferred Stock, quarterly
dividends will accrete on a compound basis and increase the liquidation
preference of the Senior Preferred Stock. At the election of the holders, the
dividends may be paid in kind.
Liquidation Preference
The Senior Preferred Stock will have a liquidation preference of $25.00
per share, plus accreted dividends, plus accrued and unpaid cash dividends,
if any.
Voting Rights
Holders of the Senior Preferred Stock will have no general voting rights,
except (i) as required by law and (ii) holders of a majority of the
outstanding shares of Senior Preferred Stock, voting as a separate class,
will (a) upon the failure of the Company to (1) pay dividends, in cash
(following the date on which
67
<PAGE>
dividends become payable in cash), for more than six consecutive quarters,
(2) satisfy any mandatory redemption obligation (including, without
limitation, in connection with a change of control (as described below)) with
respect to the Senior Preferred Stock (regardless of whether the reason for
such failure is lack of legally available funds), (3) make any offer to
redeem the Senior Preferred Stock upon a change of control within 30 days
following the change of control date (as defined in the certificate of
designations for Senior Preferred Stock) related thereto or (4) comply with
the certain other covenants, be entitled to elect two members to the board of
directors of the Company, (b) have the right to approve each issuance by the
Company of any other class of capital stock or series of preferred stock
issued by the Company after the issuance of the Senior Preferred Stock the
terms of which specifically provide that such series will rank on a parity
with, or senior to, the Senior Preferred Stock, except that without the
approval of the holders of Senior Preferred Stock, the Company may issue and
have outstanding shares of parity securities issued from time to time in
exchange for, or the proceeds of which are used to redeem or repurchase, all
of the shares of Senior Preferred Stock, and (c) have the right to approve
certain mergers, consolidations and sales of assets by the Company unless, in
the case of a merger or consolidation, the consolidated net worth of the
surviving corporation immediately after the transaction is at least equal to
that of the Company immediately prior to the transaction.
Redemption Provisions
Mandatory Redemption: The Company will be (subject to the legal
availability of funds) required to redeem the Senior Preferred Stock on
August 15, 2007 at a redemption price equal to the liquidation preference per
share, plus accrued and unpaid cash dividends, if any, to the date of
redemption.
Optional Redemption: Subject to certain restrictions, the Senior Preferred
Stock will be (subject to legal availability of funds) redeemable at any time
after August 15, 2000 at the option of the Company, in whole or in part, at
the redemption prices set forth in the certificate of designations for the
Senior Preferred Stock plus accrued and unpaid cash dividends, if any, to the
date of redemption.
Change of Control
In the event of a change of control (as defined in the certificate of
designations for the Senior Preferred Stock), each holder of Senior Preferred
Stock will have the right to require the Company to repurchase its Senior
Preferred Stock at a purchase price equal to 101% of the liquidation
preference of the Senior Preferred Stock plus accrued and unpaid cash
dividends, if any.
Exchange Feature
The Senior Preferred Stock may, subject to certain conditions, be
exchanged into the Company's 13% Subordinated Exchange Debentures due 2007
(the "Exchange Debentures") (which shall have terms similar to those of the
Senior Preferred Stock) at the option of the Company and so long as no shares
of Senior Preferred Stock are held at the time by DLJMB or its affiliates, in
whole or in part, on any scheduled dividend payment date at a rate of one
dollar (or fraction thereof) principal amount of Exchange Debentures for each
dollar (or fraction thereof) in liquidation preference (and for each dollar
(or fraction thereof) of accrued and unpaid cash dividends, if any) of Senior
Preferred Stock held by such holder at the time of such exchange.
Certain Covenants
The certificate of designations for the Senior Preferred Stock will
contain certain customary covenants which (i) limit the ability of the
Company to redeem or repurchase Junior Securities and pay dividends thereon,
(ii) prohibit, under certain circumstances, certain mergers and
consolidations, or the sales of assets by the Company, in the manner
described under "Voting Rights" above, and (iii) require the Company to
deliver certain reports and information to the holders.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
The Company is a Delaware corporation and subject to Section 203 of the
DGCL. Because the Board of Directors of the Company approved the Merger
Agreement and Voting Agreement prior to the
68
<PAGE>
execution thereof, the restrictions set forth in Section 203 of the DGCL will
not apply to the DLJMB Funds with respect to the Merger or the other
transactions contemplated by the Merger Agreement and the Voting Agreeement.
However, in general, Section 203 prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's
outstanding voting stock) from engaging in a "business combination" (as
defined) with a Delaware corporation for three years following the date such
person became an interested stockholder, subject to certain exceptions such
as transactions done with the approval of the Board of Directors and of the
holders of at least two-thirds of the outstanding shares of voting stock not
owned by the interested stockholder. The existence of this provision would be
expected to have an anti-takeover effect, including possibly discouraging
takeover attempts that might result in a premium over the market price for
the shares of Company Common Stock.
CAPITAL STOCK OF THE COMPANY FOLLOWING THE MERGER
Common Stock and Preferred Stock
If the Merger is approved by the requisite vote of the stockholders of
Company Common Stock at the Special Meeting, at the Effective Time of the
Merger the Certificate of Incorporation of the Company, as amended, will be
amended in accordance with the terms set forth as Exhibit A to the Merger
Agreement, which is attached hereto as Annex A, and, as so amended, until
thereafter further amended as provided therein and under the Merger
Agreement, will be the certificate of incorporation of the Company following
the Merger. The Amended and Restated Certificate of Incorporation will amend
the total number of shares of capital stock that the Company is authorized to
issue from 100,000,000 to 30,000,000 shares of Common Stock and from
5,000,000 to 15,000,000 shares of Preferred Stock. The Amended and Restated
Certificate of Incorporation will also amend the par value of the shares of
Preferred Stock from $1.00 per share to $.01 per share. The terms of the
Preferred Stock of the Company will be the same as the terms of the Company's
Senior Preferred Stock described above.
Warrants
Each DLJMB Warrant (if issued) will entitle the holder thereof to purchase
one share of Company Common Stock at an exercise price of not less than $0.01
per share subject to customary antidilution provisions and other customary
terms. The DLJMB Warrants will be exercisable at any time prior to 5:00 p.m.,
New York City time, on August 15, 2007. The exercise of the DLJMB Warrants
also will be subject to applicable federal and state securities laws. Each
Public Warrant will have the same terms as the DLJMB Warrants, other than the
exercise price.
The DLJMB Funds will be entitled to request six demand registrations with
respect to the DLJMB Warrants (together with all or any portion of the Senior
Preferred Stock owned by them) and the Company Common Stock owned by them,
which demand registration rights will be immediately exercisable subject to
customary deferral and cutback provisions. In addition, the holders of the
DLJMB Warrants will also be entitled to unlimited piggyback registration
rights with respect to such Warrants (together with all or any portion of the
Senior Preferred Stock) subject to customary cutback provisions. If the DLJMB
Warrants are sold in connection with a registered sale or a sale under Rule
144A of the Securities Act of the Senior Preferred Stock, the Company will
(not earlier than the time of the Company registers the Senior Preferred
Stock (or exchange securities in the case of a Rule 144A offering)) file a
shelf registration statement covering the Company Common Stock underlying
such DLJMB Warrants.
Transfer Agent and Registrar
The transfer agent and registrar for the Company Common Stock following
the Merger will be Chase Mellon Shareholder Services, L.L.C.
In addition, the Bylaws of the MergerSub as in effect at the Effective
Time of the Merger will be the Bylaws of the Company following the Merger
until thereafter changed or amended as provided therein or by applicable law.
69
<PAGE>
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The following summarizes the material provisions of the Merger Agreement
which appears as Annex A to this Proxy Statement/Prospectus and is
incorporated herein by reference. Such summary is qualified in its entirety
by reference to the Merger Agreement.
THE MERGER
The Merger Agreement provides that as soon as practicable after
satisfaction or waiver of all conditions to the Merger, the Company and
MergerSub will file a certificate of merger with the Secretary of State of
the State of Delaware and make all other filings or recordings required by
Delaware Law in connection with the Merger. The Merger will become effective
at such time as the certificate of merger is duly filed with the Secretary of
State of the State of Delaware or at such later time as is specified in the
certificate of merger. From and after the Effective Time, the Surviving
Corporation will possess all the rights, privileges, powers and franchises
and be subject to all of the restrictions, disabilities and duties of the
Company and MergerSub, all as provided under Delaware Law.
At the Effective Time each Share held by the Company as treasury stock or
owned by MergerSub immediately prior to the Effective Time will be canceled,
and no payment will be made with respect thereto; each share of common stock,
par value $.01 per share, of MergerSub outstanding immediately prior to the
Effective Time will be converted into and become one share of common stock of
the Surviving Corporation with the same rights, powers and privileges as the
shares so converted; each share of preferred stock, par value $.01 per share,
of MergerSub ("MergerSub Preferred Stock"), if any, outstanding immediately
prior to the Effective Time will be converted into and become one share of
preferred stock of the Surviving Corporation with the same rights, powers and
privileges as the shares of preferred stock so converted; each outstanding
warrant to purchase shares of MergerSub common stock will be automatically
amended to constitute a warrant to acquire shares of common stock of the
Surviving Corporation on the same terms and conditions as the MergerSub
Warrant; and each share of Common Stock outstanding immediately prior to the
Effective Time will, except as otherwise provided with respect to Shares as
to which appraisal rights have been exercised, be converted into the
following: for each such Share with respect to which an election to retain
Company Common Stock has been effectively made, revoked or lost, the right to
retain one share of Company Common Stock, par value $.01 per share and for
each such Share (other than Stock Electing Shares), the right to receive in
cash from MergerSub an amount equal to $23.00.
ELECTIONS
Each person who, on or prior to the Election Date referred to below, is a
record holder of Shares will be entitled, with respect to such Shares, to
make an unconditional election on or prior to such Election Date to retain
the Stock Election Price, on the basis hereinafter set forth. "Election"
means a Stock Election.
MergerSub will prepare and mail a form of election, which form will be
subject to the reasonable approval of the Company (the "Form of Election"),
with the Proxy Statement/Prospectus to the record holders of Shares as of the
record date for the Special Meeting called for the purpose of voting on the
approval and adoption of the Merger Agreement and the Merger. Such Form of
Election shall be used by each record holder of Shares who makes an Election
with respect to any or all its Shares. The Company will use its reasonable
best efforts to make the Form of Election and the Proxy Statement/Prospectus
available to all persons who become holders of Shares during the period
between such record date and the Election Date referred to below. Any such
holder's Election shall have been properly made only if the Exchange Agent
shall have received at its designated office, by 5:00 p.m., New York City
time on the business day (the "Election Date") next preceding the date of the
Special Meeting, a Form of Election properly completed and signed and
accompanied by certificates for the Shares to which such Form of Election
relates, duly endorsed in blank or otherwise in form acceptable for transfer
on the books of the Company (or by an appropriate guarantee of delivery of
such certificates as set forth in such Form of Election from a firm which is
a member of a registered national securities exchange or of the National
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Association of Securities Dealers, Inc. or a commercial bank or trust company
having an office or correspondent in the United States, provided such
certificates are in fact delivered to the Exchange Agent within five New York
Stock Exchange trading days after the date of execution of such guarantee of
delivery).
Any Form of Election may be revoked by the holder submitting it to the
Exchange Agent only by written notice received by the Exchange Agent (i)
prior to 5:00 p.m., New York City time on the Election Date or (ii) after the
date of the Proxy Statement/Prospectus, if (and to the extent that) the
Exchange Agent is legally required to permit revocations, and the Effective
Time shall not have occurred prior to such date. In addition, all Forms of
Election will automatically be revoked if the Exchange Agent is notified in
writing by MergerSub or the Company that the Merger has been abandoned or the
Merger Agreement has been terminated. If a Form of Election is revoked, the
certificate or certificates (or guarantees of delivery, as appropriate) for
the Shares to which such Form of Election relates will be promptly returned
to the stockholder submitting the same to the Exchange Agent.
The determination of the Exchange Agent will be binding whether or not
Elections have been properly made or revoked with respect to Shares and when
elections and revocations were received by it. If the Exchange Agent
determines that any Election either (x) was not properly made or (y) was not
submitted to or received by the Exchange Agent with respect to any Shares,
such Shares will be converted into Merger Consideration. The Exchange Agent
shall also make all computations as to the allocation and the proration
contemplated below, and any such computation shall be conclusive and binding
on the holders of Shares. See "Certain Provisions of the Merger
Agreement--Proration of Election Price." The Exchange Agent may, with the
mutual agreement of MergerSub and the Company, make such rules as are
necessary or desirable fully to effect such elections.
PRORATION OF ELECTION PRICE
Subject to the cancellation of each Share held by the Company as treasury
stock or owned by MergerSub, or Appraisal Shares, the number of Shares to be
converted into the right to retain Company Common Stock at the Effective Time
will be the sum of (A) 1,474,345 plus (B) 5.3% of the number of Shares, if
any, issued after April 21, 1997 but prior to the Effective Time in respect
of Options (as defined below) or Warrants (as defined below) (excluding for
this purpose any Shares held as treasury stock or owned by Merger Sub which
will be canceled).
If the number of Stock Electing Shares exceeds in the aggregate the Stock
Election Number, then the Stock Electing Shares for each Stock Election will
be converted into the right to retain the Stock Election Price or the right
to receive the Cash Election Price in the following manner: (i) a stock
proration factor shall be determined by dividing the Stock Election Number by
the total number of Stock Electing Shares; (ii) the number of Stock Electing
Shares covered by each Stock Election to be converted into the right to
retain the Stock Election Price will be determined by multiplying the Stock
Proration Factor by the total number of Stock Electing Shares covered by such
Stock Election; (iii) each Stock Electing Share, other than any Shares
converted into the right to receive the Stock Election Price in accordance
with clause (ii) above, shall be converted into the right to receive the Cash
Election Price as if such shares were not Stock Electing Shares.
If the number of Stock Electing Shares is equal to the Stock Election
Number, then all Stock Electing Shares shall be converted into the right to
receive the Stock Election Price and all Shares other than Stock Electing
Shares will be converted into the right to receive the Cash Election Price.
If the number of Stock Electing Shares is less in the aggregate than the
Stock Election Number, then: (i) all Stock Electing Shares will be converted
into the right to receive the Stock Election Price ; (ii) such number of
Shares with respect to which a Stock Election is not in effect ("Non-Electing
Shares") will be converted into the right to retain the Stock Election Price
(and a Stock Election shall be deemed to have been made with respect to such
Shares) in the following manner: (A) the Cash Proration Factor will be
determined by dividing (x) the difference between the Stock Election Number
and the number of Stock Electing Shares, by (y) the total number of Shares
other than Stock Electing Shares and Appraisal Shares (as defined below); and
(B) the number of Shares in addition to Stock Electing Shares to be converted
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into the right to retain the Stock Election Price will be determined by
multiplying the Cash Proration Factor by the total number of Shares other
than Stock Electing Shares and Appraisal Shares so that the aggregate number
of Stock Electing Shares and Non-Electing Shares converted into such right
equals the Stock Election Number.
Subject to the provisions of clause (ii) of the preceding paragraph, the
Exchange Agent will determine (on a consistent basis among stockholders who
held Shares as to which they did not make the Stock Election pro rata to the
number of shares as to which they did not make such Stock Election) which
Non-Electing Shares shall be converted into the right to receive the Stock
Election Price.
SURRENDER AND PAYMENT
As soon as reasonably practicable as of or after the Effective Time,
MergerSub will deposit with the Exchange Agent, for the benefit of the
holders of Shares, for exchange, the Merger Consideration. For purposes of
determining the Merger Consideration to be made available, MergerSub will
assume that no holder of Shares will perfect his right to appraisal of his
Shares. Promptly after the Effective Time, MergerSub will send, or will cause
the Exchange Agent to send, to each holder of Shares at the Effective Time a
letter of transmittal for use in such exchange (which will specify that the
delivery will be effected, and risk of loss and title will pass, only upon
proper delivery of the certificates representing Shares to the Exchange
Agent).
Each holder of Shares that have been converted into a right to receive the
Merger Consideration, upon surrender to the Exchange Agent of a certificate
or certificates representing such Shares, together with a properly completed
letter of transmittal covering such Shares, will be entitled to receive the
Merger Consideration payable in respect of such Shares. Until so surrendered,
each such certificate will, after the Effective Time, represent for all
purposes, only the right to receive such Merger Consideration. No interest
will be paid or will accrue on any cash payable as Merger Consideration or in
lieu of any fractional shares of Company Stock.
If any portion of the Merger Consideration is to be paid to a person other
than the registered holder of the Shares represented by the certificate or
certificates surrendered in exchange therefor, it will be a condition to such
payment that the certificate or certificates so surrendered will be properly
endorsed or otherwise be in proper form for transfer and that the person
requesting such payment will pay to the Exchange Agent any transfer or other
taxes required as a result of such payment to a person other than the
registered holder of such Shares or establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
After the Effective Time, there will be no further registration of
transfers of Shares. If, after the Effective Time, certificates representing
Shares are presented to the Surviving Corporation, they will be canceled and
exchanged for the Merger Consideration provided for, and in accordance with
the procedures set forth, in the Merger Agreement.
Any portion of the Merger Consideration made available to the Exchange
Agent that remains unclaimed by the holders of Shares six months after the
Effective Time will be returned to MergerSub, upon demand, and any such
holder who has not exchanged his Shares for the Merger Consideration in
accordance with the terms of the Merger Agreement prior to that time will
thereafter look only to MergerSub for payment of the Merger Consideration in
respect of his Shares. Notwithstanding the foregoing, MergerSub will not be
liable to any holder of Shares for any amount paid to a public official
pursuant to applicable abandoned property laws. Any amounts remaining
unclaimed by holders of Shares two years after the Effective Time (or such
earlier date immediately prior to such time as such amounts would otherwise
escheat to or become property of any governmental entity) will, to the extent
permitted by applicable law, become the property of MergerSub free and clear
of any claims or interest of any person previously entitled thereto.
Any portion of the Merger Consideration made available to the Exchange
Agent to pay for Shares for which appraisal rights have been perfected will
be returned to MergerSub, upon demand.
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No dividends or other distributions with respect to Company Common Stock
with a record date after the Effective Time will be paid to the holder of any
unsurrendered certificate for Shares with respect to the shares of Company
Common Stock represented thereby and no cash payment in lieu of fractional
shares will be paid to any such holder until the surrender of such
certificate. Subject to the effect of applicable laws, following surrender of
any such certificate, there will be paid to the holder of the certificate
representing whole shares of Company Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender or as promptly
after the sale of the Excess Shares (as defined below) as practicable, the
amount of any cash payable in lieu of a fractional share of Company Common
Stock to which such holder is entitled and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of Company Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with
a record date after the Effective Time but prior to such surrender and a
payment date subsequent to such surrender payable with respect to such whole
shares of Company Common Stock.
Shares which are issued and outstanding immediately prior to the Effective
Time and which are held by a holder who has not voted such shares in favor of
the Merger, who will have delivered a written demand for appraisal of such
Shares in the manner provided by the DGCL and who, as of the Effective Time,
will not have effectively withdrawn or lost such right to appraisal will not
be converted into a right to receive the Merger Consideration. The holders
thereof will be entitled only to such rights as are granted by Section 262 of
the DGCL. Each holder of Appraisal Shares who becomes entitled to payment for
such Shares pursuant to Section 262 of the DGCL will receive payment therefor
from the Surviving Corporation in accordance with the DGCL; provided,
however, that (i) if any such holder of Appraisal Shares shall have failed to
establish his entitlement to appraisal rights as provided in Section 262 of
the DGCL, if any such holder of Appraisal Shares shall have effectively
withdrawn his demand for appraisal of such Shares or lost his right to
appraisal and payment for his Shares under Section 262 of the DGCL or if
neither any holder of Appraisal Shares nor the Surviving Corporation shall
have filed a petition demanding a determination of the value of all Appraisal
Shares within the time provided in Section 262 of the DGCL, such holder will
forfeit the right to appraisal of such Shares and each such Share will be
treated as if it had been a Non-Electing Share and had been converted, as of
the Effective Time, into a right to receive the Merger Consideration, without
interest thereon, from the Surviving Corporation. The Company will give
MergerSub prompt notice of any demands received by the Company for appraisal
of Shares, and MergerSub will have the right to participate in all
negotiations and proceedings with respect to such demands. The Company will
not, except with the prior written consent of MergerSub, make any payment
with respect to, or settle or offer to settle, any such demands. See also
Dissenting Stockholders' Rights."
Immediately prior to the Effective Time, each outstanding option to
acquire Shares granted to employees and directors, whether vested or not (the
"Options") will be canceled and, in lieu thereof, as soon as reasonably
practicable as of or after the Effective Time, the holders of such Options
will receive, with respect to each Option, a cash payment in an amount equal
to the product of (x) the excess, if any, of $23.00 over the exercise price
of such Option multiplied by (y) the number of Shares subject to such Option.
Alternatively, a portion of the Options may be converted into options to
purchase common stock of the Surviving Corporation. Prior to the Effective
Time, the Company will (i) obtain any consents from holders of options to
purchase Shares granted under the Company's stock option or compensation
plans or arrangements and (ii) make any amendments to the terms of such stock
option or compensation plans or arrangements that are necessary to give
effect to the transactions contemplated above. Notwithstanding the foregoing,
payment may be withheld in respect of any Option until necessary consents are
obtained.
The Company will use its reasonable best efforts to cause holders of all
Existing Warrants to surrender such Existing Warrants to the Company prior to
the Effective Time in exchange for payment immediately after the Effective
Time of an amount equal to the difference between the exercise price in
respect of each Share for which such Existing Warrant is exercisable and
$23.00, multiplied by the number of Shares subject to such Existing Warrant,
and upon such other terms and conditions satisfactory to MergerSub. With
respect to Existing Warrants that are not surrendered prior to the Effective
Time, after the Effective Time, the Surviving Corporation will comply with
all applicable terms of such unsurrendered Existing Warrants.
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No certificates or scrip representing fractional shares of Company Common
Stock will be issued upon the surrender for exchange of certificates
representing Shares, and such fractional share interests will not entitle the
owner thereof to vote or to any rights of a stockholder of the Surviving
Corporation.
Each holder of Shares exchanged pursuant to the Merger who would otherwise
have been entitled to receive a fraction of a share of Company Common Stock
(after taking into account all Shares delivered by such holder) will receive,
in lieu thereof, a cash payment (without interest) representing such holder's
proportionate interest in the net proceeds from the sale by the Exchange
Agent (following the deduction of applicable transaction costs), on behalf of
all such holders, of the shares (the "Excess Shares") of Company Common Stock
representing such fractions. Such sale will be made as soon as practicable
after the Effective Time.
THE SURVIVING CORPORATION
The certificate of incorporation of the Company in effect immediately
prior to the Effective Time will be amended in accordance with Exhibit A to
the Merger Agreement, and as so amended, will be the certificate of
incorporation of the Surviving Corporation until thereafter amended in
accordance with applicable law. The bylaws of MergerSub in effect at the
Effective Time will be the bylaws of the Surviving Corporation until amended
in accordance with applicable law. From and after the Effective Time, until
successors are duly elected or appointed and qualified in accordance with
applicable law (a) the directors of MergerSub at the Effective Time will be
the directors of the Surviving Corporation, and (b) the officers of the
Company at the Effective Time will be the officers of the Surviving
Corporation. See "Management Following the Merger."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
the Company relating, with respect to the Company and its subsidiaries, to,
among other things, (a) organization, standing and similar corporate matters;
(b) the authorization, execution, delivery, performance and enforceability of
the Merger Agreement; (c) the Company's capital structure; (d) documents
filed by the Company with the Commission and the accuracy of information
contained therein; (e) the Company's financial statements; (f) the accuracy
of information supplied by the Company in connection with this Proxy
Statement/ Prospectus; (g) the absence of certain changes or events since the
date of the most recent audited financial statements filed with the
Commission, including material adverse changes with respect to the Company
and the absence of material undisclosed liabilities; (h) pending or
threatened material litigation; (i) filing of tax returns and payment of
taxes; (j) benefit plans and other matters relating to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and employment
matters; (k) certain labor matters and compliance with applicable laws; (l)
possession of required permits; (m) brokers' fees and expenses; (n)
repairable parts; (o) the absence of a rights plan or similar preferred stock
purchase plan; (p) ownership of or rights to use Company intellectual
property; and (q) the inapplicability of certain restrictions of Section 203
of the DGCL.
The Merger Agreement also contains customary representations and
warranties of MergerSub relating to, among other things, (a) organization,
standing and similar corporate matters; (b) authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
matters; (c) accuracy of information supplied by Merger Sub in connection
with this Proxy Statement/Prospectus; (d) brokers' fees and expenses; (e)
financing commitments in connection with the Merger; and (f) MergerSub's
capital structure.
CERTAIN PRE-CLOSING COVENANTS
Pursuant to the Merger Agreement, the Company has agreed that prior to the
Effective Time, the Board of Directors of the Company will not approve or
authorize any action that would allow the Company and its subsidiaries to
carry on their respective businesses other than in the ordinary and usual
course of business and consistent with past practice or any action that would
prevent the Company and its subsidiaries from using their best efforts to
preserve intact their respective present business
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organizations, maintain in effect all federal, state and local licenses,
approvals and authorizations, including, without limitation, all permits that
are required for the Company or any of its subsidiaries to carry on its
business, keep available the services of their respective key officers and
employees and maintain satisfactory relationships with their respective
customers, lenders, suppliers and others having business relationships with
any of them. Without limiting the generality of the foregoing, and except as
otherwise provided in the Merger Agreement, without the prior written consent
of MergerSub, prior to the Effective Time, the Board of Directors of the
Company will not, nor will it authorize or direct the Company or any
subsidiary, directly or indirectly, to: adopt or propose any change in its
certificate of incorporation or bylaws (other than as contemplated in the
Merger Agreement); except pursuant to existing agreements or arrangements
acquire (by merger, consolidation or acquisition of stock or assets) any
material corporation, partnership or other business organization or division
thereof, or sell, lease or otherwise dispose of a material subsidiary or a
material amount of assets or securities; make any investment whether by
purchase of stock or securities, contributions to capital or any property
transfer, or purchase any property or assets of any other individual or
entity other than the purchase of inventory, supplies, office equipment or
repairable parts in the ordinary course of business, with certain exceptions,
in the aggregate for an amount in excess of $3,000,000; waive, release,
grant, or transfer any rights of material value; modify or change in any
material respect any existing material license, lease, contract, or other
document; with certain exceptions, assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for the obligations of any other person which, are in excess of $1,500,000 in
the aggregate; make any loans, advances or capital contributions to, or
investments in, any other person which, are in excess of $1,000,000 in the
aggregate or make any capital expenditure which, individually, is in excess
of $1,000,000 or, in the aggregate with any other such expenditure, are in
excess of $5,000,000; take any action that would make any representation and
warranty of the Company made in the Merger Agreement inaccurate in any
respect at, or as of any time prior to, the Effective Time, or omit to take
any action necessary to prevent any such representation or warranty from
being inaccurate in any respect at any such time; split, combine or
reclassify any shares of its capital stock, declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, other than cash
dividends and distributions by a wholly owned subsidiary of the Company to
the Company or to a subsidiary all of the capital stock which is owned
directly or indirectly by the Company, or redeem, repurchase or otherwise
acquire or offer to redeem, repurchase, or otherwise acquire any of its
securities or any securities of its subsidiaries; adopt or amend any bonus,
profit sharing, compensation, severance, termination, stock option, pension,
retirement, deferred compensation, employment or employee benefit plan,
agreement, trust, plan, fund or other arrangement for the benefit and welfare
of any director, officer or employee, or (except for normal increases in the
ordinary course of business that are consistent with past practices and that,
in the aggregate, do not result in a material increase in benefits or
compensation expense to the Company or any subsidiary) increase in any manner
the compensation or fringe benefits of any director, officer or employee or
pay any benefit not required by any existing plan or arrangement (including,
without limitation, the granting of stock options or stock appreciation
rights or the removal of existing restrictions in any benefit plans or
agreements); revalue in any material respect any significant portion of its
assets, including, without limitation, writing down the value of inventory in
any material manner or write-off of notes or accounts receivable in any
material manner; pay, discharge or satisfy any material claims, liabilities
or obligations (whether absolute, accrued, asserted or unasserted, contingent
or otherwise) other than the payment, discharge or satisfaction in the
ordinary course of business, consistent with past practices, of liabilities
reflected or reserved against in the consolidated financial statements of the
Company or incurred in the ordinary course of business, consistent with past
practices; make any tax election with respect to or settle or compromise any
material income tax liability; take any action other than in the ordinary
course of business and consistent with past practices with respect to
accounting policies or procedures; or agree or commit to do any of the
foregoing.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that neither the Company nor any of its
subsidiaries will (whether directly or indirectly through advisors, agents or
other intermediaries), nor will the Company or any of its subsidiaries
authorize or permit any of its or their officers, directors, agents,
representatives, advisors
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or subsidiaries to, (a) solicit, initiate or take any action knowingly to
facilitate the submission of inquiries, proposals or offers from any Third
Party (as defined below) (other than MergerSub) relating to (i) any
acquisition or purchase of 20% or more of the consolidated assets of the
Company and its subsidiaries or of over 20% of any class of equity securities
of the Company or any of its subsidiaries, (ii) any tender offer (including a
self tender offer) or exchange offer that if consummated would result in any
Third Party beneficially owning 20% or more of any class of equity securities
of the Company or any of its subsidiaries, (iii) any merger, consolidation,
business combination, sale of substantially all assets, recapitalization,
liquidation, dissolution or similar transaction involving the Company, or any
of its subsidiaries whose assets, individually or in the aggregate,
constitute more than 20% of the consolidated assets of the Company, other
than the transactions contemplated by the Merger Agreement, or (iv) any other
transaction the consummation of which would, or could reasonably be expected
to impede, interfere with, prevent or materially delay the Merger or which
would, or could reasonably be expected to, materially dilute the benefits to
MergerSub of the transactions contemplated hereby (collectively, "Acquisition
Proposals"), or agree to or endorse any Acquisition Proposal, or (b) enter
into or participate in any discussions or negotiations regarding any of the
foregoing, or furnish to any Third Party any information with respect to its
business, properties or assets or any of the foregoing, or otherwise
cooperate in any way with, or knowingly assist or participate in, facilitate
or encourage, any effort or attempt by any Third Party (other than MergerSub)
to do or seek any of the foregoing; provided, however, that the foregoing
will not prohibit the Company (either directly or indirectly through
advisors, agents or other intermediaries) from (i) publicly disclosing in a
press release, in a general manner, the Company's permitted activities under
the Merger Agreement, (ii) furnishing information pursuant to an appropriate
confidentiality letter (which letter will not be less favorable to the
Company in any material respect than the Confidentiality Agreement between
DLJMB Inc. and the Company, and a copy of which will be provided for
informational purposes only to MergerSub) concerning the Company and its
businesses, properties or assets to a Third Party who has made a bona fide
Acquisition Proposal, (iii) engaging in discussions or negotiations with such
a Third Party who has made a bona fide Acquisition Proposal, (iv) following
receipt of a bona fide Acquisition Proposal, taking and disclosing to its
stockholders a position contemplated by Rule 14d-9 or Rule 14e-2(a) under the
Exchange Act or otherwise making disclosure to its stockholders, (v)
following receipt of a bona fide Acquisition Proposal, failing to make or
withdrawing or modifying its recommendation and/or (vi) taking any
non-appealable, final action ordered to be taken by the Company by any court
of competent jurisdiction but in each case referred to in the foregoing
clauses (ii) through (vi) only to the extent that the Board of Directors of
the Company has concluded in good faith on the basis of advice from counsel
that such action is required to prevent the Board of Directors of the Company
from breaching its fiduciary duties to the stockholders of the Company under
applicable law; provided, further, that (A) the Board of Directors of the
Company will not take any of the foregoing actions until reasonable notice to
MergerSub of its intent to take such action will have been give to MergerSub;
and (B) if the Board of Directors of the Company receives an Acquisition
Proposal, to the extent it may do so without breaching its fiduciary duties
as advised by counsel and as determined in good faith, and without violating
any of the conditions of such Acquisition Proposal, then the Company will
promptly inform MergerSub of the terms and conditions of such proposal and
the identity of the person making it. Subject to the provisions of the
previous sentence, the Company was obligated to immediately cease and cause
its subsidiaries and its and their advisors, agents and other intermediaries
to cease any and all existing activities, discussions or negotiations with
any parties (other than MergerSub) conducted prior to the date on which the
Merger Agreement was entered into with respect to any of the foregoing, and
to use its reasonable best efforts to cause any such parties in possession of
confidential information about the Company that was furnished by or on behalf
of the Company to return or destroy all such information in the possession of
any such party (other than MergerSub) or in the possession of any agent or
advisor of any such party. As used in the Merger Agreement, the term "Third
Party" means any Person or "group," as described in Rule 13d-5(b) promulgated
under the Exchange Act, other than MergerSub or any of its affiliates.
If a Payment Event (as hereinafter defined) occurs, the Company will pay
to MergerSub, within two business days following such Payment Event, a fee of
$20,947,000.00. "Payment Event" means that at least one enumerated event has
occurred in all of the following clauses (i)-(iii): (i) a Third Party shall
have
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made an Acquisition Proposal prior to the Special Meeting, (ii) the Merger
Agreement shall have been terminated pursuant to its terms and (iii) any
Acquisition Proposal (whether or not proposed prior to the Special Meeting
and whether or not it involves the Third Party making the Acquisition
Proposal referred to above) shall have been consummated within 12 months
following the termination of the Merger Agreement.
BOARD OF DIRECTORS OF THE COMPANY FOLLOWING THE MERGER
The Merger Agreement provides that prior to the Effective Time, the
Company will deliver to MergerSub evidence satisfactory to MergerSub of the
resignation of all directors of the Company effective at the Effective Time.
PREFERRED STOCK
In accordance with the terms of the Merger Agreement, the Board of
Directors of the Company has established the terms of the Senior Preferred
Stock and has caused to be filed the certificate of designations with the
Delaware Secretary of State. The terms of the Senior Preferred Stock are
identical in all respects (except the name of the Company) to the terms of
the MergerSub Preferred Stock. If the MergerSub Preferred Stock is issued,
each share of MergerSub Preferred Stock will be converted into a share of
Senior Preferred Stock at the Effective Time.
INDEMNIFICATION AND INSURANCE
Pursuant to the terms of the Merger Agreement, for a period of 6 years
following the Merger, MergerSub will cause the Surviving Corporation to
indemnify and hold harmless the present and former officers and directors of
the Company in respect of acts or omissions occurring prior to the Effective
Time to the extent provided under the Company's certificate of incorporation
and bylaws; provided that such indemnification will be subject to any
limitation imposed from time to time under applicable law. During such
six-year period, MergerSub will cause the Surviving Corporation to provide
officers' and directors' liability insurance in respect of acts or omissions
occurring prior to the Effective Time covering each such person currently
covered by the Company's officers' and directors' liability insurance policy
on terms with respect to coverage and amount no less favorable than those of
such policy in effect on the date of the Merger Agreement (or, if such
insurance policy cannot be obtained, such insurance policy on terms with
respect to coverage and amount as favorable as can be obtained, subject to
the proviso at the conclusion of this sentence), provided that in satisfying
the aforementioned obligation, MergerSub will not be obligated to cause the
Surviving Corporation to pay premiums in excess of 125% of the amount per
annum the Company paid in its last full fiscal year.
In furtherance of and not in limitation of the obligations set forth in
the preceding paragraph, MergerSub has agreed that the officers and directors
of the Company that are defendants in all litigation commenced by
stockholders of the Company with respect to (x) the performance of their
duties as such officers and/or directors under federal or state law
(including litigation under federal and state securities laws) and (y) the
Merger, including, without limitation, any and all such litigation commenced
on or after the date of the Merger Agreement (the "Subject Litigation") will
be entitled to be represented, at the reasonable expenses of the Company, in
the Subject Litigation by one counsel (and Delaware counsel if appropriate
and one local counsel in each jurisdiction in which a case is pending) each
of which counsel will be selected by a plurality of such director defendants;
provided that the Company will not be liable for any settlement effected
without its prior written consent (which consent will not be unreasonably
withheld) and that a condition to any indemnification payments will be that
such officer/director defendant not have settled any Subject Litigation
without the consent of the Surviving Corporation (such consent not to be
unreasonably withheld) and, prior to the Effective Time, MergerSub; and
provided further that neither MergerSub nor the Surviving Corporation will
have any obligation to any officer/director defendant when and if a court of
competent jurisdiction shall ultimately determine, and such determination
shall have become final and non-appealable, that indemnification of such
officer/ director defendant in the manner contemplated by the Merger
Agreement is prohibited by applicable law.
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EMPLOYEE BENEFIT PLANS
From and after the Effective Time, subject to applicable law, the
Surviving Corporation and its subsidiaries will honor obligations of the
Company and its subsidiaries incurred prior to the Effective Time under all
existing employee plans and benefit arrangements.
MergerSub has agreed that, for at least one year from the Effective Time,
subject to applicable law, the Surviving Corporation and its subsidiaries
will provide benefits to their employees which will, in the aggregate, be
comparable to those currently provided by the Company and its subsidiaries to
their employees. Notwithstanding the foregoing, the Surviving Corporation and
its subsidiaries are not obligated to provide employees with a plan or
arrangement similar to any equity based compensation plans currently
maintained by the Company. The Surviving Corporation may amend, modify or
terminate any employee plan or benefit arrangement.
It is MergerSub's current intention to maintain the Surviving
Corporation's headquarters at its present location or another location in the
greater Philadelphia area.
FINANCING
Pursuant to the terms of the Merger Agreement, Merger Sub will use its
reasonable best efforts to obtain the Merger Financing. In the event that any
portion of such Merger Financing becomes unavailable, regardless of the
reason therefor, MergerSub will use its reasonable best efforts to obtain
alternative financing on substantially comparable or more favorable terms
from other sources.
NASDAQ LISTING
MergerSub will not take any action, for at least three years after the
Effective Time of the Merger, to cause the Company Stock to be delisted from
NASDAQ; provided, however, that MergerSub may cause or permit the Company
Stock to be de-listed in connection with any transaction which results in the
termination of registration of such securities under Section 12 of the
Exchange Act, and provided, further, that the foregoing will not require the
Company to take any affirmative action to prevent the Company Common Stock
from being delisted by NASDAQ if the Company Common Stock ceases to meet the
applicable listing standards.
ACCESS TO INFORMATION
From the date of the Merger Agreement until the Effective Time, MergerSub
will give the Company and its independent advisor any such information
regarding MergerSub as may be necessary to permit such independent advisor to
render the advice to be delivered to the Company's Board of Directors
regarding the effect the transactions contemplated by the Merger Agreement
will have on the Company's solvency, capital and ability to service debt.
COOPERATION AND REASONABLE BEST EFFORTS
Pursuant to the Merger Agreement, and subject to certain conditions and
limitations described therein, the parties have agreed to cooperate with each
other and to use their respective reasonable best efforts to take certain
specified and other actions, including cooperation in the arrangement of
financing, so that the transactions contemplated by the Merger Agreement may
be consummated.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of the Company and MergerSub to consummate the
Merger are subject to the satisfaction of the following conditions: (a) the
Merger Agreement shall have been adopted by the stockholders of the Company
in accordance with Delaware law; (b) any applicable waiting period under the
HSR Act relating to the Merger shall have expired or been terminated; (c) no
provision of any applicable law or regulation and no judgment, order, decree
or injunction shall prohibit or restrain the consummation of the Merger;
provided, however, that the Company and MergerSub will each use its
reasonable best efforts to have any such judgment, order, decree or
injunction vacated; (d) all consents,
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approvals and licenses of any governmental or other regulatory body required
in connection with the execution, delivery and performance of the Merger
Agreement and for the Surviving Corporation to conduct the business of the
Company in substantially the manner now conducted, shall have been obtained,
unless the failure to obtain such consents, authorizations, orders or
approvals would not have a material adverse effect on the Company and its
subsidiaries after giving effect to the transactions contemplated by the
Merger Agreement (including the Merger Financing); (e) the funds in an amount
at least equal to the Required Amounts (as defined in the Merger Agreement)
shall have been made available to MergerSub and/or Operating Co.; and (f) the
registration statement of which this Proxy Statement/Prospectus is a part
shall have been declared effective and no stop order suspending the
effectiveness of the registration statement shall be in effect and no
proceedings for such purpose will be pending before or threatened by the
Commission.
In addition, the obligations of MergerSub to consummate the Merger are
further subject to the satisfaction of the following conditions: (a) the
Company shall have performed in all material respects all of its obligations
required to be performed by it at or prior to the Effective Time, the
representations and warranties of the Company contained in the Merger
Agreement and in any certificate or other writing delivered by the Company
pursuant hereto shall be true in all material respects at and as of the
Effective Time (provided that representations made as of a specific date will
be required to be true as of such date only) as if made at and as of such
time and MergerSub shall have received a certificate signed by any Vice
President of the Company to the foregoing effect; (b) there shall not be
instituted or pending (x) any action or proceeding by any government or
governmental authority or agency, or (y) any action or proceeding by any
other person, that has a reasonable likelihood of success, in any case
referred to in clauses (x) or (y), before any court or governmental authority
or agency, (i) challenging or seeking to make illegal, to delay materially or
otherwise directly or indirectly to restrain or prohibit the consummation of
the Merger or seeking to obtain material damages or otherwise directly or
indirectly relating to the transactions contemplated by the Merger Agreement,
(ii) seeking to restrain or prohibit MergerSub's (including its subsidiaries
and affiliates) ownership or operation of all or any material portion of the
business or assets of the Company and its subsidiaries, taken as a whole, or
to compel MergerSub or any of its subsidiaries or affiliates to dispose of or
hold separate all or any material portion of the business or assets of the
Company and its subsidiaries, taken as a whole, (ii) seeking to impose or
confirm material limitations on the ability of MergerSub or any of its
subsidiaries or affiliates to effectively control the business or operations
of the Company and its subsidiaries, taken as a whole, or effectively to
exercise full rights of ownership of the Shares or Company Common Stock,
including, without limitation, the right to vote any Shares or Company Common
Stock acquired or owned by MergerSub or any of its subsidiaries or affiliates
on all matters properly presented to the Company's stockholders, or (iii)
seeking to require divestiture by MergerSub or any of its Subsidiaries or
affiliates of any Shares or Company Common Stock, and no court, arbitrator or
governmental body, agency or official will have issued any judgment, order,
decree or injunction, and there will not be any statute, rule or regulation,
that, in the sole judgment of MergerSub is likely, directly or indirectly, to
result in any of the consequences referred to in the preceding clauses (i)
through (iv); (c) MergerSub shall have received all documents it may
reasonably request relating to the existence of the Company and the
Subsidiaries and the authority of the Company for the Merger Agreement, all
in form and substance satisfactory to MergerSub; (d) the holders of not more
than 3% of the outstanding Shares shall have demanded appraisal of their
Shares in accordance with Delaware law; (e) MergerSub shall be reasonably
satisfied that the Merger will be recorded as a "recapitalization" for
financial reporting purposes; (f) MergerSub shall have received undertakings
in writing from each person, if any, who according to counsel for the Company
might reasonably be considered "affiliates" of the Company within the meaning
of Rule 145(c) of the SEC pursuant to the Securities Act (each, an
"Affiliate"), in each case in form and substance satisfactory to counsel for
MergerSub providing (i) such Affiliate will notify MergerSub in writing
before offering for sale or selling or otherwise disposing of any shares of
Company Stock owned by such Affiliate and (ii) no such sale or other
disposition will be made unless and until the Affiliate has supplied to
MergerSub an opinion of counsel for the Affiliate (which opinion and counsel
will be reasonably satisfactory to MergerSub) to the effect that such
transfer is not in violation of the Securities Act; (g) the Registration
Rights Agreement dated as of October 20, 1995, entered into among the Company
and the Significant Security Holders (as
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defined therein), shall have been amended in the manner previously agreed;
(h) the certificate of designation for the Senior Preferred Stock shall have
been accepted for filing by the Delaware Secretary of State; and (i) total
indebtedness (long and short term) of the Company and its subsidiaries as of
the Effective Time, excluding any indebtedness attributable to "Phase II" as
defined in the Agreement for Services for End-Of-Life Inventory Management
dated as of June 7, 1996 between Operating Co. and Compaq ("Attributable
Indebtedness") shall not exceed $240,000,000 and will not exceed $255,000,000
including Attributable Indebtedness.
The obligation of the Company to consummate the Merger is further subject
to the satisfaction of following additional conditions: (a) MergerSub shall
have performed in all material respects all of its obligations under the
Merger Agreement required to be performed by it at or prior to the Effective
Time, the representations and warranties of MergerSub contained therein and
in any certificate or other writing delivered by either of them pursuant to
the Merger Agreement shall be true in all material respects at and as of the
Effective Time (except for any inaccuracies in such representations and
warranties that are solely due to an action taken after the date the Merger
Agreement was entered into of the type described above under the heading
"Certain Provisions of the Merger Agreement--Certain Pre-Closing Covenants,"
which is taken specifically in accordance with the terms described in such
Section (provided that representations made as of a specific date shall be
required to be true as of such date only) as if made at and as of such time
and the Company shall have received a certificate signed by any Vice
President of MergerSub to the foregoing effect; and (b) the Board of
Directors of the Company shall have received advice, reasonably satisfactory
to the Board, from an independent advisor confirming the belief of MergerSub
that upon the consummation of the transactions contemplated by the Merger
Agreement, the Surviving Corporation will not become insolvent, will not be
left with unreasonably small capital, will not have incurred debts beyond its
ability to pay such debts as they mature, and the capital of the Company will
not become impaired.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time (notwithstanding any approval of the
Merger Agreement by the stockholders of the Company):
(a) by mutual written consent of the Company and MergerSub; (b) by either
the Company or MergerSub, if the Merger has not been consummated by the later
of (x) the earlier of September 15, 1997 and ten business days after the
Special Meeting, and (y) August 15, 1997, provided that the party seeking to
exercise such right is not then in breach in any material respect of any of
its obligations under the Merger Agreement; (c) by either the Company or
MergerSub, if MergerSub (in the case of termination by the Company), or the
Company (in the case of termination by MergerSub) shall have breached in any
material respect any of its obligations under the Merger Agreement or any
representation and warranty of MergerSub (in the case of termination by the
Company) or the Company (in the case of termination by MergerSub) shall have
been incorrect in any material respect when made or at any time prior to the
Closing; (d) by either the Company or MergerSub, if there is any law or
regulation that makes consummation of the Merger illegal or otherwise
prohibited or if any judgment, injunction, order or decree enjoining
MergerSub or the Company from consummating the Merger is entered and such
judgment, injunction, order or decree becomes final and nonappealable; (e) by
MergerSub if the Board of Directors of the Company has withdrawn or modified
or amended, in a manner adverse to MergerSub, its approval or recommendation
of the Merger Agreement and the Merger or its recommendation that
stockholders of the Company adopt and approve the Merger Agreement and the
Merger, or approved, recommended or endorsed any proposal for a transaction
other than the Merger (including a tender or exchange offer for Shares) or if
the Company has failed to call the Special Meeting or failed as promptly as
reasonably practicable after the registration statement is declared effective
to mail the Proxy Statement/Prospectus to its stockholders or failed to
include in such statement the recommendation referred to above; (f) by the
Company if prior to the Effective Time the Board of Directors of the Company
has withdrawn or modified or amended, in a manner adverse to MergerSub, its
approval or recommendation of the Merger Agreement and the Merger or its
recommendation that stockholders of the Company adopt and approve the Merger
Agreement and the Merger in order to permit the Company
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to execute a definitive agreement providing for the acquisition of the
Company or in order to approve a tender or exchange offer for any or all of
the Shares, in either case, as determined by the Board of Directors of the
Company to be on terms more favorable to the Company's stockholders than the
Merger from a financial point of view provided that the Company is in
compliance with its obligations described under "--No Solicitation of
Transactions"; and (g) by either the Company or MergerSub if, at a duly held
stockholders meeting of the Company or any adjournment thereof at which the
Merger Agreement and the Merger is voted upon, the requisite stockholder
adoption and approval has not been obtained.
The party desiring to terminate the Merger Agreement will give written
notice of such termination to the other party in accordance with the terms
thereof. If the Merger Agreement is terminated, such Agreement will become
void and of no effect with no liability on the part of any party hereto.
Upon the termination of the Merger Agreement for any reason other than (i)
a termination by the Company pursuant to clause (e) above; (ii) a termination
by either the Company or Merger Sub pursuant to clause (a) above; (iii) a
termination that follows a failure of the condition set forth above in clause
(c) of the first and second paragraphs under "Certain Provisions of the
Merger Agreement--Conditions to the Consummation of the Merger," or (iv) any
termination that follows a refusal by MergerSub to consummate the Merger
because of an inaccuracy in the Company's representations and warranties
regarding the absence of (A) a material adverse change in the business of the
Company and its subsidiaries since June 30, 1996, or (B) certain
cancellations since June 30, 1996 of licenses, sublicenses, franchises,
permits or agreements to which the Company or any subsidiary is a party, the
Company will reimburse MergerSub and its affiliates not later than two
business days after submission of reasonable documentation thereof for 100%
of their documented out-of-pocket fees and expenses (including, without
limitation, the reasonable fees and expenses of their counsel and investment
banking fees), actually incurred by any of them or on their behalf in
connection with the Merger Agreement and the transactions contemplated
thereby and the arrangement, obtaining the commitment to provide or obtaining
the Merger Financing for the transactions contemplated by the Merger
Agreement (including fees payable to the financing entities and their
respective counsel) provided that the aggregate amount payable will not
exceed $8,250,000; provided further, that (x) in the event a Payment Event
occurs, and the Company pays to MergerSub, fee of $20,947,000 described under
"--No Solicitation of Transactions," or (y) in the event of any termination
of the Merger Agreement which follows a refusal of MergerSub to consummate
the Merger by reason of a condition set forth above in either (1) clause (c)
of the first paragraph, or (2) clause (b) of the second paragraph, under the
heading "--Conditions to the Consummation of the Merger," the aggregate
amount payable will not include any investment banking fee payable to DLJSC
and the limit set forth in the immediately preceding clause will be reduced
from $8,250,000 to $5,750,000.
If the Company fails to promptly pay any amount due pursuant to the
previous paragraph, and, in order to obtain such payment, the other party
commences a suit which results in a judgment against the Company for such fee
or fees and expenses, the Company will also pay to MergerSub its costs and
expenses incurred in connection with such litigation.
AMENDMENT AND WAIVER
The Merger Agreement may be amended or waived if, and only if, such
amendment or waiver is in writing and signed, in the case of an amendment, by
the Company and MergerSub or in the case of a waiver, by the party against
whom the waiver is to be effective; provided that after the adoption of the
Merger Agreement by the stockholders of the Company, no such amendment or
waiver will, without the further approval of such stockholders, alter or
change the amount or kind of consideration to be received in exchange for any
shares of capital stock of the Company, any term of the certificate of
incorporation of the Surviving Corporation or any of the terms or conditions
of the Merger Agreement if such alteration or change would adversely affect
the holders of any shares of capital stock of the Company.
EXPENSES
Except as otherwise provided in "--Termination" above, all costs and
expenses incurred in connection with the Merger will be paid by the party
incurring such cost or expense.
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CERTAIN PROVISIONS OF THE VOTING AGREEMENT
The following summarizes the material provisions of the Voting Agreement,
a copy of which appears as Annex B to this Proxy Statement/Prospectus and is
incorporated herein by reference. This summary is qualified in its entirety
by reference to the Voting Agreement.
J.H. Whitney, which as of June 30, 1997, together with its affiliates
owned approximately 20.1% of the outstanding Company Common Stock, and
certain partnerships associated with Welsh Carson, (each, for the purposes of
the Voting Agreement, a "Stockholder") which as of June 30, 1997, together
owned approximately 34.9% of the Company Common Stock, MergerSub and the
Company entered into the Voting Agreement on May 4, 1997.
TRANSFER RESTRICTIONS
During the period (the "Agreement Period") beginning on May 4, 1997 and
ending on the earlier of (i) the Effective Time (as defined in the Merger
Agreement) or (ii) the later of (x) if an Extension Event has not occurred,
the termination of the Merger Agreement in accordance with its terms and (y)
if an Extension Event has occurred, the date which is four months after the
date of the termination of the Merger Agreement in accordance with its terms,
and (in the case of clauses (x) and (y)) payment in full of all amounts (if
any) payable to MergerSub pursuant to Section 10.04 thereof, each of the
Stockholders has agreed not to sell, transfer, assign, encumber or otherwise
dispose of certain shares of Company Common Stock, options or warrants
therefor specified on the exhibit to the Voting Agreement (with respect to
each such Stockholder, his " Scheduled Securities") or enter into any
contract, option or other arrangement or understanding with respect to the
direct or indirect sale, assignment, transfer, encumbrance or other
disposition of any of such Stockholder's Scheduled Securities.
Notwithstanding the foregoing, no disposition of Scheduled Securities
pursuant to (i) the Merger or (ii) any other merger or similar transaction
(provided, that, in any instance referred to in clause (ii), the Stockholder
is not in breach of its obligations hereunder) will be considered a breach of
the Voting Agreement. "Extension Event" means the occurrence of both of the
following events: (i) a Third Party shall have made an Acquisition Proposal
and thereafter (ii) either party shall have terminated the Merger Agreement
pursuant to Section 9.01(e), 9.01(f) or 9.01(g) thereof. As of June 30, 1997,
the Scheduled Securities of J.H. Whitney which are subject to the Voting
Agreement represented approximately 11% of the outstanding shares of Company
Common Stock. As of June 30, 1997, the Scheduled Securities of Welsh Carson
which are the subject of the Voting Agreement represented approximately 19%
of the outstanding shares of Company Common Stock.
VOTING
Each Stockholder has agreed to vote such Stockholder's Scheduled
Securities to approve and adopt the Merger Agreement, the Merger and all
agreements related to the Merger and any actions related thereto at any
meeting or meetings of the stockholders of the Company, and at any
adjournment thereof, at which such Merger Agreement and other related
agreements (or any amended version or versions thereof), or such other
actions, are submitted for the consideration and vote of the stockholders of
the Company.
Each of the Stockholders has agreed that during the Agreement Period, it
will not vote any of such Stockholder's Scheduled Securities in favor of the
approval of any other merger, consolidation, sale of assets, reorganization,
recapitalization, liquidation or winding up of the Company or any other
extraordinary transaction involving the Company or any matters related to or
in connection therewith, or any corporate action relating to or the
consummation of which would either frustrate the purposes of, or prevent or
delay the consummation of, the transactions contemplated by the Merger
Agreement.
Each of the Stockholders has irrevocably appointed MergerSub, during the
Agreement Period, as proxy for and on behalf of such Stockholder to vote
(including, without limitation, the taking of action by written consent) such
Stockholder's Scheduled Securities, for and in the name, place and stead of
such Stockholder for the matters and in the manner contemplated above.
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NO SOLICITATION
Each Stockholder has agreed that until the termination of the Voting
Agreement, such Stockholder will not, directly or indirectly, (i) take any
action to solicit, initiate or encourage any Acquisition Proposal or (ii)
engage in negotiations or discussions with, or disclose any nonpublic
information relating to the Company or any Subsidiary or afford access to the
properties, books or records of the Company or any Subsidiary to, or
otherwise assist, facilitate or encourage, any Third Party that may be
considering making, or has made, an Acquisition Proposal. Such Stockholder
will promptly notify MergerSub after receipt of any Acquisition Proposal or
any indication that any Third Party is considering making an Acquisition
Proposal or any request for nonpublic information relating to the Company or
any Subsidiary or for access to the properties, books or records of the
Company or any Subsidiary by any Third Party that may be considering making,
or has made, an Acquisition Proposal and will keep MergerSub fully informed
of the status and details of any such Acquisition Proposal, indication or
request. The foregoing provisions will not be construed to limit actions
taken, or to require actions to be taken, by any Stockholder (i) one or more
of whose directors, partners, officers or employees is a director or officer
of the Company that are required or restricted by such director's fiduciary
duties or such officer's employment duties, or permitted by the Merger
Agreement, and that, in each case, are undertaken solely in such person's
capacity as a director or officer of the Company and, in the case of an
officer of the Company, as directed by the Board of Directors or (ii) with
respect to securities of the Company other than the Securities after the
Board of Directors has delivered the notice contemplated by clause (A) of the
second proviso of Section 5.04(a) of the Merger Agreement. For the purposes
of the Voting Agreement, "Acquisition Proposal" means, with respect to any
Stockholder, an Acquisition Proposal as defined in the Merger Agreement but
only in respect of such Stockholder's Scheduled Securities.
SURRENDER OF WARRANTS
Pursuant to the Voting Agreement, each of the Stockholders has agreed to
surrender to the Company immediately prior to the Effective Time any Warrants
owned by him in exchange for payment immediately after the Effective Time of
an amount equal to the difference between the exercise price in respect of
each share of Company Common Stock for which such Warrant is exercisable and
$23.00, multiplied by the number of shares of Company Common Stock issuable
upon exercise of such Warrants, and upon such other terms and conditions
satisfactory to MergerSub.
APPRAISAL RIGHTS
Each of the Stockholders has agreed not to exercise any rights (including,
without limitation, under Section 262 of the DGCL) to demand appraisal of any
shares of Company Common Stock owned by such Stockholder with respect to the
Merger.
CERTAIN REPRESENTATIONS AND WARRANTIES
Pursuant to the Voting Agreement, each Stockholder has represented and
warranted that: (a) such Stockholder (i) owns beneficially all of the shares
of Company Common Stock, options and warrants therefor which are subject to
Voting Agreement, (ii) has the full and unrestricted legal power, authority
and right to enter into, execute and deliver the Voting Agreement without the
consent or approval of any other person and (iii) has not entered into any
voting agreement with or granted any person any proxy (revocable or
irrevocable) with respect to such shares (other than the Voting Agreement);
(b) the Voting Agreement is the valid and binding agreement of the
Stockholder.
TERMINATION
The Voting Agreement will terminate upon the termination of the Agreement
Period.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements including the notes thereto.
This discussion contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
COMPANY HISTORY
Founded in 1969, the Company began operations as a provider of key punch
machines under the tradename "Decision Data." During the 1980s, its
operations expanded to include the sale of midrange computer hardware and
related maintenance services. During fiscal 1993, the Company decided to
focus on providing computer maintenance and support services and sold its
computer hardware products business.
Since the beginning of fiscal 1993, the Company established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of over 35
complementary businesses. The most significant of these were IDEA Servcom,
Inc. ("Servcom"), certain assets and liabilities of which were acquired in
August 1994 for cash consideration of $29.5 million, BABSS which was acquired
in October 1995 for cash consideration of approximately $250.0 million and
certain assets of the U.S. computer service business of Memorex Telex which
were acquired in November 1996 for cash consideration of approximately $24.4
million after certain purchase price adjustments. These acquisitions were
accounted for as purchase transactions.
At the time of its acquisition by the Company, BABSS was among the largest
independent, multivendor service organizations servicing end-user
organizations and OEMs. Prior to the acquisition of BABSS, the Company had
higher gross margins than BABSS principally because approximately 30% of the
Company's revenues in fiscal 1995 were attributable to higher margin
contracts involving systems that can be serviced by a limited number of
service providers ("proprietary systems"), whereas BABSS had limited revenues
from proprietary systems. Prior to the acquisition, BABSS established a
strong record of internal revenue growth, growing revenues from $338.4
million in 1991 to $486.1 million in 1994, representing a compound annual
rate of 12.8%.
The Company's primary source of revenues is contracted services for
multivendor computer maintenance and technology support services, including
hardware support, end-user and software support, network support and other
support services. Approximately 85% of the Company's revenues during the last
fiscal year were derived from maintenance contracts covering a broad spectrum
of computer hardware. These contracts typically have a stipulated monthly fee
over a fixed initial term (typically one year) and continue thereafter unless
canceled by either party. Such contracts generally provide that customers may
eliminate certain equipment and services from the contract upon notice to the
Company. In addition, the Company enters into per incident arrangements with
its customers. Per incident contracts can cover a range of bundled services
for computer maintenance or support services or for a specific service, such
as network support or equipment relocation services. Another form of per
incident service revenues includes time and material billings for services as
needed, principally maintenance and repair, provided by the Company.
Furthermore, the Company derives other revenues from the repair of hardware
and components at the Company's logistics services and depot repair
facilities. Pricing of the Company's services is based on various factors
including equipment failure rates, cost of repairable parts and labor
expenses. The Company customizes its contracts to the individual customer
based generally on the nature of the customer's requirements, the term of the
contract and the services that are provided.
The Company experiences reductions in revenue when customers replace
equipment being serviced with new equipment covered under a manufacturer's
warranty, discontinue the use of equipment being serviced due to
obsolescence, choose to use a competitor's services or move technical support
services
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in-house. The Company must more than offset this revenue "reduction" to grow
its revenues and seeks revenue growth from two principal sources: internally
generated sales from its direct and indirect sales force and the acquisition
of contracts and assets of other service providers. While the Company
historically has been able to offset the erosion of contract-based revenue
and maintain revenue growth through acquisitions and new contracts,
notwithstanding the reduction in contract based revenue, there can be no
assurance it will continue to do so in the future, and any failure to
consummate acquisitions, enter into new contracts or add additional services
and equipment to existing contracts could have a material adverse effect on
the Company's profitability.
Cost of revenues is comprised principally of personnel-related costs
(including fringe benefits), inventory cost recognition, amortization of
repairable parts and facilities costs and related expenses.
The acquisition of contracts and assets has generally provided the Company
with an opportunity to realize economies of scale because the Company
generally does not increase its costs related to facilities, personnel and
repairable parts in the same proportion as increases in acquired revenues.
The proposed Merger, which will be recorded as a recapitalization for
accounting purposes, is subject to a number of conditions, including
regulatory approvals and approval by Company stockholders. The transaction is
estimated to have an aggregate cash value of approximately $957 million,
including refinancing of the Company's existing revolving credit facility.
The Company expects the Merger to close by September 1997.
As a result of the proposed Merger, including the Merger Financing and the
application of the proceeds thereof, the Company and MergerSub will incur
various costs currently estimated to range between $95 million and $105
million (pretax) in connection with consummating the transaction. These costs
consist primarily of compensation costs, underwriting discounts and
commissions, professional and advisory fees and other expenses. While the
exact timing, nature and amount of these costs are subject to change, the
Company anticipates that a one-time pretax charge of approximately $76
million ($69 million after tax) will be recorded in the quarter in which the
Merger is consummated. As a result of the foregoing, the Company expects to
record a significant net loss in the quarter in which the Merger is recorded.
Because this loss will result directly from the one-time charge incurred in
connection with the Merger, and this charge will be funded entirely through
the proceeds of the Merger Financing, the Company does not expect this loss
to materially impact its liquidity, ongoing operations or market position.
For a discussion of the consequences of the incurrence of indebtedness in
connection with the Merger Financing, see "--Liquidity and Capital Resources."
STRATEGIC INITIATIVES
During fiscal 1997, the Company has implemented several strategic
initiatives designed to rationalize its cost structure and capitalize on
economies of scale. These initiatives included:
o the acquisition of complementary contracts and assets which the Company
has been able to service with fewer employees than the prior owners by
leveraging the Company's existing infrastructure. For example, during
fiscal 1997, the Company acquired contracts and assets of Memorex Telex
and Xerox Canada and reduced the number of service personnel required
to support such contracts from 1,192 to 768 and 160 to 120,
respectively;
o ongoing initiatives to enhance the efficiency of the Company's field
technician service force, including the addition of functionalities of
the Company's information systems which enable the Company to match
field technician skill sets with call productivity history and workload
requirements and the implementation of best practices, benchmarking and
targeted training programs across the Company's over 150 branch
locations; and
o the renegotiation of certain vendor contracts on more favorable terms,
including the Company's data center outsourcing contract with
Electronic Data Systems Corp. and the Company's telecommunications
contracts with several providers.
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As a result of these strategic initiatives and the Company's increased
operating leverage, the Company's Adjusted EBITDA has increased in each
successive quarter of fiscal 1997. Adjusted EBITDA for the quarter ended
March 31, 1997 increased to $30.1 million from $20.6 million for the quarter
ended September 30, 1996. Over the same period, Adjusted EBITDA margin
increased to 14.7% from 11.7%. In addition, these initiatives enabled the
Company to reduce 203 employees from its core business in November and
December of 1996 without impacting service levels and resulted in improved
revenue per employee from $30,700 in the quarter ended September 30, 1996 to
$32,400 in the quarter ending March 31, 1997. Certain quarterly data for
fiscal 1997 are shown in the table below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
------------------ ----------------- --------------
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C> <C>
Revenues................................ $176,426 $191,253 $205,070
Sequential growth...................... 3.2% 8.4% 7.2%
Gross profit............................ $ 41,861 $ 48,221 $ 54,698
% of revenues.......................... 23.7% 25.2% 26.7%
Adjusted EBITDA(1)...................... $ 20,589 $ 25,386 $ 30,063
% of revenues.......................... 11.7% 13.3% 14.7%
Revenue per average number of employees. $ 30.7 $ 31.6 $ 32.4
</TABLE>
- ------------
(1) As defined in Note 10 to the Summary Selected Historical and Unaudited
Pro Forma Condensed Consolidated Financial Data.
RECENT DEVELOPMENTS
The Company's 1997 fiscal year ended on June 30, 1997. While the final
results of the quarter ended June 30, 1997 are not yet available, the Company
currently estimates that it recorded revenues of approximately $213.2 million
during the fourth quarter, and during such quarter realized operating income
of approximately $22.7 million and net income of approximately $11.2 million.
Based upon an estimated weighted average number of shares outstanding during
the quarter ended June 30, 1997 of approximately 30,266,000 shares, net
income per share for the fourth quarter is currently estimated to be
approximately $0.37.
The Company currently estimates that revenues for the full fiscal year
ended June 30, 1997 were approximately $785.9 million and that it realized
operating income of approximately $67.8 million and net income of
approximately $31.1 million. Based upon an estimated weighted average number of
shares outstanding during the fiscal year ended June 30, 1997 of approximately
30,110,000 shares, net income per share for fiscal year ended June 30, 1997
is currently estimated to be $1.03 per share. Results of operations for the
full fiscal year ended June 30, 1997 include the impact of certain charges
recorded during the second quarter of fiscal 1997, as discussed below.
The above information is preliminary in nature only, and is subject in all
respects to completion of various internal analyses and procedures necessary
to finalize the Company's financial statements, and to completion of the
audit of the Company's financial statements for the fiscal year ended June
30, 1997.
RESULTS OF OPERATIONS
The following discussion of results of operations is presented for the
three and nine month periods ended March 31, 1997, and fiscal years ended
June 30, 1996, 1995 and 1994. The results of operations of the Company
include the operations of Memorex Telex from November 15, 1996, BABSS from
October 20, 1995 and Servcom from September 1, 1994.
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<PAGE>
The following table sets forth, for the periods indicated, certain
operating data expressed in dollar amounts and as a percentage of revenues:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, MARCH 31, MARCH 31,
-------------------------------- --------------------- ---------------------
1994 1995 1996 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $108,416 $163,020 $540,191 $369,167 $572,749 $172,673 $205,070
Cost of revenues........... 76,980 113,483 402,316 272,708 427,969 129,962 150,372
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............... 31,436 49,537 137,875 96,459 144,780 42,711 54,698
Operating Expenses:
Selling, general and
administrative expenses .. 16,474 21,982 69,237 49,519 78,578 22,303 28,228
Amortization and write-off
of intangibles............ 5,380 6,776 15,673 10,617 16,861 4,872 6,390
Employee severance and
unutilized lease costs
(credit).................. (6,401) -- 3,592 7,000 4,300 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income........... 15,983 20,779 49,373 29,323 45,041 15,536 20,080
OTHER DATA:
EBITDA..................... 22,672 37,021 114,816 75,568 121,680 34,308 46,419
Adjusted EBITDA (1)........ 16,743 29,333 76,947 52,551 76,038 23,094 30,063
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED THREE MONTHS
JUNE 30, MARCH 31, ENDED MARCH 31,
-------------------------- ----------------- -----------------
1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 71.0 69.6 74.5 73.9 74.7 75.3 73.3
-------- -------- -------- -------- -------- -------- --------
Gross profit............... 29.0 30.4 25.5 26.1 25.3 24.7 26.7
Operating Expenses:
Selling, general and
administrative expenses .. 15.2 13.5 12.8 13.4 13.7 12.9 13.8
Amortization and write-off
of intangibles............ 5.0 4.2 2.9 2.9 2.9 2.8 3.1
Employee severance and
unutilized lease costs
(credit).................. (5.9) -- 0.7 1.9 0.8 -- --
-------- -------- -------- -------- -------- -------- --------
Operating income........... 14.7 12.7 9.1 7.9 7.9 9.0 9.8
OTHER DATA:
EBITDA..................... 20.9 22.7 21.3 20.5 21.2 19.9 22.6
Adjusted EBITDA (1)........ 15.4 18.0 14.2 14.2 13.3 13.4 14.7
</TABLE>
- ------------
(1) As defined in Note 10 to the Summary Selected Historical and Unaudited
Pro Forma Condensed Consolidated Financial Data.
THREE AND NINE MONTHS ENDED MARCH 31, 1997
The following discussion of results of operations is presented for the
Company for the fiscal quarters ended March 31, 1997 and 1996 (the "1997
Quarter" and "1996 Quarter", respectively), and for the nine-month periods
then ended (the "1997 Period" and the "1996 Period", respectively).
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<PAGE>
Revenues: Revenues for the 1997 Quarter increased by $32.4 million, or
18.8%, to $205.1 million as compared to revenues for the 1996 Quarter of
$172.7 million. This increase is attributable primarily to the acquisition of
Memorex Telex in November 1996, which resulted in increased revenues of
approximately $25 million as compared to the 1996 Quarter.
For the 1997 Period, revenues increased to $572.7 million, as compared to
revenues of $369.2 million for the 1996 Period. This 55.1% increase was due
primarily to the BABSS acquisition, which occurred on October 20, 1995.
Gross Profit: Gross profit increased by $12.0 million, or 28.1%, from
$42.7 million for the 1996 Quarter to $54.7 million for the 1997 Quarter.
This increase is principally attributable to the Memorex Telex acquisition,
which occurred during the second quarter of fiscal 1997. As a percentage of
revenues, gross profit increased from 24.7% in the 1996 Quarter to 26.7% in
the 1997 Quarter.
The improvement in gross profit margin was primarily attributable to (i)
increased revenues from both acquisitions (including contract and asset
acquisitions from Memorex Telex, Xerox Canada and EMC) during the 1997 Period
and internal sales growth without a proportionate increase in personnel and
other operating expenses, (ii) head count reductions in the Company's field
technician force effected in November 1996 and (iii) more efficient
utilization of the Company's field service personnel and resources to service
the increased revenues referred to above.
Gross profit increased by $48.3 million, or 50.1%, from $96.5 million in
the 1996 Period to $144.8 million in the 1997 Period. The increase was due
primarily to the increase in revenues during the 1997 Period attributable to
the full period effect of the BABSS acquisition and, to a lesser extent, the
Memorex Telex acquisition. As a percentage of revenues, gross profit
decreased from 26.1% in the 1997 Period to 25.3% in the 1996 Period. The
decrease in gross margin was attributable to the full period effect in the
1997 Period of the change in mix of the Company's services resulting from the
BABSS acquisition, partially offset by improved gross profit margins
attributable to the efficiencies and productivity improvements described
above during the second and third quarters of the 1997 Period. As a result of
the BABSS acquisition, a significantly smaller portion of the Company's
revenues was derived from proprietary systems which typically generate higher
profit margins than services for non-proprietary systems.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by $5.9 million, or 26.5%, from $22.3
million for the 1996 Quarter to $28.2 million for the 1997 Quarter. This
increase was attributable primarily to the Memorex Telex acquisition,
including increased sales force salaries and commissions, as well as
increased travel and bad debt expenses. As a percentage of revenues, selling,
general and administrative expenses increased from 12.9% for the 1996 Quarter
to 13.8% for the 1997 Quarter. Selling, general and administrative expenses
increased by $29.1 million, or 58.8% from $49.5 million in the 1996 Period to
$78.6 million in the 1997 Period. This increase was due primarily to the
acquisition of BABSS in October 1995. Selling, general and administrative
expenses as a percentage of revenue increased from 13.4% for the 1996 Period
to 13.7% for the 1997 Period.
Amortization of Intangibles: Amortization of intangible assets increased
by $1.5 million, or 30.6%, from $4.9 million for the 1996 Quarter to $6.4
million for the 1997 Quarter. This increase was attributable principally to
the amortization of intangibles, primarily goodwill, arising from
acquisitions during the 1997 Period, principally Memorex Telex in November,
1996.
Amortization of intangible assets increased by $6.3 million, or 59.4%,
from $10.6 million for the 1996 Period to $16.9 million for the 1997 Period.
This increase was attributable principally to the amortization of intangibles
resulting from the BABSS and Memorex Telex acquisitions.
Employee severance and unutilized lease costs (credit): The Company
recorded charges of $4.3 million and $7.0 million, respectively, in the
second quarter of 1997 and 1996 for estimated future employee severance costs
and unutilized lease/contract losses in connection with specific
acquisitions. See Note 4 to the Unaudited Condensed Consolidated Financial
Statements.
Interest Expense: Interest expense, net of interest income, decreased by
$2.1 million, or 36.2%, from $5.8 million for the 1996 Quarter to $3.7
million for the 1997 Quarter. This decrease was primarily
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<PAGE>
attributable to the Company's reduced average borrowing rate on long-term
indebtedness, which equaled approximately 9.0% and 6.4%, respectively, for
the corresponding periods. The decrease in the average borrowing rate
resulted from the refinancing of the Company's revolving credit facility in
April, 1996. This interest rate-related decrease, coupled with lower average
outstanding borrowings in the 1997 Quarter resulted in decreased overall
interest expense.
Interest expense, net of interest income, decreased by $0.5 million, or
4.6%, from $11.2 million for the 1996 Period to $10.7 million for the 1997
Period. This decrease was also due primarily to the factors noted above.
Income Taxes: The Company's income tax provisions for the 1997 Quarter and
the 1997 Period reflect an estimated effective income tax rate of
approximately 42%, while the effective income tax rate for the 1996 Quarter
and the 1996 Period was approximately 40%. This increase in the Company's
anticipated effective income tax rate was due primarily to the prior-year
impact of certain non-recurring foreign income tax benefits relating to net
operating loss carryforwards.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues: Revenues increased by $377.2 million, or 231.4%, from $163.0
million for the fiscal year ended June 30, 1995 to $540.2 million for the
fiscal year ended June 30, 1996. The increase is largely a result of
acquisitions, principally the BABSS acquisition in October 1995 which
accounted for approximately $350 million of the increase.
Gross profit: Gross profit increased by $88.4 million, or 178.6%, from
$49.5 million during the fiscal year ended June 30, 1995 to $137.9 million
for the fiscal year ended June 30, 1996. As a percentage of revenues, gross
profit decreased from 30.4% to 25.5%, reflecting the change in mix of
services resulting from the acquisition of BABSS. As a result of that
acquisition, a smaller portion of revenues was derived from proprietary
systems which typically generate higher profit margins than services for
non-proprietary systems.
Selling, general and administrative expenses: Selling, general and
administrative expenses increased by $47.2 million, from $22.0 million for
the fiscal year ended June 30, 1995 to $69.2 million for the fiscal year
ended June 30, 1996, principally as a result of the additional expenses
relating to the revenue growth discussed above. As a percentage of revenues,
selling, general and administrative decreased from 13.5% to 12.8%,
respectively, reflecting economies of scale.
Amortization and write-off of intangibles: Amortization of intangibles
increased by $8.9 million, from $6.8 million for the fiscal year ended June
30, 1995 to $15.7 million for the fiscal year ended June 30, 1996,
principally due to the amortization of intangibles arising from the BABSS
acquisition.
Employee severance and unutilized lease costs (credit): During fiscal
1996, the Company recorded $3.6 million (net of adjustments recording during
the year) in employee severance and unutilized lease costs. These costs were
related principally to future rent obligations and related costs for
facilities of the Company that the Company determined were no longer required
as a result of the acquisition of BABSS.
Interest expense: Interest expense increased by $12.2 million, from $2.5
million for the fiscal year ended June 30, 1995 to $14.7 million for the
fiscal year ended June 30, 1996, principally as a result of the indebtedness
incurred to finance the acquisition of BABSS. See Note 10 of the Notes to the
Company's Consolidated Financial Statements.
Provision for income taxes: The income tax provision for the fiscal year
ended June 30, 1996 was based on an effective tax rate of approximately 40%.
For the fiscal year ended June 30, 1995, the Company reported an income tax
benefit equivalent of approximately 126%, arising primarily from the
recognition of future tax benefits of tax loss carry-forwards and temporary
timing differences. See Note 11 of the Notes to the Company's Consolidated
Financial Statements.
Extraordinary item--early extinguishment of debt: Upon consummation of its
initial public offering in April 1996, the Company was required to pay the
total outstanding principal amount of its $30 million of 10.101% subordinated
debentures due October 20, 2001. This prepayment resulted in the write-off of
unamortized original issue discount of approximately $1.9 million, net of
income tax effect of $1.3 million, related to warrants issued with the
debentures.
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<PAGE>
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues: Revenues increased by $54.6 million, or 50.4%, from $108.4
million for fiscal 1994 to $163.0 million for fiscal 1995. The increase
principally reflected the benefit throughout the period of the Company's
acquisition of certain assets and liabilities of Servcom in August 1994.
Servcom had a monthly revenue base of approximately $5 million at the time of
the acquisition.
Gross profit: Gross profit increased by $18.1 million, or 57.6%, from
$31.4 million in fiscal 1994 to $49.5 million in fiscal 1995. As a percentage
of revenues, gross profit increased from 29.0% to 30.4%, principally as a
result of increased revenues from service contracts without a proportionate
increase in personnel costs.
Selling, general and administrative: Selling, general and administrative
expenses increased by $5.5 million, from $16.5 million in fiscal 1994 to
$22.0 million in fiscal 1995. The increase is related predominantly to the
Servcom acquisition, which required additional administrative and selling
support for the Servcom customer contracts. As a percentage of revenues,
selling, general and administrative expenses decreased from 15.2% to 13.5%,
due to economies of scale.
Amortization and write-off of intangibles: Amortization of intangibles
increased by $1.4 million, from $5.4 million in fiscal 1994 to $6.8 million
in fiscal 1995. The amortization in fiscal 1994 included a $2.9 million
write-off of intangibles relating to acquisitions in prior years.
Furthermore, amortization of intangibles arising from acquisitions made in
1991 and 1992 ended during fiscal 1994, offsetting, in part, the additional
amortization of intangibles recorded during fiscal 1995 as a result of the
August 1994 acquisition of Servcom.
Employee severance and unutilized lease costs (credit): During fiscal
1994, the Company recorded a benefit of $6.4 million arising from the
settlement of lease obligations for facilities no longer used in the
Company's business, which obligations had previously been accrued in fiscal
1993. During fiscal 1995, there were no comparable lease settlements.
Interest expense: Interest expense decreased $2.3 million, from $4.8
million in fiscal 1994 to $2.5 million in fiscal 1995, due to the
restructuring of indebtedness of the Company in 1994 (see Note 10 of the
Notes to the Company's Consolidated Financial Statements) and a decrease in
the prevailing interest rates on bank loans.
Income taxes: During fiscal 1995, the Company recorded a $23.1 million
income tax benefit related to the expected utilization of tax loss
carryforwards (which is net of a $10 million offsetting charge for potential
limitations on their use) and the future tax benefit of other deductible
temporary differences. As of June 30, 1995, based on its ability to generate
taxable income, the Company recorded the appropriate deferred taxes. See Note
11 of the Notes to the Company's Consolidated Financial Statements. The
effective tax rate in 1994 was approximately 9.2%, which resulted from
application of alternative minimum income tax and state taxes.
Discontinued operations: During fiscal 1995, the Company revised its
estimates of certain accruals created as a result of the disposal of its
computer products division during fiscal 1993. The reversal of certain
accruals resulted in $1.1 million in additional net income in fiscal 1995.
See Note 3 of the Notes to the Company's Consolidated Financial Statements.
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS AND OTHER TAX CREDITS
As of June 30, 1996, the Company had tax loss carryforwards of
approximately $38.1 million and $15.2 million for Federal and state income
tax purposes, respectively, which are scheduled to expire between 1997 and
2009. The Company also had minimum tax credits of approximately $1.2 million
as of June 30, 1996, with no applicable expiration period. These
carryforwards and credits may be utilized, as applicable, to reduce future
taxable income. The Company's initial public offering resulted in an
"ownership change" pursuant to Section 382 of the Code, which in turn
resulted in the usage, for U.S. federal income tax purposes, of these
carryforwards and credits during any future period being limited to
approximately $20 million per annum. See Note 11 to the Company's
Consolidated Financial Statements for the year ended June 30, 1996. In
addition, the Merger will cause another "ownership change" under
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Section 382 of the Code, and the Company, therefore, estimates that, for U.S.
federal income tax purposes, the limitation on its use of tax loss
carryforwards and other credits in any post-Merger period will be reduced to
approximately $9.0 million per annum. The Company anticipates that fees and
expenses incurred in connection with the Merger will result in additional tax
loss carryforwards arising in fiscal 1998. For financial reporting purposes,
the anticipated tax benefit associated with these carryforwards will be
limited due primarily to the length of the period during which the
anticipated tax benefit is expected to be realized.
LIQUIDITY AND CAPITAL RESOURCES
Post-Merger
Following the Merger, the Company's principal sources of liquidity will be
cash flow from operations and borrowings under the New Credit Facility. The
Company's principal uses of cash will be debt service requirements, capital
expenditures, purchases of repairable parts and acquisitions, and working
capital. The Company expects that ongoing requirements for debt service,
capital expenditures, repairable parts and working capital will be funded
from operating cash flow and borrowing under the New Credit Facility. In
connection with future acquisitions, the Company may require additional
funding which may be provided in the form of additional debt, equity
financing or a combination thereof.
The Company will incur substantial indebtedness in connection with the
Merger and the Merger Financings. On a pro forma basis, after giving effect
to the Merger, the Merger Financings and the application of the proceeds
thereof, the Company would have had approximately $738.8 million of
indebtedness outstanding as of March 31, 1997 as compared to $246.7 million
of indebtedness outstanding as of March 31, 1997. In addition, on the same
pro forma basis, the Company would have a stockholders' deficit of $262.0
million at March 31, 1997 as compared to a stockholders' equity of $201.1
million as of March 31, 1997. The Company's significant debt service
obligations following the Merger could, under certain circumstances, have
material consequences to security holders of the Company. See "Risk Factors."
In connection with the Merger, MergerSub expects to raise $85 million
through the issuance of the Discount Notes, which may be sold together with
Public Warrants (or, alternatively, through the issuance of Preferred Stock
to the DLJMB Funds and any Institutional Investor). At the Effective Time,
the Company will succeed to the obligations of MergerSub with respect to the
Discount Notes. In addition, Operating Co. expects to issue the Subordinated
Notes for approximately $150 million of gross proceeds, and expects to enter
into the New Credit Facility providing for term loans of $470 million and
revolving loans of up to $105 million. At the Effective Time, Operating Co.
is expected to borrow all term loans available thereunder and approximately
$8.3 million of revolving loans. The remaining revolving loans will, subject
to a borrowing base, be available to fund the working capital requirements of
Operating Co. after the Merger. The proceeds of such financings will, in
part, be distributed to the Company in the form of a dividend and, in part,
as an intercompany note. Each financing is subject to customary conditions,
including the negotiation, execution and delivery of definitive documentation
with respect to such financing.
The DLJMB Funds and certain Institutional Investors also expect to purchase
approximately 9,782,508 shares of common stock of MergerSub and the DLJMB
Warrants (or the Direct Shares) for approximately $225 million. Upon the
effectiveness of the Merger, the proceeds of such purchase will become an
asset of the Company. The proceeds of the Discount Notes, the Senior
Subordinated Notes, the initial borrowings under the New Credit Facility and
the purchase of common stock by DLJMB Funds and Institutional Investors will
be used to finance the payment of the cash portion of the Merger Consideration,
the Option Cash Proceeds and the Warrant Cash Proceeds, to refinance outstanding
indebtedness of the Company and to pay expenses incurred in connection with the
Merger.
The term loan facility under the New Credit Facility will consist of (i) a
$195 million Term Loan A, (ii) a $150 million Term Loan B and (iii) a $125
million Term Loan C. Term Loan A will mature six years after the closing
date, Term Loan B will mature seven years after the closing date and Term
Loan C will
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<PAGE>
mature eight years after the closing date. Commitments under the revolving
credit facility of the New Credit Facility will terminate six years after the
closing date.
Borrowings under the New Credit Facility will bear interest based on a
margin over, at Operating Co.'s option, the base rate or LIBOR. The
applicable margin will vary based on Operating Co.'s ratio of consolidated
indebtedness to Adjusted EBITDA. Operating Co.'s obligations under the New
Credit Facility will be secured by substantially all of the assets of
Operating Co. including a pledge of the capital stock of all of its direct
material subsidiaries, subject to certain limitations with respect to foreign
subsidiaries. In addition, the Company will guarantee the obligations of
Operating Co. under the New Credit Facility. Such guarantee will only be
recourse to the Company's pledge of all of the outstanding capital stock of
Operating Co. to secure Operating Co.'s obligations under the New Credit
Facility. The New Credit Facility will contain customary covenants and events
of default including substantial restrictions on Operating Co.'s ability to
make dividends or other distributions to the Company.
The Discount Notes will be issued by MergerSub, will become obligations of
the Company following the Merger and will not be guaranteed by Operating Co.
nor by any of the Company's consolidated subsidiaries. The Discount Notes
will mature in 2008. No interest will accrue or be payable on the Discount
Notes until August 2002. Thereafter, interest on the Discount Notes will be
payable semi-annually in cash. The Discount Notes will contain customary
covenants and events of default, including covenants that limit the ability
of the Company and its subsidiaries to incur debt, pay dividends and make
certain investments.
The Senior Subordinated Notes will be issued by Operating Co. and, upon
issuance, will not be guaranteed by the Company or any of Operating Co.'s
subsidiaries. The Senior Subordinated Notes will mature in 2007. Interest on
the Senior Subordinated Notes will be payable semi-annually in cash. The
Senior Subordinated Notes will contain customary covenants and events of
default, including covenants that limit the ability of Operating Co. and its
subsidiaries to incur debt, pay dividends and make certain investments.
As of March 31, 1997, the Company had no material commitments for
purchases of repairable parts or for capital expenditures.
The Company has budgeted approximately $10 million in incremental
expenditures for information systems to be incurred in fiscal 1998. The
initiatives to be funded include the following: (i) enhancements to the
Company's service entitlement process which will further ensure that
customers are billed for all work performed; (ii) improvements to the
Company's dispatch system and field engineer data collection and technical
support tools which are designed to increase productivity; (iii) enhancements
to the Company's help desk and central dispatch systems to provide an
integrated support solution to the customer base, and (iv) improvements to
the Company's field inventory tracking system which will facilitate increased
transfer of inventory among field locations and reduce purchases of
repairable parts. There can be no assurance that these amounts will be so
expended by the Company, nor when these amounts will be so expended.
The Company anticipates that its operating cash flow, together with
borrowings under the New Credit Facility, will be sufficient to meet its
anticipated future operating expenses, capital expenditures and to service
its debt requirements as they become due. However, the Company's ability to
make scheduled payments of principal of, to pay interest on or to refinance
its indebtedness and to satisfy its other debt obligations will depend upon
its future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory, business and other factors
beyond its control. See "Risk Factors."
Historical
Financing: Until its initial public offering in April 1996, the Company's
principal sources of capital had been borrowings from banks (primarily to
finance acquisitions), private placements of equity and debt securities with
principal stockholders and cash flow generated by operations. In April 1996,
the Company (i) completed an initial public offering, which raised
approximately $106 million and (ii) refinanced its bank debt, each of which
is more fully discussed below.
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The Company has relied on banks as the primary source of funds required
for larger acquisitions, such as the August 1994 acquisition of certain
assets and liabilities of Servcom and the October 1995 acquisition of BABSS.
Since July 1993, the Company's smaller acquisitions have been funded
primarily through a combination of seller financing, cash and the assumption
of liabilities under acquired prepaid service contracts.
In April 1996, the Company completed an initial public offering raising
$106 million through the issuance of 6.3 million shares of common stock. The
Company used the proceeds to repay approximately $70 million of its then
existing term loan (the "1995 Term Loan") and the Affiliate Notes. Concurrent
with the initial public offering, the Company's Preferred Stock (Series A, B
and C) was converted into common stock in accordance with the terms thereof.
In April 1996, the Company converted the 1995 Term Loan and an existing
$30 million revolving credit facility into a $225 million variable rate,
unsecured revolving credit facility (the "1996 Revolving Credit Facility").
During November 1996, in connection with the acquisition of certain assets of
the U.S. computer service business of Memorex Telex, the Company's lender
approved a $75 million increase to the 1996 Revolving Credit Facility,
raising the total loan commitment to $300 million. See Note 3 to the
unaudited Condensed Consolidated Financial Statements.
The 1996 Revolving Credit Facility provides for revolving borrowings up to
$300 million. The commitments thereunder terminate on April 26, 2001. The
interest rate applicable to the 1996 Revolving Credit Facility varies, at the
Company's option, based upon LIBOR (plus an applicable margin not to exceed
1%) or the prime rate. The Company has entered into interest rate swap
agreements resulting in fixed Euro dollar interest rates of 5.4% on $40.0
million through December 1997 and 5.5% on another $40.0 million through
December 1998. See Notes 2 and 10 to the Company's audited Consolidated
Financial Statements. Although it may be exposed to losses in the event of
nonperformance by counterparties to such swap agreements, the Company does
not expect such losses, if any, to be material. As of March 31, 1997, the
interest rate applicable to loans under the 1996 Revolving Credit Facility
was LIBOR plus .75%, or an effective rate of approximately 6.5%, and
available borrowings under the 1996 Revolving Credit Facility were $55.5
million.
Borrowings incurred under the 1996 Revolving Credit Facility in the 1997
Quarter and the 1997 Period were approximately $2.6 million and $52.9
million, respectively. Borrowings incurred during the 1997 Period included
substantially all of the funding required with respect to the Memorex Telex
acquisition.
The borrower under the 1996 Revolving Credit Facility is Operating Co. The
obligations of Operating Co. thereunder are guaranteed by the Company and
certain subsidiaries, except for its Canadian subsidiary. In connection with
the Merger, the Merger Financings and the application of the proceeds
thereof, all indebtedness outstanding under the 1996 Revolving Credit
Facility will be repaid.
Cash Flow and Leverage: Cash flow from operating activities for the 1997
Quarter was approximately $36.7 million. These funds, together with
borrowings under the 1996 Revolving Credit Facility, provided the required
capital to fund capital expenditures of approximately $31.0 million, as well
as the acquisition of assets from complementary businesses for approximately
$3.5 million. Cash flow from operating activities for the 1997 Period was
approximately $57.7 million. These funds, together with borrowings under the
1996 Revolving Credit Facility, provided the capital required to fund capital
expenditures of approximately $70.9 million, as well as the acquisition of
assets from complementary businesses for approximately $34.4 million.
Reducing cash flow from operating activities for the 1997 Quarter and the
1997 Period was a $1.8 million payment to the Internal Revenue Service in
full satisfaction of certain interest liabilities related to prior tax
periods. See Note 9 to the Company's audited consolidated financial
statements for the fiscal year ended June 30, 1996. The Company had
adequately accrued for this liability prior to payment, and no further
amounts are due with regard to these matters.
In fiscal years 1996, 1995, and 1994, the Company generated net cash flow
from operating activities of $51.9 million, $38.4 million, and $28.7 million,
respectively. Cash required to fund the purchase of repairable parts and for
capital expenditures totaled $70.8 million, $14.9 million and $2.2 million,
during fiscal 1996, 1995 and 1994, respectively.
93
<PAGE>
The majority of the Company's capital expenditures have historically
consisted of purchases of repairable parts needed to meet the service
requirements of customers under computer maintenance contracts. These
repairable parts are generally purchased from OEMs and other third parties.
The Company expended $86.4 million for the purchase of repairable parts in
fiscal 1997, including purchases relating to the Company's Compaq "End of
Life" Program. As of March 31, 1997, the Company had no material commitments
for purchases of repairable parts or for capital expenditures other than
those in the ordinary course of business.
The Company maintains a significant inventory of expendable and repairable
parts. Expendable parts are expensed as they are used in the operations of
the business. Repairable parts are recorded at cost at the time of their
acquisition and amortized over five years. The Company maintains a high level
of inventories due to the wide range of products serviced, ranging from
mainframe to personal computers.
The Company provides for obsolescence when accounting for expendable
inventories and reviews obsolescence as it applies to its repairable parts.
The Company believes it has provided adequate reserves for obsolescence for
expendable inventories. The Company believes that accumulated amortization on
repairable parts renders the need for an obsolescence reserve with respect to
repairable parts unnecessary.
The most significant of the Company's acquisitions during the 1997 Period
was the Memorex Telex acquisition on November 15, 1996. The base purchase
price was $50.4 million, comprised of the Company's assumption of $26.0
million of liabilities under acquired customer maintenance contracts, and
$24.4 million in cash after taking into account certain purchase price
adjustments.
The balance sheet reflects working capital (deficiency) as of March 31,
1997 of $10.1 million, and as of June 30, 1996, 1995, and 1994, of $12.9
million, ($51.8) million and ($34.0) million, respectively, which deficits
for 1995 and 1994 were primarily attributable to the use of short-term
liabilities to fund the purchase of long-term assets.
The allowance for uncollectible accounts at March 31, 1997 and 1996
amounted to 7.9% and 9.4% of trade receivables, respectively. The allowance
for uncollectible accounts at June 30, 1996 and 1995 amounted to 9.4% and
19.2% of trade receivables, respectively, because of the Company's write-off
experience with respect to accounts receivable obtained by acquisition and
the potential offset against an OEM's trade receivable in respect of
unreturned, unused and replaced parts.
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 of three waste disposal sites that have been identified by
the U.S. Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party in respect of a fourth, related site, but has not received
any other communication in respect of that site. The Company has estimated
that its share of the costs of the clean-up of one of the sites will be
approximately $500,000, which has been provided for in liabilities related to
the discontinued products division in the Company's financial statements.
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 share, if any, of 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. See Note 18 of the Notes to the Company's
Consolidated Financial Statements. See "Risk Factors--Potential Environmental
Liabilities."
EFFECT OF INFLATION; SEASONALITY
Inflation has not been a material factor affecting the Company's business.
In recent years, the cost of electronic components has remained relatively
stable due to competitive pressures within the industry, which has enabled
the Company to contain its service costs. The Company's general operating
expenses, such as salaries, employee benefits, and facilities costs, are
subject to normal inflationary pressures.
The operations of the Company are generally not subject to seasonal
fluctuations.
94
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning the current
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Kenneth Draeger ....... 56 Chairman and Chief Executive Officer and Director
Stephen J. Felice .... 40 President
Thomas J. Fitzpatrick 39 Vice President and Chief Financial Officer
Joseph S. Giordano ... 42 Senior Vice President--Operations
James J. Greenwell ... 38 Senior Vice President--Sales & Marketing
Thomas M. Molchan .... 42 General Counsel and Corporate Secretary
Dwight T. Wilson ...... 41 Vice President--Human Resources
Bruce K. Anderson .... 57 Director
Michael C. Brooks .... 52 Director
Thomas E. McInerney ... 55 Director
Arthur F. Weinbach .... 54 Director
</TABLE>
Kenneth Draeger has been the Chief Executive Officer of the Company since
July 1992 and Chairman of the Company since November 1995. From 1988 to 1991,
Mr. Draeger was President of Agfa/Compugraphic, a manufacturer of electronic
pre-press equipment. Mr. Draeger is also a director of Galileo Corporation.
Mr. Draeger is a U.S. citizen.
Stephen J. Felice has been the President of the Company since October
1995. Mr. Felice joined BABBS in March 1987. He served as Vice President and
General Manager, Sales and Operations from January 1991 to October 1995 and
was responsible for all service delivery, sales activity, customer
management, and marketing channels with management responsibility over almost
3,000 employees.
Thomas J. Fitzpatrick has been the Vice President and Chief Financial
Officer of the Company since August 1996. Prior to August 1996 Mr.
Fitzpatrick was Vice President of Network Finance at Bell Atlantic Network
Services, Inc. Mr. Fitzpatrick served more than eight years at Bell Atlantic
Business Systems Services, including over four years as Vice President and
Chief Financial Officer.
Joseph S. Giordano has been Senior Vice President--Operations of the
Company since October 1995. From October 1993 to October 1995, Mr. Giordano
was Vice President Sales and Service Delivery of BABSS. From January 1991 to
October 1993, he was an Area General Manager of BABSS.
James J. Greenwell has been Senior Vice President--Sales & Marketing of
the Company since October 1995, and was Vice President Sales and Marketing of
the Company from 1993 to October 1995. From January 1992 to 1993, Mr.
Greenwell was Director of Operations of the Company's Qantel operation. Prior
to January 1992, he was Vice President, Sales and Marketing of Qantel
Corporation.
Thomas M. Molchan has been General Counsel and Corporate Secretary of the
Company since October 1995. From December 1986 to October 1995, he was Vice
President and General Counsel of BABSS.
Dwight T. Wilson has been Vice President--Human Resources of the Company
since October 1995. From April 1994 to October 1995, Mr. Wilson was Vice
President--Human Resources of BABSS. From October 1990 to March 1994, Mr.
Wilson was Director, Human Resources Policies and Planning of BABSS.
Bruce K. Anderson has been a Director of the Company since 1988. Mr.
Anderson has been a General Partner of certain Welsh affiliated partnerships
since 1979. Mr. Anderson is also a director of SEER Technologies and Broadway
& Seymour.
Michael C. Brooks has been a Director of the Company since 1988. Mr.
Brooks has been a General Partner of J.H. Whitney since January 1985 and
currently serves as Managing Partner. Mr. Brooks is also a director of
SunGard Data Systems, Inc. and Nitinol Medical Technologies, Inc.
95
<PAGE>
Thomas E. McInerney has been a Director of the Company since 1988. From
1994 to 1995, Mr. McInerney served as Chairman of the Company. Mr. McInerney
has been a General Partner of certain Welsh Carson affiliated partnerships
since 1991. Mr. McInerney is also a director of Bisys Group, Inc. and Aurora
Electronics, Inc.
Arthur F. Weinbach has been a Director of the Company since 1996. Mr.
Weinbach is President and Chief Executive Officer and a Director of Automatic
Data Processing, Inc. ("ADP"). Since 1981, he has served in various executive
and managerial positions with ADP, including over nine years as Chief
Financial Officer and six years as a member of ADP's Board of Directors.
Prior to joining ADP, Mr. Weinbach was a Partner with Touche Ross & Co., a
predecessor of Deloitte & Touche LLP. Mr. Weinbach is also a director of
Health Plan Services Inc.
96
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of May 15, 1997
(except as otherwise noted) regarding the ownership of Company Common Stock
(i) by each person known by the Company to be the beneficial owner of more
than five percent of the outstanding Company Common Stock, (ii) by each
director of the Company, (iii) by each executive officer of the Company named
in the Summary Compensation Table included elsewhere in this Proxy
Statement/Prospectus and (iv) by all current executive officers and directors
of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER OWNED(1) OF CLASS(1)
- ---------------- -------- -----------
<S> <C> <C>
Welsh Carson Anderson & Stowe
320 Park Avenue, Suite 2500
New York, New York 10022(2).................... 9,704,626 34.9%
J.H. Whitney & Co.
177 Broad Street
Stamford, Connecticut 06901(3)................. 5,602,060 20.1
Kenneth Draeger(4)(5)........................... 1,251,310 4.5
Stephen J. Felice(5)............................ 25,000 *
Thomas J. Fitzpatrick........................... 500 *
James J. Greenwell(5)(6)........................ 123,500 *
Thomas M. Molchan(5)............................ 8,250 *
Bruce K. Anderson(7)............................ 9,770,082 35.1
Michael C. Brooks(8)............................ 5,645,946 20.3
Thomas E. McInerney(9).......................... 9,757,003 35.1
Arthur F. Weinbach(10).......................... 3,000 *
Edgemont Asset Management(11)
140 East 45th Street
New York, New York 10017....................... 1,700,000 6.1
All current executive officers and directors as
a group (11 persons)........................... 16,893,715 60.7
</TABLE>
* Less than one percent.
- ------------
(1) Applicable percentage of ownership is based on 27,817,830 shares of
Company Common Stock outstanding as of May 15, 1997, together with
applicable options for such stockholders. In accordance with the
rules of the Commission, shares of Company Common Stock that are
exercisable as of May 15, 1997 or exercisable within 60 days
thereafter are deemed to be outstanding and beneficially owned by the
person holding such option for purpose of computing such person's
percentage ownership, but are not treated as outstanding for the
purpose of computing the percentage of any other person. The nature
of ownership consists of sole voting or investment power unless
otherwise noted.
(2) Includes the following: 4,155,947 shares of Company Common Stock
owned by Welsh, Carson, Anderson & Stowe IV, a limited partnership of
which the general partner is a partnership comprised of Patrick J.
Welsh ("Welsh"), Russell L. Carson ("Carson"), Bruce K. Anderson
("Anderson"), Richard H. Stowe ("Stowe"), Andrew M. Paul ("Paul") and
Thomas E. McInerney ("McInerney"); 2,914,857 shares of Company Common
Stock owned by WCAS Capital Partners, a limited partnership of which
the general partner is a partnership comprised of Welsh, Carson,
Anderson, Stowe, Paul and McInerney; 2,266,410 shares of Company
Common Stock owned by Welsh, Carson, Anderson & Stowe VI, L.P., a
limited partnership of which the general partner is a partnership
comprised of Welsh, Carson, Anderson, Stowe, McInerney, Paul, Laura
M. VanBuren ("VanBuren"), James B. Hoover, Robert A. Minicucci and
Anthony J. de Nicola; 297,606 shares of Company Common Stock issuable
upon exercise of a currently exercisable warrant issued to WCAS
97
<PAGE>
Capital Partners II, a limited partnership of which the general
partner is a partnership comprised of Welsh, Carson, Anderson, Stowe,
Paul and McInerney; 51,176 shares of Company Common Stock owned by
WCAS Information Partners, a limited partnership of which the general
partner is a partnership comprised of Anderson and McInerney; and
18,630 shares of Company Common Stock owned by WCAS Venture Partners,
a limited partnership of which the general partner is a partnership
comprised of Welsh, Carson, Anderson, Stowe, McInerney, Paul and
VanBuren. The Company believes that the general partners of each fund
share voting and investment power in respect of such shares.
(3) Includes the following: 4,309,821 shares of Company Common Stock
owned directly by J.H. Whitney; 1,121,095 shares of Company Common
Stock owned by Whitney 1990 Equity Fund L.P. of which J.H. Whitney is
a general partner; and 171,144 shares of Company Common Stock
issuable upon exercise of currently exercisable warrants owned by
Whitney Subordinated Debt Fund, L.P. of which J.H. Whitney is a
general partner. Mr. Brooks is a general partner of J.H. Whitney. The
Company believes that the general partners of J.H. Whitney share
voting and investment power in respect of such shares.
(4) Includes 1,052,310 options that are exercisable as of May 15, 1997 or
within 60 days thereafter.
(5) In connection with the acquisition of Bell Atlantic Business Systems
Services, Inc. ("BABSS") and the resulting reorganization of the
Company's management, the following current executive officers of the
Company received stock option grants, at an exercise price of $8.00
per share, on November 29, 1995: Kenneth Draeger received an option
to purchase 70,000 shares of Company Common Stock; Stephen J. Felice
received an option to purchase 100,000 shares of Company Common
Stock; R. Peter Zimmermann received an option to purchase 15,000
shares of Company Common Stock; James J. Greenwell received an option
to purchase 10,000 shares of Company Common Stock; Thomas M. Molchan
received an option to purchase 33,000 shares of Company Common Stock;
Joseph S. Giordano received an option to purchase 32,000 shares of
Company Common Stock; and Dwight T. Wilson received an option to
purchase 25,000 shares of Company Common Stock. These options vest in
four equal annual increments commencing on November 29, 1996. Of
these grants, the amounts shown in the table for Messrs. Draeger,
Felice, Greenwell, and Molchan include 17,500; 22,000; 2,500; and
8,250 options, respectively, that are exercisable as of May 15, 1997
or within 60 days thereafter.
(6) Includes 79,000 options that are exercisable as of May 15, 1997 or
within 60 days thereafter.
(7) Includes 64,456 shares of Company Common Stock owned directly by
Anderson and options to purchase 1,000 shares that are exercisable as
of May 15, 1997 or within 60 days thereafter and 9,704,626 shares of
Company Common Stock beneficially owned by certain Welsh Carson
entities of which Anderson is a general partner. See footnote (2).
(8) Includes 42,886 shares of Company Common Stock owned directly by Mr.
Brooks and options to purchase 1,000 shares that are exercisable as
of May 15, 1997 or within 60 days thereafter and shares of Company
Common Stock beneficially owned by certain J.H. Whitney entities of
which Mr. Brooks is a general partner. See footnote (3).
(9) Includes 51,377 shares of Company Common Stock owned directly by
McInerney and options to purchase 1,000 shares that are exercisable
as of May 15, 1997 or within 60 days thereafter and 9,704,626 shares
of Company Common Stock beneficially owned by certain WCAS entities
of which McInerney is a general partner. See footnote (2).
(10) Includes options for 2,000 shares that are exercisable as of May 15,
1997 or within 60 days thereafter.
(11) As disclosed in the Schedule 13F filed by Edgemont Asset Management
with the Commission as of March 31, 1997.
It is expected that, upon consummation of the Merger, the DLJMB Funds will
own, in the aggregate, approximately 77.2% of the outstanding Company Common
Stock and DLJMB Warrants exercisable immediately for up to 11.2% of the
Company Common Stock (or, if the DLJMB Funds acquire the Direct Shares, 88.4%
of the outstanding Company Common Stock) and the public stockholders will own
approximately 11.6% of the outstanding Company Common Stock (calculated, in
each case, on a fully diluted basis). In addition, DLJMB has proposed that
certain members of the Company management be offered the opportunity to
purchase shares of Company Common Stock at or following the Effective Time.
98
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth for the years ended June 30, 1997, 1996 and
1995 certain compensation paid by the Company to its Chief Executive Officer
and the four other most highly paid executive officers of the Company whose
cash compensation exceeded $100,000 for the year ended June 30, 1997. Certain
members of management are expected to enter into new employment agreements at
the Effective Time which may alter their compensation arrangements. See "The
Merger--Interests of Certain Persons in the Merger."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
---------------------------------------- --------------
SECURITIES
OTHER UNDERLYING
SALARY BONUS ANNUAL OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)
- ---------------------------------- ---- ----------- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Kenneth Draeger 1997 425,000 -- (1) -- 50,000
Chief Executive Officer 1996 355,000 484,500 (2) -- 70,000
1995 250,625 375,000 -- --
Stephen J. Felice 1997 225,000 60,000 (1) -- 9,000
President 1996 157,500(3) 130,340 (3) -- 100,000
1995 -- -- -- --
Thomas J. Fitzpatrick 1997 168,077(4) 59,866 (1)(4) 224,908 (5) 100,000
Vice President and Chief 1996 -- -- -- --
Financial Officer 1995 -- -- -- --
Thomas M. Molchan 1997 139,300 27,500 (1) -- 10,000
General Counsel and Corporate 1996 90,020(3) 42,725 (3) -- 33,000
Secretary 1995 -- -- -- --
James J. Greenwell 1997 140,500 22,500 (1) -- --
Senior Vice President--Sales and 1996 131,000 58,460 -- 10,000
Marketing 1995 129,500 90,000 -- 40,000
</TABLE>
- ------------
(1) Final payment of bonuses for fiscal 1997 will be determined in Au gust
1997. Therefore, there may be additional bonus payments for fiscal
1997 which have not been determined at the time of filing.
(2) Mr. Draeger's bonus for fiscal 1996 was paid in two parts. $357,000
of this bonus was paid on August 15, 1996. The remaining $127,500 was
paid on May 15, 1997 after completion of ten consecutive trading days
where the share price of Common Stock closed above $18.00.
(3) Messrs. Felice and Molchan joined the Company and were named
executive officers on October 21, 1995. The salaries and bonuses
shown reflect the amount earned after such date through June 30,
1996.
(4) Mr. Fitzpatrick joined the Company and was named an executive officer
on August 12, 1996. The salary and bonus reflect the amount earned
after such date through June 30, 1997. Of the bonus amount, $30,000
was a one-time signing bonus.
(5) Of this amount, $223,908 is for relocation assistance. The other
$1,000 was for tax preparation assistance.
99
<PAGE>
The following table summarizes stock options granted during fiscal 1997 to
the persons named in the Summary Compensation Table.
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR
------------------------------------------------------- OPTION TERM(1)
NUMBER OF -----------------------
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS
OPTIONS GRANTED TO EXERCISE OF
GRANTED(1) EMPLOYEES IN BASE PRICE EXPIRATION
NAME(2) (#) FISCAL 1997 ($/SH) DATE 5%($) 10%($)
- --------------------- ------------ ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Draeger....... 50,000 4.3% $16.750 12/04/06 $ 526,699 $1,334,759
Stephen J. Felice .... 9,000 0.8 16.750 12/04/06 94,806 240,257
Thomas J. 100,000 (3) 8.7 22.875 08/12/06 1,438,596 3,645,686
Fitzpatrick.......... 100,000 8.7 14.000 09/08/06 880,452 2,231,239
Thomas M. Molchan .... 10,000 0.9 16.750 12/04/06 105,340 266,952
James J. Greenwell ... -- -- -- -- -- --
</TABLE>
- ------------
(1) Options vest in four equal annual installments commencing on the
first anniversary of the date of grant. Unvested options are subject
to termination upon termination of the optionee's service with the
Company.
(2) Potential Realizable Values are based on an assumption that the share
price of the Company Common Stock starts equal to the exercise price
shown for each particular option grant and appreciates at the annual
rate shown (compounded annually) from the date of the grant until the
end of the term of the option. These amounts are reported net of the
option exercise price, but before any taxes associated with exercise
or subsequent sale of the underlying stock. The actual value, if any,
an optionholder may realize will be a function of the extent to which
the share price exceeds the exercise price on the date the option is
exercised and also will depend on the optionholder's continued
employment through the vesting period. The actual value to be
realized by the optionholder may be greater or less than the values
estimated in this table.
(3) This grant which was issued on August 13, 1996 was subsequently
canceled and, as shown in the table, replaced by another grant on
September 9, 1996.
The following table summarizes option exercises during fiscal 1997 and the
value of vested and unvested options for the persons named in the Summary
Compensation Table at June 30, 1997. Year-end values are based upon a price
of $22.75 per share, which was the closing market price of a share of Common
Stock on June 30, 1997, the last trading day of the fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT JUNE 30, 1997 AT JUNE 30, 1997
----------------------------- -----------------------------
SHARES
ACQUIRED ON
EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
- ---------------------- ------------- -------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Draeger........ 25,000 337,500 1,109,780 102,500 24,561,355 1,074,375
Stephen J. Felice .... 3,000 24,750 22,000 84,000 324,500 1,160,250
Thomas J. Fitzpatrick -- -- -- 100,000 -- 600,000
Thomas M. Molchan...... -- -- 8,250 34,750 121,688 425,063
James J. Greenwell .... 60,000 1,040,000 79,000 27,500 1,629,000 445,625
</TABLE>
The Company does not currently grant any long-term incentives, other than
stock options, to its executives or other employees, nor does it sponsor any
defined benefit or actuarial plans at this time.
Immediately prior to the Effective Time, all outstanding options granted
to employees and directors, whether or not vested, will be cancelled, and the
holders of such options will receive a cash payment in respect of such
options following the Effective Time. Alternatively, a portion of such
options may be converted into options to purchase common stock of the
Surviving Corporation. See "The Merger--Effect on Stock Options and Employee
Benefits Matters."
100
<PAGE>
EMPLOYMENT AND SEVERANCE AGREEMENTS
Mr. Draeger entered into an employment agreement with Decision Data Inc.,
the predecessor of a wholly owned subsidiary of the Company, in October 1992.
The employment agreement, which is terminable at will by either party,
provides for a base salary of not less than $250,000 plus an annual bonus
awarded pursuant to a target formula developed by the Board of Directors. The
employment agreement also provides for a bonus to be paid to Mr. Draeger in
the event of a change of control of the Company, ranging from $300,000 if the
Equity Value (as defined in the employment agreement) of the transaction is
at least $40.0 million, to an amount equal to $2.0 million plus 2% of any
excess in Equity Value over $100.0 million for transactions with an Equity
Value in excess of $100.0 million. The amount payable to Mr. Draeger upon
consummation of the Merger is approximately $13.9 million. In addition,
severance benefits are payable to Mr. Draeger in the event that his
employment is terminated, other than for cause (as defined in the agreement),
death or disability, for a period of 18 months following such termination in
a monthly amount equal to one-twelfth of his annual salary. Mr. Draeger has
agreed not to compete with the Company for a one year period after
termination of his employment for any reason. Mr. Draeger is expected to
enter into a new employment agreement with the Company at the Effective Time.
See "The Merger--Interests of Certain Persons in the Merger."
Messrs. Felice, Fitzpatrick, Giordano, Greenwell, Molchan and Wilson have
severance arrangements with the Company which in various instances provide
for a severance payment of up to one times base annual salary, a pro-rata
portion of accrued bonus, and the continuation of certain benefits for up to
one year in the event of termination without cause.
COMPENSATION OF DIRECTORS
Non-employee directors receive an annual retainer of $10,000 as well as
$1,500 for attendance at any meeting of the Board of Directors or any meeting
of the Executive Committee, Audit Committee or Compensation Committee, except
telephonic meetings and committee meetings held on the same date as a Board
meeting.
Under the terms of the Company's Stock Option and Restricted Stock
Purchase Plan (the "Plan"), as amended in 1996, each non-employee director is
entitled to receive a one-time grant of options to purchase 4,000 shares of
Company Common Stock vesting 25% a year over four years. In addition, the
Plan provides for a one-time grant of options to purchase 1,000 shares of
Common Stock to each non-employee director elected on or after May 2, 1996,
vesting immediately.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In connection with the financing of the Company's acquisition of BABSS,
the Company issued 181,145 shares, 109,532 shares, 848 shares and 1,695
shares of Series C Preferred Stock (subsequently converted into 3,751,486
shares of Company Common Stock in connection with the initial public
offering) to certain partnerships associated with WCAS, J.H. Whitney, Mr.
McInerney and Mr. Anderson, respectively, in each case at a price of $100 per
share. In addition, the Company issued to a partnership associated with WCAS
and a partnership associated with J.H. Whitney, respectively, warrants to
purchase 297,606 and 171,144 shares of Company Common Stock, at an exercise
price of $.10 per share, for a cash purchase price of $7.25333 per warrant.
Finally, the Company sold $19.1 million and $10.9 million aggregate principal
amount of 10.101% subordinated notes due 2001 (the "Notes") to a partnership
associated with WCAS and a partnership associated with J.H. Whitney,
respectively. The Notes were repaid with proceeds from the Company's initial
public offering. Messrs. Anderson and McInerney are general partners of
certain WCAS entities and Mr. Brooks is a general partner of J.H. Whitney.
In December 1995, the Company paid J.H. Whitney $125,000 representing the
payment of past due amounts for financial consulting services rendered by
J.H. Whitney to the Company in a prior transaction. Mr. Brooks is a general
partner of J.H. Whitney.
Mr. McInerney previously served as Chairman of the Company from 1994 to
1995.
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MANAGEMENT FOLLOWING THE MERGER
BOARD OF DIRECTORS
The following table sets forth the name, age and position with the Company
of each person who is expected to serve as a director of the Company
following the Effective Time. Following the Effective Time, directors of the
Company are expected to be compensated in accordance with the current
policies of the Company. See "Compensation of Executive Officers and
Directors--Compensation of Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Kenneth Draeger ........... 56 Chairman and Chief Executive Officer and Director
Peter T. Grauer ........... 51 Director
Lawrence M. v. D. Schloss 42 Director
Tom G. Greig .............. 49 Director
Kirk B. Wortman ........... 34 Director
</TABLE>
In addition, it is expected that two additional directors, not affiliated
with DLJMB or the Company, will be appointed at the Effective Time.
Kenneth Draeger has been the Chief Executive Officer of the Company since
July 1992 and Chairman of the Company since November 1995. From 1988 to 1991,
Mr. Draeger was President of Agfa/ Compugraphic, a manufacturer of electronic
pre-press equipment. Mr. Draeger is also a director of Galileo Corporation.
Peter T. Grauer has been a Managing Director of DLJ Merchant Banking II,
Inc. since September 1992. From April 1989 to September 1992, he was
Co-Chairman of Grauer & Wheat, Inc., an investment firm specializing in
leveraged buyouts. Prior thereto Mr. Grauer was a Senior Vice President of
Donaldson, Lufkin & Jenrette Securities Corporation. Mr. Grauer is a director
of Doane Products Co., SDW Holdings, Inc. and Total Renal Care, Inc.
(NYSE:(TRL)).
Lawrence M.v.D. Schloss has been the Managing Partner of DLJ Merchant
Banking II, Inc. since November 1995. Prior to November 1995, he was the
Chief Operating Officer and a Managing Director of DLJ Merchant Banking, Inc.
Mr. Schloss currently serves as Chairman of the Board of McCulloch
Corporation and as a director of Wilson Greatbatch, Inc. Mr. Schloss has
previously served as a director of GTECH Corporation (NYSE:GTK), Krueger
International, Inc., OSi Specialties, Inc. and MPB Corporation.
Tom G. Greig is a Managing Director in the Investment Banking Division of
DLJ and serves as co-head of the Technology Investment Banking Group. Mr.
Greig is a director of Manufacturers Services Limited, a contract electronics
manufacturer. Mr. Greig has over 20 years of experience in the investment
banking industry, the majority of which he has spent working with technology
based companies.
Kirk B. Wortman has been a Principal of DLJ Merchant Banking II, Inc.
since February 1997. For the five years prior to joining DLJ Merchant
Banking, Inc. he worked in the Leveraged Finance Group within DLJ's
Investment Banking Group, most recently as a Senior Vice President.
EXECUTIVE OFFICERS
Pursuant to the Merger Agreement, the officers of the Company at the
Effective Time will be the officers of the Surviving Corporation. For
additional information regarding the officers of the Company, see "Directors
and Executive Officers of the Company."
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REGULATORY CONSIDERATIONS
ANTITRUST
Under the HSR Act and the rules that have been promulgated thereunder (the
"Rules") by the Federal Trade Commission (the "FTC"), certain merger
transactions may not be consummated unless certain information has been
furnished to the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the FTC and certain applicable waiting periods have
expired. The Merger is subject to the requirements of the HSR Act and the
Rules.
Pursuant to the requirements of the HSR Act, DLJMB filed Notification and
Report Forms with respect to the Merger with the Antitrust Division and the
FTC on June 25, 1995. The Company filed a Notification and Report Form with
respect to the Merger on June 27, 1997. The waiting period applicable to the
Merger was terminated on July 15, 1997.
At any time before or after the consummation of the Merger, the Antitrust
Division or the FTC could take such action under the antitrust laws as either
deems necessary or desirable in the public interest, including seeking to
enjoin the Merger or seeking divestiture of the Company by the DLJMB Funds
following consummation of the Merger. Private parties (including individual
states) may also bring legal actions under the antitrust laws. Neither DLJMB
nor the Company believes that the consummation of the Merger will result in a
violation of any applicable antitrust laws. However, there can be no
assurance that a challenge to the Merger on antitrust grounds will not be
made, or if such a challenge is made, what the result will be.
In addition, the Company and the DLJMB Funds may be required to make
other filings with certain regulatory authorities, including a filing under
Section 114 of the Canadian Competition Act. Section 114 of the Canadian
Competition Act requires that advance notification of certain substantial
mergers be made to the Director of Investigation and Research. While a
notification prior to the consummation of the Merger may be required, the
parties are not required under applicable law to obtain the consent of the
Director of Investigation and Research prior to the consummation of the
transaction.
EXON-FLORIO
Under Section 721 of the Defense Production Act of 1950, as amended
("Exon-Florio"), the President of the United States is authorized to prohibit
or suspend acquisitions, mergers or takeovers by foreign persons of persons
engaged in interstate commerce in the United States if the President
determines, after investigation, that such foreign persons in exercising
control of such acquired persons might take action that threatens to impair
the national security of the United States and that other provisions of
existing law do not provide adequate authority to protect national security.
Pursuant to Exon-Florio, notice of an acquisition by a foreign person may be
made to the Committee on Foreign Investment in the United States ("CFIUS")
either voluntarily by the parties to such proposed acquisition, merger or
takeover or by any member of CFIUS. Because DLJMB is owned, indirectly, in
part by a foreign entity, on July 8, 1997 DLJ and the Company filed with
CFIUS a joint notice of the transactions contemplated by the Merger
Agreement. CFIUS must inform DLJ by August 7, 1997 whether it will conduct an
investigation in connection with the transactions contemplated by the Merger
Agreement.
DEFENSE DEPARTMENT
Under the National Industrial Security Operating Manual, companies with
contracts or subcontracts with the U.S. government that involve access to
classified information must, if they will come under foreign ownership,
control or influence ("FOCI"), notify the U.S. Department of Defense. If they
wish to retain their security clearances, such companies must propose a plan
of action to mitigate or negate the FOCI. Operating Co. currently requires
security clearances in order to perform services under certain classified
contracts. As a result, on May 13, 1997, the Company notified the Defense
Department of the proposed Merger, and on June 27, 1997 it submitted to the
Defense Department its plan to mitigate or negate FOCI through use of a
Special Security Agreement. Among other things, the Company has proposed to
mitigate the FOCI by the addition of two independent directors to the board
of directors of Operating Co. There is no deadline by which the Department of
Defense must approve a plan. If no plan has been approved by the Effective
Time, the status of existing contracts will be subject to case-by-case review
and Operating Co. will be unable to bid on new classified government work
until and unless such an approval is forthcoming.
MERGERSUB AND DLJMB
MergerSub, a Delaware corporation, was organized in connection with the
Merger and has not carried on any activities to date other than those
incident to its formation and the transactions
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<PAGE>
contemplated by the Merger Agreement and the Voting Agreement, respectively.
As of the date hereof, all of the outstanding capital stock of MergerSub is
owned in the aggregate by the DLJMB Funds, which include DLJMB, a Delaware
limited partnership, DLJ Offshore Partners II, C.V. ("Offshore"), a
Netherlands Antilles limited partnership, DLJ Diversified Partners, L.P.
("Diversified"), a Delaware limited partnership, DLJMB Funding II, Inc.
("Funding"), a Delaware corporation, UK Investment Plan 1997 Partners ("UK
Partners"), a Delaware partnership and DLJ First ESC, LLC ("DLJ First"), a
Delaware limited liability company. Immediately prior to consummation of the
Merger the following Additional Funds affiliated with DLJ Inc. will acquire
capital stock of MergerSub: DLJ Merchant Banking Partners II-A, L.P.
("DLJMB-A"), a Delaware limited partnership; DLJ Diversified Partners-A L.P.
("Diversified-A"), a Delaware limited partnership; DLJ EAB Partners, L.P.
("EAB"), a Delaware limited partnership; DLJ Millennium Partners, L.P.
("Millennium"), a Delaware limited partnership and DLJ Millennium Partners-A,
L.P. ("Millennium-A"), a Delaware limited partnership.
The two general partners of DLJMB, DLJMB-A, Millennium and EAB are DLJMB
Inc. and DLJ Merchant Banking II, LLC ("DLJMB LLC"). DLJMB Inc. is an
indirect, wholly-owned subsidiary of DLJ Inc. DLJMB Inc. is also the advisory
general partner of Offshore and DLJMB LLC is the associate general partner of
Offshore. The two general partners of Diversified and Diversified-A are DLJ
Diversified Partners, Inc. ("DLJDP"), a Delaware corporation and DLJ
Diversified Associates, LP ("DLJDA"), a Delaware limited partnership. The
general partner of DLJDA is DLJDP. DLJDP is an indirect, wholly-owned
subsidiary of DLJ. The manager of DLJ First is DLJ LBO Plans Management
Corporation, a Delaware corporation and a wholly-owned subsidiary of DLJ. The
general partners of UK Partners are DLJ and UK Investment Plan 1997, Inc., a
wholly-owned subsidiary of DLJ.
The directors of MergerSub are Messrs. Grauer and Wortman. The officers of
MergerSub are as of the date hereof: Mr. Grauer, as President and Treasurer,
and Mr. Wortman, as Vice President and Secretary. The principal offices of
MergerSub and the DLJMB Funds are located at 277 Park Avenue, New York, New
York 10171; telephone number (212) 892-3000. MergerSub owns no physical
properties. There are no pending legal proceedings to which MergerSub is a
party or which relate to its property.
Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate of DLJ,
Inc., is expected to receive a fee of $5.0 million in cash from MergerSub
upon consummation of the Merger.
The Institutional Investors include Apollo Advisors II, L.P. ("Apollo"),
Bain Capital, Inc. ("Bain Capital"), Thomas H. Lee Company ("THL"), certain
investment funds associated with DLJ Capital Corp. ("Sprout") and Ontario
Teachers' Pension Plan Board ("Teachers").
Any investment by Apollo in MergerSub (expected to represent approximately
6.57% of the outstanding Company Common Stock) would be made by Apollo
Investment Fund III, L.P., a Delaware limited partnership ("AIF III"), Apollo
Overseas Partners III, L.P., a Delaware limited partnership ("Overseas
Partners"), and Apollo (U.K.) Partners III, L.P., a limited partnership
organized under the laws of England ("Apollo UK Partners") (collectively,
"Apollo Entities"). Each of the Apollo Entities is principally engaged in the
business of investment securities.
Apollo Advisors II, L.P., a Delaware limited partnership ("Advisors"), is
the general partner of AIF III and the managing general partner of Overseas
Partners and Apollo UK Partners. Advisors is principally engaged in the
business of providing advice regarding investments by, and serving as the
general partner of, the Apollo Entities. The address of Apollo is 1301 Avenue
of the Americas, 38th Floor, New York, New York 10019.
Any investment by Bain Capital in MergerSub (expected to represent
approximately 6.57% of the outstanding Company Common Stock) would by made by
Bain Capital Fund V, L.P., Bain Capital Fund, V-B, L.P., BCIP Associates, and
BCIP Trust Associates, L.P. Bain Capital Investors V, Inc. is the general
partner of Bain Capital Partners V, L.P ("BCP V"), a Delaware limited
partnership. BCP V is the general partner of Bain Capital Fund V, L.P. and
Bain Capital Fund V-B, L.P (the "Bain Fund Vs"), both of which are Delaware
limited partnerships. The Bain Fund Vs' primary business activity is to make
investments in private equity securities and other interests in business
organizations, domestic and foreign.
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<PAGE>
BCIP Associates, a general partnership, and BCIP Trust Associates, L.P., a
limited partnership (together the "BCIPs"), are both organized under the laws
of the state of Delaware. The BCIPs' primary business activity is to make
investments in private equity securities and other interests in business
organizations, domestic and foreign. The address of Bain Capital is Two
Copely Place, Boston, Massachusetts 02116.
Any investment by THL in MergerSub (expected to represent approximately
6.57% of the outstanding Company Common Stock) would be made by Thomas H. Lee
Equity Fund III, L.P., a Delaware limited partnership ("Fund III"), Thomas H.
Lee Foreign Fund III, L.P., a Delaware limited partnership ("Foreign Fund"),
THL Co-Investors III-A, LLC, a Massachusetts limited liability company
("Co-Investors A"), and THL Co-Investors III-B, LLC, a Massachusetts limited
liability company ("Co-Investors B"). The general partner of each of Fund III
and Foreign Fund is THL Equity Advisors III Limited Partnership, a
Massachusetts limited partnership ("Equity Advisors"). The general partner of
Equity Advisors is THL Equity Trust III, a Massachusetts business trust, the
beneficial owners of which are affiliates of Thomas H. Lee Company. The
manager of each of Co-Investors A and Co-Investors B is Thomas H. Lee. The
address of THL is 75 State Street, 26th Floor, Boston, Massachusetts 02109.
DLJ Capital Corp., a Delaware corporation, Sprout Growth II, L.P., a
Delaware limited Partnership, The Sprout CEO Fund, L.P., a Delaware limited
partnership and one additional entity managed by the Sprout Group, the
Venture Capital affiliate of DLJ, may also acquire capital stock of
MergerSub. DLJ Capital Corp. ("DLJCC") is a wholly owned subsidiary of DLJ
Sprout Growth II, L.P. has two general partners: DLJCC is the managing
general partner and DLJ Growth Associates II, L.P. is the general partner.
DLJ Growth Associates II, L.P. is a Delaware limited partnership, whose
general partners are a group of individual employees of DLJCC and DLJ Growth
Associates (II), Inc., a Delaware corporation which is a wholly owned
subsidiary of DLJCC. DLJCC is the managing general partner of The Sprout CEO
Fund. The address of Sprout is 277 Park Avenue, New York, New York 10172.
Teachers is an independent corporation established in 1990 to administer
the benefits and manage the investments of the pension plan for over 200,000
Ontario teachers. At year end 1996, the fund assets stood at a total of Cdn
$51 billion. The address of Teachers is 5650 Yonge Street, 5th Floor, North
York, Ontario M2M 4H5.
DISSENTING STOCKHOLDERS' RIGHTS
Holders of shares of Company Common Stock are entitled to appraisal rights
under Section 262 ("Section 262") of the DGCL, provided that they comply with
the conditions established by Section 262. Section 262 is reprinted in its
entirety as Annex D to this Proxy Statement/Prospectus. The following
discussion does not purport to be a complete statement of the law relating to
appraisal rights and is qualified in its entirety by reference to Annex D.
This discussion and Annex D should be reviewed carefully by any holder who
wishes to exercise statutory appraisal rights or who wishes to preserve the
right to do so, as failure to comply with the procedures set forth herein or
therein may result in the loss of appraisal rights. Stockholders of record
who desire to exercise their appraisal rights must: (i) hold shares of
Company Common Stock on the date of making a demand for appraisal; (ii)
continuously hold such shares through the Effective Time; (iii) deliver a
properly executed written demand for appraisal to the Company prior to the
vote by the stockholders of the Company on the Merger; (iv) not vote in favor
of the Merger or consent thereto in writing; (v) file any necessary petition
in the Delaware Court of Chancery (the "Delaware Court"), as more fully
described below, within 120 days after the Effective Time; and (vi) otherwise
satisfy all of the conditions described more fully below and in Annex D.
A record holder of shares of Company Common Stock who makes the demand
described below with respect to such shares, who continuously is the record
holder of such shares through the Effective Time, who otherwise complies with
the statutory requirements of Section 262 and who neither votes in favor of
the Merger nor consents thereto in writing will be entitled, if the Merger is
consummated, to receive payment of the fair value of his shares of Company
Common Stock as appraised by the Delaware Court. All references in Section
262 and in this summary of appraisal rights to a "stockholder" or "holders of
shares of Common Stock" are to the record holder or holders of shares of
Common Stock.
105
<PAGE>
Under Section 262, not less than 20 days prior to the Special Meeting, the
Company is required to notify each stockholder eligible for appraisal rights
of the availability of such appraisal rights. This Proxy Statement/Prospectus
constitutes notice to holders of Common Stock that appraisal rights are
available to them. Stockholders of record who desire to exercise their
appraisal rights must satisfy all of the conditions set forth herein. A
written demand for appraisal of any shares of Company Common Stock must be
filed with the Company before the taking of the vote on the Merger. Such
written demand must reasonably inform the Company of the identity of the
stockholder of record and of such stockholder's intention to demand appraisal
of the Company Common Stock held by such stockholder. This written demand for
appraisal of shares must be in addition to and separate from any proxy or
vote abstaining from or voting against the Merger. Voting against, abstaining
from voting on, failing to return a proxy with respect to, or failing to vote
on the Merger will not constitute a demand for appraisal within Section 262.
Stockholders who desire to exercise appraisal rights must not vote in
favor of the Merger or consent thereto in writing. Voting in favor of the
Merger or delivering a proxy in connection with the Special Meeting (unless
the proxy votes against, or expressly abstains from the vote on, the approval
of the Merger), will constitute a waiver of the stockholder's right of
appraisal and will nullify any written demand for appraisal submitted by the
stockholder.
A demand for appraisal must be executed by or on behalf of the stockholder
of record, fully and correctly, as such stockholder's name appears on the
certificate or certificates representing the shares of Company Common Stock.
A person having a beneficial interest in shares of Company Common Stock that
are held of record in the name of another person, such as a broker, fiduciary
or other nominee, must act promptly to cause the record holder to follow the
steps summarized herein properly and in a timely manner to perfect any
appraisal rights. If the shares of Company Common Stock are owned of record
by a person other than the beneficial owner, including a broker, fiduciary
(such as a trustee, guardian or custodian) or other nominee, such demand must
be executed by or for the record owner. If the shares of Common Stock are
owned of record by more than one person, as in a joint tenancy or tenancy in
common, such demand must be executed by or for all such joint owners. An
authorized agent, including an agent for two or more joint owners, may
execute the demand for appraisal for a stockholder of record; however, the
agent must identify the record owner and expressly disclose the fact that, in
exercising the demand, such person is acting as agent for the record owner. A
record owner, such as a broker, fiduciary or other nominee, who holds shares
of Common Stock as a nominee for others, may exercise appraisal rights with
respect to the shares held for all or less than all beneficial owners of
shares as to which such person is the record owner. In such case, the written
demand must set forth the number of shares covered by such demand. Where the
number of shares is not expressly stated, the demand will be presumed to
cover all shares of Common Stock outstanding in the name of such record
owner. A stockholder who elects to exercise appraisal rights should mail or
deliver his or her written demand to: DecisionOne Holdings Corp., 50 East
Swedesford Road, Frazer, PA 19355, Attention: Corporate Secretary. The
written demand for appraisal should specify the stockholder's name and
mailing address, the number of shares of Common Stock owned, and that the
stockholder is thereby demanding appraisal of his or her shares. A proxy or
vote against the Merger will not constitute such a demand.
Within ten days after the Effective Time, the Surviving Corporation must
provide notice of the Effective Time to all stockholders who have complied
with Section 262. Within 120 days after the Effective Time, either the
Surviving Corporation or any stockholder who has complied with the required
conditions of Section 262 may file a petition in the Delaware Court, with a
copy served on the Surviving Corporation in the case of a petition filed by a
stockholder, demanding a determination of the fair value of the shares of all
dissenting stockholders. The Surviving Corporation does not currently intend
to file an appraisal petition and stockholders seeking to exercise appraisal
rights should not assume that the Surviving Corporation will file such a
petition or that the Surviving Corporation will initiate any negotiations
with respect to the fair value of such shares. Accordingly, stockholders who
desire to have their shares appraised should initiate any petitions necessary
for the perfection of their appraisal rights within the time periods and in
the manner prescribed in Section 262. Within 120 days after the Effective
Time, any stockholder who has theretofore complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from the Surviving Corporation a statement setting forth the
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<PAGE>
aggregate number of shares of Common Stock not voted in favor of the Merger
and with respect to which demands for appraisal were received by the Company
and the number of holders of such shares. Such statement must be mailed
within 10 days after the written request therefor has been received by the
Surviving Corporation or within 10 days after expiration of the time for
delivery of demands for appraisal under Section 262, whichever is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled
to appraisal rights and will appraise the shares of Common Stock owned by
such stockholders, determining the fair value of such shares exclusive of any
element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. In determining fair value, the
Delaware Court is to take into account all relevant factors. In Weinberger v.
UOP, Inc., the Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court"
should be considered, and that, "fair price obviously requires consideration
of all relevant factors involving the value of a company." The Delaware
Supreme Court stated that in making this determination of fair value the
court must consider market value, asset value, dividends, earnings prospects,
the nature of the enterprise and any other facts which are known or which can
be ascertained as of the date of the merger and which throw any light on
future prospects of the merged corporation. In Weinberger, the Delaware
Supreme Court stated that "elements of future value, including the nature of
the enterprise, which are known or susceptible of proof as of the date of the
merger and not the product of speculation, may be considered." Section 262,
however, provides that fair value is to be "exclusive of any element of value
arising from the accomplishment or expectation of the merger."
Stockholders considering seeking appraisal should recognize that the fair
value of their shares as determined under Section 262 could be more than, the
same as or less than the Merger Consideration to be received if they do not
seek appraisal of their shares. The cost of the appraisal proceeding may be
determined by the Delaware Court and taxed against the parties as the
Delaware Court deems equitable in the circumstances. Upon application of a
dissenting stockholder of the Company, the Delaware Court may order that all
or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including without limitation,
reasonable attorneys' fees and the fees and expenses of experts, be charged
pro rata against the value of all shares of stock entitled to appraisal.
Any holder of shares of Common Stock who has duly demanded appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled
to vote for any purpose any shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for
dividends or distributions payable to stockholders of record at a date prior
to the Effective Time.
At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw such demand for appraisal and to accept the terms
offered in the Merger; after this period, the stockholder may withdraw such
demand for appraisal only with the consent of the Surviving Corporation. If
no petition for appraisal is filed with the Delaware Court within 120 days
after the Effective Time, stockholders' rights to appraisal will cease, and
all holders of shares of Common Stock will be entitled to receive the Merger
Consideration. Inasmuch as the Surviving Corporation has no obligation to
file such a petition, and has no present intention to do so, any holder of
shares of Common Stock who desires such a petition to be filed is advised to
file it on a timely basis.
Failure to take any required step in connection with the exercise of
appraisal rights may result in termination of such rights. In view of the
complexity of these provisions of the DGCL, stockholders who are considering
exercising their rights under Section 262 should consult with their legal
advisors.
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EXPERTS
The Consolidated Financial Statements of the Company as of June 30, 1996
and for each of the three years in the period ended June 30, 1996 and the
Consolidated Financial Statements of DecisionOne Corporation (formerly BABSS)
as of December 31, 1994 and October 20, 1995 and for the years ended December
31, 1993 and 1994 and the period from January 1, 1995 to October 20, 1995,
and the related financial statement schedules appearing in this Proxy
Statement/Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as set forth in their reports included herein and are included in
reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
LEGAL MATTERS
The validity of the Company Common Stock to be retained in connection
with the Merger will be passed upon for the Company by Morgan, Lewis &
Bockius LLP, Philadelphia, Pennsylvania.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
DECISIONONE HOLDINGS CORP.
Audited Financial Statements:
Independent Auditors' Report............................................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996................................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1994, 1995 and 1996 .... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1994, 1995
and 1996.................................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1994, 1995 and 1996 .... F-6
Notes to Consolidated Financial Statements................................................. F-7
Unaudited Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1996 and March 31, 1997 ............. F-27
Condensed Consolidated Statement of Operations--Three and Nine Months Ended March 31, 1996
and 1997.................................................................................. F-28
Condensed Consolidated Statement of Cash Flows--Nine Months Ended March 31, 1996 and 1997 . F-29
Notes to Condensed Consolidated Financial Statements ...................................... F-30
DECISIONONE CORPORATION (FORMERLY BELL ATLANTIC BUSINESS SYSTEMS SERVICES, INC.)
Audited Financial Statements:
Independent Auditors' Report............................................................... F-33
Consolidated Balance Sheets as of December 31, 1994 and October 20, 1995 .................. F-34
Consolidated Statements of Operations for the years ended December 31, 1993 and 1994 and
for the period January 1, 1995 to October 20, 1995........................................ F-35
Consolidated Statements of Stockholder's Equity for the years ended December 31, 1993 and
1994 and for the period January 1, 1995 to October 20, 1995............................... F-36
Consolidated Statements of Cash Flows for the years ended December 31, 1993 and 1994 and
for the period January 1, 1995 to October 20, 1995........................................ F-37
Notes to Consolidated Financial Statements................................................. F-38
</TABLE>
F-1
<PAGE>
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,
1995 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, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 at June 30, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
August 30, 1996
F-2
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
YEARS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 2,659 $ 8,221
Accounts receivable, net.......................................... 27,758 92,650
Inventories....................................................... 4,024 30,130
Prepaid expenses, income tax receivable and other assets ......... 7,636 4,752
Deferred tax asset................................................ 8,503 8,018
---------- ----------
Total current assets............................................. 43,707 143,771
---------- ----------
Repairable Parts, net.............................................. 27,360 154,970
Property and Equipment, net........................................ 4,429 32,430
Deferred Tax Asset, net............................................ 25,011 16,405
Intangibles, net................................................... 34,568 164,659
Other Assets....................................................... 478 2,275
---------- ----------
Total Assets....................................................... $135,553 $514,510
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt................................. $ 19,414 $ 2,321
Accounts payable.................................................. 11,412 53,347
Accrued expenses.................................................. 21,773 36,217
Deferred revenues................................................. 40,222 38,485
Income taxes payable.............................................. 1,648
Net liabilities related to discontinued products division ........ 1,056 479
---------- ----------
Total current liabilities........................................ 95,525 130,849
---------- ----------
Revolving Credit Loan and Long-term Debt........................... 6,157 188,582
Other Liabilities.................................................. 12,383 14,286
Redeemable Preferred Stock......................................... 6,811
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 5,000,000 shares;
none outstanding
Common stock, $.01 par value; authorized 25,000,000 shares in
1995 and 100,000,000 shares in 1996; issued and outstanding
8,935,348 shares in 1995 and 27,340,288 shares in 1996 .......... 89 273
Additional paid-in capital........................................ 107,991 255,262
Accumulated deficit............................................... (92,378) (73,516)
Foreign currency translation adjustment........................... 680 622
Pension liability adjustment...................................... (1,705) (1,848)
---------- ----------
Total shareholders' equity....................................... 14,677 180,793
---------- ----------
Total Liabilities and Shareholders' Equity......................... $135,553 $514,510
========== ==========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
DECISIONONE HOLDINGS AND SUBSIDIARIES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Service............................................ $ 97,548 $ 154,044 $ 526,703
Other.............................................. 10,868 8,976 13,488
------------ ------------ ------------
108,416 163,020 540,191
------------ ------------ ------------
Cost of Revenues:
Service............................................ 70,502 107,922 393,311
Other.............................................. 6,478 5,561 9,005
------------ ------------ ------------
76,980 113,483 402,316
------------ ------------ ------------
Gross Profit........................................ 31,436 49,537 137,875
Operating Expenses:
Selling, general and administrative expenses ...... 16,474 21,982 69,237
Amortization and write-off of intangibles ........ 5,380 6,776 15,673
Employee severance and unutilized lease costs
(credit).......................................... (6,401) 3,592
------------ ------------ ------------
Operating Income.................................... 15,983 20,779 49,373
Interest expense, net of interest income of $132 in
1994, $53 in 1995 and $239 in 1996................. 4,847 2,468 14,714
------------ ------------ ------------
Income from continuing operations before income
taxes (benefit), discontinued operations and
extraordinary item................................. 11,136 18,311 34,659
Provision for income taxes (benefit)................ 1,024 (23,104) 13,870
------------ ------------ ------------
Income before discontinued operations and
extraordinary item................................. 10,112 41,415 20,789
Discontinued operations--Income from operations of
discontinued products division...................... 1,113
------------ ------------ ------------
Income before extraordinary item.................... 10,112 42,528 20,789
Extraordinary item, net of tax benefit of $1,284 .. (1,927)
------------ ------------ ------------
Net income........................................ $ 10,112 $ 42,528 $ 18,862
============ ============ ============
Primary Income (Loss) Per Common Share:
Continuing operations.............................. $ 0.45 $ 1.81 $ 0.83
Discontinued operations............................ $ 0.05
Extraordinary item................................. $ (0.08)
------------ ------------ ------------
Net income ....................................... $ 0.45 $ 1.86 $ 0.75
============ ============ ============
Weighted average number of common and common
equivalent shares outstanding...................... 22,594,764 22,842,727 25,195,867
============ ============ ============
Fully Diluted Income (Loss) Per Common Share:
Continuing operations.............................. $ 0.45 $ 1.79 $ 0.82
Discontinued operations............................ $ 0.05
Extraordinary item................................. (0.08)
------------ ------------ ------------
Net income........................................ $ 0.45 $ 1.84 $ 0.74
============ ============ ============
Weighted average number of common and common
equivalent shares outstanding...................... 22,594,764 23,149,301 25,429,961
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN TOTAL
--------------------- CURRENCY PENSION SHAREHOLDERS'
NUMBER ADDITIONAL ACCUMULATED TRANSLATION LIABILITY (DEFICIENCY)
OF SHARES AMOUNT PAID-IN CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT EQUITY
------------ -------- --------------- ------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 .......... 8,889,547 $ 89 $ 87,324 $(145,018) $ 445 $ (986) $(58,146)
Net income ................... 10,112 10,112
Adjustment to pension
liability .................... (639) (639)
Foreign currency translation
adjustment ................... 12 12
Accrued dividends on Series A
and B Redeemable Preferred
Stock ........................ (186) (186)
Increase in additional paid-in
capital and number of common
stock shares due to debt
restructuring ................ 30,801 21,220 21,220
------------ -------- --------------- ------------- ------------- ------------ ---------------
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)
Increase due to exercise of
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 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
============ ======== =============== ============= ============= ============ ===============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income..................................................... $ 10,112 $ 42,528 $ 18,862
Adjustments to reconcile net income to net cash provided by
operating activities:
Income from discontinued operations............................ (1,113)
Write-down of intangible assets................................ 2,932 70
Net credit on unused leases, net............................... (6,401)
Depreciation and amortization of property and equipment ....... 1,781 1,778 8,309
Amortization of intangibles.................................... 2,448 6,706 15,673
Amortization of repairable parts............................... 5,929 7,688 37,869
Deferred income taxes.......................................... (23,104) 7,579
Provision (recovery of loss) on accounts receivable ........... (162) 1,930 3,434
Provision for inventory obsolescence........................... 1,580 1,995 1,171
Extraordinary item............................................. 1,927
Changes in operating assets and liabilities, net of effects
from companies acquired, which provided (used) cash:
Accounts receivable............................................ (3,498) (8,836) (1,900)
Inventories.................................................... 1,107 931 (1,248)
Accounts payable............................................... (787) 4,552 29
Accrued expenses............................................... 264 (5,723) 227
Deferred revenues.............................................. 9,547 6,811 (33,928)
Net changes in other assets and liabilities.................... 3,870 2,202 (6,110)
---------- ---------- -----------
Net cash provided by operating activities..................... 28,722 38,415 51,894
---------- ---------- -----------
Investing Activities:
Capital expenditures-net of retirements........................ (304) (2,786) (7,278)
Repairable parts purchases..................................... (1,857) (12,154) (63,514)
Purchases of companies......................................... (1,187) (39,331) (275,562)
---------- ---------- -----------
Net cash used in investing activities......................... (3,348) (54,271) (346,354)
---------- ---------- -----------
Financing Activities:
Proceeds from issuance of preferred stock...................... 2,250 31,392
Proceeds from issuance of subordinated debentures.............. 30,000
Proceeds from issuance of common stock......................... 107,298
Proceeds from borrowings....................................... 11,000 32,000 703,720
Payment of subordinated debentures............................. (30,000)
Payments on borrowings......................................... (37,713) (14,463) (537,548)
Principal payments under capital leases........................ (3,423)
Dividends paid on preferred stock ............................. (1,446)
Other.......................................................... (483) 29
---------- ---------- -----------
Net cash provided by (used in) financing activities .......... (24,946) 17,537 300,022
---------- ---------- -----------
Net increase in cash and cash equivalents....................... 428 1,681 5,562
Cash and cash equivalents, beginning of year.................... 550 978 2,659
---------- ---------- -----------
Cash and cash equivalents, end of year.......................... $ 978 $ 2,659 $ 8,221
========== ========== ===========
Supplemental Disclosures of Cash Flow Information:
Net cash paid during the year for:
Interest...................................................... 485 2,065 14,838
Income taxes.................................................. 397 1,009 5,344
Noncash investing/financing activities:
Interest exchanged for subordinated debt...................... 2,073
Issuance of seller notes in connection with acquisitions .... 1,313 2,866 587
Accretion of accrued dividends................................ 186 375 885
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
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's services include hardware support, user and
software support, network support and other support services. These services
are offered by the Company across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, personal
computers ("PCs") and related peripherals. The Company maintains
approximately 3,900 technical personnel located in over 150 service locations
in North America.
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, DecisionOne Holdings Corp.'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, international subsidiaries are not significant
to the Company's financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION -- The consolidated financial statements include the
accounts of DecisionOne Holdings Corp. and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
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.
INVENTORIES --Inventories are stated at the lower of cost or market, cost
principally being determined using the weighted average method. The Company
previously determined cost using the FIFO (first-in, first-out) method. The
change has no material effect on the consolidated financial statements.
REPAIRABLE PARTS -- Repairable parts are required in order to meet the
requirements of the contracts with the Company's maintenance customers. These
parts are principally purchased from equipment manufacturers and other third
parties. As these parts are purchased, they are capitalized at cost and
amortized principally using the straight-line method over three to five
years, their estimated useful life. Repairable parts are repaired by the
Company based upon anticipated need and generally have an economic life that
extends beyond the normal life cycle of the applicable product. Costs of
refurbishing parts are charged to operations as incurred. Repairable parts
are stated at cost, less accumulated amortization of $46,554 and $45,064 as
of June 30, 1995 and 1996, respectively. Repairable parts amortization
expense for the years ended June 30, 1994, 1995 and 1996 was $5,929, $7,688
and $37,869, respectively.
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; renewals and betterments are capitalized. 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.
F-7
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
INTANGIBLES --Intangible assets are comprised of excess purchase price
over net assets acquired (goodwill), debt issuance costs and other intangible
assets, including the fair value of contractual profit participation rights,
acquired customer contracts, tradenames, other intangibles, and amounts
assigned to noncompete agreements.
Goodwill is being amortized on a straight-line basis over 20 years. Other
intangibles are being amortized, primarily on a straight-line basis, over 3
to 8 years for customer contracts; 20 years for contractual profit
participation rights; 1 to 6 years for tradenames and other intangibles; and
over four-year terms for specific noncompete agreements. Debt issuance costs
are amortized using the interest method over the term of the related debt.
CARRYING VALUE OF LONG-TERM ASSETS --The Company evaluates the carrying
value of long-term assets, property and equipment, repairable parts and
intangible assets, based upon current and anticipated undiscounted cash
flows, and recognizes an impairment when such estimated cash flows will be
less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is 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. 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.
Estimated losses on contracts, if any, are charged against earnings in the
period in which such losses are identified.
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.
INCOME TAXES -- Effective July 1, 1993, the Company changed its policy of
accounting for income taxes to conform to Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes. The Company
previously followed Financial Accounting Standards No. 96, Accounting for
Income Taxes. SFAS No. 109 requires, among other things, the accrual of
deferred tax liabilities for future taxable amounts, deferred tax assets for
future deductions and operating loss carryforwards and a valuation allowance
to reduce deferred tax assets to the amounts that are more likely than not to
be realized. The adoption of SFAS No. 109 on July 1, 1993 did not have a
material effect on the Company's consolidated financial position or results
of operations.
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.
F-8
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE --
The carrying amount of these items is a reasonable estimate of their fair
value.
SHORT-TERM DEBT AND LONG-TERM DEBT --Rates currently available to the
Company for debt with similar terms and remaining maturities are used to
estimate the fair value for debt issues. 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.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS -- Effective July 1, 1994, the
Company adopted the provisions of No. 106, ("SFAS No. 106") Employers'
Accounting for Postretirement Benefits Other Than Pensions, and No. 112
("SFAS No. 112"), Employers' Accounting for Postemployment Benefits. The
adoption of SFAS No. 106 and SFAS No. 112 did not have a material effect on
the Company's consolidated financial position or results of operations.
STOCK-BASED COMPENSATION --In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123
defines a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at
the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period.
Under SFAS No. 123, the Company is permitted to continue to account for
employee stock-based transactions under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB No. 25"), but will be
required to disclose in a note to the consolidated financial statements pro
forma net income and income per share information as if the Company had
applied the new method of accounting. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements regardless of the
method chosen to measure and recognize compensation for employee stock-based
arrangements.
The Company has determined that it will continue to account for such
transactions under APB No. 25 and will provide the disclosures required by
SFAS No. 123 during the year ending June 30, 1997.
DERIVATIVE FINANCIAL INSTRUMENTS -- Derivative financial instruments,
which constitute interest rate swaps (see Note 10), are used by the Company
in the management of its interest rate exposure and are accounted for on an
accrual basis. These derivative financial instruments are used to hedge risk
caused by fluctuating interest rates. Hedged financial instruments are
accounted for based on settlement accounting. Income and expense are recorded
in the same category as that arising from the related asset or liability. The
amounts to be paid or received under interest rate swap agreements are
recognized as interest income or expense in the periods in which they accrue.
Gains and losses resulting from effective hedges of existing assets,
liabilities or firm commitments are deferred and recognized when the
offsetting gains and losses are recognized on the related hedged items. Gains
realized on termination of interest rate swap contracts are deferred and
amortized over the remaining terms of the original swap agreements. The
Company does not hold or issue any derivative financial instruments for
trading purposes.
F-9
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
3. DISCONTINUED OPERATIONS
On February 9, 1993, the Company sold all of the inventory, fixed assets
and other intangible assets, as defined in the asset purchase agreement, of
its products division. The remaining assets and liabilities of the
discontinued operations consisted mainly of accounts receivable and accrued
expenses for warranty, lease commitments and other accrued costs. In 1993,
the Company established liabilities based on the best available information.
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 for the change in estimate.
In conjunction with the sale of the products division, the Company entered
into a maintenance service agreement with the purchaser. The agreement
provides that the Company has the option to be the exclusive provider of
warranty, extended warranty and maintenance services of products marketed by
the purchaser for a term of 5 years after the date of the sale.
4. BUSINESS ACQUISITIONS
During the years ended June 30, 1994, 1995 and 1996, the Company acquired
certain net assets of a series of service companies as follows:
<TABLE>
<CAPTION>
CONSIDERATION (IN THOUSANDS)
-------------------------------------------------------------------
TOTAL
NUMBER OF PURCHASE OTHER
YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTANGIBLES GOODWILL
- ----------- ------------ -------- -------- ---------- ------------- ----------
<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 and
maintenance contract acquisitions:
June 30, 1994..................... 5 975 1,490 2,465 3,193
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
</TABLE>
The Company purchased substantially all of the operating assets and
assumed certain liabilities of the acquired entities. These acquisitions have
been accounted for as purchase transactions, with the purchase price of each
acquisition allocated to the assets and liabilities acquired based on their
respective estimated fair values at the dates of acquisition. The results of
operations of the acquired entities have been included in the accompanying
consolidated financial statements from the dates of acquisition.
On August 31, 1994, the Company purchased certain net assets and
liabilities of IDEA/Servcom, Inc. ("Servcom") for approximately $29,500. This
acquisition was funded by cash and the issuance of a $2,600
noninterest-bearing note to the seller. See seller notes payable section of
Note 10. The excess of asset purchase price over the fair value of assets
acquired at the date of purchase resulted in goodwill of approximately
$7,400.
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. The acquisition was funded with the proceeds from the
issuance of $30,000 of Series C preferred stock, $30,000 of subordinated
debentures and the balance from additional bank borrowings (see Notes 10 and
15). The excess of asset purchase price over the fair value of assets
acquired at the date of purchase resulted in goodwill of approximately
$58,796 initially recorded. Subsequent to the acquisition, the Company
recorded a net adjustment increasing goodwill by $1,737 and adjusted other
balance sheet accounts principally by the
F-10
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS (CONTINUED)
same amount. This resulted from the adjustment and reclassification of
certain tax accruals offset by favorable negotiations on certain leased
facilities (see Note 9). 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 value of the discounted estimated future cash flows over a
twenty-year period from these contractual profit participation rights is
$25,000.
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, 1995 and 1996 assumes that the
Servcom and BABSS 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>
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30,
---------------------
1995 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues ............................................................. $679,284 $697,676
Income from continuing operations before extraordinary item ......... 20,153 31,080
Net income........................................................... 21,266 29,153
Primary Income Per Common Share:
Income from continuing operations before extraordinary item per
share .............................................................. $ 0.88 $ 1.23
Net income per common share.......................................... 0.93 1.16
Fully Diluted Income Per Common Share:
Income from continuing operations before extraordinary item per
share............................................................... $ 0.87 $ 1.22
Net income per common share.......................................... 0.92 1.15
</TABLE>
5. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Trade receivables .......................................... $33,843 $ 99,762
Other ...................................................... 531 2,468
--------- ---------
34,374 102,230
Allowance for uncollectible accounts ....................... (6,616) (9,580)
--------- ---------
$27,758 $ 92,650
========= =========
</TABLE>
F-11
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Consumable parts ................................. $ 15,243 $ 40,564
Finished goods.................................... 569 360
---------- ----------
15,812 40,924
Allowance for
obsolescence..................................... (11,788) (10,794)
---------- ----------
$ 4,024 $ 30,130
========== ==========
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Land and buildings......................... $ 2,055
Equipment.................................. $ 5,682 13,858
Computer hardware and software............. 8,359 27,277
Furniture and fixtures..................... 4,306 8,051
Leasehold improvements..................... 1,450 4,125
---------- ----------
19,797 55,366
Accumulated depreciation and amortization (15,368) (22,936)
---------- ----------
$ 4,429 $ 32,430
========== ==========
</TABLE>
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (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 $1,781, $1,778 and
$8,309 for the fiscal years ended 1994, 1995 and 1996.
F-12
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
8. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
--------------------
1995 1996
--------- ----------
<S> <C> <C>
Goodwill................................ $16,074 $ 82,355
Customer contracts...................... 20,248 64,758
Contractual profit participation rights. 25,000
Noncompete agreement.................... 3,000 4,500
Other intangibles....................... 2,250 7,671
Tradename............................... 1,500
--------- ----------
43,072 184,284
Accumulated amortization................ (8,504) (19,625)
--------- ----------
$34,568 $164,659
========= ==========
</TABLE>
Based upon the results of an impairment evaluation for the years ended
June 30, 1994 and 1995, management determined that customer contracts should
be written down $2,932 and $70, respectively. There were no write-downs of
intangibles in 1996.
Amortization expenses relating to intangibles were approximately $2,448,
$6,706 and $15,673 for the fiscal years ended 1994, 1995 and 1996.
9. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Compensation and benefits......... $11,046 $22,115
Interest.......................... 2,246 1,505
Unused leases..................... 857 3,485
Pension accrual................... 1,262 1,258
Accrued accounting and legal fees. 920 1,073
Other accrued expenses............ 5,442 6,781
--------- ---------
$21,773 $36,217
========= =========
</TABLE>
Prior to 1994, the Company received $2,600 in tax bills (primarily
interest) from the Internal Revenue Service ("IRS") related to claims for tax
and interest for the years ended 1981 through 1987. The Company paid
approximately $500 of the claims upon receipt of the bills. As the Company
disputes the tax bills, no payments were made in 1994 nor 1995. In 1996, an
IRS mandated payment of $828 was made. As of June 30, 1995 and 1996, the
Company has an accrued liability of $2,500 and $1,883, respectively.
Subsequent to June 30, 1996, the Company provided the IRS with a letter of
credit in the amount of $1,768 to collateralize the outstanding balance.
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 in liabilities resulting from planned actions with
respect to BABSS, which included the costs to exit certain leased facilities
and
F-13
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
9. ACCRUED EXPENSES (CONTINUED)
to involuntarily terminate employees. The provision of approximately $3,500
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 was provided for severance and termination benefits of
approximately 210 employees in the field, operations support, sales and
administration. Approximately $3,000 was provided in connection with the exit
plan for write-downs of inventory and equipment at two California facilities
which will not be utilized in future operations. The provision for various
other charges of approximately $500 consisted of costs to complete the exit
plan. As of June 30, 1996, the Company has settled all of these liabilities,
except for the lease liabilities on idle facilities approximating $1,200 for
which payments will continue through 1999.
As a result of successful negotiations of unutilized leased facilities,
during 1996, the Company recorded a reduction of approximately $975 to both
the provisions for leased facilities and goodwill.
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
--------------------
1995 1996
--------- ----------
<S> <C> <C>
Revolving credit loan........................................... $186,400
Bank debt....................................................... $21,000
Promissory note, noninterest-bearing, due August 31, 1998 ...... 2,256
Seller noninterest-bearing notes payable........................ 2,122 2,118
Capitalized lease obligations, payable in varying installments
amounting to $1,413 and $972 in 1997 and 1998, respectively,
at interest rates ranging from 7.25% to 13.01% at June 30,
1996, net of interest of approximately $6 and $187 in 1995 and
1996, respectively............................................. 193 2,385
--------- ----------
25,571 190,903
Less current portion............................................ 19,414 2,321
--------- ----------
$ 6,157 $188,582
========= ==========
</TABLE>
BANK DEBT
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 and a revolving credit facility of up to a
maximum of $30,000. The 1995 Term Loan provided for 19 equal quarterly
principal payments of $10,000 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 (NationsBank 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
15). The Company used a portion of the proceeds to repay approximately
$70,000 of the 1995 Term Loan.
F-14
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT (CONTINUED)
Also in April 1996, the Company converted the 1995 Term Loan and the
existing $30,000 Revolving Credit Facility into a $225,000 variable rate,
unsecured revolving credit facility ("the 1996 Revolving Credit Facility").
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, 1996, the applicable rate was LIBOR
plus .75% or 6.32%. The 1996 Revolving Credit Facility enables the Company to
borrow up to $225,000 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 has entered into interest rate swap agreements with
two banks resulting in fixed interest rates of 5.4% on $40,000 notional
principal amount through December 1997 and 5.5% on another $40,000 notional
principal amount through December 1998, thereby leaving approximately
$100,000 subject to floating rates under the 1996 Revolving Credit Facility.
Under the swap agreements, the Company receives interest payments at a
floating rate based on the pricing of the three-month LIBOR and pays interest
on the same notional amounts at an average fixed rate of 5.45%. The floating
rate is 5.44% for the three-month period ended June 30, 1996. For the
three-month period ending September 30, 1996, the floating rate is 5.57%. The
agreements convert a portion of the Company's debt obligation from a floating
rate to a fixed rate basis. The fair value of the interest rate swap
agreements generally reflects the estimated amount that the Company would
receive or pay to terminate the agreements. As of June 30, 1996, the Company
would receive approximately $1,100 to terminate the swap agreements.
The Company attempts to minimize its credit exposure by entering into
interest rate swap agreements only with major financial institutions.
Although the Company may be exposed to losses in the event of nonperformance
by counterparties, the Company does not expect such losses, if any, to be
significant.
Under the terms of the 1996 Revolving Credit Facility, the Company may use
up to $25,000 for letters of credit, subject to the limitation of $225,000 in
total credit. As of June 30, 1996, letters of credit in the face amount of
$3,498 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 and its other
subsidiaries except for its Canadian subsidiary.
The Company had average borrowings of $24,379 and $172,065 during 1995 and
1996, respectively, at an average interest rate of 10.34% and 8.69%,
respectively. Maximum borrowings during 1995 and 1996 were $32,648 and
$268,748, respectively.
SELLER NOTES PAYABLE
In connection with various acquisitions, the Company issued
noninterest-bearing notes, the principal of which is payable monthly,
primarily based upon a percentage of monthly maintenance contract revenues
billed during the previous month (ranging from 12.5% to 30.0%). Aggregate
maturities of these notes are as follows: 1997-$908; 1998-$647; 1999-$475 and
2000-$88. As of June 30, 1996, the notes are presented at their estimated net
present value based on imputed interest rates ranging from 7.25% to 11.00%.
F-15
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT (CONTINUED)
PROMISSORY NOTE
As part of the August 31, 1994 acquisition of certain assets and
liabilities of IDEA/Servcom, Inc., the Company issued a $2,600
noninterest-bearing note which was due in annual installments of $650 over
four years. The liability was reflected on the Company's books, net of a $506
discount calculated at the Company's then incremental borrowing rate of
9.50%. The loan was scheduled to mature on August 31, 1998. During the year
ended June 30, 1996, the Company prepaid the entire outstanding loan balance.
The resulting gain from prepayment was not material.
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 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 $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 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 of the proceeds to retire the Affiliate Notes. As a
result, the Company recorded an extraordinary loss in the amount of $3,211,
net of taxes of $1,284, due to the acceleration of the amortization of
original issue discount.
1994 DEBT RESTRUCTURING
On January 27, 1994, the Company amended its then current Credit Agreement
to provide an $11,000 term loan and an $8,000 Revolving Credit Facility. The
term loan provided for 29 equal monthly payments of $350 beginning January
31, 1994 through May 31, 1996. Interest was at the "Base Rate" (the higher of
the bank's base rate or 1/2 percent above the Federal Funds Effective Rate)
plus 1-1/2 percent. The Revolving Credit Facility was due on demand and bore
interest at the Base Rate plus 1-1/2 percent. The loans were collateralized
by all of the Company's assets. The proceeds of the term loan were used to
extinguish certain subordinated notes. The term loan was prepaid in June
1994. There were no borrowings under the Revolving Credit Facility through
June 30, 1994.
Also, on January 27, 1994, the Company agreed with certain noteholders to
restructure its equity capitalization and subordinated debt. The noteholders
forgave debt approximating $46,698 of principal and interest in exchange for
cash and equity interest in the Company which resulted in a net gain of
approximately $20,031 to the Company, which was recorded as additional
paid-in capital. The outstanding indebtedness as of January 27, 1994 was
restructured as follows:
F-16
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT (CONTINUED)
Senior Subordinated Noteholders exchanged $38,068 principal amount of
notes, $2,008 in accrued but unpaid interest, 2,570,160 shares of the
Company's common stock and warrants to purchase 210,369 shares of the
Company's common stock for $19,625 in cash and 40,000 shares of the Company's
Series B Convertible Preferred Stock, $1.00 par value, with a redemption
value of $100 per share (see Note 15).
The Junior Subordinated Noteholders exchanged $6,556 principal amount of
notes, $64 in accrued interest and warrants to purchase 55,707 shares of the
Company's common stock for 2,617,612 shares of the Company's common stock,
$.01 par value. The shares of common stock issued were deemed at such time to
have a fair value of $.50 per share.
As part of previous credit agreements and the 1994 Debt Restructuring, the
Company issued warrants to purchase shares of the Company's common stock at a
price of $10 per share. At June 30, 1995, due to antidilution adjustment,
warrants to purchase 235,735 shares at an exercise price of $5.90 were
outstanding. During 1996, warrants to purchase 101,257 shares of common stock
were exercised. At June 30, 1996, warrants to purchase 134,478 shares of
common stock were outstanding. These warrants expire in the year 2000.
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED JUNE 30,
------------------------------
1994 1995 1996
--------- ----------- --------
<S> <C> <C> <C>
Current:
Federal................................. $ 2,485 $ 16,065 $ 2,892
State................................... 760 4,599 1,595
Foreign................................. (1,272) 548
Deferred:
Federal................................. (29,897) 8,945
State................................... (3,617) 641
Foreign................................. (499)
Benefit of operating loss carryforwards:
Federal................................. (1,861) (7,729)
State................................... (360) (1,253)
Foreign................................. (252)
--------- ----------- --------
Provision (benefit) for income taxes ... $ 1,024 $(23,104) $13,870
========= =========== ========
</TABLE>
F-17
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
11. INCOME TAXES (CONTINUED)
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable.................................... $ 1,443 $ 1,341
Inventory.............................................. 3,299 2,586
Accrued expenses....................................... 3,761 6,378
Unused leases.......................................... 1,353
Fixed assets........................................... 100 299
Goodwill and other intangibles......................... 598 5,670
Operating loss carryforwards........................... 25,482 14,252
Minimum tax carryforward............................... 632 1,170
--------- ---------
Gross deferred tax asset................................ 36,668 31,696
Net valuation allowance................................. (686)
Gross deferred tax liabilities--repairable spare parts . (2,468) (7,273)
--------- ---------
Net deferred tax asset.................................. $33,514 $24,423
========= =========
</TABLE>
The change in the valuation allowance from 1995 to 1996 is principally due
to the utilization of foreign net operating loss carryforwards.
Net operating loss and minimum tax credit carryforwards available at June
30, 1996 expire in the following years:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR OF
AMOUNT EXPIRATION
-------------- ------------
<S> <C> <C>
Federal operating losses. 38,136 2002-2009
State operating losses .. 15,223 1997-2009
Minimum tax credit....... 1,170 INDEFINITE
</TABLE>
As a result of the Company's initial public offering, an "ownership
change" occurred pursuant to Section 382 of the Internal Revenue Code.
Accordingly, net operating loss and tax credit carryforwards are limited
during any future period to approximately $20,000 per annum.
F-18
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
11. INCOME TAXES (CONTINUED)
A reconciliation between the provision (benefit) for income taxes,
computed by applying the statutory federal income tax rate of 34% for 1994,
35% for 1995 and 35% for 1996 to income before income taxes, and the actual
provision (benefit) for income taxes follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- -------
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate ...... 34.0% 35.0% 35.0%
State income taxes, net of federal income tax provision . 4.5 3.5 4.6
Foreign income taxes..................................... (6.9)
Unused lease credit...................................... (18.1) (0.1)
Write-off of intangibles................................. 12.6
Benefit of operating loss carryforward................... (19.9) (49.1) (0.8)
Change in valuation allowance............................ (108.9) (1.4)
Other.................................................... (3.9) (0.3) 2.6
-------- --------- -------
Actual income tax provision (benefit) effective tax rate. 9.2% 126.2% 40.0%
======== ========= =======
</TABLE>
12. OTHER LIABILITIES
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
------------------
1995 1996
--------- --------
<S> <C> <C>
Accrued rent, unused facilities and deferred revenues. $ 2,334 $ 4,237
Other noncurrent liabilities.......................... 10,049 10,049
--------- --------
$12,383 $14,286
========= ========
</TABLE>
Other noncurrent liabilities include provisions for possible liabilities
relating to various tax matters.
13. 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 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.
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 May 2006. 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,
1994, 1995 and 1996:
F-19
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
13. STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
------- -----------
<S> <C> <C>
Balance, July 1, 1993 . 436,606 .50-100.00
Options granted....... 1,507,089 .50
Options canceled...... (100) .50
Balance, June 30, 1994. 1,943,595 .50-100.00
Options exercised .... (15,000) .50
Options granted....... 410,000 1.25-6.00
Options canceled...... (75,275) .50-100.00
Balance, June 30, 1996. 2,263,320 .50-6.00
Options exercised .... (329,850) .50-6.00
Options granted....... 803,000 8.00-27.50
Options canceled...... (125,000) 1.25-8.00
Balance, June 30, 1996. 2,611,470 .50-27.50
</TABLE>
As of June 30, 1995, 977,454 options were vested and 40,901 options
remained available for issuance. As of June 30, 1996, 1,274,877 options were
vested and 382,808 options remained available for issuance.
14. 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 noncancellable terms in excess of one year for the five years
succeeding June 30, 1996 and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997............................................................. 20,477
1998............................................................. 16,080
1999............................................................. 13,300
2000............................................................. 10,811
2001............................................................. 4,621
Thereafter ...................................................... 12,150
--------
77,439
========
</TABLE>
On December 29, 1993, the Company entered into a settlement agreement to
terminate an existing lease on an unused facility, resulting in a payment to
the lessor amounting to $1,000. The payment was structured in the form of
cash and a $250 five-year, noninterest-bearing note payable. The settlement
resulted in a credit of approximately $8,000 recorded in the consolidated
statement of operations net of the provision of $1,599 for additional unused
leases for the year ended June 30, 1994. The outstanding balance of the $250
five-year, noninterest-bearing note payable was repaid in full during the
year ended June 30, 1995.
Rental expense, exclusive of unused rental expense and credits under all
noncancellable operating leases, amounted to approximately $5,128, $5,878 and
$13,149 for the fiscal years ended 1994, 1995 and 1996, respectively.
F-20
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
15. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
In January 1994, as part of its debt restructuring (see Note 10), the
Company authorized the issuance of 22,500 shares of Series A redeemable
preferred stock, $1.00 par value, and 40,000 shares of Series B redeemable
preferred stock, $1.00 par value. The Series A redeemable preferred stock
("Series A Preferred Stock") was issued in exchange for $2,250 in cash and
the Series B redeemable preferred stock ("Series B Preferred Stock") was
issued in connection with the settlement of the senior subordinated notes
(see Note 10). On October 17, 1995, the Board of Directors and the
shareholders amended the Company's Certificate of Incorporation to authorize
the issuance of 300,000 shares of Series C Preferred Stock, $1.00 par value
(herein called the "Series C Preferred Stock" and together with the Series A
Preferred Stock and the Series B Preferred Stock, herein called the
"Preferred Stock"). On December 8, 1995, the Board of Directors and
shareholders further amended the Company's Certificate of Incorporation to
authorize 376,416 shares of preferred stock; consisting of 23,499 shares
designated Series A; 41,776 shares designated Series B; and 311,141 shares
designated Series C.
The holders of Series A Preferred Stock voted as a class (each holder of
Series A Preferred Stock entitled to one vote for each share of common stock
that would be issuable to such holder upon the conversion of the Series A
Preferred Stock); each share of the Series B and Series C Preferred Stock was
nonvoting. Cash dividends were cumulative and accrued at the rate of $6.00
per share per annum for Series A and Series B and $4.00 per share per annum
for Series C from the date of issuance. Dividends were paid when and as
declared by the Board of Directors. Series A was junior to Series C and
senior to Series B. No dividends (except dividends payable in common stock)
were permitted on Series A and Series B Preferred Stock or on common stock,
and no redemption of Series A and B Preferred Stock or common stock was
permitted unless all accrued dividends of Series C Preferred Stock had been
paid and Series C Preferred Stock had been fully redeemed. The Series A, B
and C redeemable preferred stock was assigned a value of $100 per share.
The Series A and B Preferred Stock were to be automatically converted if
the Company completed a public offering in which the total price paid for
shares of common stock was at least $12,500, the price per share of common
stock was at least $2.75, and the common stock was authorized for trading on
Nasdaq or listed on the New York or American Stock Exchange. The Series C
Preferred Stock was to automatically convert if the Company completed a
public offering of shares of its common stock in which (i) the aggregate
price paid for such shares by the public was at least $50,000, (ii) the price
per share paid by the public for such shares was at least $10 per share, and
(iii) the common stock after such public offering, was authorized for trading
on Nasdaq or was listed on the New York or American Stock Exchange.
Accordingly, as of June 30, 1996 all outstanding preferred stock has been
converted into common stock.
F-21
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
15. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
The following table summarizes certain matters relating to Series A, B
and C preferred stock activity from July 1, 1993 to June 30, 1996:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
-------------------- -------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT TOTAL
---------- --------- ---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1993
Issuance of Series A and B
Preferred Stock................ 22,500 $ 2,250 40,000 $ 4,000 $ 6,250
Accretion of accruing
dividends...................... 67 119 186
---------- --------- ---------- --------- ----------- ---------- ----------
Balance, June 30, 1994.......... 22,500 2,317 40,000 4,119 6,436
Accretion of accruing
dividends...................... 135 240 375
---------- --------- ---------- --------- ----------- ---------- ----------
Balance, June 30, 1995.......... 22,500 2,452 40,000 4,359 6,811
Issuance of Series A, B and C
Preferred Stock ............... 999 100 1,776 178 311,141 31,114 31,392
Accretion of accruing
dividends...................... 107 190 588 885
Payment of accrued dividends ... (309) (549) (588) (1,446)
Conversion to Common Stock ..... (23,499) (2,350) (41,776) (4,178) (311,141) (31,114) (37,642)
---------- --------- ---------- --------- ----------- ---------- ----------
Balance, June 30, 1996.......... 0 $ 0 0 $ 0 0 $ 0 $ 0
========== ========= ========== ========= =========== ========== ==========
</TABLE>
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)
11,141 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.
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.
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. The proceeds were used to repay
approximately $70,000 of the 1995 Term Loan, $30,000 in Affiliate Notes,
approximately $1,446 in accrued dividends to holders of the Redeemed
Preferred Stock and for other general corporate purposes.
In connection with the Company's initial public offering in April 1996,
all of the preferred shares were automatically converted to common stock at
the conversion price of $.4928 per Series A share, $1.6560 per Series B share
and $7.8161 per Series C share. Preferred shares were converted into
11,271,924 shares of common stock. Additionally, dividends in arrears of $309
for Series A, $549 for Series B and $588 for Series C were declared and paid
by the Company.
F-22
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
15. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
In connection with his service as a director and Chairman of the Board
prior to 1994, the Company granted an individual warrants to purchase an
aggregate of 66,667 shares of common stock at an exercise price of $4.00 per
share. The warrants which expire on March 15, 2003 remain outstanding at June
30, 1996.
For further information regarding warrants attached to affiliate notes,
and other outstanding warrants, see Note 10.
16. 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.
Pension expense for the defined benefit pension plan was computed as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED JUNE 30,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Interest cost ..................................... $ 461 $ 482 $ 495
Actual return on plan assets ..................... (271) (312) (449)
Net amortization and deferral (72) (42) (72)
------- ------- -------
Periodic pension costs............................. $ 118 $ 128 $ 118
======= ======= =======
</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 1994, 1995 and 1996.
The following table sets forth the funded status of the frozen pension
plan as of May 1, 1996 and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1996
--------- ---------
<S> <C> <C>
Accumulated benefits (100% vested) ..................... $ 6,757 $ 7,116
Fair value of plan assets............................... 5,432 5,800
--------- ---------
Unfunded projected benefit obligation ................ 1,325 1,316
Unrecognized net loss................................... 1,705 1,848
Unrecognized net transition obligation ................. 536 504
Adjustment to recognized minimum
liability.............................................. (2,241) (2,352)
--------- ---------
Accrued pension costs................................. $ 1,325 $ 1,316
========= =========
</TABLE>
F-23
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
17. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
In the second quarter of fiscal year 1996, in connection with the BABSS
acquisition, the Company recorded a $7,000 charge for $6,900 of leases of
duplicate facilities (the former headquarters, several large repair depots,
and numerous field offices of the Company) and $100 of severance of former
employees of the Company. Such amounts were based on management estimates.
In the fourth quarter of fiscal year 1996, the Company reversed $3,400 of
the charge. The reversal was the result of the Company's ability to utilize
and sublease various facilities identified in the original restructuring
charge. Such information was unknown to the Company when the original charge
was recorded.
18. 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 three 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 fourth related site, but 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 which is provided for in
liabilities related to the discontinued products division in the accompanying
consolidated balance sheets as of June 30, 1995 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 share, if any, of
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.
19. 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, 1994, 1995 and 1996 were
approximately $1,421, $1,972 and $1,512, respectively. Accounts payable to
Genicom amounted to approximately $42 and $14 as of June 30, 1995 and 1996,
respectively.
During the year ended June 30, 1996, the Company entered into a contract
with a related party for cleaning services. The approximate annual value of
the contract approximates $150.
During the year ended June 30, 1996, the Company paid approximately $125
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-24
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
19. RELATED PARTY TRANSACTIONS (CONTINUED)
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 10 and 15).
20. INCOME (LOSS) PER COMMON SHARE
Primary income (loss) per common share is computed using the weighted
average number of shares of common stock and dilutive common stock
equivalents outstanding during the period. Common stock equivalents are
computed on the applicable outstanding options and warrants using the average
price for the period under the treasury stock method. For the years ended
June 30, 1994, 1995 and 1996, the effect upon the primary income per share of
common stock equivalents was dilutive and is included in the computations.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, primary income (loss) per share when presented during periods
which include a Company's initial public offering, also include amounts
computed on options and warrants issued within twelve months of the filing
date as if they were outstanding for all periods presented, even when the
result is anti-dilutive, using the treasury stock method and the assumed
initial public offering price. For these options and warrants, the
determination of common stock and equivalents outstanding for the remainder
of the year, subsequent to initial public offering, assumes computation using
average prices for the period under the treasury stock method. Additionally,
the computation of primary income (loss) per common share includes the
conversion of all preferred stock, which automatically converts to shares of
common stock as of the closing of the initial public offering, as if they
were outstanding for all periods prior to the initial public offering, even
when the result is anti-dilutive.
The fully diluted income (loss) per common share computation assumes
common stock equivalents are computed on the applicable outstanding options
and warrants using the end of the period price under the treasury stock
method.
21. SUPPLEMENTARY DATA (UNAUDITED)
The unaudited supplementary primary and fully diluted income per common
share data gives effect to the Company's initial public offering and
recapitalization and the assumed use of predominately all of the proceeds
from the Company's sale of 6,300,000 shares of common stock therefrom to
principally reduce by approximately $70,000 the outstanding amount of its
1995 Term Loan due September 30, 2000, and to repay the $30,000 face amount
of the Affiliate Notes in each case as if such transactions had occurred on
October 20, 1995, the date of the aforementioned debt transactions.
Supplementary weighted average number of common and common equivalent shares
outstanding reflects additional shares of 3,647,368 assumed to be outstanding
to effect these transactions. The supplementary extraordinary item results
from the write-off of unamortized original issue discount related to the
warrants issued in conjunction with the Affiliate Notes, which occurred in
April 1996, and is assumed as of October 20, 1995.
F-25
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
21. SUPPLEMENTARY DATA (UNAUDITED) (CONTINUED)
The unaudited supplementary per share data for the year ended June 30,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Supplementary primary income per share data:
Supplementary income from continuing operations before
extraordinary item ........................................... 0.81
Supplementary extraordinary item--early extinguishment of debt (0.07)
Supplementary weighted average number of common and common
equivalent shares outstanding ................................ 28,843,235
Supplementary fully diluted income per share data:
Supplementary income from continuing operations before
extraordinary item ........................................... 0.80
Supplementary extraordinary item--early extinguishment of debt (0.07)
Supplementary weighted average number of common and common
equivalent shares outstanding................................. 29,077,329
</TABLE>
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial
information for the fiscal years ended 1995 and 1996:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,(1)
--------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
1995
Revenues ............................................. $32,044 $41,730 $41,660 $47,586
Gross profit ......................................... 8,334 13,221 13,245 14,737
Income before extraordinary item ..................... 1,476 4,043 4,660 32,349
Net income ........................................... 1,476 4,043 4,660 32,349
Primary income per common share:
Income before extraordinary item .................... 0.06 0.18 0.20 1.42
Net income........................................... 0.06 0.18 0.20 1.42
</TABLE>
- ------------
(1) Net income for the fourth quarter of 1995 includes a tax benefit of
$24,900 primarily related to the future utilization of tax loss
carryforwards.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,(2)
--------------- -------------- ----------- -----------
<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
Primary income per common share:
Income before extraordinary item ................... 0.19 0.03 0.25 0.34
Net income ......................................... 0.19 0.03 0.25 0.27
</TABLE>
- ------------
(2) Net income for the fourth quarter of 1996 includes (a) a $3,400
reversal of the previously recorded charge for employee severance and
unutilized lease costs (Note 17); and (b) a $1,500 adjustment related
to recoveries of previously reserved receivables.
F-26
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
---------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 8,221 $ 12,886
Accounts receivable, net of allowances of $9,580 and $11,727 .... 92,650 136,401
Inventories, net of allowances of $19,537 and $19,928 ........... 30,130 35,186
Other ........................................................... 12,770 7,637
---------- -----------
Total current assets ........................................... 143,771 192,110
Repairable Parts, Net of Accumulated Amortization of $105,462 and
$144,158 .......................................................... 154,970 195,656
Intangibles, Net of Accumulated Amortization of $19,625 and $36,164 164,659 197,675
Property, Plant and Equipment, Net of Accumulated Depreciation of
$22,936 and $36,530 ............................................... 32,430 33,283
Other .............................................................. 18,680 22,953
---------- -----------
Total Assets ....................................................... $514,510 $641,677
========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Current portion of long-term debt ............................... $ 2,321 $ 4,756
Accounts payable and accrued expenses ........................... 89,564 101,156
Deferred revenues ............................................... 38,485 72,096
Other ........................................................... 479 3,691
---------- -----------
Total current liabilities ...................................... 130,849 182,059
Revolving Credit Loan and Long-term Debt ........................... 188,582 241,915
Other Liabilities .................................................. 14,286 16,608
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 27,340,288 and 27,813,832 shares ........ 273 278
Additional paid-in capital ...................................... 255,262 255,691
Accumulated deficit ............................................. (73,516) (53,600)
Other ........................................................... (1,226) (1,274)
---------- -----------
Total Shareholders' Equity ..................................... 180,793 201,095
---------- -----------
Total Liabilities and Shareholders' Equity ......................... $514,510 $641,677
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-27
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ................................. $172,673 $205,070 $369,167 $572,749
Cost of Revenues ......................... 129,962 150,372 272,708 427,969
---------- ---------- ---------- ----------
Gross Profit ............................. 42,711 54,698 96,459 144,780
Operating Expenses:
Selling, general and administrative
expenses ............................. 22,303 28,228 56,519 82,878
Amortization of intangibles ........... 4,872 6,390 10,617 16,861
---------- ---------- ---------- ----------
Total Operating Expenses ............ 27,175 34,618 67,136 99,739
Operating Income ......................... 15,536 20,080 29,323 45,041
---------- ---------- ---------- ----------
Interest Expense, Net of Interest Income 5,801 3,689 11,220 10,704
---------- ---------- ---------- ----------
Income Before Income Taxes ............... 9,735 16,391 18,103 34,337
Provision for Income Taxes ............... 3,893 6,884 7,237 14,421
---------- ---------- ---------- ----------
Net Income ............................... $ 5,842 $ 9,507 $ 10,866 $ 19,916
========== ========== ========== ==========
Per Common Share:
- -----------------
Net Income................................ $ 0.25 $ 0.32 $ 0.46 $ 0.66
Weighted Average Number of
Common Shares and Equivalent Shares
Outstanding ............................. 23,469 30,062 23,424 30,066
</TABLE>
See notes to condensed consolidated financial statements.
F-28
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Operating Activities:
Net income.............................................................. $ 10,866 $ 19,916
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment................. 5,611 9,836
Amortization of intangibles............................................. 10,617 16,861
Amortization of repairable parts........................................ 23,017 45,642
Changes in assets and liabilities, net of effects of business
acquisitions........................................................... (14,622) (34,601)
----------- -----------
Net cash provided by operating activities.............................. 35,489 57,654
Investing Activities:
Business acquisitions................................................... (273,725) (34,433)
Capital expenditures, net of retirements................................ (3,331) (6,093)
Repairable parts purchases.............................................. (31,715) (64,803)
----------- -----------
Net cash used in investing activities.................................. (308,771) (105,329)
Financing Activities:
Proceeds from issuance of common stock.................................. 1,631 434
Proceeds from issuance of redeemable preferred stock.................... 31,392 --
Proceeds from issuance of subordinated debentures and warrants ......... 30,126 --
Proceeds from borrowings................................................ 260,945 52,915
Payments on borrowings.................................................. (48,062) ---
Principal payments under capital leases................................. -- (961)
----------- -----------
Net cash provided by financing activities.............................. 276,032 52,388
Effect of exchange rates on cash......................................... (20) (48)
----------- -----------
Net change in cash and cash equivalents................................... 2,730 4,665
Cash and cash equivalents beginning of period............................. 2,659 8,221
----------- -----------
Cash and cash equivalents end of period................................... $ 5,389 $ 12,886
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-29
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Holdings Corp. and Subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and, therefore, do not include all information and footnotes
necessary for presentation of financial position, results of operations and
cash flows required by generally accepted accounting principles. The June 30,
1996 balance sheet was derived from the Company's audited consolidated
financial statements. The information furnished reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair summary of the financial position, results
of operations and cash flows. The Notes have been prepared based on
information available as of May 15, 1997 except with respect to Note 5 which
has been updated. The financial statements should be read in conjunction with
the audited historical consolidated financial statements of the Company and
notes thereto filed with the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, as amended.
NOTE 2: INCOME PER COMMON SHARE
Pursuant to Securities and Exchange Commission Staff Accounting Bulletins,
primary income per share for the three and nine month periods ended March 31,
1996, presented in connection with the Company's initial public offering of
common stock in its Registration Statement on Form S-1, as amended, dated
April 3, 1996 (the "Offering"), also includes amounts computed on options and
warrants issued within twelve months of the filing date as if they were
outstanding for all periods presented, even when the result is anti-dilutive,
using the treasury stock method and the Company's initial public offering
price. Additionally, the computation of primary income per common share for
the three and nine month periods ended March 31, 1996 includes the conversion
of all shares of preferred stock, which automatically converted into shares
of common stock as of the closing of the Offering, as if they were
outstanding for all periods presented, even when the result is anti-dilutive.
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128"). SFAS 128, which supersedes Accounting Principles Board Opinion
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 net income per
common 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 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 per share information will be required
to be restated on a comparable basis.
Assuming that SFAS 128 had been implemented, pro forma basic earnings per
share would have been $0.34 and $0.27 for the three month periods and $0.72
and $0.51 for the nine month periods ended March 31, 1997 and 1996,
respectively. Under SFAS 128, diluted earnings per share would not have
differed from net income per common share for the periods presented in the
accompanying unaudited condensed consolidated statements of operations.
F-30
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 3: BUSINESS ACQUISITION
On November 15, 1996, the Company acquired substantially all of the assets
of the U.S. computer service business (the "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 in the District of Delaware on October 15, 1996; the Court
approved the sale to the Company on November 1, 1996. The base purchase price
was $52,500, comprised of the assumption of certain liabilities under
contracts of the Business (the "Deferred Revenues"), which were estimated at
closing to be $26,015, and base cash consideration of $26,485, excluding
transaction and closing costs. The purchase price is subject to further
adjustment based upon the actual amount of Deferred Revenues, the amount of
revenues of the Business for the two calendar months prior to closing, and
the actual amount of inventory. The estimated fair market values of certain
assets acquired, as well as liabilities assumed, are also subject to further
adjustment as additional information becomes available to the Company. During
the third quarter of fiscal 1997, the estimated Deferred Revenue liability
was increased by approximately $2,300.
The primary source of funds used for the acquisition was the Company's
revolving credit facility, which was increased from $225,000 to $300,000 on
November 13, 1996.
NOTE 4: EMPLOYEE SEVERANCE AND EXIT COSTS
In the second quarter of fiscal 1997, in connection with the Memorex Telex
acquisition, the Company recorded a $3,400 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 $3,400 charge, recorded in accordance
with Statement of Financial Accounting Standards No. 112 ("SFAS 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
unaudited condensed consolidated statement of operations for the nine month
period ended March 31, 1997. For further information regarding the Memorex
Telex acquisition, see Note 3.
In the second quarter of fiscal 1996, in connection with the acquisition
of Bell Atlantic Business Systems Services ("BABSS"), the Company recorded
pre-tax charges for exit costs of $6,900, and estimated future employee
severance costs of $100. During the fourth quarter of fiscal 1996, the
Company reversed $3,400 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 $7,000
combined liability. Such information was unknown to the Company when the
original liability was recorded.
NOTE 5: SUBSEQUENT EVENT
On May 4, 1997, the Company and Quaker Holding Co. ("Quaker") an affiliate
of DLJ Merchant Banking Partners II, L.P. and affiliated funds and other
entities, entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement"). Under the terms of the Merger Agreement, Quaker will merge with
and into the Company, and, subject to the following sentence, the holders of
each share of the Company's common stock can elect to receive $23 in cash for
such share or to retain such share in the merged Company. In any event,
holders will be required to retain 5.3% of the Company's common stock
outstanding immediately prior to the merger. In addition, the Company and
Quaker entered into a voting agreement with certain partnerships affiliated
with Welsh, Carson, Anderson & Stowe and J.H. Whitney & Co., pursuant to
which these partnerships, subject to certain conditions, have agreed to vote
in favor
F-31
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 5: SUBSEQUENT EVENT (CONTINUED)
of the merger 8,345,349 of the 14,837,501 shares of Company common stock
owned by them, exclusive of warrants to purchase 468,750 shares of common
stock at $0.10 per share. The 8,345,349 shares represent approximately 30% of
the Company's common stock outstanding on April 21, 1997.
The proposed merger, which will be recorded as a recapitalization for
accounting purposes, is subject to a number of conditions, including
regulatory approvals and approval by Company stockholders. The transaction is
estimated to have an aggregate value of approximately $957,000, including
refinancing of the Company's existing revolving credit facility. The Company
expects the merger to close by September, 1997.
As a result of the proposed merger, the Company and Quaker will incur
various costs, currently estimated to range between $95,000 and $105,000, on
a pretax basis, in connection with consummating the transaction. These costs
consist primarily of professional fees, registration costs, compensation
costs and other expenses. Although the exact timing, nature and amount of
these merger transaction costs are subject to change, the Company expects
that a one-time charge for these costs will be recorded in the quarter during
which the merger is consummated.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder
of DecisionOne Corporation (formerly Bell Atlantic Business Systems Services,
Inc.):
We have audited the accompanying consolidated balance sheets of
DecisionOne Corporation (formerly, Bell Atlantic Business Systems Services,
Inc.) and subsidiary (the "Company") as of December 31, 1994 and October 20,
1995, and the related consolidated statements of operations, stockholder's
equity and of cash flows for the years ended December 31, 1993 and 1994 and
the period from January 1, 1995 to October 20, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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
subsidiary as of December 31, 1994 and October 20, 1995, and the results of
their operations and their cash flows for the years ended December 31, 1993
and 1994 and the period from January 1, 1995 to October 20, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and postemployment
benefits as of January 1, 1993.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 29, 1995
F-33
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC BUSINESS
SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents.................................... $ 6,456 --
Accounts receivable, net.................................... 50,743 66,426
Inventories, net............................................ 28,620 24,371
Deferred tax asset--current................................. 6,910 --
Prepaid expenses and other assets........................... 2,754 2,990
-------------- -------------
Total current assets...................................... 95,483 93,787
Repairable parts, net........................................ 91,012 91,486
Property and equipment, net.................................. 24,925 28,352
Intangibles, net............................................. 52,345 50,747
Deferred tax asset, net...................................... 12,814 1,062
Other assets................................................. 1,005 499
-------------- -------------
Total assets................................................. $ 277,584 $ 265,933
============== =============
Liabilities and Stockholder's Equity
Current Liabilities:
Accounts payable............................................ $ 24,767 $ 26,260
Accrued expenses............................................ 20,160 18,384
Deferred revenues........................................... 14,582 29,231
Current capitalized lease obligations....................... 1,627 1,525
Income taxes payable........................................ 1,548 --
Due to Bell Atlantic affiliates............................. 39,579 --
-------------- -------------
Total current liabilities................................. 102,263 75,400
Noncurrent capitalized lease obligations..................... 3,128 1,880
Due to Bell Atlantic affiliates.............................. 773 862
Other liabilities............................................ 23,377 1,293
Commitments and contingent liabilities
Stockholder's equity:
Common stock, no par value; one share authorized, issued
and outstanding in 1994 and 1995........................... -- --
Additional paid-in capital.................................. 276,619 314,262
Accumulated deficit......................................... (127,730) (127,134)
Foreign currency translation adjustment..................... (846) (630)
-------------- -------------
Total stockholder's equity................................ 148,043 186,498
-------------- -------------
Total liabilities and stockholder's equity................... $ 277,584 $ 265,933
============== =============
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
DECEMBER 31, JANUARY 1 TO
---------------------- OCTOBER 20,
1993 1994 1995
---------- ---------- --------------
<S> <C> <C> <C>
Revenues:
Service................................................... $375,977 $457,675 $388,203
Other..................................................... 27,405 28,418 24,283
---------- ---------- --------------
403,382 486,093 412,486
---------- ---------- --------------
Cost of revenues:
Service................................................... 304,334 369,596 316,964
Other..................................................... 21,856 21,281 20,348
---------- ---------- --------------
326,190 390,877 337,312
---------- ---------- --------------
Gross profit............................................... 77,192 95,216 75,174
Operating expenses:
Selling, general and administrative expenses.............. 71,096 74,627 69,980
Amortization of intangibles............................... 4,383 3,884 1,652
---------- ---------- --------------
Operating income........................................... 1,713 16,705 3,542
Interest expense........................................... (3,341) (2,203) (1,855)
Interest income............................................ 206 54 218
---------- ---------- --------------
Income (loss) before income taxes and cumulative effect of
accounting change......................................... (1,422) 14,556 1,905
Provision for income taxes................................. 132 6,595 1,309
---------- ---------- --------------
Income (loss) before cumulative effect of accounting
change.................................................... (1,554) 7,961 596
Cumulative effect of accounting change..................... 1,881
---------- ---------- --------------
Net income.............................................. $ 327 $ 7,961 $ 596
========== ========== ==============
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK FOREIGN
------------------ ADDITIONAL CURRENCY TOTAL
NUMBER OF PAID-IN ACCUMULATED TRANSLATION STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
--------- ------ ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 ... 1 $0 $295,419 $(136,018) $(312) $159,089
Net income ............... 327 327
Foreign currency
translation adjustment .. (215) (215)
Distributions to BAC ..... (1,900) (1,900)
----------- -------- ------------ ------------- ------------- ---------------
Balance, December 31, 1993 . 1 0 293,519 (135,691) (527) 157,301
Net income ............... 7,961 7,961
Foreign currency
translation adjustment .. (319) (319)
Distributions to BAC ..... (16,900) (16,900)
----------- -------- ------------ ------------- ------------- ---------------
Balance, December 31, 1994 . 1 0 276,619 (127,730) (846) 148,043
Net income ............... 596 596
Foreign currency
translation adjustment .. 216 216
Distributions to BAC ..... (800) (800)
Contributed capital ...... 38,443 38,443
----------- -------- ------------ ------------- ------------- ---------------
Balance, October 20, 1995 .. 1 $0 $314,262 $(127,134) $(630) $186,498
=========== ======== ============ ============= ============= ===============
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
YEARS ENDED DECEMBER 31, JANUARY 1,
------------------------ TO OCTOBER 20,
1993 1994 1995
---------- ---------- ---------
<S> <C> <C> <C>
Operating activities:
Net income ............................................... $ 327 $ 7,961 $ 596
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment............................................ 7,572 8,499 7,171
Amortization of intangibles........................... 4,383 3,884 1,652
Amortization of repairable parts...................... 43,443 43,450 28,767
Loss on fixed asset retirements ...................... 259 215 165
Provision for accounts receivable .................... 1,213 810 810
Provision for inventory obsolescence ................. 5,351 4,802 6,365
Changes in operating assets and liabilities, net of
effects from contributed capital, which provided
(used) cash:
Accounts receivable ............................. (9,448) (7,660) (18,305)
Inventories ..................................... (4,321) (3,800) (2,116)
Accounts payable ................................ 5,673 7,755 1,493
Accrued expenses ................................ 3,734 3,391 2,953
Deferred revenues ............................... 5,154 (757) 14,649
Net changes in income taxes, deferred taxes,
other assets and liabilities ................... (2,865) (189) 4,415
---------- ---------- --------------
Net cash provided by operating activities ..... 60,475 68,361 48,615
---------- ---------- --------------
Investing activities:
Capital expenditures ..................................... (8,336) (9,585) (10,763)
Repairable parts purchases ............................... (29,833) (45,907) (29,241)
Proceeds from sale of fixed assets ....................... 124 -- --
---------- ---------- --------------
Net cash used in investing activities ............. (38,045) (55,492) (40,004)
---------- ---------- --------------
Financing activities:
Distributions to shareholder ............................. (1,900) (16,900) (3,475)
Net borrowings (repayments) on affiliated debt ........... (19,029) 7,544 (10,242)
Additions to capital lease obligations ................... 1,825 2,283
Payments on capital lease obligations .................... (1,309) (1,357) (1,350)
---------- ---------- --------------
Net cash used in financing activities ............. (20,413) (8,430) (15,067)
---------- ---------- --------------
Net increase (decrease) in cash and cash equivalents ....... 2,017 4,439 (6,456)
Cash and cash equivalents, beginning of year ................ -- 2,017 6,456
---------- ---------- --------------
Cash and cash equivalents, end of year ...................... $ 2,017 $ 6,456 --
========== ========== ==============
Supplemental disclosures of cash flow information:
Net cash paid during the year for:
Interest ............................................... $ 3,409 $ 2,307 $ 1,986
Income taxes ........................................... 1,598 8,366 5,237
Noncash investing and financing activities:
Assets and liabilities contributed to capital by stockholder:
Accounts receivable .................................... $ 1,812
Accounts payable ....................................... (4,729)
Notes payable .......................................... (29,248)
Income tax payable ..................................... 1,675
Deferred taxes ......................................... 17,079
Employee related liabilities ........................... (27,707)
--------------
$(41,118)
==============
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
1. NATURE OF BUSINESS
The consolidated financial statements include the accounts of DecisionOne
Corporation (formerly, Bell Atlantic Business Systems Services, Inc.
("BABSS")) and its wholly-owned subsidiary, Sorbus Canada Ltd. (the
"Company"). Prior to the acquisition discussed below, BABSS had been wholly
owned by Bell Atlantic Business Systems, Inc., a subsidiary of Bell Atlantic
Enterprises International, Inc., and, ultimately by Bell Atlantic Corporation
("BAC"). The Company is a provider of multivendor computer maintenance
service and technology support services.
On September 19, 1995, BAC entered into a stock purchase agreement (the
"Agreement") to sell all of the outstanding common stock of BABSS to Decision
Servcom, Inc. ("Operating Co."), an independent provider of computer
maintenance services in the mid-range computer market, for a cash purchase
price of approximately $250,000. In connection with the acquisition, the
Company's name was changed from BABSS to DecisionOne Corporation, and
Operating Co. was merged into it.
The Company's wholly-owned international subsidiary is not significant to
the Company's financial statements.
2. BASIS OF PRESENTATION
The Company was acquired effective October 20, 1995, through a transaction
accounted for using the purchase method of accounting. The accounts of the
Company do not reflect the allocation of the purchase price.
BAC's retention of certain of the Company's liabilities, and net of
certain assets (including cash and cash equivalents), has been accounted for
as a contribution of capital in the Company's accompanying consolidated
statements of stockholder's equity for the period ended October 20, 1995. See
Note 4.
Obligations arising out of employee benefit and pension plans accrued
prior to October 20, 1995, as well as certain claims and causes of action
related to the Company's actions or omissions that occurred prior to October
20, 1995 have been retained by BAC. Therefore, no accruals for the
aforementioned have been made in the Company's accompanying consolidated
balance sheet as of October 20, 1995.
3. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION -- The consolidated financial statements include the
accounts of BABSS and its wholly owned subsidiary. All intercompany balances
and transactions have been eliminated in consolidation.
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.
INVENTORIES -- Inventories are stated at the lower of cost or market, cost
being determined using the weighted average method. Inventories consist of
consumable replacement parts which are charged to operations when used.
Inventories are stated net of a provision for obsolescence of $21,718,
$22,742 and $23,852 at December 31, 1993 and 1994 and October 20, 1995,
respectively.
REPAIRABLE PARTS -- Repairable parts are required in order to meet the
requirements of the contracts with the Company's maintenance customers. These
parts are primarily purchased from equipment manufacturers or other third
parties. As these parts are purchased, they are capitalized at cost and
amortized using the straight-line method over five years, the estimated
useful life of these repairable parts.
F-38
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(In thousands)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
When a repairable part is used in providing maintenance services to a
customer's equipment, the defective part taken from the equipment is
exchanged for the repairable part taken from the Company's inventory.
Repairable parts are repaired by the Company based upon anticipated need and
generally have an economic life that extends beyond the normal life cycle of
the applicable product. Costs of refurbishing parts are charged to operations
as incurred. Repairable parts are stated at cost, less accumulated
amortization of $68,803 and $74,411 as of December 31, 1994 and October 20,
1995, respectively. Repairable parts amortization expense for the years ended
December 31, 1993 and 1994 and the period ended October 20, 1995 was $43,443,
$43,450 and $28,767, respectively.
No such impairment writedowns were required in the years ended December
31, 1993, or 1994, or in the period ended October 20, 1995.
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; renewals and betterments are capitalized. 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.
INTANGIBLE ASSETS -- Intangible assets are comprised of excess purchase
price over net assets acquired ("goodwill") and the fair value of acquired
customer contracts.
Goodwill is being amortized on a straight-line basis over a life of 25 to
40 years. Other intangibles are being amortized on a straight-line basis,
with lives between 2 to 18 years.
CARRYING VALUE OF LONG-TERM ASSETS -- The Company evaluates the carrying
value of long-term assets, property and equipment, repairable parts and
intangible assets, based upon current and anticipated undiscounted cash
flows, and recognizes an impairment when such estimated cash flows will be
less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and
fair value.
SERVICE REVENUE -- The Company enters into maintenance contracts whereby
it services various manufacturers' equipment. Revenues from these contracts
are recorded as deferred revenues and are recognized ratably over the term of
the contract. Revenues derived from the maintenance of equipment not under
contract are recognized as the service is performed.
FOREIGN CURRENCY TRANSLATION -- Gains and losses resulting from foreign
currency translation are accumulated in a separate component of shareholder's
equity titled, "Cumulative Foreign Currency Translation Adjustment". Gains
and losses resulting from foreign currency transactions are not significant
and 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.
INCOME TAXES -- The Company is included in the consolidated federal tax
return of BAC. Calculation of the Company's income taxes on a separate return
basis would not result in any change to the amounts reflected in the
consolidated financial statements. Effective January 1, 1993, the Company
changed its policy of accounting for income taxes to conform to Statement of
Financial Accounting Standards
F-39
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("SFAS") No. 109, Accounting for Income Taxes. The Company previously
followed Accounting Principles Board Opinion No. 11, "Accounting for Income
Taxes." SFAS No. 109 requires, among other things, the accrual of deferred
tax liabilities for future taxable amounts, deferred tax assets for future
deductions and operating loss carryforwards, and a valuation allowance to
reduce deferred tax assets to the amounts that are more likely than not to be
realized. The cumulative effect of adopting SFAS No. 109 as of January 1,
1993 resulted in a non-cash increase to net income of $1,881 for the initial
adjustment of deferred tax balances to reflect the tax rates in effect at
adoption.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The following disclosure of the
estimated fair value of financial instruments was 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.
NOTES PAYABLE -- Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate the fair value
for debt issues, 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 could differ from those
estimates.
PENSION PLAN -- Substantially all of the Company's employees participated
in a noncontributory defined benefit pension plan sponsored by BAC for the
years ended December 31, 1993 and 1994 and for the period ended October 20,
1995. Amounts contributed by the Company to the pension plan were determined
by BAC based principally on the aggregate cost actuarial method, and are
subject to applicable federal income tax regulations. The obligation of the
pension plan which has been terminated as of October 20, 1995, will be
assumed by BAC.
POSTEMPLOYMENT BENEFITS -- Effective January 1, 1993, the Company adopted
the provisions of SFAS No. 112, Employers' Accounting for Postemployment
Benefits. SFAS No. 112 establishes accrual accounting standards for
employer-provided benefits which cover former or inactive employees after
employment, but before retirement. The adoption of SFAS No. 112 on January 1,
1993 did not have a material effect on the Company's consolidated financial
position or results of operations.
The Company's employees, if eligible, are provided post employment
benefits under plans administered by BAC for the years ended December 31,
1993 and 1994 and for the period ended October 20, 1995. Amounts contributed
by the Company to the benefit plans were determined by BAC based on an
actuarial methodology. BAC has assumed all such liabilities accrued as of
October 20, 1995.
4. CONTRIBUTED CAPITAL
Effective October 20, 1995, in accordance with the Agreement between BAC
and Operating Co., the Company accounted for BAC's retention of liabilities,
net of certain assets, as a contribution of capital.
F-40
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
4. CONTRIBUTED CAPITAL (CONTINUED)
Amounts contributed to capital were as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash .................................. $ (2,675)
Accounts receivable.................... (1,812)
Accounts payable and accrued expenses 4,729
Income taxes payable................... (1,675)
Notes payable to affiliates............ 29,248
Deferred taxes......................... (17,079)
Employee related liabilities........... 27,707
----------
Net amount contributed to capital ..... $ 38,443
==========
</TABLE>
5. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Trade receivables......................... $51,513 $68,136
Due from affiliates....................... 1,655 1,362
Other..................................... 847 697
-------------- -------------
54,015 70,195
Less allowance for uncollectible
accounts................................. (3,272) (3,769)
-------------- -------------
$50,743 $66,426
============== =============
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Land and buildings........................ $ 2,419 $ 2,509
Equipment, furniture and fixtures ........ 48,008 54,722
Leasehold improvements.................... 3,964 4,721
Other..................................... 11,461 10,854
-------------- -------------
65,852 72,806
Accumulated depreciation and
amortization............................. (40,927) (44,454)
-------------- -------------
$ 24,925 $ 28,352
============== =============
</TABLE>
The principal lives (in years) used in determining depreciation rates of
various assets are: buildings (40); computers and equipment (5); furniture
and fixtures (10); office machines (10); and leasehold improvements (term of
related leases).
Depreciation expense was $7,572 and $8,499, for the years ended December
31, 1993 and 1994, respectively, and $7,171 for the period ended October 20,
1995.
F-41
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
7. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Customer contracts....... $ 8,500 $ 8,500
Goodwill................. 59,141 59,214
-------------- -------------
67,641 67,714
Accumulated
amortization............ (15,296) (16,967)
-------------- -------------
$ 52,345 $ 50,747
============== =============
</TABLE>
The Company periodically evaluates the fair value of goodwill and other
intangible assets and recognizes an impairment when it is probable that
estimated future undiscounted cash flows will be less than the carrying value
of the asset. No writedowns of goodwill or other intangible assets were made
in 1993, 1994 or 1995.
Amortization expense relating to intangibles was approximately $4,383 and
$3,884 for the years ended December 31, 1993 and 1994, respectively, and
$1,652 for the period ended October 20, 1995.
8. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Compensation and
benefits................. $ 6,642 $ 7,272
Bonuses................... 5,109 2,790
Other accrued expenses ... 8,409 8,322
-------------- -------------
$20,160 $18,384
============== =============
</TABLE>
9. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
PERIOD
YEARS ENDED DECEMBER 31, JANUARY 1,
------------------------ TO OCTOBER 20,
1993 1994 1995
---------- ---------- ---------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal..................................... $ 2,820 $ 7,243 $ 390
State....................................... 126 727 (110)
Foreign..................................... 552 1,026 653
--------- --------- -------------
3,498 8,996 933
--------- --------- -------------
Deferred:
Federal..................................... (3,119) (2,078) 707
State....................................... (7) 1,455 225
Foreign..................................... (240) (323) (331)
--------- --------- -------------
(3,366) (946) 601
--------- --------- -------------
Benefit of net operating loss carryforwards:
State....................................... -- (1,455) (225)
--------- --------- -------------
Provision for income taxes (benefit) ......... $ 132 $ 6,595 $1,309
========= ========= =============
</TABLE>
F-42
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
9. INCOME TAXES (Continued)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax asset were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Deferred tax assets (liabilities):
Current:
Accounts receivable ............... $ 1,934 --
Inventory ......................... 5,186 --
Accrued expenses ................... (489) --
Other .............................. 279 --
Deferred state taxes ............... 1,395 --
--------------
Gross deferred tax asset--current . 8,305 --
Less valuation allowance............... (1,395) --
--------------
Net deferred tax assets--current .. 6,910 --
--------------
Non-current:
Property and equipment ........... 2,646 1,062
Repairable parts ................... 2,211 --
Employee benefits ................. 8,100 --
Deferred state taxes .............. 1,777 --
Other ............................. (143) --
State net operating loss
carryforwards ...................... 5,163 --
-------------- -------------
Gross deferred tax
asset--noncurrent .................. 19,754 1,062
Less valuation allowance............... (6,940) --
-------------- -------------
Net deferred tax
asset--noncurrent .................. 12,814 1,062
-------------- -------------
Net deferred tax asset................. $19,724 $1,062
============== =============
</TABLE>
The net deferred tax asset as of December 31, 1994 in essence represents
an intercompany receivable from BAC, resulting from the future benefit of the
inclusion of the Company's temporary differences in the consolidated U.S.
federal tax return of BAC.
The October 20, 1995 deferred tax asset related to foreign operations.
A reconciliation between the provision (benefit) for income taxes,
computed by applying the statutory income tax rate to income before income
taxes, and the actual provision for income taxes follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ------- -------
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory tax
rate....................................................... (35.0)% 35.0% 35.0%
State income taxes, net of federal income tax benefit ..... 5.4 3.2 (3.7)
Foreign income tax rate differential ....................... 5.1 1.2 6.6
Nondeductible expenses ..................................... 6.8 1.8 9.7
Amortization of goodwill.................................... 33.8 4.1 21.7
Other ...................................................... (6.9) -- (0.6)
--------- ------- -------
Actual income tax provision effective tax rate ............. 9.2% 45.3% 68.7%
========= ======= =======
</TABLE>
F-43
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
10. LEASE COMMITMENTS
The Company leases certain computer equipment under noncancellable capital
leases. 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 at various dates during
the next six years.
Future minimum payments under noncancellable capital leases and operating
leases as of October 20, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
October 21, 1995 to December 31, 1995 .. $ 364 $ 3,639
1996.................................... 1,669 15,308
1997.................................... 1,261 13,456
1998.................................... 400 10,885
1999.................................... 58 8,343
2000.................................... 55 4,588
Thereafter.............................. -- 11
--------- -----------
Total minimum lease payments............ 3,807 $56,230
Less amount representing interest ...... 402
---------
Present value of minimum lease
payments............................... 3,405
Less current obligations................ 1,525
---------
Noncurrent obligations.................. $1,880
=========
</TABLE>
Rental expense for operating leases was $12,609 and $14,145 for the years
ended December 31, 1993 and 1994 and $12,749 for the period ended October 20,
1995.
11. BENEFIT PLANS
Substantially all of the Company's employees were covered under a
noncontributory pension benefit plan sponsored by BAC, which plan was
terminated on October 20, 1995 (see Note 3). The pension benefit formula used
in the determination of pension cost is based on the greater of a flat dollar
amount per year of service or a stated percentage of adjusted career average
income. BAC's objective in funding the plan is to accumulate funds at a
relatively stable rate over participants' working lives so that benefits are
fully funded at retirement. Plan assets consist principally of investments in
corporate equity securities, U.S. Government and corporate debt securities
and real estate.
SFAS No. 87 requires a comparison of the actuarial present value of
projected benefit obligations with the fair value of plan assets, the
disclosure of the components of net periodic pension costs and a
reconciliation of the funded status of the plan with amounts recorded on the
balance sheet. Such disclosures are not presented for the Company because the
structure of the plan does not allow for determination of this information on
an individual company basis.
F-44
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
11. BENEFIT PLANS (CONTINUED)
The Company recognized pension expense of $3,243 and $4,202 for the years
ended December 31, 1993 and 1994 and $4,846 for the period ended October 20,
1995.
The assumptions used in the actuarial computations by BAC for
determination of the above pension expense were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Discount rate ................................... 7.25% 8.25% 7.25%
Expected long-term rate of return on plan
assets.......................................... 8.25 8.25 8.25
Future compensation growth rate ................. 5.25 5.25 4.75
</TABLE>
Substantially all of the Company's employees participate in a savings plan
provided by BAC which provides opportunities for eligible employees to save
for retirement on a tax deferred basis. The Company recognized contribution
expense of $1,482 and $1,531 for the years ended December 31, 1993 and 1994
and $1,602 for the period ended October 20, 1995.
Under the Agreement, Operating Co. assumed no liabilities of the Company
relating to employee benefit programs.
12. OTHER LIABILITIES
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Other postemployment benefit liabilities $19,120 $ --
Accrued pension cost ..................... 3,220 --
Other noncurrent liabilities ............. 1,037 1,293
-------------- -------------
$23,377 $1,293
============== =============
</TABLE>
Effective October 20, 1995, employee related liabilities (including other
postemployment benefit liabilities and accrued pension costs) were
contributed to capital by BAC. (see Note 4).
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a defendant in a number of lawsuits in the ordinary course
of business, including actions alleging wrongful termination of employment
and breach of contract. In several of the alleged wrongful termination cases,
the plaintiffs are seeking punitive damages. The Company believes it has
meritorious defenses to all of the claims and is vigorously defending the
lawsuits. Although the ultimate outcome of these lawsuits cannot be predicted
with certainty, the Company's management, after consultation with legal
counsel, does not expect that such lawsuits will have a material adverse
effect on the Company's financial condition, results of operation or
liquidity.
F-45
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
14. RELATED PARTY TRANSACTIONS
The Company engages in various activities with Bell Atlantic affiliated
companies. Amounts due from the affiliated companies consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Bell Atlantic Network Services, Inc. $ 797 $ 806
Bell Atlantic Network Integration ... 252 281
New Jersey Bell ...................... 65 70
Bell of Pennsylvania ................. 35 62
C&P Telephone Company--Maryland ..... 96 35
Other ................................ 410 108
-------------- -------------
Total due from affiliates .......... $1,655 $1,362
============== =============
</TABLE>
Amounts due to the affiliated companies consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Bell Atlantic Enterprises International ...... $ 3,856 $ 309
Bell Atlantic Professional Services........... 110 297
Bell Atlantic Customer Services
International................................ 239
Other......................................... 340 159
-------------- -------------
Total accounts payable affiliates........... 4,545 765
-------------- -------------
Notes payable--FSI............................ 39,579
Notes payable--BAP............................ 773 862
-------------- -------------
Total notes payable affiliates.............. 40,352 862
-------------- -------------
Total due to affiliates..................... $44,897 $1,627
============== =============
</TABLE>
The Company engages in various activities with affiliated companies. The
amount due to Bell Atlantic Financial Services, Inc. ("FSI") at December 31,
1994 is represented by a promissory note for the aggregate unpaid principal
balance plus interest on demand. The interest rates charged are based on the
weighted average cost of FSI's outstanding borrowings during the month. The
weighted average interest rate for 1994 and 1995 was approximately 5.8%.
The amount due to Bell Atlantic Properties ("BAP") is also represented by
a promissory note for the aggregate unpaid principal balance plus interest.
Interest is payable monthly on the unpaid principal at the rate of 9.88% per
annum.
Effective October 20, 1995, notes payable excluding interest of $29,248
due to FSI, and $4,650 of accounts payable due to affiliates were contributed
to capital by BAC. See Note 4.
F-46
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
Transactions with affiliated companies had the following impact on the
results of operations:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1 TO
YEARS ENDED OCTOBER 20,
DECEMBER 31, 1993 1995
------------------- --------------
1993 1994 1995
--------- --------- --------------
<S> <C> <C> <C>
Revenues....................................... $17,347 $13,971 $10,270
--------- --------- --------------
Total operating and other expenses:
Rent expense ................................ $ 5,329 $ 3,176 $ 2,626
Other service and general and administrative
expenses.................................... 11,957 14,191 8,153
Interest expense............................. 3,035 1,823 1,512
--------- --------- --------------
$20,321 $19,190 $12,291
========= ========= ==============
</TABLE>
F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
DecisionOne Holdings Corp.:
We have audited the consolidated financial statements of DecisionOne Holdings
Corp. and subsidiaries as of June 30, 1995 and 1996, and for each of the
three years in the period ended June 30, 1996, and have issued our report
thereon dated August 30, 1996, (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedules listed
in Item 21 of this Registration Statement. These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. 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 30, 1996
S-1
<PAGE>
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,
--------------------- MARCH 31
1995 1996 1997
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investment in equity of subsidiaries........................ $ 21,488 $180,793 $201,095
---------- ---------- -----------
Total assets.................................................. $ 21,488 $180,793 $201,095
========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Redeemable preferred stock ................................. 6,811
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 5,000,000
shares; none outstanding
Common stock, $.01 par value--authorized, 25,000,000 shares
in 1995 and 100,000,000 shares in 1996 and 1997; issued and
outstanding 8,935,348 shares in 1995, 27,340,288 shares in
1996 and 27,813,832 shares in 1997.......................... $ 89 $ 273 $ 278
Additional paid-in capital.................................. 107,991 255,262 255,691
Accumulated deficit......................................... (92,378) (73,516) (53,600)
Foreign currency translation adjustment..................... 680 622 574
Pension liability adjustment................................ (1,705) (1,848) (1,848)
---------- ---------- -----------
Total shareholders' equity............................... 14,677 180,793 201,095
========== ========== ===========
Total liabilities and shareholders' equity ................. $ 21,488 $180,793 $201,095
========== ========== ===========
</TABLE>
See notes to condensed financial information of registrant.
S-2
<PAGE>
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, NINE MONTHS
----------------------------- ENDED
1994 1995 1996 MARCH 31, 1997
--------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Equity in net income of subsidiaries. $10,112 $42,528 $18,862 $19,916
--------- --------- --------- --------------
Net income........................... $10,112 $42,528 $18,862 $19,916
========= ========= ========= ==============
</TABLE>
See notes to condensed financial information of registrant.
S-3
<PAGE>
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 NINE MONTHS
--------------------------------- ENDED
1994 1995 1996 MARCH 31, 1997
---------- ---------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating Activities:
Net income..................................... $ 10,112 $ 42,528 $ 18,862 $ 19,916
Adjustment to reconcile net income to net cash
provided by operating activities.............. (10,112) (42,528) (17,416) (19,916)
---------- ---------- ----------- --------------
Net cash provided by operating activities... -- -- 1,446 --
---------- ---------- ----------- --------------
Investing Activities--contribution to capital of
subsidiaries.................................... (2,250) (142,090) (434)
---------- ----------- --------------
Financing Activities:
Proceeds from issuance of preferred stock...... 2,250 31,392
Proceeds from issuance of common stock
and warrants ................................. 110,698 434
Dividends paid on preferred stock ............. (1,446)
---------- ----------- --------------
Net cash provided by financing activities... 2,250 140,644 434
---------- ----------- --------------
Net Change in Cash............................. $ -- $ -- $ --
========== =========== ==============
</TABLE>
See notes to condensed financial information of registrant.
S-4
<PAGE>
SCHEDULE I
DECISIONONE HOLDINGS CORP.
NOTES 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.
2. SUBSEQUENT EVENT
On May 4, 1997, the Parent and Quaker Holding Co. ("Quaker") an affiliate
of DLJ Merchant Banking Partners II, LP an affiliated funds and other
entities, entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement"). Under the terms of the Merger Agreement, Quaker will merge with
and into the Parent. Under the terms of the Merger Agreement, the, subject to
the following sentence, holders of each share of the Parent's common stock
can elect to receive $23 in cash for such share or to retain such share in
the merged Company. In any event, holders will be required to retain 5.3% of
the Parent's stock outstanding immediately prior to the merger. In addition,
the Parent and Quaker entered into a voting agreement with certain
partnerships affiliated with Welsh, Carson, Anderson & Stowe and J. H.
Whitney & Co., pursuant to which these partnerships, subject to certain
conditions, have agreed to vote in favor of the merger 8,345,349 of the
14,837,501, respectively, shares of the Parent's common stock owned by them,
exclusive of warrants to purchase 468,750 shares of common stock at $0.10 per
share. The 8,345,349 shares represent approximately 30% of the Parent's
common stock outstanding on April 21, 1997.
The proposed merger, which will be recorded as a recapitalization for
accounting purposes, is subject to a number of conditions, including
regulatory approvals and approval by the Parent's stockholders. The
transaction is estimated to have an aggregate value of approximately $957
million, including refinancing of the Company's existing revolving credit
facility. The Parent expects the merger to close by September, 1997.
As a result of the proposed merger, the Parent and Quaker will incur
various costs, currently estimated to range between $95 million and $105
million in connection with consummating the transaction. These costs consist
primarily of professional fees, registration costs, compensation costs and
other expenses. Although the exact timing, nature and amount of these merger
transaction costs are subject to change, the Parent expects that a one-time
pre-tax charge for these costs of approximately $76 million ($69 million
after tax) will be recorded in the quarter during which the merger is
consummated.
S-5
<PAGE>
SCHEDULE II.1
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE OF CHARGES TO CHARGES TO BALANCE
BEGINNING OF CORP. AND OTHER AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- -------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1994
Accounts receivable--
Allowance for uncollectible
accounts............................. $ 2,170 $ (162) $ (547) $ 1,461
Inventory--
Allowance for obsolescence .......... $ 6,196 $1,580 $ 594(b) $ 8,370
YEAR ENDED JUNE 30, 1995
Accounts receivable--
Allowance for uncollectible accounts $ 1,481 $1,930 $3,225(a) $ 6,616
Inventory--
Allowance for obsolescence........... $ 8,370 $1,995 $1,423(b) $11,788
YEAR ENDED JUNE 30, 1996
Accounts receivable--
Allowance for uncollectible accounts $ 6,616 $3,434 $ (470)(a) $ 9,580
Inventory--
Allowance for obsolescence .......... $11,788 $1,171 $1,450(b) $ (3,615) $14,794
NINE MONTH PERIOD ENDED
MARCH 31, 1997 (UNAUDITED)
Accounts receivable--
Allowance for doubtful accounts ..... $ 9,580 $2,726 $1,593(b) (2,172)(a) $11,727
Inventory--
Allowance for obsolescence........... $14,794 $2,088 $3,046 $19,928
</TABLE>
- ------------
(a) Amount represents net recoveries (writeoffs) during the year and
allowances recorded as a result of acquisitions during the year.
(b) Amount primarily represents allowance recorded as a result of
acquisitions during the year.
S-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
DecisionOne Corporation:
We have audited the consolidated financial statements of DecisionOne
Corporation (formerly Bell Atlantic Business Systems Services, Inc.) and
subsidiary as of December 31, 1994 and October 20, 1995, and for the years
ended December 31, 1993 and 1994 and the period from January 1, 1995 to
October 20, 1995, and have issued our report thereon dated December 29, 1995
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 21 of this Registration
Statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 29, 1995
S-7
<PAGE>
SCHEDULE II.2
DECISIONONE CORPORATION
(FORMERLY, BELL ATLANTIC BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGES TO CHARGES TO BALANCE
BEGINNING OF COSTS AND OTHER AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- -------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Accounts receivable--
Allowance for uncollectible accounts $ 2,719 $1,213 $(1,074)(a) $ 2,858
Inventory--
Allowance of obsolescence ........... $21,040 $5,351 $(4,673)(b) $21,718
YEAR ENDED DECEMBER 31, 1994
Accounts receivable--
Allowance for uncollectible accounts $ 2,858 $ 810 $ (396)(a) $ 3,272
Inventory--
Allowance of obsolescence............ $21,718 $4,802 $(3,778)(b) $22,742
YEAR ENDED OCTOBER 20, 1995
Accounts receivable--
Allowance for uncollectible
accounts............................. $ 3,272 $ 810 $ (313)(a) $ 3,769
Inventory--
Allowance of obsolescence ........... $22,742 $6,365 $(5,255)(b) $23,852
</TABLE>
- ------------
(a) Amount primarily represents net write offs during the year.
(b) Amount primarily represents the writeoff of inventory during the
year.
S-8
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
dated as of
May 4, 1997
among
DECISIONONE HOLDINGS CORP.
and
QUAKER HOLDING CO.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
ARTICLE 1
THE MERGER
SECTION 1.01. The Merger.................................................. A-1
SECTION 1.02. Conversion (or Retention) of Shares......................... A-2
SECTION 1.03. Elections................................................... A-2
SECTION 1.04. Proration of Election Price................................. A-3
SECTION 1.05. Surrender and Payment....................................... A-4
SECTION 1.06. Dissenting Shares........................................... A-5
SECTION 1.07. Stock Options............................................... A-5
SECTION 1.08. Warrants.................................................... A-6
SECTION 1.09. Fractional Shares........................................... A-6
ARTICLE 2
THE SURVIVING CORPORATION
SECTION 2.01. Certificate of Incorporation................................ A-6
SECTION 2.02. Bylaws...................................................... A-6
SECTION 2.03. Directors and Officers...................................... A-6
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.01. Corporate Existence and Power............................... A-6
SECTION 3.02. Corporate Authorization..................................... A-7
SECTION 3.03. Governmental Authorization.................................. A-7
SECTION 3.04. Non-contravention........................................... A-7
SECTION 3.05. Capitalization.............................................. A-7
SECTION 3.06. Subsidiaries................................................ A-8
SECTION 3.07. SEC Filings................................................. A-8
SECTION 3.08. Financial Statements........................................ A-9
SECTION 3.09. Disclosure Documents........................................ A-9
SECTION 3.10. Absence of Certain Changes.................................. A-9
SECTION 3.11. No Undisclosed Material Liabilities......................... A-10
SECTION 3.12. Litigation.................................................. A-10
SECTION 3.13. Taxes....................................................... A-11
SECTION 3.14. ERISA....................................................... A-11
SECTION 3.15. Employees................................................... A-13
SECTION 3.16. Labor Matters............................................... A-13
SECTION 3.17. Compliance with Laws and Court Orders....................... A-13
SECTION 3.18. Licenses and Permits........................................ A-13
SECTION 3.19. Repairable Parts............................................ A-13
SECTION 3.20. Intellectual Property....................................... A-13
SECTION 3.21. Finders' Fees............................................... A-14
SECTION 3.22. Inapplicability of Certain Restrictions..................... A-14
SECTION 3.23. Rights Plan................................................. A-14
- ------------
The Table of Contents is not a part of this Agreement.
i
<PAGE>
PAGE
------
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MERGERSUB
SECTION 4.01. Corporate Existence and Power............................... A-14
SECTION 4.02. Corporate Authorization..................................... A-14
SECTION 4.03. Governmental Authorization.................................. A-14
SECTION 4.04. Non-contravention........................................... A-14
SECTION 4.05. Disclosure Documents........................................ A-15
SECTION 4.06. Finders' Fees............................................... A-15
SECTION 4.07. Financing................................................... A-15
SECTION 4.08. Capitalization.............................................. A-16
ARTICLE 5
COVENANTS OF THE COMPANY
SECTION 5.01. Conduct of the Company...................................... A-16
SECTION 5.02. Stockholder Meeting; Proxy Material......................... A-17
SECTION 5.03. Access to Information....................................... A-17
SECTION 5.04. Other Offers................................................ A-18
SECTION 5.05. Notices of Certain Events................................... A-19
SECTION 5.06. Resignation of Directors.................................... A-20
SECTION 5.07. Preferred Stock............................................. A-20
SECTION 5.08. Solvency Advice............................................. A-20
ARTICLE 6
COVENANTS OF MERGERSUB
SECTION 6.01. SEC Filings................................................. A-20
SECTION 6.02. Voting of Shares............................................ A-20
SECTION 6.03. Director and Officer Liability.............................. A-20
SECTION 6.04. Employee Plans and Benefit Arrangements..................... A-21
SECTION 6.05. Financing................................................... A-21
SECTION 6.06. NASDAQ Listing.............................................. A-21
SECTION 6.07. Access to Information....................................... A-21
ARTICLE 7
COVENANTS OF MERGERSUB AND THE COMPANY
SECTION 7.01. Best Efforts................................................ A-21
SECTION 7.02. Certain Filings............................................. A-22
SECTION 7.03. Public Announcements........................................ A-22
SECTION 7.04. Further Assurances.......................................... A-22
ARTICLE 8
CONDITIONS TO THE MERGER
SECTION 8.01. Conditions to the Obligations of Each Party................. A-23
SECTION 8.02. Conditions to the Obligations of MergerSub.................. A-23
SECTION 8.03. Condition to the Obligation of the Company.................. A-24
ii
<PAGE>
PAGE
------
ARTICLE 9
TERMINATION
SECTION 9.01. Termination................................................. A-25
SECTION 9.02. Effect of Termination....................................... A-25
ARTICLE 10
MISCELLANEOUS
SECTION 10.01. Notices.................................................... A-26
SECTION 10.02. Survival of Representations and Warranties................. A-26
SECTION 10.03. Amendments; No Waivers..................................... A-26
SECTION 10.04. Expenses................................................... A-27
SECTION 10.05. Successors and Assigns; Benefit............................ A-27
SECTION 10.06. Governing Law.............................................. A-27
SECTION 10.07. Counterparts; Effectiveness................................ A-27
SECTION 10.08. Knowledge Defined.......................................... A-27
Exhibit A Amendments to the Company's Certificate of Incorporation ..
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of May 4, 1997 among DecisionOne
Holdings Corp., a Delaware corporation (the "COMPANY") and Quaker Holding
Co., a Delaware corporation ("MERGERSUB").
W I T N E S S E T H:
WHEREAS, as of the date of execution of this Agreement, all of the
outstanding capital stock of, or other ownership interest in, MergerSub is
owned, in the aggregate, by DLJ Merchant Banking Partners II, L.P., DLJ
Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJMB Funding II,
Inc., UK Investment Plan 1997 Partners and DLJ First ESC LLC;
WHEREAS, MergerSub is unwilling to enter into this Agreement unless,
contemporaneously with the execution and delivery of this Agreement, certain
beneficial and record stockholders of the Company enter into a Voting
Agreement and Irrevocable Proxy providing for certain actions relating to
certain of the shares of common stock, options and warrants of the Company
owned by them;
WHEREAS, MergerSub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger (as
defined in Section 1.01) and also to prescribe certain conditions to the
Merger;
WHEREAS, it is intended that the Merger be recorded as a recapitalization
for financial reporting purposes and both parties, after discussion with
their auditors, believe that the Merger is eligible for such accounting
treatment;
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties hereto
agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.01. The Merger. (a) At the Effective Time, MergerSub shall be
merged (the "MERGER") with and into the Company in accordance with the
Delaware Law, and in accordance with the terms and conditions hereof,
whereupon the separate existence of MergerSub shall cease, and the Company
shall be the surviving corporation (the "SURVIVING CORPORATION").
(b) As soon as practicable after satisfaction or, to the extent permitted
hereunder, waiver of all conditions to the Merger, the Company and MergerSub
will file a certificate of merger with the Secretary of State of the State of
Delaware and make all other filings or recordings required by Delaware Law in
connection with the Merger. The Merger shall become effective at such time as
the certificate of merger is duly filed with the Secretary of State of the
State of Delaware or at such later time as is specified in the certificate of
merger (the "EFFECTIVE TIME").
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to
all of the restrictions, disabilities and duties of the Company and
MergerSub, all as provided under Delaware Law.
(d) The Company hereby represents that its Board of Directors, at a
meeting duly called and held and acting on the unanimous recommendation of
the Board of Directors of the Company, other than any directors expected to
become affiliated with MergerSub, has (i) determined that this Agreement and
the transactions contemplated hereby, including the Merger, are fair to and
in the best interest of the Company's stockholders, (ii) approved this
Agreement and the transactions contemplated hereby, including the Merger,
which approval satisfies in full the requirements of the General Corporation
Law of the State of Delaware (the "DELAWARE LAW") including, without
limitation, Section 203 thereof with respect to the transactions contemplated
hereby, and (iii) resolved to recommend approval and adoption of this
Agreement and the Merger by its stockholders. The Company further represents
that Smith Barney Inc. has delivered to the Company's Board of Directors its
opinion that the consideration to be paid in the Merger is fair to the
holders of shares of common stock of the Company, par value $0.01 per share
(each, a "SHARE"), from a financial point of view.
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SECTION 1.02. Conversion (or Retention) of Shares. At the Effective Time:
(a) each Share held by the Company as treasury stock or owned by
MergerSub immediately prior to the Effective Time shall be canceled, and
no payment shall be made with respect thereto;
(b) each share of common stock, par value $.01 per share, of MergerSub
("MERGERSUB COMMON STOCK") outstanding immediately prior to the Effective
Time shall be converted into and become 1 share of common stock of the
Surviving Corporation with the same rights, powers and privileges as the
shares so converted;
(c) each share of preferred stock, par value $.01 per share, of MergerSub
("MERGERSUB PREFERRED STOCK"), if any, outstanding immediately prior to
the Effective Time shall be converted into and become 1 share of preferred
stock of the Surviving Corporation with the same rights, powers and
privileges as the shares of preferred stock so converted;
(d) each outstanding warrant to purchase shares of MergerSub common stock
(each, a "MERGERSUB WARRANT") shall be automatically amended to constitute
a warrant to acquire shares of common stock of the Surviving Corporation
on the same terms and conditions as the MergerSub Warrant; and
(e) each Share outstanding immediately prior to the Effective Time shall,
except as otherwise provided in Section 1.02(a)-(d) or as provided in
Section 1.06 with respect to Shares as to which appraisal rights have been
exercised, be converted into the following (the "MERGER CONSIDERATION"):
(i) for each such Share with respect to which an election to retain
Company Stock (as defined below) has been effectively made and not
revoked or lost pursuant to Sections 1.03(c), (d) and (e) ("STOCK
ELECTING SHARES"), or is deemed made pursuant to Section 1.04(d)(ii),
as the case may be, the right to retain one share of common stock (the
"STOCK ELECTION PRICE"), par value $.01 per share ("COMPANY STOCK");
and
(ii) for each such Share (other than Stock Electing Shares and Shares
as to which an election to retain Company Stock is deemed made
pursuant to Section 1.04(d)(ii)), the right to receive in cash from
MergerSub an amount equal to $23.00 (the "CASH ELECTION PRICE").
SECTION 1.03. Elections. (a) Each person who, on or prior to the Election
Date referred to in (c) below, is a record holder of Shares will be entitled,
with respect to such Shares, to make an unconditional election on or prior to
such Election Date to retain the Stock Election Price (a "STOCK ELECTION"),
on the basis hereinafter set forth. For purposes of this Agreement,
"ELECTION" means a Stock Election.
(b) Prior to the mailing of the Company Proxy Statement (as defined in
Section 3.09), MergerSub shall appoint an agent reasonably acceptable to the
Company (the "EXCHANGE AGENT") for the purpose of exchanging certificates
representing Shares for the Merger Consideration.
(c) MergerSub shall prepare and mail a form of election, which form shall
be subject to the reasonable approval of the Company (the "FORM OF
ELECTION"), with the Company Proxy Statement to the record holders of Shares
as of the record date for the Company Stockholder Meeting (as defined in
Section 5.02), which Form of Election shall be used by each record holder of
Shares who makes an Election with respect to any or all its Shares. The
Company will use its reasonable best efforts to make the Form of Election and
the Company Proxy Statement available to all persons who become holders of
Shares during the period between such record date and the Election Date
referred to below. Any such holder's Election shall have been properly made
only if the Exchange Agent shall have received at its designated office, by
5:00 p.m., New York City time on the business day (the "ELECTION DATE") next
preceding the date of the Company Stockholder Meeting, a Form of Election
properly completed and signed and accompanied by certificates for the Shares
to which such Form of Election relates, duly endorsed in blank or otherwise
in form acceptable for transfer on the books of the Company (or by an
appropriate guarantee of delivery of such certificates as set forth in such
Form of Election from a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc. or a commercial bank or trust company having an office or correspondent
in the United States, provided such certificates are in fact delivered to the
Exchange Agent within five New York Stock Exchange trading days after the
date of execution of such guarantee of delivery).
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(d) Any Form of Election may be revoked by the holder submitting it to
the Exchange Agent only by written notice received by the Exchange Agent (i)
prior to 5:00 p.m., New York City time on the Election Date or (ii) after the
date of the Company Proxy Statement, if (and to the extent that) the Exchange
Agent is legally required to permit revocations, and the Effective Time shall
not have occurred prior to such date. In addition, all Forms of Election
shall automatically be revoked if the Exchange Agent is notified in writing
by MergerSub or the Company that the Merger has been abandoned or this
Agreement has been terminated. If a Form of Election is revoked, the
certificate or certificates (or guarantees of delivery, as appropriate) for
the Shares to which such Form of Election relates shall be promptly returned
to the stockholder submitting the same to the Exchange Agent.
(e) The determination of the Exchange Agent shall be binding whether or
not Elections have been properly made or revoked pursuant to this Section
1.03 with respect to Shares and when elections and revocations were received
by it. If the Exchange Agent determines that any Election either (x) was not
properly made or (y) was not submitted to or received by the Exchange Agent
with respect to any Shares, such Shares shall be converted into Merger
Consideration in accordance with Section 1.04(b)(iii) or Section 1.04(d)(ii),
as the case may be. The Exchange Agent shall also make all computations as to
the allocation and the proration contemplated by Section 1.04, and any such
computation shall be conclusive and binding on the holders of Shares. The
Exchange Agent may, with the mutual agreement of MergerSub and the Company,
make such rules as are consistent with this Section 1.03 for the
implementation of the elections provided for herein as shall be necessary or
desirable fully to effect such elections.
SECTION 1.04. Proration of Election Price. (a) Notwithstanding anything in
this Agreement to the contrary but subject to Sections 1.02(a) and 1.06, the
number of Shares to be converted into the right to retain Company Stock at
the Effective Time (the "STOCK ELECTION NUMBER") shall be the sum of (A)
1,474,345 plus (B) 5.3% of the number of Shares, if any, issued after April
21, 1997 but prior to the Effective Time in respect of Options (as defined
below) or Warrants (as defined below) (excluding for this purpose any Shares
to be canceled pursuant to Section 1.02(a)).
(b) If the number of Stock Electing Shares exceeds in the aggregate the
Stock Election Number, then the Stock Electing Shares for each Stock Election
shall be converted into the right to retain the Stock Election Price or the
right to receive the Cash Election Price in accordance with the terms of
Section 1.02(e) in the following manner:
(i) A stock proration factor (the "STOCK PRORATION FACTOR") shall be
determined by dividing the Stock Election Number by the total number of
Stock Electing Shares.
(ii) The number of Stock Electing Shares covered by each Stock Election
to be converted into the right to retain the Stock Election Price shall be
determined by multiplying the Stock Proration Factor by the total number
of Stock Electing Shares covered by such Stock Election.
(iii) Each Stock Electing Share, other than any Shares converted into the
right to receive the Stock Election Price in accordance with Section
1.04(b)(ii), shall be converted into the right to receive the Cash
Election Price as if such shares were not Stock Electing Shares in
accordance with the terms of Section 1.02(e)(ii).
(c) If the number of Stock Electing Shares is equal to the Stock Election
Number, then all Stock Electing Shares shall be converted into the right to
receive the Stock Election Price in accordance with the terms of Section
1.02(e)(i), and all Shares other than Stock Electing Shares shall be
converted into the right to receive the Cash Election Price.
(d) If the number of Stock Electing Shares is less in the aggregate than
the Stock Election Number, then:
(i) All Stock Electing Shares shall be converted into the right to
receive the Stock Election Price in accordance with Section 1.02(e)(i).
(ii) Such number of Shares with respect to which a Stock Election is not
in effect ("NON-ELECTING SHARES") shall be converted into the right to
retain the Stock Election Price (and a Stock Election shall be deemed to
have been made with respect to such Shares) in accordance with Section
1.02(e) in the following manner:
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(A) a cash proration factor (the "CASH PRORATION FACTOR") shall be
determined by dividing (x) the difference between the Stock Election
Number and the number of Stock Electing Shares, by (y) the total
number of Shares other than Stock Electing Shares and Dissenting
Shares (as defined in Section 1.06); and
(B) the number of Shares in addition to Stock Electing Shares to be
converted into the right to retain the Stock Election Price shall be
determined by multiplying the Cash Proration Factor by the total
number of Shares other than Stock Electing Shares and Dissenting
Shares so that the aggregate number of Stock Electing Shares and
Non-Electing Shares converted into such right equals the Stock
Election Number.
Subject to the provisions of Section 1.04(d)(ii), the Exchange Agent shall
determine (on a consistent basis among stockholders who held Shares as to
which they did not make the election referred to in Section 1.02(e)(i), pro
rata to the number of shares as to which they did not make such election)
which Non-Electing Shares shall be converted into the right to receive the
Stock Election Price.
SECTION 1.05. Surrender and Payment. (a) As soon as reasonably practicable
as of or after the Effective Time, MergerSub shall deposit with the Exchange
Agent, for the benefit of the holders of Shares, for exchange in accordance
with this Article 1, the Merger Consideration. For purposes of determining
the Merger Consideration to be made available, MergerSub shall assume that no
holder of Shares will perfect his right to appraisal of his Shares. Promptly
after the Effective Time, MergerSub will send, or will cause the Exchange
Agent to send, to each holder of Shares at the Effective Time a letter of
transmittal for use in such exchange (which shall specify that the delivery
shall be effected, and risk of loss and title shall pass, only upon proper
delivery of the certificates representing Shares to the Exchange Agent).
(b) Each holder of Shares that have been converted into a right to receive
the Merger Consideration, upon surrender to the Exchange Agent of a
certificate or certificates representing such Shares, together with a
properly completed letter of transmittal covering such Shares, will be
entitled to receive the Merger Consideration payable in respect of such
Shares. Until so surrendered, each such certificate shall, after the
Effective Time, represent for all purposes, only the right to receive such
Merger Consideration. No interest will be paid or will accrue on any cash
payable as Merger Consideration or in lieu of any fractional shares of
Company Stock.
(c) If any portion of the Merger Consideration is to be paid to a Person
other than the registered holder of the Shares represented by the certificate
or certificates surrendered in exchange therefor, it shall be a condition to
such payment that the certificate or certificates so surrendered shall be
properly endorsed or otherwise be in proper form for transfer and that the
Person requesting such payment shall pay to the Exchange Agent any transfer
or other taxes required as a result of such payment to a Person other than
the registered holder of such Shares or establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable. For purposes of
this Agreement, "PERSON" means an individual, a corporation, a limited
liability company, a partnership, an association, a trust or any other entity
or organization, including a government or political subdivision or any
agency or instrumentality thereof.
(d) After the Effective Time, there shall be no further registration of
transfers of Shares. If, after the Effective Time, certificates representing
Shares are presented to the Surviving Corporation, they shall be canceled and
exchanged for the Merger Consideration provided for, and in accordance with
the procedures set forth, in this Article 1.
(e) Any portion of the Merger Consideration made available to the Exchange
Agent pursuant to Section 1.05(a) that remains unclaimed by the holders of
Shares six months after the Effective Time shall be returned to MergerSub,
upon demand, and any such holder who has not exchanged his Shares for the
Merger Consideration in accordance with this Section prior to that time shall
thereafter look only to MergerSub for payment of the Merger Consideration in
respect of his Shares. Notwithstanding the foregoing, MergerSub shall not be
liable to any holder of Shares for any amount paid to a public official
pursuant to applicable abandoned property laws. Any amounts remaining
unclaimed by holders of Shares
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two years after the Effective Time (or such earlier date immediately prior to
such time as such amounts would otherwise escheat to or become property of
any governmental entity) shall, to the extent permitted by applicable law,
become the property of MergerSub free and clear of any claims or interest of
any Person previously entitled thereto.
(f) Any portion of the Merger Consideration made available to the Exchange
Agent pursuant to Section 1.05(a) to pay for Shares for which appraisal
rights have been perfected shall be returned to MergerSub, upon demand.
(g) No dividends or other distributions with respect to Company Stock with
a record date after the Effective Time shall be paid to the holder of any
unsurrendered certificate for Shares with respect to the shares of Company
Stock represented thereby and no cash payment in lieu of fractional shares
shall be paid to any such holder pursuant to Section 1.09 until the surrender
of such certificate in accordance with this Article 1. Subject to the effect
of applicable laws, following surrender of any such certificate, there shall
be paid to the holder of the certificate representing whole shares of Company
Stock issued in exchange therefor, without interest, (i) at the time of such
surrender or as promptly after the sale of the Excess Shares (as defined in
Section 1.09) as practicable, the amount of any cash payable in lieu of a
fractional share of Company Stock to which such holder is entitled pursuant
to Section 1.09 and the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such
whole shares of Company Stock, and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to such surrender and a payment date subsequent to
such surrender payable with respect to such whole shares of Company Stock.
SECTION 1.06. Dissenting Shares. Notwithstanding Section 1.02, Shares
which are issued and outstanding immediately prior to the Effective Time and
which are held by a holder who has not voted such shares in favor of the
Merger, who shall have delivered a written demand for appraisal of such
Shares in the manner provided by the Delaware Law and who, as of the
Effective Time, shall not have effectively withdrawn or lost such right to
appraisal ("DISSENTING SHARES") shall not be converted into a right to
receive the Merger Consideration. The holders thereof shall be entitled only
to such rights as are granted by Section 262 of the Delaware Law. Each holder
of Dissenting Shares who becomes entitled to payment for such Shares pursuant
to Section 262 of the Delaware Law shall receive payment therefor from the
Surviving Corporation in accordance with the Delaware Law; provided, however,
that (i) if any such holder of Dissenting Shares shall have failed to
establish his entitlement to appraisal rights as provided in Section 262 of
the Delaware Law, (ii) if any such holder of Dissenting Shares shall have
effectively withdrawn his demand for appraisal of such Shares or lost his
right to appraisal and payment for his Shares under Section 262 of the
Delaware Law or (iii) if neither any holder of Dissenting Shares nor the
Surviving Corporation shall have filed a petition demanding a determination
of the value of all Dissenting Shares within the time provided in Section 262
of the Delaware Law, such holder shall forfeit the right to appraisal of such
Shares and each such Share shall be treated as if it had been a Non-Electing
Share and had been converted, as of the Effective Time, into a right to
receive the Merger Consideration, without interest thereon, from the
Surviving Corporation as provided in Section 1.02 hereof. The Company shall
give MergerSub prompt notice of any demands received by the Company for
appraisal of Shares, and MergerSub shall have the right to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of MergerSub, make any payment
with respect to, or settle or offer to settle, any such demands.
SECTION 1.07. Stock Options. (a) Immediately prior to the Effective Time,
each outstanding option to acquire Shares granted to employees and directors,
whether vested or not (the "OPTIONS") shall be canceled and, in lieu thereof,
as soon as reasonably practicable as of or after the Effective Time, the
holders of such Options shall receive, with respect to each Option, a cash
payment in an amount equal to the product of (x) the excess, if any, of
$23.00 over the exercise price of such Option multiplied by (y) the number of
Shares subject to such Option.
(b) Prior to the Effective Time, the Company shall obtain any consents
from holders of options to purchase Shares granted under the Company's stock
option or compensation plans or arrangements and
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(ii) make any amendments to the terms of such stock option or compensation
plans or arrangements that are necessary to give effect to the transactions
contemplated by Section 1.07(a). Notwithstanding any other provision of this
Section, payment may be withheld in respect of any Option until necessary
consents are obtained.
SECTION 1.08. Warrants. The Company shall use its reasonable best efforts
to cause holders of all outstanding warrants ("WARRANTS") to surrender such
Warrants to the Company prior to the Effective Time in exchange for payment
immediately after the Effective Time of an amount equal to the difference
between the exercise price in respect of each Share for which such Warrant is
exercisable and $23.00, multiplied by the number of Shares subject to such
Warrant, and upon such other terms and conditions satisfactory to MergerSub.
With respect to Warrants that are not surrendered prior to the Effective
Time, after the Effective Time, the Surviving Corporation shall comply with
all applicable terms of such unsurrendered Warrants.
SECTION 1.09. Fractional Shares. (a) No certificates or scrip representing
fractional shares of Company Stock shall be issued upon the surrender for
exchange of certificates representing Shares, and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
stockholder of the Surviving Corporation; and
(b) Notwithstanding any other provision of this Agreement, each holder of
Shares exchanged pursuant to the Merger who would otherwise have been
entitled to receive a fraction of a share of Company Stock (after taking into
account all Shares delivered by such holder) shall receive, in lieu thereof,
a cash payment (without interest) representing such holder's proportionate
interest in the net proceeds from the sale by the Exchange Agent (following
the deduction of applicable transaction costs), on behalf of all such
holders, of the shares (the "EXCESS SHARES") of Company Stock representing
such fractions. Such sale shall be made as soon as practicable after the
Effective Time.
ARTICLE 2
THE SURVIVING CORPORATION
SECTION 2.01. Certificate of Incorporation. The certificate of
incorporation of the Company in effect immediately prior to the Effective
Time shall be amended as of the Effective Time as set forth in Exhibit A, and
as so amended, shall be the certificate of incorporation of the Surviving
Corporation until thereafter amended in accordance with applicable law.
SECTION 2.02. Bylaws. The bylaws of MergerSub in effect at the Effective
Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
SECTION 2.03. Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance
with applicable law, (a) the directors of MergerSub at the Effective Time
shall be the directors of the Surviving Corporation, and (b) the officers of
the Company at the Effective Time shall be the officers of the Surviving
Corporation.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to MergerSub that:
SECTION 3.01. Corporate Existence and Power. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of
the State of Delaware, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to
carry on its business as now conducted. The Company is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except for those
jurisdictions where the failure to be so qualified would not, individually or
in the aggregate, have a Material Adverse Effect. The Company has heretofore
delivered to MergerSub true and complete copies of the Company's certificate
of incorporation and bylaws as currently in effect. For purposes of this
Agreement, "MATERIAL ADVERSE
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EFFECT" means any material adverse effect on the condition (financial or
otherwise), business, assets, or results of operations of the Company and the
Subsidiaries taken as a whole, but excluding (i) any change resulting from
general economic conditions and (ii) with respect to Section 3.10(a) and
Section 3.10(h) (in the case of the latter, with respect to agreements only),
any change arising out of the transactions contemplated by this Agreement and
the public announcement thereof.
SECTION 3.02. Corporate Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation by the
Company of the transactions contemplated hereby are within the Company's
corporate powers and, except for any required approval by the Company's
stockholders by majority vote in connection with the consummation of the
Merger, have been duly authorized by all necessary corporate and stockholder
action. This Agreement constitutes a valid and binding agreement of the
Company.
SECTION 3.03. Governmental Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation of the
Merger by the Company require no action by or in respect of, or filing with,
any governmental body, agency, official or authority other than (a) the
filing of a certificate of merger in accordance with Delaware Law; (b)
compliance with any applicable requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR ACT"); (c)
compliance with any applicable requirements of the Securities Exchange Act of
1934, as amended and the rules and regulations promulgated thereunder (the
"EXCHANGE ACT"); (d) compliance with the applicable requirements of the
Securities Act of 1933, as amended and the rules and regulations promulgated
thereunder (the "SECURITIES ACT"); (e) compliance with any applicable foreign
or state securities or Blue Sky laws; and (f) where the failure to take such
action would not, individually or in the aggregate, have a Material Adverse
Effect.
SECTION 3.04. Non-contravention. Except as set forth on Schedule 3.04, the
execution, delivery and performance by the Company of this Agreement and the
consummation by the Company of the transactions contemplated hereby do not
and will not (a) contravene or conflict with the certificate of incorporation
or bylaws of the Company, (b) assuming compliance with the matters referred
to in Section 3.03, contravene or conflict with or constitute a violation of
any provision of any law, regulation, judgment, writ, injunction, order or
decree of any court or governmental authority binding upon or applicable to
the Company or any Subsidiary or any of their properties or assets, (c)
except under the Revolving Credit Agreement dated as of April 26, 1996 among
the Company, certain of its Subsidiaries and the banks named therein, as
amended (the "REVOLVING CREDIT AGREEMENT") constitute a default under or give
rise to a right of termination, cancellation or acceleration of any right or
obligation of the Company or any Subsidiary or to a loss of any benefit to
which the Company or any Subsidiary is entitled under any provision of any
agreement, contract or other instrument binding upon the Company or any
Subsidiary or any license, franchise, permit or other similar authorization
held by the Company or any Subsidiary, or (d) result in the creation or
imposition of any Lien on any asset of the Company or any Subsidiary, except,
in the case of clauses (b), (c) and (d), to the extent that any such
violation, failure to obtain any such consent or other action, default,
right, loss or Lien would not, individually or in the aggregate, have a
Material Adverse Effect. For purposes of this Agreement, "LIEN" means, with
respect to any asset, any mortgage, lien, pledge, charge, security interest
or encumbrance of any kind in respect of such asset.
SECTION 3.05. Capitalization. The authorized capital stock of the Company
consists of (i) 100,000,000 shares of common stock ("COMMON STOCK"), par
value $.01 per share, of which as of April 21, 1997, there were outstanding
27,817,830 shares of Common Stock and Options to purchase an aggregate of not
more than 2,932,014 shares of Common Stock (of which options to purchase an
aggregate of 1,364,014 shares of Common Stock were exercisable) and (ii)
5,000,000 shares of preferred stock ("PREFERRED STOCK"), par value $.01 per
share, of which as of April 21, 1997 none were issued and outstanding. As of
April 21, 1997 there were Warrants to purchase: (i) 134,478 shares of common
stock of the Company at an exercise price of $5.90 per share and (ii) 468,750
shares or common stock of the Company at an exercise price of $0.10 per
share. The aggregate exercise price of the (i) Options outstanding as of
April 21, 1997 is $22,064,966.50 and (ii) Warrants outstanding as of April
21, 1997 is $840,295.20. All outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable. Except as set forth in this Section and except for changes
since April 21, 1997 resulting from the exercise
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of Options and Warrants, in each case, outstanding on such date, there are
outstanding (a) no shares of capital stock or other voting securities of the
Company, (b) no securities of the Company convertible into or exchangeable
for shares of capital stock or voting securities of the Company, and (c) no
options or other rights to acquire from the Company, and no obligation of the
Company to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of
the Company (the items in clauses 3.05(a), 3.05(b) and 3.05(c) being referred
to collectively as the "COMPANY SECURITIES"). There are no outstanding
obligations of the Company or any Subsidiary to repurchase, redeem or
otherwise acquire any Company Securities.
SECTION 3.06. Subsidiaries. (a) Each Subsidiary is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to
carry on its business as now conducted and is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where
the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, except where the failure to
have such licenses, authorizations, consents and approvals or for those
jurisdictions where failure to be so qualified would not, individually or in
the aggregate, have a Material Adverse Effect. For purposes of this
Agreement, "SUBSIDIARY" means any corporation or other 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 directly or indirectly owned by the Company and/or one or more
Subsidiary, except for Properties Holding Corporation, Decision Data Computer
Investment Corporation, Decision Data Computer International S.A. and
Properties Development Corporation, none of which (i) is performing any
activity significant to the business of the Company and its Subsidiaries or
(ii) has any material assets or liabilities (together, the "IMMATERIAL
SUBSIDIARIES"), provided, however that for the purposes of Articles 5, 6 and
7 hereof, the term "Subsidiaries" shall be deemed to include the Immaterial
Subsidiaries. All Subsidiaries and their respective jurisdictions of
incorporation are identified in the Company's annual report on Form 10-K for
the fiscal year ended June 30, 1996 (the "COMPANY 10-K").
(b) Except for the restrictions on disposition of capital stock pursuant
to the Revolving Credit Agreement, all of the outstanding capital stock of,
or other ownership interests in, each Subsidiary, is owned by the Company,
directly or indirectly, free and clear of any Lien and free of any other
limitation or restriction (including any restriction on the right to vote,
sell or otherwise dispose of such capital stock or other ownership
interests). All such capital stock has been duly authorized and validly
issued and is fully paid and non-assessable. There are no outstanding (i)
securities of the Company or any Subsidiary convertible into or exchangeable
for shares of capital stock or other voting securities or ownership interests
in any Subsidiary, and (ii) options or other rights to acquire from the
Company or any Subsidiary, and no other obligation of the Company or any
Subsidiary to issue, any capital stock, voting securities or other ownership
interests in, or any securities convertible into or exchangeable for any
capital stock, voting securities or ownership interests in, any Subsidiary
(the items in clauses 3.06(b)(i) and 3.06(b)(ii) being referred to
collectively as the "SUBSIDIARY SECURITIES"). There are no outstanding
obligations of the Company or any Subsidiary to repurchase, redeem or
otherwise acquire any outstanding Subsidiary Securities.
SECTION 3.07. SEC Filings. (a) The Company has made available to MergerSub
(i) the Company 10-K, (ii) its quarterly reports on Form 10-Q for its fiscal
quarters ended September 30, 1996 and December 31, 1996 (collectively, the
"FORMS 10-Q"), (iii) its proxy or information statements relating to meetings
of, or actions taken without a meeting by, the stockholders of the Company
held since January 1, 1996, and (iv) all of its other reports, statements,
schedules and registration statements filed with the Securities and Exchange
Commission (the "SEC") since January 1, 1996 (the documents referred to in
clauses (i)-(iv), together with Schedule 3.08 collectively, the "SEC
DOCUMENTS").
(b) As of its filing date, each such report or statement filed pursuant to
the Exchange Act did not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
made therein, in the light of the circumstances under which they were made,
not misleading.
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(c) Each such registration statement, as amended or supplemented, if
applicable, filed pursuant to the Securities Act, as of the date such
statement or amendment became effective did not contain any 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.
SECTION 3.08. Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company included in its annual reports on Form 10-K, in the Forms 10-Q and in
Schedule 3.08 fairly present, in all material respects, in conformity with
generally accepted accounting principles applied on a consistent basis
(except as may be indicated in the notes thereto), the consolidated financial
position of the Company and its consolidated subsidiaries as of the dates
thereof and their consolidated results of operations and changes in financial
position for the periods then ended (subject to normal year-end adjustments
in the case of any unaudited interim financial statements). For purposes of
this Agreement, "BALANCE SHEET" means the consolidated balance sheet of the
Company and its subsidiaries as of June 30, 1996 set forth in the Company
10-K and "BALANCE SHEET DATE" means June 30, 1996.
SECTION 3.09. Disclosure Documents. (a) Each document required to be filed
by the Company with the SEC in connection with the transactions contemplated
by this Agreement (the "COMPANY DISCLOSURE DOCUMENTS"), including, without
limitation, the proxy or information statement of the Company containing
information required by Regulation 14A under the Exchange Act, and, if
applicable, Rule 13e-3 and Schedule 13E-3 under the Exchange Act (the
"COMPANY PROXY STATEMENT"), to be filed with the SEC in connection with the
Merger, and any amendments or supplements thereto will, when filed, comply as
to form in all material respects with the applicable requirements of the
Exchange Act. The representations and warranties contained in this Section
3.09(a) will not apply to statements or omissions included in the Company
Disclosure Documents based upon information furnished to the Company in
writing by MergerSub specifically for use therein.
(b) At the time the Company Proxy Statement or any amendment or supplement
thereto is first mailed to stockholders of the Company and at the time such
stockholders vote on adoption of this Agreement, the Company Proxy Statement,
as supplemented or amended, if applicable, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. At the time of the filing of any
Company Disclosure Document other than the Company Proxy Statement and at the
time of any distribution thereof, such Company Disclosure Document will not
contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties contained in this Section 3.09(b) will not
apply to statements or omissions included in the Company Disclosure Documents
based upon information furnished to the Company in writing by MergerSub
specifically for use therein.
(c) The information with respect to the Company or any Subsidiary that the
Company furnishes to MergerSub in writing specifically for use in the
MergerSub Disclosure Documents (as defined in Section 6.01) will not, at the
time of the filing thereof, at the time of any distribution thereof and at
the time of the meeting of the Company's stockholders, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
SECTION 3.10. Absence of Certain Changes. Since the Balance Sheet Date,
the Company and Subsidiaries have conducted their business in the ordinary
course consistent with past practice and there has not been:
(a) except as disclosed in the Forms 10-Q and Schedule 3.08, any event,
occurrence or development of a state of facts which, individually or in
the aggregate, has had, or would reasonably be expected to have a Material
Adverse Effect;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of the Company,
or (other than any retirement of Options or Warrants
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contemplated pursuant to this Agreement) any repurchase, redemption or
other acquisition by the Company or any Subsidiary of any outstanding
shares of capital stock or other securities of, or other ownership
interests in, the Company or any Subsidiary;
(c) except as disclosed in the SEC Documents, any amendment of any
material term of any outstanding security of the Company or any
Subsidiary;
(d) except as disclosed in the SEC Documents, any incurrence, assumption
or guarantee by the Company or any Subsidiary of any indebtedness for
borrowed money, other than in the ordinary course of business and in
amounts and on terms consistent with past practices;
(e) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of the Company or
any Subsidiary which, individually or in the aggregate, has had, or would
reasonably be expected to have, a Material Adverse Effect;
(f) except as disclosed in Schedule 5.01, any material change in any
method of accounting or accounting practice by the Company or any
Subsidiary, except for any such change required by reason of a concurrent
change in generally accepted accounting principles;
(g) except as disclosed in the SEC Documents or in Schedule 3.10(g), any
(i) grant of any severance or termination pay to any director, officer or
employee of the Company or any Subsidiary, (ii) entering into of any
employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director, officer or
employee of the Company or any Subsidiary, (iii) increase in benefits
payable under any existing severance or termination pay policies or
employment agreements or (iv) increase in compensation, bonus or other
benefits payable to directors, officers or employees of the Company or any
Subsidiary, other than in the ordinary course of business consistent with
past practice; or
(h) any cancellation of any licenses, sublicenses, franchises, permits or
agreements to which the Company or any Subsidiary is a party, or any
notification to the Company or any Subsidiary that any party to any such
arrangements intends to cancel or not renew such arrangements beyond its
expiration date as in effect on the date hereof, which cancellation or
notification, individually or in the aggregate, has had, or would
reasonably be expected to have, a Material Adverse Effect.
SECTION 3.11. No Undisclosed Material Liabilities. There are no
liabilities of the Company or any Subsidiary of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise, which,
individually or in the aggregate, would reasonably be expected to be material
to the business of the Company and its Subsidiaries taken as a whole, other
than:
(a) liabilities disclosed or provided for in the Balance Sheet;
(b) liabilities disclosed in the SEC Documents filed after the Balance
Sheet Date but prior to the date of this Agreement;
(c) liabilities incurred in the ordinary course of business consistent
with past practice since the Balance Sheet Date, which in the aggregate
would not have a Material Adverse Effect;
(d) liabilities under this Agreement; and
(e) liabilities under contracts or agreements of the Company or any
Subsidiary entered into in the ordinary course of business (as to which
contracts or agreements there is no breach or violation by the Company or
any Subsidiary).
SECTION 3.12. Litigation. Except as disclosed in Schedule 3.12, there is
no action, suit, investigation or proceeding (or any basis therefor) pending
against, or to the knowledge of the Company threatened against or affecting,
the Company or any Subsidiary or any of their respective properties before
any court or arbitrator or any governmental body, agency or official which,
if determined or resolved adversely to the Company or any Subsidiary in
accordance with the plaintiff's demands, would reasonably be expected to have
a Material Adverse Effect or which in any manner challenges or seeks to
prevent, enjoin, alter or materially delay the Merger or any of the other
transactions contemplated hereby.
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SECTION 3.13. Taxes. (a) All material tax returns, statements, reports
and forms (including estimated tax returns and reports and information
returns and reports) required to be filed with any taxing authority with
respect to any tax period (or portion thereof) ending on or before the
Effective Time (a "PRE-CLOSING TAX PERIOD") by or on behalf of the Company or
any Subsidiary of the Company (collectively, the "RETURNS"), were filed when
due (including any applicable extension periods) in accordance with all
applicable laws.
(b) The Company and its Subsidiaries have timely paid, or withheld and
remitted to the appropriate taxing authority, all material taxes shown as due
and payable on all Returns that have been filed.
(c) The charges, accruals and reserves for taxes with respect to the
Company and any Subsidiary for any Pre-Closing Tax Period (including any
Pre-Closing Tax Period for which no Return has yet been filed, with respect
to which Periods the Company has made estimates in accordance with past
practice) reflected on the books of the Company and its Subsidiaries
(excluding any provision for deferred income taxes) are adequate to cover
such taxes.
(d) There is no material claim (including under any indemnification or
tax-sharing agreement), audit, action, suit, proceeding, or investigation now
pending or threatened in writing against or in respect of any tax or "tax
asset" of the Company or any Subsidiary, other than (i) periodic sales tax
audits occurring in the ordinary course of business, the resolution of which,
individually or in the aggregate, the Company believes will not have a
Material Adverse Effect, and (ii) claims, audits, actions, suits, proceedings
or investigations with respect to which the Company is indemnified in full
pursuant to the Stock Purchase Agreement among Decision Servcom, Inc., Bell
Atlantic Business Systems Services, Inc., and Bell Atlantic Business Systems,
Inc. dated September 19, 1995. For purposes of this Section 3.13, the term
"TAX ASSET" shall include any net operating loss, net capital loss,
investment tax credit, foreign tax credit, charitable deduction or any other
credit or tax attribute which could reduce taxes.
(e) There are no Liens for taxes upon the assets of the Company or its
Subsidiaries except for Liens for current taxes not yet due.
(f) Neither the Company nor any of its Subsidiaries has been a United
States real property holding corporation within the meaning of Section
897(c)(2) of the Internal Revenue Code of 1986, as amended (the "CODE")
during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code.
SECTION 3.14. ERISA. (a) Schedule 3.14(a) sets forth a list identifying
each "EMPLOYEE BENEFIT PLAN", as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974 ("ERISA"), which (i) is subject to any
provision of ERISA and (ii) is maintained, administered or contributed to by
the Company or any affiliate (as defined below) and covers any employee or
former employee of the Company or any affiliate or under which the Company or
any affiliate has any liability. Copies of such plans (and, if applicable,
related trust agreements) and all amendments thereto and written
interpretations thereof have been furnished to MergerSub together with (A)
the three most recent annual reports (Form 5500 including, if applicable,
Schedule B thereto) prepared in connection with any such plan and (B) the
most recent actuarial valuation report prepared in connection with any such
plan. Such plans are referred to collectively herein as the "EMPLOYEE PLANS".
For purposes of this Section, "AFFILIATE" of any Person means any other
Person which, together with such Person, would be treated as a single
employer under Section 414 of the Code. The only Employee Plans which
individually or collectively would constitute an "employee pension benefit
plan" as defined in Section 3(2) of ERISA (the "PENSION PLANS") are
identified as such in the list referred to above. The Company will make
available to MergerSub complete age, salary, service and related data as of
the most recently available date for employees and former employees of the
Company and any affiliate covered under the Pension Plans.
(b) No Employee Plan constitutes a "MULTIEMPLOYER PLAN", as defined in
Section 3(37) of ERISA (a "MULTIEMPLOYER PLAN"), and no Employee Plan is
maintained in connection with any trust described in Section 501(c)(9) of the
Code. Except as otherwise identified in Schedule 3.14(b), no Employee Plan is
subject to Title IV of ERISA and no "ACCUMULATED FUNDING DEFICIENCY", as
defined in Section 412 of the Code, has been incurred with respect to any
Pension Plan, whether or not waived. The Company knows of no "REPORTABLE
EVENT", within the meaning of Section 4043 of ERISA, and no event described
in
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Section 4041, 4042, 4062 or 4063 of ERISA has occurred in connection with any
Employee Plan, other than a "REPORTABLE EVENT" or other event that
individually or in the aggregate, has not had, and would not reasonably be
expected to have, a Material Adverse Effect. To the Company's knowledge, no
condition exists and no event has occurred that could constitute grounds for
termination of any Employee Plan subject to Title IV of ERISA and neither the
Company nor any of its affiliates has incurred any liability under Title IV
of ERISA arising in connection with the termination of, or complete or
partial withdrawal from, any plan covered or previously covered by Title IV
of ERISA. Nothing done or omitted to be done and no transaction or holding of
any asset under or in connection with any Employee Plan has or will make the
Company or any Subsidiary, any officer or director of the Company or any
Subsidiary subject to any liability under Title I of ERISA or liable for any
tax pursuant to Section 4975 of the Code which liability, individually or in
the aggregate, has had, or would reasonably be expected to have, a Material
Adverse Effect.
(c) Each Employee Plan which is intended to be qualified under Section
401(a) of the Code is either a standardized prototype plan covered by an
opinion letter issued by the IRS or an individually designed plan covered by
a determination letter issued by the IRS and, to the knowledge of the
Company, nothing has occurred since the date of the opinion or determination
letter which resulted, or is likely to result, in the Company's inability to
rely on such letters. The Company has furnished to MergerSub copies of the
most recent Internal Revenue Service opinion determination letters with
respect to each such Plan. Each Employee Plan has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations, including but not
limited to ERISA and the Code, which are applicable to such Plan.
(d) Except as set forth in Schedule 3.14(d) there is no contract,
agreement, plan or arrangement covering any employee or former employee of
the Company or any affiliate that, individually or collectively, could give
rise to the payment of any amount that would not be deductible pursuant to
the terms of Section 280G of the Code.
(e) Schedule 3.14(e) sets forth a list of each employment, severance or
other similar contract, arrangement or policy and each plan or arrangement
(written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits or
for deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (i) is not an Employee Plan, (ii)
is entered into, maintained or contributed to, as the case may be, by the
Company or any of its Subsidiaries and (iii) covers any employee or former
employee of the Company or any of its Subsidiaries. Such contracts, plans and
arrangements as are described above, copies or descriptions of all of which
have been furnished previously to MergerSub are referred to collectively
herein as the "BENEFIT ARRANGEMENTS". Each Benefit Arrangement has been
maintained in substantial compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations that are
applicable to such Benefit Arrangement.
(f) To the knowledge of the Company, no condition exists that would
prevent the Company or any Subsidiary from amending or terminating any
Employee Plan or Benefit Arrangement providing health or medical benefits in
respect of any active employee of the Company or any Subsidiary.
(g) Except as disclosed on Schedule 3.14(g), there has been no amendment
to, written interpretation or announcement (whether or not written) by the
Company or any of its affiliates relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit Arrangement
which would increase materially the expense of maintaining such Employee Plan
or Benefit Arrangement above the level of the expense incurred in respect
thereof for the fiscal year ended on the Balance Sheet Date other than with
regard to any changes mandated by law.
(h) Except as disclosed in Section 3.15, neither the Company nor any
Subsidiary is a party to or subject to any union contract or any employment
contract or arrangement providing for annual future compensation (excluding
sales commissions) of $150,000 or more with any officer, director or
employee.
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SECTION 3.15. Employees. The Company has disclosed to MergerSub in
writing on the date of this Agreement the names, titles, annual salaries and
other compensation of all employees of the Company (the "KEY EMPLOYEES")
whose base compensation, together with any other cash compensation (excluding
sales commissions), was in excess of $150,000 per annum for calendar year
1996. Except as disclosed to MergerSub in writing on the date of this
Agreement, none of the Key Employees has indicated to the Company in writing
on or prior to the date hereof that he or she intends to resign or retire as
a result of the transactions contemplated by this Agreement or otherwise
within three months after the Effective Time.
SECTION 3.16. Labor Matters. The Company is in compliance with all
currently applicable laws respecting employment practices, terms and
conditions of employment and wages and hours, and is not engaged in any
unfair labor practice, the failure to comply with which or engagement in
which, as the case may be, individually or in the aggregate, has not had, and
would not reasonably be expected to have, a Material Adverse Effect. There is
no unfair labor practice complaint pending or, to the knowledge of the
Company, threatened against the Company before the National Labor Relations
Board. Except as otherwise set forth on Schedule 3.16, there are no strikes,
slowdowns, union organizational campaigns or other protected concerted
activity under the National Labor Relations Act or, to the knowledge of
Company, threats thereof, by or with respect to any employees of the Company.
SECTION 3.17. Compliance with Laws and Court Orders. Neither the Company
nor any Subsidiary is in violation of, or has since January 1, 1996 violated,
and to the knowledge of the Company none is under investigation with respect
to or has been threatened to be charged with or given notice of any violation
of, in each case, by any governmental agency or authority, any applicable
law, rule, regulation, judgment, injunction, order or decree, except for
violations that have not had, and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
SECTION 3.18. Licenses and Permits. Except as set forth on Schedule 3.18
or except as has not had, and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect, (i) the Permits
are valid and in full force and effect, (ii) neither the Company nor any
Subsidiary is in default under, and no condition exists that with notice or
lapse of time or both would constitute a default under, the Permits and (iii)
none of the Permits will be terminated or impaired or become terminable, in
whole or in part, as a result of the transactions contemplated hereby.
"PERMITS" means each material license, franchise, permit, certificate,
approval or other similar authorization affecting, or relating in any way to,
the assets or business of the Company and its Subsidiaries.
SECTION 3.19. Repairable Parts. The repairable parts set forth in the
Balance Sheet were stated therein at cost less accumulated amortization.
Since the Balance Sheet Date, the repairable parts of the Company and its
Subsidiaries have been maintained in the ordinary course of business. All
such repairable parts are owned free and clear of all Liens, except for a
purchase money security interest in certain parts in favor of Electronic Data
Systems Corp. to secure the issuance of approximately $2,000,000 of credits.
The repairable parts recorded on the Balance Sheet consist of, and all
repairable parts of the Company and its Subsidiaries as of the Effective Time
will consist of, items of a quality usable in the normal course of business
consistent with past practices (it being understood that at any given time, a
portion of repairable parts are not in good repair) and are and will be in
quantities sufficient for the normal operation of the business of the Company
and its Subsidiaries in accordance with past practice.
SECTION 3.20. Intellectual Property. Except for that litigation involving
certain independent service providers referred to in "Item 3. Legal
Proceedings" in the Company 10-K, provided that the Company is not a party to
litigation of such nature which would be required to be disclosed in response
to this sentence, the Company and the Subsidiaries own or possess adequate
licenses or other rights to use all Intellectual Property Rights necessary to
conduct the business now operated by them, except where the failure to own or
possess such licenses or rights, individually or in the aggregate, has not
had, and would not reasonably be expected to have, a Material Adverse Effect.
To the knowledge of the Company, the Intellectual Property Rights of the
Company and the Subsidiaries do not conflict with or infringe upon any
Intellectual Property Rights of others to the extent that, if sustained, such
conflict or infringement, individually or in the aggregate, would reasonably
be expected to have a Material Adverse Effect. For
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purposes of this Agreement, "INTELLECTUAL PROPERTY RIGHT" means any
trademark, service mark, trade name, mask work, copyright, patent, software
license, other data base, invention, trade secret, know-how (including any
registrations or applications for registration of any of the foregoing) or
any other similar type of proprietary intellectual property right.
SECTION 3.21. Finders' Fees. With the exception of fees payable to Smith
Barney Inc., a copy of whose engagement agreement has been provided to
MergerSub, there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of,
the Company or any Subsidiary who might be entitled to any fee or commission
from the Company or any Subsidiary or any of its affiliates upon consummation
of the transactions contemplated by this Agreement.
SECTION 3.22. Inapplicability of Certain Restrictions. Section 203 of the
Delaware Law does not in any way restrict the consummation of the Merger or
the other transactions contemplated by this Agreement. The adoption of this
Agreement by the affirmative vote of the holders of Shares entitling such
holders to exercise at least a majority of the voting power of the Shares is
the only vote of holders of any class or series of the capital stock of the
Company required to adopt this Agreement or to approve the Merger or any of
the other transactions contemplated hereby, and no higher or additional vote
is required pursuant to of the Company's certificate of incorporation or
otherwise.
SECTION 3.23. Rights Plan. Neither the Company nor any of its Subsidiaries
has any rights plan or similar common stock or preferred stock purchase plan
or similar arrangement.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MERGERSUB
MergerSub represents and warrants to the Company that:
SECTION 4.01. Corporate Existence and Power. MergerSub is a corporation
duly incorporated, validly existing and in good standing under the laws of
its jurisdiction of incorporation and has all corporate powers and all
material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted. Since the date of its
incorporation, MergerSub has not engaged in any activities other than in
connection with or as contemplated by this Agreement and the Merger or in
connection with arranging any financing required to consummate the
transactions contemplated hereby. MergerSub has furnished to the Company true
and correct copies of its certificate of incorporation and by-laws, which
shall not be amended or modified prior to the Effective Time except to
reflect the terms of the MergerSub Preferred Stock.
SECTION 4.02. Corporate Authorization. The execution, delivery and
performance by MergerSub of this Agreement and the consummation by MergerSub
of the transactions contemplated hereby are within the corporate powers of
MergerSub and have been duly authorized by all necessary corporate and
stockholder action. This Agreement constitutes a valid and binding agreement
of MergerSub.
SECTION 4.03. Governmental Authorization. The execution, delivery and
performance by MergerSub of this Agreement and the consummation by MergerSub
of the transactions contemplated by this Agreement require no action by or in
respect of, or filing with, any governmental body, agency, official or
authority other than (a) the filing of a certificate of merger in accordance
with the Delaware Law, (b) compliance with any applicable requirements of the
HSR Act; (c) compliance with any applicable requirements of the Exchange Act;
(d) compliance with the applicable requirements of the Securities Act; and
(e) compliance with any applicable foreign or state securities or Blue Sky
laws.
SECTION 4.04. Non-contravention. The execution, delivery and performance
by MergerSub of this Agreement and the consummation by MergerSub of the
transactions contemplated hereby do not and will not (a) contravene or
conflict with the certificate of incorporation or bylaws of MergerSub, (b)
assuming compliance with the matters referred to in Section 4.03, contravene
or conflict with any provision of law, regulation, judgment, order or decree
binding upon MergerSub, or (c) constitute a default under or give rise to any
right of termination, cancellation or acceleration of any right or obligation
of MergerSub or to a loss of any benefit to which MergerSub is entitled under
any agreement, contract or other instrument binding upon MergerSub.
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SECTION 4.05. Disclosure Documents. (a) The information with respect to
MergerSub that MergerSub furnishes to the Company in writing specifically for
use in any Company Disclosure Document will not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements made therein, in the light of the circumstances under
which they were made, not misleading (i) in the case of the Company Proxy
Statement at the time the Company Proxy Statement or any amendment or
supplement thereto is first mailed to stockholders of the Company, at the
time the stockholders vote on adoption of this Agreement and at the Effective
Time, and (ii) in the case of any Company Disclosure Document other than the
Company Proxy Statement, at the time of the filing thereof and at the time of
any distribution thereof.
(b) The MergerSub Disclosure Documents (as defined in Section 6.01), when
filed, will comply as to form in all material respects with the applicable
requirements of the Securities Act and the Exchange Act and will not at the
time of the filing thereof, at the time of any distribution thereof or at the
time of the meeting of the Company's stockholders, contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements made therein, in the light of the circumstances under
which they were made, not misleading, provided, that this representation and
warranty will not apply to statements or omissions in the MergerSub
Disclosure Documents based upon information furnished to MergerSub in writing
by the Company specifically for use therein.
SECTION 4.06. Finders' Fees. Except for Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC"), a copy of whose engagement agreement has
been provided to the Company and whose fees will be paid by MergerSub, there
is no investment banker, broker, finder or other intermediary which has been
retained by or is authorized to act on behalf of MergerSub who might be
entitled to any fee or commission from MergerSub or any of its affiliates
upon consummation of the transactions contemplated by this Agreement.
SECTION 4.07. Financing. The Company has received copies of (a) a
commitment letter dated May 4, 1997 from DLJ Merchant Banking Partners II,
L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, C.V., DLJ
Funding II, Inc., UK Investment Plan 1997 Partners and DLJ First ESC LLC
pursuant to which each of the foregoing has committed, subject to the terms
and conditions set forth therein, to purchase securities of MergerSub for an
aggregate amount equal to $310,000,007, b) a letter dated May 4, 1997 from
DLJSC pursuant to which DLJSC has indicated that it is highly confident of
its ability to place privately, or underwrite in the public markets, Senior
Subordinated Notes of DecisionOne Corporation, a Delaware corporation
("OPERATING CO.") in the amount of $150,000,000, and (c) a commitment letter
dated April 30, 1997 from DLJ Capital Funding, Inc. ("DLJ SENIOR DEBT FUND")
pursuant to which DLJ Senior Debt Fund has committed, subject to the terms
and conditions set forth therein, to enter into one or more credit agreements
providing for loans to Operating Co. of up to $575,000,000. As used in this
Agreement, the aforementioned entities shall hereinafter be referred to as
the "FINANCING ENTITIES." The aforementioned credit agreements and
commitments to purchase equity securities of MergerSub or Operating Co. shall
be referred to as the "FINANCING AGREEMENTS" and the financing to be provided
thereunder and under the arrangements described in clause (b) above shall be
referred to as the "FINANCING." The aggregate proceeds of the Financing are
in an amount sufficient to pay the Merger Consideration, to repay all of the
Company's and its Subsidiaries' indebtedness together with any interest,
premium or penalties payable in connection therewith, to provide a reasonable
amount of working capital financing and to pay related fees and expenses
(collectively, the "REQUIRED AMOUNTS"). As of the date hereof, none of the
commitment letters relating to the Financing Agreements referred to above has
been withdrawn and MergerSub does not know of any facts or circumstances that
may reasonably be expected to result in any of the conditions set forth in
the commitment letters relating to the Financing Agreements not being
satisfied. MergerSub believes that the Financing will not create any
liability to the directors and stockholders of the Company under any federal
or state fraudulent conveyance or transfer law. MergerSub further believes
that, upon the consummation of the transactions contemplated hereby,
including, without limitation, the Financing, the Surviving Corporation (i)
will not become insolvent, (ii) will not be left with unreasonably small
capital, (iii) will not have incurred debts beyond its ability to pay such
debts as they mature, and (iv) the capital of the Company will not become
impaired.
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SECTION 4.08. Capitalization. The authorized capital stock of MergerSub
consists of (i) 30,000,000 shares of MergerSub Common Stock, of which as of
the date hereof, there were outstanding 101 shares and (ii) 15,000,000 shares
of MergerSub Preferred Stock, of which as of the date hereof no shares were
outstanding. All outstanding shares of capital stock of MergerSub have been
duly authorized and validly issued and are fully paid and nonassessable. As
of the moment immediately prior to the Effective Time, 9,782,609 shares of
MergerSub Common Stock, 3,400,000 shares of MergerSub Preferred Stock (or, in
lieu thereof, Senior Discount Notes of MergerSub in an equivalent proceeds
amount of $85,000,000) and MergerSub Warrants to acquire 1,417,180 shares of
MergerSub Common Stock at an exercise price of not less than $0.01 per share,
will be outstanding; provided that if any Shares are issued after the date
hereof but prior to the Effective Time in respect of Options or Warrants as
set forth in Section 1.04(a), the number of MergerSub Warrants shall be
increased to reflect any such issuances.
ARTICLE 5
COVENANTS OF THE COMPANY
The Company agrees that:
SECTION 5.01. Conduct of the Company . Except as otherwise specifically
provided in this Agreement, from the date hereof to the Effective Time, the
Board of Directors of the Company shall not approve or authorize any action
that would allow the Company and its Subsidiaries to carry on their
respective businesses other than in the ordinary and usual course of business
and consistent with past practice or any action that would prevent the
Company and its Subsidiaries from using their best efforts to (i) preserve
intact their respective present business organizations, (ii) maintain in
effect all federal, state and local licenses, approvals and authorizations,
including, without limitation, all permits that are required for the Company
or any of its Subsidiaries to carry on its business, (iii) keep available the
services of their respective key officers and employees and (iv) maintain
satisfactory relationships with their respective customers, lenders,
suppliers and others having business relationships with any of them. Without
limiting the generality of the foregoing, and except as otherwise
specifically provided in this Agreement, without the prior written consent of
MergerSub, prior to the Effective Time, the Board of Directors of the Company
shall not, nor shall it authorize or direct the Company or any Subsidiary,
directly or indirectly, to:
(a) adopt or propose any change in its certificate of incorporation or
bylaws (other than as contemplated by this Agreement);
(b) except pursuant to existing agreements or arrangements (i) acquire
(by merger, consolidation or acquisition of stock or assets) any material
corporation, partnership or other business organization or division
thereof, or sell, lease or otherwise dispose of a material subsidiary or a
material amount of assets or securities; (ii) make any investment whether
by purchase of stock or securities, contributions to capital or any
property transfer, or purchase any property or assets of any other
individual or entity other than the purchase of inventory, supplies,
office equipment or repairable parts in the ordinary course of business
(it being understood that purchases pursuant to the agreement referenced
in 8.02(i) are in the ordinary course of business) in the aggregate for an
amount in excess of $3,000,000; (iii)waive, release, grant, or transfer
any rights of material value; modify or change in any material respect any
existing material license, lease, contract, or other document; (v) other
than endorsements of negotiable instruments in the ordinary course,
guaranties of obligations of Subsidiaries or guaranties or other
liabilities related to the purchases of inventory, repairable parts,
office equipment or supplies which arise in the ordinary course of
business, assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the
obligations of any other Person which, are in excess of $1,500,000 in the
aggregate; (vi) make any loans, advances or capital contributions to, or
investments in, any other Person which, are in excess of $1,000,000 in the
aggregate or (vii) make any capital expenditure which, individually, is in
excess of $1,000,000 or, in the aggregate with any other such expenditure,
are in excess of $5,000,000;
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(c) take any action that would make any representation and warranty of
the Company hereunder inaccurate in any respect at, or as of any time
prior to, the Effective Time, or omit to take any action necessary to
prevent any such representation or warranty from being inaccurate in any
respect at any such time;
(d) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, other than cash dividends and distributions by a wholly
owned subsidiary of the Company to the Company or to a subsidiary all of
the capital stock which is owned directly or indirectly by the Company, or
redeem, repurchase or otherwise acquire or offer to redeem, repurchase, or
otherwise acquire any of its securities or any securities of its
subsidiaries;
(e) adopt or amend any bonus, profit sharing, compensation, severance,
termination, stock option, pension, retirement, deferred compensation,
employment or employee benefit plan, agreement, trust, plan, fund or other
arrangement for the benefit and welfare of any director, officer or
employee, or (except for normal increases in the ordinary course of
business that are consistent with past practices and that, in the
aggregate, do not result in a material increase in benefits or
compensation expense to the Company or any Subsidiary) increase in any
manner the compensation or fringe benefits of any director, officer or
employee or pay any benefit not required by any existing plan or
arrangement (including, without limitation, the granting of stock options
or stock appreciation rights or the removal of existing restrictions in
any benefit plans or agreements);
(f) revalue in any material respect any significant portion of its
assets, including, without limitation, writing down the value of inventory
in any material manner or write-off of notes or accounts receivable in any
material manner;
(g) pay, discharge or satisfy any material claims, liabilities or
obligations (whether absolute, accrued, asserted or unasserted, contingent
or otherwise) other than the payment, discharge or satisfaction in the
ordinary course of business, consistent with past practices, of
liabilities reflected or reserved against in the consolidated financial
statements of the Company or incurred in the ordinary course of business,
consistent with past practices;
(h) make any tax election with respect to or settle or compromise any
material income tax liability;
(i) take any action other than in the ordinary course of business and
consistent with past practices with respect to accounting policies or
procedures; or
(j) agree or commit to do any of the foregoing.
SECTION 5.02. Stockholder Meeting; Proxy Material. The Company shall cause
a meeting of its stockholders (the "COMPANY STOCKHOLDER MEETING") to be duly
called and held as soon as reasonably practicable for the purpose of voting
on the approval and adoption of this Agreement and the Merger. The Board of
Directors of the Company shall, subject to its fiduciary duties as determined
in good faith and as advised by counsel, recommend approval and adoption of
this Agreement and the Merger by the Company's stockholders. In connection
with such meeting, the Company (a) shall promptly prepare and file with the
SEC, shall use its reasonable best efforts to have cleared by the SEC and
shall thereafter mail to its stockholders as promptly as practicable the
Company Proxy Statement and all other proxy materials for such meeting, (b)
subject to its fiduciary duties as determined in good faith and as advised by
counsel, shall use its reasonable best efforts to obtain the necessary
approvals by its stockholders of this Agreement and the transactions
contemplated hereby and (c) shall otherwise comply with all legal
requirements applicable to such meeting.
SECTION 5.03. Access to Information. From the date hereof until the
Effective Time, the Company shall give MergerSub, its counsel, financial
advisors, auditors and other authorized representatives full access to the
offices, properties, books and records of the Company and the Subsidiaries
during normal business hours, will furnish to MergerSub, their counsel,
financial advisors, auditors and other authorized representatives such
financial and operating data and other information as such Persons may
reasonably
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request and will instruct the Company's and its Subsidiaries' employees,
counsel and financial advisors to cooperate with MergerSub in its
investigation of the business of the Company and the Subsidiaries; provided
that no investigation pursuant to this Section shall affect any
representation or warranty given by the Company to MergerSub hereunder; and
provided, further that any information provided to MergerSub pursuant to this
Section 5.03 shall be subject to the Confidentiality Agreement dated as of
March 19, 1997 between the Company and DLJ Merchant Banking II, Inc. (the
"CONFIDENTIALITY AGREEMENT").
SECTION 5.04. Other Offers. (a) Neither the Company nor any of its
Subsidiaries shall (whether directly or indirectly through advisors, agents
or other intermediaries), nor shall the Company or any of its Subsidiaries
authorize or permit any of its or their officers, directors, agents,
representatives, advisors or Subsidiaries to, (i) solicit, initiate or take
any action knowingly to facilitate the submission of inquiries, proposals or
offers from any Third Party (as defined below) (other than MergerSub)
relating to (A) any acquisition or purchase of 20% or more of the
consolidated assets of the Company and its Subsidiaries or of over 20% of any
class of equity securities of the Company or any of its Subsidiaries, (B) any
tender offer (including a self tender offer) or exchange offer that if
consummated would result in any Third Party beneficially owning 20% or more
of any class of equity securities of the Company or any of its Subsidiaries,
(C) any merger, consolidation, business combination, sale of substantially
all assets, recapitalization, liquidation, dissolution or similar transaction
involving the Company, or any of its Subsidiaries whose assets, individually
or in the aggregate, constitute more than 20% of the consolidated assets of
the Company, other than the transactions contemplated by this Agreement, or
(D) any other transaction the consummation of which would, or could
reasonably be expected to impede, interfere with, prevent or materially delay
the Merger or which would, or could reasonably be expected to, materially
dilute the benefits to MergerSub of the transactions contemplated hereby
(collectively, "ACQUISITION PROPOSALS"), or agree to or endorse any
Acquisition Proposal, or (ii) enter into or participate in any discussions or
negotiations regarding any of the foregoing, or furnish to any Third Party
any information with respect to its business, properties or assets or any of
the foregoing, or otherwise cooperate in any way with, or knowingly assist or
participate in, facilitate or encourage, any effort or attempt by any Third
Party (other than MergerSub) to do or seek any of the foregoing; provided,
however, that the foregoing shall not prohibit the Company (either directly
or indirectly through advisors, agents or other intermediaries) from (i)
publicly disclosing in a press release, in a general manner, the Company's
permitted activities hereunder, (ii) furnishing information pursuant to an
appropriate confidentiality letter (which letter shall not be less favorable
to the Company in any material respect than the Confidentiality Agreement,
and a copy of which shall be provided for informational purposes only to
MergerSub) concerning the Company and its businesses, properties or assets to
a Third Party who has made a bona fide Acquisition Proposal, (iii) engaging
in discussions or negotiations with such a Third Party who has made a bona
fide Acquisition Proposal, (iv) following receipt of a bona fide Acquisition
Proposal, taking and disclosing to its stockholders a position contemplated
by Rule 14d-9 or Rule 14e-2(a) under the Exchange Act or otherwise making
disclosure to its stockholders, (v) following receipt of a bona fide
Acquisition Proposal, failing to make or withdrawing or modifying its
recommendation referred to in Section 5.02 and/or (vi) taking any
non-appealable, final action ordered to be taken by the Company by any court
of competent jurisdiction but in each case referred to in the foregoing
clauses (ii) through (vi) only to the extent that the Board of Directors of
the Company shall have concluded in good faith on the basis of advice from
counsel that such action is required to prevent the Board of Directors of the
Company from breaching its fiduciary duties to the stockholders of the
Company under applicable law; provided, further, that (A) the Board of
Directors of the Company shall not take any of the foregoing actions until
reasonable notice to MergerSub of its intent to take such action shall have
been give to MergerSub; and (B) if the Board of Directors of the Company
receives an Acquisition Proposal, to the extent it may do so without
breaching its fiduciary duties as advised by counsel and as determined in
good faith, and without violating any of the conditions of such Acquisition
Proposal, then the Company shall promptly inform MergerSub of the terms and
conditions of such proposal and the identity of the person making it. Subject
to the provisions of the previous sentence, the Company shall immediately
cease and cause its Subsidiaries and its and their advisors, agents and other
intermediaries to cease any and all existing activities, discussions or
negotiations with any parties (other than MergerSub) conducted heretofore
with respect to any of the
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foregoing, and shall use its reasonable best efforts to cause any such
parties in possession of confidential information about the Company that was
furnished by or on behalf of the Company to return or destroy all such
information in the possession of any such party (other than MergerSub) or in
the possession of any agent or advisor of any such party. As used in this
Agreement, the term "THIRD PARTY" means any Person or "GROUP," as described
in Rule 13d-5(b) promulgated under the Exchange Act, other than MergerSub or
any of its affiliates.
(b) If a Payment Event (as hereinafter defined) occurs, the Company shall
pay to MergerSub, within two business days following such Payment Event, a
fee of $20,947,000.00.
(c) "PAYMENT EVENT" shall mean that at least one enumerated event has
occurred in all of the following clauses (i)-(iii): (i) a Third Party shall
have made an Acquisition Proposal prior to the Company Stockholder Meeting,
(ii) this Agreement shall have been terminated pursuant to any of Sections
9.01(e), 9.01(f) or 9.01(g) and (iii) any Acquisition Proposal (whether or
not proposed prior to the Company Stockholders Meeting and whether or not it
involves the Third Party making the Acquisition Proposal referred to in
Section 5.04(c)(i) above) shall have been consummated within 12 months
following the termination of this Agreement.
(d) Upon the termination of this Agreement for any reason other than (i) a
termination by the Company pursuant to Section 9.01(c), (ii) a termination by
either the Company or MergerSub pursuant to Section 9.01(a), (iii) a
termination that follows a failure of the condition set forth in Section
8.01(e) or Section 8.02(e) to be satisfied, or (iv) any termination that
follows a refusal by MergerSub to consummate the Merger because Section
3.10(a) or 3.10(h) is not true and correct as of the Effective Time, by
reason of an event that occurs between the date hereof and the Effective
Time, the Company shall reimburse MergerSub and its affiliates not later than
two business days after submission of reasonable documentation thereof for
100% of their documented out-of-pocket fees and expenses (including, without
limitation, the reasonable fees and expenses of their counsel and investment
banking fees), actually incurred by any of them or on their behalf in
connection with this Agreement and the transactions contemplated hereby and
the arrangement, obtaining the commitment to provide or obtaining the
Financing for the transactions contemplated by this Agreement (including fees
payable to the Financing Entities and their respective counsel) provided that
the aggregate amount payable pursuant to this Section 5.04(d) shall not
exceed $8,250,000; provided further, that (i) in the event that a fee is paid
pursuant to Section 5.04(b) or (ii) in the event of any termination of this
Agreement which follows a refusal of MergerSub to consummate the Merger by
reason of the condition set forth in Section 8.01(c) or Section 8.02(b), the
aggregate amount payable pursuant to this Section 5.04(d) shall not include
any investment banking fee payable to DLJSC as disclosed in Section 4.06 and
the limit set forth in the immediately proceeding clause shall be reduced
from $8,250,000 to $5,750,000.
(e) The Company acknowledges that the agreements contained in this Section
5.04 are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, MergerSub would not enter into this
Agreement; accordingly, if the Company fails to promptly pay any amount due
pursuant to this Section 5.04, and, in order to obtain such payment, the
other party commences a suit which results in a judgment against the Company
for the fee or fees and expenses set forth in this Section 5.04, the Company
shall also pay to MergerSub its costs and expenses incurred in connection
with such litigation.
(f) Sections 5.04(b)-(e) shall survive any termination of this Agreement,
however caused.
SECTION 5.05. Notices of Certain Events. The Company shall promptly notify
MergerSub of:
(a) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or regulatory
agency or authority in connection with the transactions contemplated by
this Agreement; and
(c) any actions, suits, claims, investigations or proceedings commenced
or, to the best of its knowledge threatened against, relating to or
involving or otherwise affecting the Company or any Subsidiary which, if
pending on the date of this Agreement, would have been required to have
been disclosed pursuant to Section 3.12 or which relate to the
consummation of the transactions contemplated by this Agreement.
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SECTION 5.06. Resignation of Directors. Prior to the Effective Time, the
Company shall deliver to MergerSub evidence satisfactory to MergerSub of the
resignation of all directors of the Company effective at the Effective Time.
SECTION 5.07. Preferred Stock. Provided that MergerSub shall have provided
to Company reasonably in advance of the first mailing to stockholders of the
Company Proxy Statement the terms thereof, prior to the Effective Time, the
Board of Directors of the Company shall take all necessary action to
establish the terms of the Mirror Preferred Stock and file the Certificate of
Designations with the Delaware Secretary of State, all in accordance with the
applicable provisions of Delaware Law. The "MIRROR PREFERRED STOCK" shall be
Preferred Stock of the Company, the terms of and certificate of designations
of which shall be identical in all respects (except the name of the Company)
to the terms of the MergerSub Preferred Stock and the certificate of
designations therefor.
SECTION 5.08. Solvency Advice. The Company shall request an independent
advisor to deliver the advice contemplated by Section 8.03(a) as promptly as
practicable.
ARTICLE 6
COVENANTS OF MERGERSUB
MergerSub agrees that:
SECTION 6.01. SEC Filings. As soon as practicable after the date of
announcement of the execution of the Merger Agreement, MergerSub shall file
(separately, or as part of the Company Proxy Statement) with the SEC, if
required, a Rule 13E-3 Transaction Statement ("TRANSACTION STATEMENT") with
respect to the Merger (together with any supplements or amendments thereto,
collectively the "MERGERSUB DISCLOSURE DOCUMENTS"). MergerSub and the Company
each agrees to correct any information provided by it for use in the
MergerSub Disclosure Documents if and to the extent that it shall have become
false or misleading in any material respect. MergerSub agrees to take all
steps necessary to cause the MergerSub Disclosure Documents as so corrected
to be filed with the SEC and to be disseminated to holders of Shares, in each
case as and to the extent required by applicable federal securities laws. The
Company and its counsel shall be given reasonable opportunity to review and
comment on each MergerSub Disclosure Document prior to its being filed with
the SEC.
SECTION 6.02. Voting of Shares. MergerSub agrees to vote all Shares
beneficially owned by it in favor of adoption of this Agreement at the
Company Stockholder Meeting.
SECTION 6.03. Director and Officer Liability. (a) For a period of 6 years
after the Effective Time, MergerSub shall cause the Surviving Corporation to
indemnify and hold harmless the present and former officers and directors of
the Company in respect of acts or omissions occurring prior to the Effective
Time to the extent provided under the Company's certificate of incorporation
and bylaws in effect on the date hereof; provided that such indemnification
shall be subject to any limitation imposed from time to time under applicable
law. For a period of 6 years after the Effective Time, MergerSub shall cause
the Surviving Corporation to provide officers' and directors' liability
insurance in respect of acts or omissions occurring prior to the Effective
Time covering each such Person currently covered by the Company's officers'
and directors' liability insurance policy on terms with respect to coverage
and amount no less favorable than those of such policy in effect on the date
hereof (or, if such insurance policy cannot be obtained, such insurance
policy on terms with respect to coverage and amount as favorable as can be
obtained, subject to the proviso at the conclusion of this sentence),
provided that in satisfying its obligation under this Section, MergerSub
shall not be obligated to cause the Surviving Corporation to pay premiums in
excess of 125% of the amount per annum the Company paid in its last full
fiscal year, which amount has been disclosed to MergerSub.
(b) In furtherance of and not in limitation of the preceding paragraph,
MergerSub agrees that the officers and directors of the Company that are
defendants in all litigation commenced by stockholders of the Company with
respect to (x) the performance of their duties as such officers and/or
directors under federal or state law (including litigation under federal and
state securities laws) and (y) the Merger, including, without limitation, any
and all such litigation commenced on or after the date of this
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Agreement (the "SUBJECT LITIGATION") shall be entitled to be represented, at
the reasonable expenses of the Company, in the Subject Litigation by one
counsel (and Delaware counsel if appropriate and one local counsel in each
jurisdiction in which a case is pending) each of which counsel shall be
selected by a plurality of such director defendants; provided that the
Company shall not be liable for any settlement effected without its prior
written consent (which consent shall not be unreasonably withheld) and that a
condition to the indemnification payments provided in Section 6.03(a) shall
be that such officer/director defendant not have settled any Subject
Litigation without the consent of the Surviving Corporation (such consent not
to be unreasonably withheld) and, prior to the Effective Time, MergerSub; and
provided further that neither MergerSub nor the Surviving Corporation shall
have any obligation hereunder to any officer/director defendant when and if a
court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and non-appealable, that
indemnification of such officer/ director defendant in the manner
contemplated hereby is prohibited by applicable law.
SECTION 6.04. Employee Plans and Benefit Arrangements. (a) From and after
the Effective Time, subject to applicable law, the Surviving Corporation and
its subsidiaries will honor obligations of the Company and its Subsidiaries
incurred prior to the Effective Time under all existing Employee Plans and
Benefit Arrangements (as defined in Section 3.14).
(b) MergerSub agrees that, for at least one year from the Effective Time,
subject to applicable law, the Surviving Corporation and its Subsidiaries
will provide benefits to their employees which will, in the aggregate, be
comparable to those currently provided by the Company and its subsidiaries to
their employees. Notwithstanding the foregoing, nothing herein shall obligate
or require the Surviving Corporation or any of its subsidiaries to provide
its employees with a plan or arrangement similar to any equity based
compensation plans currently maintained by the Company and nothing herein
shall otherwise limit the Surviving Corporation's right to amend, modify or
terminate any Employee Plan or Benefit Arrangement, as defined in Section
3.14.
(c) It is MergerSub's current intention to maintain the Surviving
Corporation's headquarters at its present location or another location in the
greater Philadelphia area.
SECTION 6.05. Financing. MergerSub shall use its reasonable best efforts
to obtain the Financing. In the event that any portion of such Financing
becomes unavailable, regardless of the reason therefor, MergerSub will use
its reasonable best efforts to obtain alternative financing on substantially
comparable or more favorable terms from other sources.
SECTION 6.06. NASDAQ Listing. MergerSub will not take any action, for at
least three years after the Effective Time of the Merger, to cause the
Company Stock to be de-listed from The NASDAQ National Market System
("NASDAQ"); provided, however, that MergerSub may cause or permit the Company
Stock to be de-listed in connection with any transaction which results in the
termination of registration of such securities under Section 12 of the
Exchange Act, and provided, further, that nothing in this Section 6.06 shall
require the Company to take any affirmative action to prevent the Company
Stock from being de-listed by NASDAQ if the Company Stock ceases to meet the
applicable listing standards.
SECTION 6.07. Access to Information. From the date hereof until the
Effective Time, MergerSub shall give the Company and its independent advisor
any such information regarding MergerSub as may be necessary to permit such
independent advisor to render the advice to be delivered to the Company's
Board of Directors pursuant to Section 8.03(b).
ARTICLE 7
COVENANTS OF MERGERSUB AND THE COMPANY
The parties hereto agree that:
SECTION 7.01. Best Efforts. Subject to the terms and conditions of this
Agreement, each party will use its reasonable best efforts to take, or cause
to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the transactions
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contemplated by this Agreement. Each party shall also refrain from taking,
directly or indirectly, any action contrary to or inconsistent with the
provisions of this Agreement, including action which would impair such
party's ability to consummate the Merger and the other transactions
contemplated hereby. Without limiting the foregoing, the Company and its
Board of Directors shall use their reasonable best efforts to (a) take all
action necessary so that no state takeover statute or similar statute or
regulation is or becomes applicable to the Merger or any of the other
transactions contemplated by this Agreement and (b) if any state takeover
statute or similar statute or regulation becomes applicable to any of the
foregoing, take all reasonable action necessary so that the Merger and the
other transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effect of such statute or regulation on the Merger
and the other transactions contemplated by this Agreement.
SECTION 7.02. Certain Filings. (a) The Company and MergerSub shall use
their respective reasonable best efforts to take or cause to be taken, (i)
all actions necessary, proper or advisable by such party with respect to the
prompt preparation and filing with the SEC a registration statement on Form
S-4 (the "REGISTRATION STATEMENT"), the Company Disclosure Documents and the
MergerSub Disclosure Documents, (ii) such actions as may be required to have
the Registration Statement declared effective under the Securities Act and to
have the Company Proxy Statement cleared by the SEC, in each case as promptly
as practicable, and (iii) such actions as may be required to have to be taken
under state securities or applicable Blue Sky laws in connection with the
issuance of the securities contemplated hereby.
(b) The Company agrees to provide, and will cause its Subsidiaries and its
and their respective officers, employees and advisors to provide, all
necessary cooperation in connection with the arrangement of any financing to
be consummated contemporaneous with or at or after the Closing in respect of
the transactions contemplated by this Agreement, including without
limitation, (x) participation in meetings, due diligence sessions and road
shows, (y) the preparation of offering memoranda, private placement
memoranda, prospectuses and similar documents, and (z) the execution and
delivery of any commitment letters, underwriting or placement agreements,
pledge and security documents, other definitive financing documents, or other
requested certificates or documents, including a certificate of the chief
financial officer of the Company with respect to solvency matters, comfort
letters of accountants and legal opinions as may be requested by MergerSub;
provided that the form and substance of any of the material documents
referred to in clause (y), and the terms and conditions of any of the
material agreements and other documents referred to in clause (z), shall be
substantially consistent with the terms and conditions of the financing
required to satisfy the condition precedent set forth in Section 8.01(e).
(c) The Company and MergerSub shall cooperate with one another (i) in
determining whether any action by or in respect of, or filing with, any
governmental body, agency or official, or authority is required, or any
actions, consents, approvals or waivers are required to be obtained from
parties to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement (including the Financing) and
(ii) in seeking any such actions, consents, approvals or waivers or making
any such filings, furnishing information required in connection therewith or
with the Registration Statement, the Company Disclosure Documents and
MergerSub Disclosure Documents and seeking timely to obtain any such actions,
consents, approvals or waivers.
SECTION 7.03. Public Announcements. MergerSub and the Company will consult
with each other before issuing any press release or making any public
statement with respect to this Agreement and the transactions contemplated
hereby and, except for any press release or public statement as may be
required by applicable law or any listing agreement with any national
securities exchange, will not issue any such press release or make any such
public statement prior to such consultation.
SECTION 7.04. Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or MergerSub,
any deeds, bills of sale, assignments or assurances and to take and do, in
the name and on behalf of the Company or MergerSub, any other actions and
things to vest, perfect or confirm of record or otherwise in the Surviving
Corporation any and all right, title and interest in, to and under any of the
rights, properties or assets of the Company acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger.
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ARTICLE 8
CONDITIONS TO THE MERGER
SECTION 8.01. Conditions to the Obligations of Each Party. The obligations
of the Company and MergerSub to consummate the Merger are subject to the
satisfaction of the following conditions:
(a) this Agreement shall have been adopted by the stockholders of the
Company in accordance with Delaware Law;
(b) any applicable waiting period under the HSR Act relating to the
Merger shall have expired or been terminated;
(c) no provision of any applicable law or regulation and no judgment,
order, decree or injunction shall prohibit or restrain the consummation of
the Merger; provided, however, that the Company and MergerSub shall each
use its reasonable best efforts to have any such judgment, order, decree
or injunction vacated; and
(d) all consents, approvals and licenses of any governmental or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement and for the Surviving Corporation to conduct
the business of the Company in substantially the manner now conducted,
shall have been obtained, unless the failure to obtain such consents,
authorizations, orders or approvals would not have a Material Adverse
Effect after giving effect to the transactions contemplated by this
Agreement (including the Financing);
(e) the funds in an amount at least equal to the Required Amounts shall
have been made available to MergerSub and/or Operating Co. as contemplated
in Section 4.07; and
(f) the Registration Statement shall have been declared effective and no
stop order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be pending
before or threatened by the SEC.
SECTION 8.02. Conditions to the Obligations of MergerSub. The obligations
of MergerSub to consummate the Merger are subject to the satisfaction of the
following further conditions:
(a) the Company shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time, the representations and warranties of the Company
contained in this Agreement and in any certificate or other writing
delivered by the Company pursuant hereto shall be true in all material
respects at and as of the Effective Time (provided that representations
made as of a specific date shall be required to be true as of such date
only) as if made at and as of such time and MergerSub shall have received
a certificate signed by any Vice President of the Company to the foregoing
effect;
(b) There shall not be instituted or pending (x) any action or proceeding
by any government or governmental authority or agency, or (y) any action
or proceeding by any other person, that has a reasonable likelihood of
success, in any case referred to in clauses (x) or (y), before any court
or governmental authority or agency, (i) challenging or seeking to make
illegal, to delay materially or otherwise directly or indirectly to
restrain or prohibit the consummation of the Merger or seeking to obtain
material damages or otherwise directly or indirectly relating to the
transactions contemplated by this Agreement, (ii) seeking to restrain or
prohibit MergerSub's (including its Subsidiaries and affiliates) ownership
or operation of all or any material portion of the business or assets of
the Company and its Subsidiaries, taken as a whole, or to compel MergerSub
or any of its Subsidiaries or affiliates to dispose of or hold separate
all or any material portion of the business or assets of the Company and
its Subsidiaries, taken as a whole, (iii) seeking to impose or confirm
material limitations on the ability of MergerSub or any of its
Subsidiaries or affiliates to effectively control the business or
operations of the Company and its Subsidiaries, taken as a whole, or
effectively to exercise full rights of ownership of the Shares or Company
Stock, including, without limitation, the right to vote any Shares or
Company Stock acquired or owned by MergerSub or any of its Subsidiaries or
affiliates on all matters properly presented to the Company's
stockholders, or (iv)
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seeking to require divestiture by MergerSub or any of its Subsidiaries or
affiliates of any Shares or Company Stock, and no court, arbitrator or
governmental body, agency or official shall have issued any judgment,
order, decree or injunction, and there shall not be any statute, rule or
regulation, that, in the sole judgment of MergerSub is likely, directly or
indirectly, to result in any of the consequences referred to in the
preceding clauses (i) through (iv);
(c) MergerSub shall have received all documents it may reasonably request
relating to the existence of the Company and the Subsidiaries and the
authority of the Company for this Agreement, all in form and substance
satisfactory to MergerSub;
(d) the holders of not more than 3% of the outstanding Shares shall have
demanded appraisal of their Shares in accordance with Delaware Law;
(e) MergerSub shall be reasonably satisfied that the Merger will be
recorded as a "recapitalization" for financial reporting purposes;
(f) MergerSub shall have received undertakings in writing from each
person, if any, who according to counsel for the Company might reasonably
be considered "affiliates" of the Company within the meaning of Rule
145(c) of the SEC pursuant to the Securities Act (each, an "AFFILIATE"),
in each case in form and substance satisfactory to counsel for MergerSub
providing (i) such Affiliate will notify MergerSub in writing before
offering for sale or selling or otherwise disposing of any shares of
Company Stock owned by such Affiliate and (ii) no such sale or other
disposition shall be made unless and until the Affiliate has supplied to
MergerSub an opinion of counsel for the Affiliate (which opinion and
counsel shall be reasonably satisfactory to MergerSub) to the effect that
such transfer is not in violation of the Securities Act;
(g) the Registration Rights Agreement dated as of October 20, 1995,
entered into among the Company and the Significant Security Holders (as
defined therein), shall have been amended in the manner previously agreed;
(h) The certificate of designation for the Mirror Preferred Stock shall
have been accepted for filing by the Delaware Secretary of State; and
(i) Total indebtedness (long and short term) of the Company and its
Subsidiaries as of the Effective Time, excluding any indebtedness
attributable to "Phase II" as defined in the Agreement for Services for
End-Of-Life Inventory Management dated as of June 7, 1996 between
Operating Co. and Compaq Computer Corporation ("ATTRIBUTABLE
INDEBTEDNESS") shall not exceed $240,000,000 and shall not exceed
$255,000,000 including Attributable Indebtedness.
SECTION 8.03. Condition to the Obligation of the Company. The obligation
of the Company to consummate the Merger is subject to the satisfaction of the
following further conditions:
(a) MergerSub shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time, the representations and warranties of MergerSub contained
in this Agreement and in any certificate or other writing delivered by
either of them pursuant hereto shall be true in all material respects at
and as of the Effective Time (except for any inaccuracies in such
representations and warranties that are solely due to an action taken
after the date hereof of the type described in Section 5.01 which is taken
specifically in accordance with Section 5.01) (provided that
representations made as of a specific date shall be required to be true as
of such date only) as if made at and as of such time and the Company shall
have received a certificate signed by any Vice President of MergerSub to
the foregoing effect; and
(b) The Board of Directors of the Company shall have received advice,
reasonably satisfactory to the Board, from an independent advisor
confirming the belief of MergerSub set forth in the last sentence of
Section 4.07.
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ARTICLE 9
TERMINATION
SECTION 9.01. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time (notwithstanding any
approval of this Agreement by the stockholders of the Company):
(a) by mutual written consent of the Company and MergerSub;
(b) by either the Company or MergerSub, if the Merger has not been
consummated by the later of (x) the earlier of September 15, 1997 and ten
business days after the Company Stockholders Meeting, and (y) August 15,
1997, provided that the party seeking to exercise such right is not then
in breach in any material respect of any of its obligations under this
Agreement;
(c) by either the Company or MergerSub, if MergerSub (in the case of
termination by the Company), or the Company (in the case of termination by
MergerSub) shall have breached in any material respect any of its
obligations under this Agreement or any representation and warranty of
MergerSub (in the case of termination by the Company) or the Company (in
the case of termination by MergerSub) shall have been incorrect in any
material respect when made or at any time prior to the Closing;
(d) by either the Company or MergerSub, if there shall be any law or
regulation that makes consummation of the Merger illegal or otherwise
prohibited or if any judgment, injunction, order or decree enjoining
MergerSub or the Company from consummating the Merger is entered and such
judgment, injunction, order or decree shall become final and
nonappealable;
(e) by MergerSub if the Board of Directors of the Company shall have
withdrawn or modified or amended, in a manner adverse to MergerSub, its
approval or recommendation of this Agreement and the Merger or its
recommendation that stockholders of the Company adopt and approve this
Agreement and the Merger, or approved, recommended or endorsed any
proposal for a transaction other than the Merger (including a tender or
exchange offer for Shares) or if the Company has failed to call the
Company Stockholders Meeting or failed as promptly as reasonably
practicable after the Registration Statement is declared effective to mail
the Company Proxy Statement to its stockholders or failed to include in
such statement the recommendation referred to above;
(f) by the Company if prior to the Effective Time the Board of Directors
of the Company shall have withdrawn or modified or amended, in a manner
adverse to MergerSub, its approval or recommendation of this Agreement and
the Merger or its recommendation that stockholders of the Company adopt
and approve this Agreement and the Merger in order to permit the Company
to execute a definitive agreement providing for the acquisition of the
Company or in order to approve a tender or exchange offer for any or all
of the Shares, in either case, as determined by the Board of Directors of
the Company to be on terms more favorable to the Company's stockholders
than the Merger from a financial point of view, provided that the Company
shall be in compliance with Section 5.04;
(g) by either the Company or MergerSub if, at a duly held stockholders
meeting of the Company or any adjournment thereof at which this Agreement
and the Merger is voted upon, the requisite stockholder adoption and
approval shall not have been obtained.
The party desiring to terminate this Agreement pursuant to Sections
9.01(b)-(g) shall give written notice of such termination to the other party
in accordance with Section 10.01.
SECTION 9.02. Effect of Termination. If this Agreement is terminated
pursuant to Section 9.01, this Agreement shall become void and of no effect
with no liability on the part of any party hereto, except that the agreements
contained in Sections 5.04(b)-(f) and 10.04 shall survive the termination
hereof.
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<PAGE>
ARTICLE 10
MISCELLANEOUS
SECTION 10.01. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including telecopy or similar
writing) and shall be given,
if to MergerSub, to:
Peter T. Grauer
C/O DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, New York 10172
Telecopy: 212-892-7552
with a copy to:
George R. Bason, Jr.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: (212) 450-4800
if to the Company, to:
Thomas M. Molchan
DecisionOne Holdings Corp.
50 East Swedesford Road
Frazer, PA 19355
Telecopy: (610) 408-3820
with a copy to:
David R. King
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
Telecopy: (215) 963-5299
or such other address or telecopy number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice,
request or other communication shall be effective (a) if given by telecopy,
when such telecopy is transmitted to the telecopy number specified in this
Section and the appropriate telecopy confirmation is received or (b) if given
by any other means, when delivered at the address specified in this Section.
SECTION 10.02. Survival of Representations and Warranties. The
representations and warranties and agreements contained herein and in any
certificate or other writing delivered pursuant hereto shall not survive the
Effective Time or the termination of this Agreement except for the agreements
set forth in Sections 6.03, 6.04, 6.06 and 7.04 which will survive the
Effective Time and Sections 5.04(b)-(f) and 10.04 which will survive any
termination hereof.
SECTION 10.03. Amendments; No Waivers. (a) Any provision of this Agreement
may be amended or waived prior to the Effective Time if, and only if, such
amendment or waiver is in writing and signed, in the case of an amendment, by
the Company and MergerSub or in the case of a waiver, by the party against
whom the waiver is to be effective; provided that after the adoption of this
Agreement by the stockholders of the Company, no such amendment or waiver
shall, without the further approval of such stockholders, alter or change (i)
the amount or kind of consideration to be received in exchange for any shares
of capital stock of the Company, (ii) any term of the certificate of
incorporation of the Surviving Corporation or (iii) any of the terms or
conditions of this Agreement if such alteration or change would adversely
affect the holders of any shares of capital stock of the Company.
A-26
<PAGE>
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
SECTION 10.04. Expenses. Except as provided in Section 5.04, all costs and
expenses incurred in connection with this Agreement shall be paid by the
party incurring such cost or expense.
SECTION 10.05. Successors and Assigns; Benefit. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, provided that no party
may assign, delegate or otherwise transfer any of its rights or obligations
under this Agreement without the consent of the other parties hereto. Nothing
in this Agreement, expressed or implied, shall confer on any Person other
than the parties hereto, and their respective successors and assigns, any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except that the present and former officers and directors of the
Company shall have the rights set forth in Section 6.03 hereof.
SECTION 10.06. Governing Law. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware, without
reference to the conflicts of laws rules thereof.
SECTION 10.07. Counterparts; Effectiveness. 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. This Agreement shall become effective when each party hereto
shall have received counterparts hereof signed by all of the other parties
hereto.
SECTION 10.08. Knowledge Defined. When used with respect to the Company,
"KNOWLEDGE" means the actual knowledge of any of the following officers of
the Company or any of their successors: Kenneth Draeger, Stephen Felice,
Thomas Fitzpatrick and Thomas Molchan.
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/ Kenneth Draeger
---------------------------------
Name: Kenneth Draeger
Title: Chief Executive Officer
QUAKER HOLDING CO.
By: /s/ Peter T. Grauer
---------------------------------
Name: Peter T. Grauer
Title: President
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<PAGE>
AMENDMENT NO. 1
AMENDMENT, dated as of July 15, 1997 (the "Amendment"), to the Agreement
and Plan of Merger between Quaker Holding Co. ("Merger Sub") and DecisionOne
Holdings Corp. (the "Company"), dated as of May 4, 1997 (the "Merger
Agreement").
WITNESSETH:
WHEREAS, pursuant to the Merger Agreement, MergerSub and the Company have
approved the terms and conditions of the merger of MergerSub with and into
the Company; and
WHEREAS, MergerSub and the Company have agreed that certain provisions of
the Merger Agreement be amended in the manner provided for in this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used but not defined herein shall have
the meanings given to them in the Merger Agreement. References in the Merger
Agreement to the "Merger Agreement" or "this Agreement" and other similar
references shall be deemed to refer to the Merger Agreement as amended
hereby.
2. Amendment to Merger Agreement.
(a) Section 1.07 (a) of the Merger Agreement is hereby amended by adding
the following sentence to the end thereof:
"Notwithstanding the foregoing, the parties hereto may agree prior to the
Effective Time that all or a portion of the Options shall not be canceled
in respect of the payment referred to in the previous sentence, but shall
be converted into options to purchase stock of the Surviving Corporation
in compliance with the requirements of Section 424 of the Code and the
regulations thereunder."
(b) Section 1.07(b) of the Merger Agreement is hereby amended to insert,
in the last sentence thereof, prior to the word "payment", the word "the",
and following the word "payment", the words "or conversion referred to
Section 1.07(a)".
(c) Section 4.08 of the Merger Agreement is hereby amended by deleting
the third sentence of such section in its entirety and replacing it with
the following sentence:
"As of the moment immediately prior to the Effective Time, 9,782,609
shares of MergerSub Common Stock, 3,400,000 shares of MergerSub Preferred
Stock (or, in lieu thereof, Senior Discount Notes of MergerSub in an
equivalent proceeds amount of $85,000,000) and MergerSub Warrants to
acquire 1,417,180 shares of MergerSub Common Stock at an exercise price of
not less than $0.01 per share will be outstanding; provided, however that
in lieu of such MergerSub Warrants, up to 1,417,180 additional shares of
MergerSub Common Stock (the "Direct Shares") may be issued at a price of
not less than $.01 per share, thereby increasing the 9,782,609 number
referred to above; and provided further that if any Shares are issued
after the date hereof but prior to the Effective Time in respect of
Options or Warrants as set forth in Section 1.04(a), the number of
MergerSub Warrants or Direct Shares shall be increased to reflect any such
issuances."
3. Representations and Warranties of the Company. The Company hereby
represents and warrants to MergerSub that the execution, delivery and
performance by the Company of this Amendment and the consummation by the
Company of the transactions contemplated hereby are within the Company's
corporate powers, and except for any required approval by the Company's
stockholders by majority vote in connection with the consummation of the
Merger, have been duly authorized by all necessary corporate and stockholder
action. This Amendment constitutes a valid and binding agreement of the
Company.
4. Representations and Warranties of MergerSub. MergerSub hereby
represents and warrants to the Company that the execution, delivery and
performance by MergerSub of this Amendment and the consummation by MergerSub
of the transactions contemplated hereby are within the corporate powers of
MergerSub and have been duly authorized by all the necessary corporate and
stockholder action. This Amendment constitutes a valid and binding agreement
of MergerSub.
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5. Miscellaneous.
(a) Attached as Exhibit A is a Certificate of Designations establishing
the Mirror Preferred Stock pursuant to Section 5.07 of the Merger
Agreement. The Company will take all necessary action to establish the
Mirror Preferred Stock and file the Certificate of Designations with
respect thereto with the Secretary of State of the State of Delaware, and
in accordance with applicable provisions of Delaware Law.
(b) Except as expressly amended, modified and supplemented hereby, the
provisions of the Merger Agreement are and shall remain in full force and
effect.
(c) This Amendment shall be construed in accordance with and governed by
the law of the State of Delaware, without reference to the conflicts of
laws rules thereof.
(d) This Amendment 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. This Amendment shall
become effective when each party hereto shall have received counterparts
hereof signed by all of the other parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first written above.
DECISIONONE HOLDINGS CORP.
By: /s/ Kenneth Draeger
-------------------------------
Name: Kenneth Draeger
Title: Chief Executive Officer
QUAKER HOLDING CO.
By: /s/ Peter T. Grauer
-------------------------------
Name: Peter T. Grauer
Title: President
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<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF 13% SENIOR EXCHANGEABLE
PREFERRED STOCK DUE 2007
of
DECISIONONE HOLDINGS CORP.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
We, the undersigned, Stephen J. Felice, President, and Thomas M. Molchan,
Secretary, of DecisionOne Holdings Corp., a Delaware corporation (hereinafter
called the "CORPORATION"), pursuant to the provisions of Sections 103 and 151
of the General Corporation Law of the State of Delaware, do hereby make this
Certificate of Designations and do hereby state and certify that pursuant to
the authority expressly vested in the Board of Directors of the Corporation
by the Certificate of Incorporation, the Board of Directors duly adopted the
following resolution:
RESOLVED, that, pursuant to Article Fourth of the Certificate of
Incorporation (which authorizes 5,000,000 shares of preferred stock, $0.01
par value ("PREFERRED STOCK"), of which no shares of Preferred Stock are
currently issued and outstanding), the Board of Directors hereby fixes the
powers, designations, preferences and relative, participating, optional and
other special rights, and the qualifications, limitations and restrictions,
of a series of Preferred Stock.
RESOLVED, that each share of such series of Preferred Stock shall rank
equally in all respects and shall be subject to the following provisions:
(1) NUMBER AND DESIGNATION. 3,400,000 shares of the Preferred Stock of the
Corporation shall be designated as 13% Senior Exchangeable Preferred Stock
Due 2007 (the "SENIOR PREFERRED STOCK").
(2) RANK. The Senior Preferred Stock shall, with respect to dividend
rights and rights on liquidation, dissolution and winding up, rank prior to
all classes of or series of common stock of the Corporation, including the
Corporation's common stock, par value $0.01 per share ("COMMON STOCK"), and
each other class of capital stock of the Corporation, the terms of which
provide that such class shall rank junior to the Senior Preferred Stock or
the terms of which do not specify any rank relative to the Senior Preferred
Stock. All equity securities of the Corporation to which the Senior Preferred
Stock ranks prior (whether with respect to dividends or upon liquidation,
dissolution, winding up or otherwise), including the Common Stock, are
collectively referred to herein as the "JUNIOR SECURITIES." All equity
securities of the Corporation with which the Senior Preferred Stock ranks on
a parity (whether with respect to dividends or upon liquidation, dissolution
or winding up) are collectively referred to herein as the "PARITY
SECURITIES." The respective definitions of Junior Securities and Parity
Securities shall also include any rights or options exercisable for or
convertible into any of the Junior Securities and Parity Securities, as the
case may be. The Senior Preferred Stock shall be subject to the creation of
Junior Securities.
(3) DIVIDENDS. (a) (i) The holders of shares of Senior Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available for the payment of dividends,
dividends (subject to Sections 3(a)(ii) and (iii) hereof) at the rate of 13%
per annum (computed on the basis of a 360 day year) (the "DIVIDEND RATE") on
the Liquidation Value of each share of Senior Preferred Stock on and as of
the most recent Dividend Payment Date (as defined below). In the event the
Corporation is unable or shall fail to discharge its obligation to redeem all
outstanding shares of Senior Preferred Stock pursuant to paragraph 5(c) or
5(d) hereof, the Dividend Rate shall increase by .25 percent per quarter
(each, a "DEFAULT DIVIDEND") for each quarter or portion thereof following
the date on which such redemption was required to be made until cured,
provided that the aggregate increase shall not exceed 5%. Such dividends
shall be payable in the manner set forth below in Sections 3(a)(ii) and (iii)
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<PAGE>
quarterly on March 31, June 30, September 30, and December 31 of each year
(unless such day is not a business day, in which event on the next succeeding
business day) (each of such dates being a "DIVIDEND PAYMENT DATE" and each
such quarterly period being a "DIVIDEND PERIOD"). Such dividends shall be
cumulative from the date of issue, whether or not in any Dividend Period or
Periods there shall be funds of the Corporation legally available for the
payment of such dividends.
(ii) Prior to the fifth anniversary of the issuance of the Senior
Preferred Stock (the "CASH PAY DATE"), dividends shall not be payable in
cash to holders of shares of Senior Preferred Stock but shall, subject
to Section 3(b) hereof, accrete to the Liquidation Value in accordance
with Section 4(a) hereof.
(iii) Following the Cash Pay Date, each such dividend shall be payable
in cash on the Liquidation Value per share of the Senior Preferred
Stock, in equal quarterly amounts (to which the Default Dividend, if
any, shall be added), to the holders of record of shares of the Senior
Preferred Stock, as they appear on the stock records of the Corporation
at the close of business on such record dates, not more than 60 days or
less than 10 days preceding the payment dates thereof, as shall be fixed
by the Board of Directors. Accrued and unpaid dividends for any past
Dividend Periods may be declared and paid at any time, without reference
to any Dividend Payment Date, to holders of record on such date, not
more than 45 days preceding the payment date thereof, as may be fixed by
the Board of Directors.
(b) At the written request of the holders of a majority of the shares of
Senior Preferred Stock (provided, that at the time such request is made, DLJ
Merchant Banking Partners II, L.P. or any of its affiliates shall not own any
shares of Senior Preferred Stock), the Corporation shall, commencing on the
first Dividend Payment Date after such request and ending on the Cash Pay
Date, be required to pay all dividends on shares of Senior Preferred Stock by
the issuance of additional shares of Senior Preferred Stock ("ADDITIONAL
SHARES"). The Additional Shares shall be identical to all other shares of
Senior Preferred Stock, except as set forth in Section 4. For the purposes of
determining the number of Additional Shares to be issued as dividends
pursuant to this Paragraph (b), such Additional Shares shall be valued at
their Applicable Liquidation Value as provided in Section 4(c).
(c) Holders of shares of Senior Preferred Stock shall not be entitled to
any dividends, whether payable in cash, property or stock, in excess of the
cumulative dividends, as herein provided, on the Senior Preferred Stock.
Except as provided in this Section 3, no interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
the Senior Preferred Stock that may be in arrears.
(d) So long as any shares of the Senior Preferred Stock are outstanding,
no dividends, except as described in the next succeeding sentence, shall be
declared or paid or set apart for payment on Parity Securities, for any
period unless (to the extent such dividends are payable in cash) full
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such
payment on the Senior Preferred Stock for all Dividend Periods terminating on
or prior to the date of payment of the dividend on such class or series of
Parity Securities. When (to the extent such dividends are payable in cash)
dividends are not paid in full or a sum sufficient for such payment is not
set apart, as aforesaid, all dividends declared upon shares of the Senior
Preferred Stock and all dividends declared upon any other class or series of
Parity Securities shall (in each case, to the extent payable in cash) be
declared ratably in proportion to the respective amounts of dividends
accumulated and unpaid on the Senior Preferred Stock and accumulated and
unpaid on such Parity Securities.
(e) So long as any shares of the Senior Preferred Stock are outstanding,
no dividends (other than dividends or distributions paid in shares of, or
options, warrants or rights to subscribe for or purchase shares of, Junior
Securities) shall be declared or paid or set apart for payment or other
distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan of the Corporation or any
subsidiary) (all such dividends, distributions, redemptions or purchases
being hereinafter referred to as a "JUNIOR SECURITIES DISTRIBUTION") for any
consideration (or any moneys be paid to or made available for a sinking fund
for
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<PAGE>
the redemption of any shares of any such stock) by the Corporation, directly
or indirectly (except by conversion into or exchange for Junior Securities),
unless in each case (i) the full cumulative dividends on all outstanding
shares of the Senior Preferred Stock and any other Parity Securities shall
(to the extent payable in cash) have been paid or set apart for payment for
all past Dividend Periods with respect to the Senior Preferred Stock and all
past dividend periods with respect to such Parity Securities and (ii) (to the
extent payable in cash) sufficient funds shall have been paid or set apart
for the payment of the dividend for the current Dividend Period with respect
to the Senior Preferred Stock and the current dividend period with respect to
such Parity Securities.
(4) LIQUIDATION PREFERENCE. (a) In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, before any payment or distribution of the assets of the
Corporation (whether capital or surplus) shall be made to or set apart for
the holders of Junior Securities, the holders of the shares of Senior
Preferred Stock shall be entitled to receive an amount equal to the
Liquidation Value of such share plus any accrued and unpaid cash dividends to
the date of distribution. "LIQUIDATION VALUE" on any date means, with respect
to (x) any share of Senior Preferred Stock other than any Additional Shares,
the sum of (1) $25 per share and (2) the aggregate of all dividends accreted
on such share until the most recent Dividend Payment Date upon which an
accretion to Liquidation Value has occurred (or if such date is a Dividend
Payment Date upon which an accretion to Liquidation Value has occurred, such
date), provided that in the event of an actual liquidation, dissolution or
winding up of the Corporation or the redemption of any shares of Senior
Preferred Stock pursuant to Section 5 hereunder, the amount referred to in
(2) shall be calculated by including dividends accreting to the actual date
of such liquidation, dissolution or winding up or the redemption date, as the
case may be, rather than the Dividend Payment Date referred to above and
provided further that in no event will dividends accrete beyond the earlier
of (i) the Cash Pay Date and (ii) the most recent Dividend Payment Date prior
to the Dividend Payment Date on which dividends on the Senior Preferred Stock
are payable in Additional Shares and (y) any Additional Share, the Applicable
Liquidation Value. All accretions to Liquidation Value will be calculated
using compounding on a quarterly basis. Except as provided in the preceding
sentences, holders of shares of Senior Preferred Stock shall not be entitled
to any distribution in the event of liquidation, dissolution or winding up of
the affairs of the Corporation. If, upon any liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation, or proceeds
thereof, distributable among the holders of the shares of Senior Preferred
Stock shall be insufficient to pay in full the preferential amount aforesaid
and liquidating payments on any Parity Securities, then such assets, or the
proceeds thereof, shall be distributed among the holders of shares of Senior
Preferred Stock and any such other Parity Securities ratably in accordance
with the respective amounts that would be payable on such shares of Senior
Preferred Stock and any such other stock if all amounts payable thereon were
paid in full. For the purposes of this paragraph (4), (i) a consolidation or
merger of the Corporation with one or more corporations, or (ii) a sale or
transfer of all or substantially all of the Corporation's assets, shall not
be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the Corporation.
(b) Subject to the rights of the holders of any Parity Securities, after
payment shall have been made in full to the holders of the Senior Preferred
Stock, as provided in this paragraph (4), any other series or class or
classes of Junior Securities shall, subject to the respective terms and
provisions (if any) applying thereto, be entitled to receive any and all
assets remaining to be paid or distributed, and the holders of the Senior
Preferred Stock shall not be entitled to share therein.
(c) The Applicable Liquidation Value of any Additional Shares shall be the
Liquidation Value of Senior Preferred Stock outstanding immediately prior to
the first Dividend Payment Date occurring after a request for payment in
Additional Shares has been made in accordance with Section 3(b).
(5) REDEMPTION. (a) Redemption Upon Consummation of First Public Offering.
The Corporation may, at its option, to the extent it shall have funds legally
available for such payment, redeem, prior to August 15, 2000, in whole but
not in part, shares of Senior Preferred Stock, at a redemption price per
share equal to 112% of the Liquidation Value, in cash, plus accrued and
unpaid cash dividends on such shares to the date fixed for redemption,
without interest, provided that the Corporation shall not redeem any shares
of Senior Preferred Stock pursuant to this Paragraph 5(a) unless (i) prior to
such redemption the First Public Offering shall have been consummated, and
(ii) the aggregate redemption price of the
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shares of Senior Preferred Stock redeemed pursuant to this Section 5(a) does
not exceed the net proceeds received by the Corporation in such Initial
Public Offering, and provided further that at least 50% of the shares of
Senior Preferred Stock originally issued at closing remain outstanding
following such redemption. "FIRST PUBLIC OFFERING" shall have the meaning
ascribed to such term in the Investors' Agreement and shall, in addition, for
the purposes of Section 5(a) hereof, include any sale following the Closing
Date of any equity securities by any affiliate of the Corporation, the net
proceeds of which are contributed or loaned to the Corporation in such a
manner that such proceeds may lawfully be used for the redemption of the
Senior Preferred Stock.
"CLOSING DATE" shall have the meaning ascribed to such term in the
Investors' Agreement.
"INVESTORS' AGREEMENT" means the Investors' Agreement to be entered into
among the DLJ Merchant Banking Partners II, L.P., DLJ Offshore Partners,
C.V., DLJ Merchant Banking Funding, Inc., DLJ Offshore Partners II, C.V., DLJ
Diversified Partners, L.P., DLJMB Funding II, Inc., DLJ First ESC LLC, UK
Investment Plan 1997 Partners, (collectively, the "DLJMB Funds") Quaker
Holding Co., Apollo Investment Fund III, L.P., Apollo Overseas Partners III,
L.P., Apollo (U.K.) Partners III, L.P., Bain Capital Inc., Thomas H. Lee
Corporation, Ontario Teachers' Pension Plan Board, Sprout Capital L.P., and
certain other stockholders listed on the signature pages thereof.
(b) Redemption At the Option of the Corporation. On and after August 15,
2002, to the extent the Corporation shall have funds legally available for
such payment, the Corporation may, at its option, redeem shares of Senior
Preferred Stock, at any time in whole or from time to time in part, at
redemption prices per share in cash set forth in the table below, together
with accrued and unpaid cash dividends thereon to the date fixed for
redemption, without interest:
<TABLE>
<CAPTION>
YEAR BEGINNING
AUGUST 15 PERCENTAGE OF LIQUIDATION VALUE
<S> <C>
2002 106.50%
2003 104.33
2004 102.167
2005 100.00
2006 100.00
</TABLE>
(c) Redemption In the Event of a Change of Control. In the event of a
Change of Control, the Corporation shall, to the extent it shall have funds
legally available for such payment, offer to redeem all of the shares of
Senior Preferred Stock then outstanding, and shall redeem the shares of
Senior Preferred Stock of any holder of such shares that shall consent to
such redemption, upon a date no later than 30 days following the Change in
Control, at a redemption price per share equal to 101% of the Liquidation
Value, in cash, plus accrued and unpaid cash dividends thereon to the date
fixed for redemption, without interest.
"CHANGE OF CONTROL" means such time as: (a) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, as amended), other than any person or group comprised solely of the
Initial Investors, has become the beneficial owner, by way of merger,
consolidation or otherwise, of 30% or more of the voting power of all classes
of voting securities of the Corporation, and such person or group has become
the beneficial owner of a greater percentage of the voting power of all
classes of voting securities of the Corporation than that beneficially owned
by the Initial Investors; or (b) a sale or transfer of all or substantially
all of the assets of the Corporation to any person or group (other than any
group consisting solely of the Initial Investors or their affiliates) has
been consummated; or (c) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Corporation (together with any new directors whose election
was approved by a vote of a majority of the directors then still in office,
who either were directors at the beginning of such period or whose election
or nomination for the election was previously so approved) cease for any
reason to constitute a majority of the directors of the Corporation, then in
office.
"INITIAL INVESTORS" means the Shareholders (determined as of the issuance
of the Preferred Stock) and their Permitted Transferees, each as defined in
the Investors' Agreement.
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(d) Mandatory Redemption. To the extent the Corporation shall have funds
legally available for such payment, on August 15, 2007, if any shares of the
Senior Preferred Stock shall be outstanding, the Corporation shall redeem all
outstanding shares of the Senior Preferred Stock, at a redemption price equal
to the aggregate Liquidation Value, in cash, together with any accrued and
unpaid cash dividends thereon to the date fixed for redemption, without
interest.
(e) Status of Redeemed Shares. Shares of Senior Preferred Stock which have
been issued and reacquired in any manner, including shares purchased or
redeemed, shall (upon compliance with any applicable provisions of the laws
of the State of Delaware) have the status of authorized and unissued shares
of the class of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of the Preferred Stock;
provided that no such issued and reacquired shares of Senior Preferred Stock
shall be reissued or sold as Senior Preferred Stock.
(f) Failure to Redeem. If the Corporation is unable or shall fail to
discharge its obligation to redeem all outstanding shares of Senior Preferred
Stock pursuant to paragraph (5)(c) or 5(d) (each, a "MANDATORY REDEMPTION
OBLIGATION"), such Mandatory Redemption Obligation shall be discharged as
soon as the Corporation is able to discharge such Mandatory Redemption
Obligation. If and so long as any Mandatory Redemption Obligation with
respect to the Senior Preferred Stock shall not be fully discharged, the
Corporation shall not (i) directly or indirectly, redeem, purchase, or
otherwise acquire any Parity Security or discharge any mandatory or optional
redemption, sinking fund or other similar obligation in respect of any Parity
Securities (except in connection with a redemption, sinking fund or other
similar obligation to be satisfied pro rata with the Senior Preferred Stock)
or (ii) in accordance with paragraph 3(e), declare or make any Junior
Securities Distribution, or, directly or indirectly, discharge any mandatory
or optional redemption, sinking fund or other similar obligation in respect
of the Junior Securities.
(g) Failure to Pay Dividends. Notwithstanding the foregoing provisions of
this paragraph (5), unless full cumulative cash dividends (whether or not
declared) on all outstanding shares of Senior Preferred Stock shall have been
paid or contemporaneously are declared and paid or set apart for payment for
all dividend periods terminating on or prior to the applicable redemption
date, none of the shares of Senior Preferred Stock shall be redeemed, and no
sum shall be set aside for such redemption, unless shares of Senior Preferred
Stock are redeemed pro rata.
(6) PROCEDURE FOR REDEMPTION. (a) In the event that fewer than all the
outstanding shares of Senior Preferred Stock are to be redeemed pursuant to
Sections 5(a) or (b) hereof, the number of shares to be redeemed shall be
determined by the Board of Directors and the shares so shall be selected pro
rata (with any fractional shares being rounded to the nearest whole share)
according to the number of whole shares held by each holder of the Senior
Preferred Stock.
(b) In the event the Corporation shall redeem shares of Senior Preferred
Stock pursuant to Sections 5(a), (b) or (d), notice of such redemption shall
be given by first class mail, postage prepaid, mailed not less than 30 days
nor more than 60 days prior to the redemption date, to each holder of record
of the shares to be redeemed at such holder's address as the same appears on
the stock register of the Corporation; provided that neither the failure to
give such notice nor any defect therein shall affect the validity of the
giving of notice for the redemption of any share of Senior Preferred Stock to
be redeemed except as to the holder to whom the Corporation has failed to
give said notice or except as to the holder whose notice was defective. Each
such notice shall state: (i) the redemption date; (ii) the number of shares
of Senior Preferred Stock to be redeemed and, if fewer than all the shares
held by such holder are to be redeemed, the number of shares to be redeemed
from such holder; (iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the
redemption price; and (v) that dividends on the shares to be redeemed will
cease to accrue on such redemption date.
(c) In the case of any redemption pursuant to Sections 5(a), (b) or (d)
hereof, notice having been mailed as provided in Section 6(b) hereof, from
and after the redemption date (unless default shall be made by the
Corporation in providing money for the payment of the redemption price of the
shares called for redemption), dividends on the shares of Senior Preferred
Stock so called for redemption shall cease to accrue, and all rights of the
holders thereof as stockholders of the Corporation (except the right to
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<PAGE>
receive from the Corporation the redemption price) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if the Board of
Directors of the Corporation shall so require and the notice shall so state),
such share shall be redeemed by the Corporation at the redemption price
aforesaid. In case fewer than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof.
(d) In the case of a redemption pursuant to Section 5(c) hereof, notice of
such redemption shall be given by first class mail, postage prepaid, mailed
not more than 10 days following the occurrence of the Change of Control and
not less than 20 days prior to the redemption date, to each holder of record
of the shares to be redeemed at such holder's address as the same appears on
the stock register of the Corporation; provided that neither the failure to
give such notice nor any defect therein shall affect the validity of the
giving of notice for the redemption of any share of Senior Preferred Stock to
be redeemed except as to the holder to whom the Corporation has failed to
give said notice or except as to the holder whose notice was defective. Each
such notice shall state: (i) that a Change of Control has occurred; (ii) the
redemption date; (iii) the redemption price; (iv) that such holder may elect
to cause the Corporation to redeem all or any of the shares of Senior
Preferred Stock held by such holder; (v) the place or places where
certificates for such shares are to be surrendered for payment of the
redemption price; and (vi) that dividends on the shares the holder elects to
cause the Corporation to redeem will cease to accrue on such redemption date.
Upon receipt of such notice, the holder shall, within 20 days of receipt
thereof, return such notice to the Corporation indicating the number of
shares of Senior Preferred Stock such holder shall elect to cause the
Corporation to redeem, if any.
(e) In the case of a redemption pursuant to Section 5(c) hereof, notice
having been mailed as provided in Section 6(d) hereof, from and after the
redemption date (unless default shall be made by the Corporation in providing
money for the payment of the redemption price of the shares called for
redemption), dividends on such shares of Senior Preferred Stock as the holder
elects to cause the Corporation to redeem shall cease to accrue, and all
rights of the holders thereof as stockholders of the Corporation (except the
right to receive from the Corporation the redemption price) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if the Board of
Directors of the Corporation shall so require and the notice shall so state),
such share shall be redeemed by the Corporation at the redemption price
aforesaid. In case fewer than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof.
(7) EXCHANGE. (a) Subject to the provisions of this paragraph (7) the
Corporation may, at its option, at any time and from time to time on any
Dividend Payment Date, exchange, to the extent it is legally permitted to do
so, any or all outstanding shares (and fractional shares) of Senior Preferred
Stock, except those shares of Senior Preferred Stock beneficially owned by
the DLJMB Funds, any of their respective Permitted Transferees and any of
their respective Affiliates, in whole or in part, for Exchange Debentures,
provided that (i) on or prior to the date of exchange the Corporation shall
have paid to or declared and set aside for payment to the holders of
outstanding shares of Senior Preferred Stock all accrued and unpaid cash
dividends on shares of Senior Preferred Stock through the exchange date in
accordance with the next succeeding paragraph; (ii) no event of default under
the indenture (as defined in such indenture) governing the Exchange
Debentures shall have occurred and be continuing; and (iii) no shares of
Senior Preferred Stock are held on such date by the DLJMB Funds or any of
their Affiliates. The principal amount of Exchange Debentures deliverable
upon exchange of a share of Senior Preferred Stock, adjusted as hereinafter
provided, shall be determined in accordance with the Exchange Ratio (as
defined below).
Cash dividends on any shares of Senior Preferred Stock exchanged for
Exchange Debentures which have accrued but have not been paid as of the date
of exchange shall be paid, at the option of the Corporation, in cash or in
additional Exchange Debentures in an equivalent principal amount of such
accrued and unpaid dividends. In no event shall the Corporation issue
Exchange Debentures in
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<PAGE>
denominations other than $1,000 or in an integral multiple thereof. Cash will
be paid in lieu of any such fraction of an Exchange Debenture which would
otherwise have been issued (which shall be determined with respect to the
aggregate principal amount of Exchange Debentures to be issued to a holder
upon any such exchange). Interest will accrue on the Exchange Debentures from
the date of exchange.
Prior to effecting any exchange hereunder, the Corporation shall appoint a
trustee to serve in the capacity contemplated by an indenture between the
Corporation and such trustee, containing customary terms and conditions.
The EXCHANGE RATIO shall be, as of any Dividend Payment Date, $1.00 (or
fraction thereof) of principal amount of Exchange Debenture for each $1.00 of
(i) Liquidation Value plus (ii) accrued and unpaid cash dividends, if any,
per share of Senior Preferred Stock held by a holder on the applicable
exchange date.
"AFFILIATES" shall have the meaning ascribed such term in the Investors'
Agreement.
"EXCHANGE DEBENTURES" means 13% Subordinated Exchange Debentures due 2007
of the Corporation, to be issued pursuant to an indenture between the
Corporation and a trustee, containing customary terms and conditions.
"PERMITTED TRANSFEREES" shall have the meaning ascribed to such term in
the Investors' Agreement.
(b) Procedure for Exchange. (i) In the event that fewer than all the
outstanding shares of Senior Preferred Stock are to be exchanged, the number
of shares to be exchanged shall be determined by the Board of Directors and
the shares to be exchanged shall be selected by lot or pro rata (with any
fractional shares being rounded to the nearest whole share) as may be
determined by the Board of Directors.
(ii) In the event the Corporation shall exchange shares of Senior
Preferred Stock, notice of such exchange shall be given by first class
mail, postage prepaid, mailed not less than 30 days nor more than 60
days prior to the exchange date, to each holder of record of the shares
to be exchanged at such holder's address as the same appears on the
stock register of the Corporation; provided that neither the failure to
give such notice nor any defect therein shall affect the validity of the
giving of notice for the exchange of any share of Senior Preferred Stock
to be exchanged except as to the holder to whom the Corporation has
failed to give said notice or except as to the holder whose notice was
defective. Each such notice shall state: (A) the exchange date; (B) the
number of shares of Senior Preferred Stock to be exchanged and, if fewer
than all the shares held by such holder are to be exchanged, the number
of shares to be exchanged from such holder; (C) the Exchange Ratio; (D)
the place or places where certificates for such shares are to be
exchanged for notes evidencing the Exchange Debentures to be received by
the exchanging holder; and (E) that dividends on the shares to be
exchanged will cease to accrue on such exchange date.
(iii) Prior to giving notice of intention to exchange, the Corporation
shall execute and deliver with a bank or trust company selected by the
Corporation an indenture containing customary terms and conditions. The
Corporation will cause the Exchange Debentures to be authenticated on
the Dividend Payment Date on which the exchange is effective, and will
pay interest on the Exchange Debentures at the rate and on the dates
specified in such indenture from the exchange date.
The Corporation will not give notice of its intention to exchange under
paragraph 6(b) (ii) hereof unless it shall file at the place or places
(including a place in the Borough of Manhattan, The City of New York)
maintained for such purpose an opinion of counsel (who may be an employee
of the Corporation) to the effect that (i) the indenture has been duly
authorized, executed and delivered by the Corporation, has been duly
qualified under the Trust Indenture Act of 1939 (or that such
qualification is not necessary) and constitutes a valid and binding
instrument enforceable against the Corporation in accordance with its
terms (subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles, and subject
to such other qualifications as are then customarily contained in opinions
of counsel experienced in such matters), (ii) the Exchange Debentures have
been duly authorized and, when executed and authenticated in accordance
with the provisions of the indenture
A1-9
<PAGE>
and delivered in exchange for the shares of Preferred Stock, will
constitute valid and binding obligations of the Corporation entitled to
the benefits of the indenture (subject as aforesaid), (iii) neither the
execution nor delivery of the indenture or the Exchange Debentures nor
compliance with the terms, conditions or provisions of such instruments
will result in a breach or violation of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust or
agreement or instrument, known to such counsel, to which the Corporation
or any of its subsidiaries is a party or by which it or any of them is
bound, or any decree, judgment, order, rule or regulation, known to such
counsel, of any court or governmental agency or body having jurisdiction
over the Corporation and such subsidiaries or any of their properties,
(iv) the Exchange Debentures have been duly registered for such exchange
with the Securities and Exchange Commission under a registration statement
that has become effective under the Securities Act of 1933 (the "Act") or
that the exchange of the Exchange Debentures for the shares of Senior
Preferred Stock is exempt from registration under the Act, and (v) the
Corporation has sufficient legally available funds for such exchange such
that such exchange is permitted under applicable law.
(iv) Notice having been mailed as aforesaid, from and after the exchange
date (unless default shall be made by the Corporation in issuing
Exchange Debentures in exchange for the shares called for exchange),
dividends on the shares of Senior Preferred Stock so called for exchange
shall cease to accrue, and all rights of the holders thereof as
stockholders of the Corporation (except the right to receive from the
Corporation the Exchange Debentures and any rights such holder, upon the
exchange, may have as a holder of the Exchange Debenture) shall cease.
Upon surrender in accordance with said notice of the certificates for
any shares so exchanged (properly endorsed or assigned for transfer, if
the Board of Directors of the Corporation shall so require and the
notice shall so state), such share shall be exchanged by the Corporation
for the Exchange Debentures at the Exchange Ratio. In case fewer than
all the shares represented by any such certificate are exchanged, a new
certificate shall be issued representing the unexchanged shares without
cost to the holder thereof.
(v) Each exchange shall be deemed to have been effected immediately
prior to the close of business on the relevant Dividend Payment Date,
and the person in whose name or names any Exchange Debentures shall be
issuable upon such exchange shall be deemed to have become the holder of
record of the Exchange Debentures represented thereby at such time on
such Dividend Payment Date.
(vi) Prior to the delivery of any securities which the Corporation shall
be obligated to deliver upon exchange of the Senior Preferred Stock, the
Corporation shall comply with all applicable federal and state laws and
regulations which require action to be taken by the Corporation.
(c) The Corporation will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of notes
evidencing Exchange Debentures on exchange of the Senior Preferred Stock
pursuant hereto; provided that the Corporation shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issue
or delivery of Exchange Debentures in a name other than that of the holder of
the Senior Preferred Stock to be exchanged and no such issue or delivery
shall be made unless and until the person requesting such issue or delivery
has paid to the Corporation the amount of any such tax or has established, to
the satisfaction of the Corporation, that such tax has been paid.
(8) VOTING RIGHTS. (a) The holders of record of shares of Senior Preferred
Stock shall not be entitled to any voting rights except as hereinafter
provided in this paragraph (8), as otherwise provided by law or as provided
in the Investors' Agreement.
(b) If and whenever (i) six consecutive quarterly cash dividends payable
on the Senior Preferred Stock have not been paid in full, (ii) for any reason
(including the reason that funds are not legally available for a redemption),
the Corporation shall have failed to discharge any Mandatory Redemption
Obligation (including a redemption in the Event of a Change of Control
pursuant to Section 5(c) hereof), (iii) the Corporation shall have failed to
provide the notice required by Section 6(d) hereof within the time period
specified in such section or (iv) the Corporation shall have failed to comply
with Sections 3(d),
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3(e) or 8(c) hereof, (1) the number of directors then constituting the Board
of Directors shall be increased by two and the holders of a majority of the
outstanding shares of Senior Preferred Stock, voting as a single class
regardless of series, shall be entitled to elect the two additional directors
to serve on the Board of Directors at any annual meeting of stockholders or
special meeting held in place thereof, or at a special meeting of the holders
of the Senior Preferred Stock and the Preferred Shares called as hereinafter
provided. Whenever (i) all arrears in cash dividends on the Senior Preferred
Stock and the Preferred Shares then outstanding shall have been paid and cash
dividends thereon for the current quarterly dividend period shall have been
paid or declared and set apart for payment, (ii) the Corporation shall have
fulfilled its Mandatory Redemption Obligation, (iii) fulfilled its obligation
to provide notice as specified in subsection (b)(iii) hereof, or (iv) the
Corporation shall have complied with Sections 3(d), 3(e), or 8(c) hereof, as
the case may be, then the right of the holders of the Senior Preferred Stock
to elect such additional two directors shall cease (but subject always to the
same provisions for the vesting of such voting rights in the case of any
similar future (i) arrearage in six consecutive quarterly cash dividends,
(ii) failure to fulfill any Mandatory Redemption Obligation, (iii) failure to
fulfill the obligation to provide the notice required by Section 6(d) hereof
within the time period specified in such section or (iv) failure to comply
with Sections 3(d), 3(e), or 8(c)) and the terms of office of all persons
elected as directors by the holders of the Senior Preferred Stock shall
forthwith terminate and the number of the Board of Directors shall be reduced
accordingly. At any time after such voting power shall have been so vested in
the holders of shares of Senior Preferred Stock and the Preferred Shares, the
secretary of the Corporation may, and upon the written request of any holder
of Senior Preferred Stock (addressed to the secretary at the principal office
of the Corporation) shall, call a special meeting of the holders of the
Senior Preferred Stock and of the Preferred Shares for the election of the
two directors to be elected by them as herein provided, such call to be made
by notice similar to that provided in the Bylaws of the Corporation for a
special meeting of the stockholders or as required by law. If any such
special meeting required to be called as above provided shall not be called
by the secretary within 20 days after receipt of any such request, then any
holder of shares of Senior Preferred Stock may call such meeting, upon the
notice above provided, and for that purpose shall have access to the stock
books of the Corporation. The directors elected at any such special meeting
shall hold office until the next annual meeting of the stockholders or
special meeting held in lieu thereof if such office shall not have previously
terminated as above provided. If any vacancy shall occur among the directors
elected by the holders of the Senior Preferred Stock and the Preferred
Shares, a successor shall be elected by the Board of Directors, upon the
nomination of the then-remaining director elected by the holders of the
Senior Preferred Stock and the Preferred Shares or the successor of such
remaining director, to serve until the next annual meeting of the
stockholders or special meeting held in place thereof if such office shall
not have previously terminated as provided above.
(c) Without the written consent of a majority of the outstanding shares of
Senior Preferred Stock or the vote of holders of a majority of the
outstanding shares of Senior Preferred Stock at a meeting of the holders of
Senior Preferred Stock called for such purpose, the Corporation will not (i)
amend, alter or repeal any provision of the Certificate of Incorporation (by
merger or otherwise) so as to adversely affect the preferences, rights or
powers of the Senior Preferred Stock; provided that any such amendment that
changes the dividend payable on or the Liquidation Value of the Senior
Preferred Stock shall require the affirmative vote of holders of each share
of Senior Preferred Stock at a meeting of holders of Senior Preferred Stock
called for such purpose or written consent of the holder of each share of
Senior Preferred Stock; (ii) create, authorize or issue any class of stock
ranking prior to, or on a parity with, the Senior Preferred Stock with
respect to dividends or upon liquidation, dissolution, winding up or
otherwise, or increase the authorized number of shares of any such class or
series, or reclassify any authorized stock of the Corporation into any such
prior or parity shares or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any such prior
or parity shares, except that the Corporation may, without such approval,
create authorize and issue Parity Securities for the purpose of utilizing the
proceeds from the issuance of such Parity Securities for the redemption or
repurchase of all outstanding shares of Senior Preferred Stock in accordance
with the terms hereof or of the Investors' Agreement; or (iii) merge or
consolidate, or sell, exchange or convey all or substantially all of the
assets, property or business of the Corporation unless, in the case of a
merger or consolidation, the surviving corporation has a Consolidated Net
Worth (immediately following any such transaction but prior to any purchase
price accounting adjustments resulting from the transaction) at least equal
to that of the Corporation immediately prior to such transaction.
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"CONSOLIDATED NET WORTH" means at any date and with respect to any Person,
the consolidated stockholders' equity of such Person and its consolidated
subsidiaries less their consolidated Intangible Assets, all determined as of
such date. For purposes of this definition "Intangible Assets" means the
amount (to the extent reflected in determining such consolidated
stockholders' equity) of (i) all write-ups (other than write-ups of assets of
a going concern business made within twelve months after the acquisition of
such business) subsequent to August 15, 1997 in the book value of any asset
owned by such Person or a consolidated subsidiary, (ii) all investments in
unconsolidated subsidiaries and all equity investments in Persons which are
not subsidiaries and (iii) all unamortized debt discount and expense,
unamortized deferred charges, goodwill, patents, trademarks, service marks,
trade names, anticipated future benefit of tax loss carry-forwards,
copyrights, organization or developmental expenses and other intangible
assets.
(d) In exercising the voting rights set forth in this paragraph (8), each
share of Senior Preferred Stock shall have one vote per share, except that
when any other series of preferred stock shall have the right to vote with
the Senior Preferred Stock as a single class on any matter, then the Senior
Preferred Stock and such other series shall have with respect to such matters
one vote per $25 of Liquidation Value or other liquidation preference. Except
as otherwise required by applicable law or as set forth herein, the shares of
Senior Preferred Stock shall not have any relative, participating, optional
or other special voting rights and powers and the consent of the holders
thereof shall not be required for the taking of any corporate action.
(9) REPORTS. So long as any of the Senior Preferred Stock is outstanding,
the Corporation will furnish the holders thereof with the quarterly and
annual financial reports that the Corporation is required to file with the
Securities and Exchange Commission pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 or, in the event the Corporation is not
required to file such reports, reports containing the same information as
would be required in such reports.
(10) GENERAL PROVISIONS. (a) The term "PERSON" as used herein means any
corporation, limited liability company, partnership, trust, organization,
association, other entity or individual.
(b) The term "OUTSTANDING", when used with reference to shares of stock,
shall mean issued shares, excluding shares held by the Corporation or a
subsidiary.
(c) The headings of the paragraphs, subparagraphs, clauses and subclauses
of this Certificate of Designations are for convenience of reference only and
shall not define, limit or affect any of the provisions hereof.
(d) Each holder of Senior Preferred Stock, by acceptance thereof,
acknowledges and agrees that payments of dividends, interest, premium and
principal on, and exchange, redemption and repurchase of, such securities by
the Corporation are subject to restrictions on the Corporation contained in
certain credit and financing agreements.
IN WITNESS WHEREOF, DecisionOne Holdings Corp. has caused this Certificate
of Designations to be signed and attested by the undersigned this th day of
, 1997.
DecisionOne Holdings Corp.
By
--------------------------------
Name: Stephen J. Felice
Title: President
ATTEST:
- --------------------------------
Name: Thomas M. Molchan
Title: Secretary
A1-12
<PAGE>
ANNEX B
VOTING AGREEMENT AND IRREVOCABLE PROXY
In consideration of Quaker Holding Co., a Delaware corporation
("MERGERSUB") and DecisionOne Holdings Corp., a Delaware corporation (the
"COMPANY"), entering into an Agreement and Plan of Merger dated as of the
date hereof (the "MERGER AGREEMENT") which provides, among other things, that
MergerSub, upon the terms and subject to the conditions thereof, will be
merged with and into the Company (the "MERGER") and each outstanding share of
common stock, $0.01 par value, of the Company (the "COMPANY COMMON STOCK")
will be converted into the right to receive the Merger Consideration (as
defined in the Merger Agreement) in accordance with the terms of such
Agreement, each of the undersigned holders (the "STOCKHOLDERS") of shares of
Company Common Stock, options and warrants agrees with MergerSub as follows:
1. During the period (the "AGREEMENT PERIOD") beginning on the date
hereof and ending on the earlier of (i) the Effective Time (as defined in the
Merger Agreement) or (ii) the later of (x) if an Extension Event has not
occurred, the termination of the Merger Agreement in accordance with its
terms and (y) if an Extension Event has occurred, the date which is four
months after the date of the termination of the Merger Agreement in
accordance with its terms, and (in the case of clauses (x) and (y)) payment
in full of all amounts (if any) payable to MergerSub pursuant to Section
10.04 thereof, each of the Stockholders hereby agrees not to sell, transfer,
assign, encumber or otherwise dispose of any shares of Company Common Stock,
options or warrants therefor set forth opposite his name in Schedule A
attached hereto (with respect to each such Stockholder, his "SCHEDULE A
SECURITIES") or enter into any contract, option or other arrangement or
understanding with respect to the direct or indirect sale, assignment,
transfer, encumbrance or other disposition of any of such Stockholder's
Schedule A Securities. Notwithstanding the foregoing, no disposition of
Schedule A Securities pursuant to (i) the Merger or (ii) any other merger or
similar transaction (provided, that, in any instance referred to in clause
(ii), the Stockholder is not in breach of its obligations hereunder) shall be
considered a breach of this Agreement. As used in this Agreement, "EXTENSION
EVENT" means the occurrence of both of the following events: (i) a Third
Party shall have made an Acquisition Proposal and thereafter (ii) either
party shall have terminated the Merger Agreement pursuant to Section 9.01(e),
9.01(f) or 9.01(g) thereof. Terms used but not otherwise defined herein shall
have the same meanings as are given them in the Merger Agreement.
2. During the Agreement Period, each Stockholder hereby agrees to vote
such Stockholder's Schedule A Securities to approve and adopt the Merger
Agreement, the Merger and all agreements related to the Merger and any
actions related thereto at any meeting or meetings of the stockholders of the
Company, and at any adjournment thereof, at which such Merger Agreement and
other related agreements (or any amended version or versions thereof), or
such other actions, are submitted for the consideration and vote of the
stockholders of the Company.
3. During the Agreement Period, each of the Stockholders hereby agrees
that it will not vote any of such Stockholder's Schedule A Securities in
favor of the approval of any other merger, consolidation, sale of assets,
reorganization, recapitalization, liquidation or winding up of the Company or
any other extraordinary transaction involving the Company or any matters
related to or in connection therewith, or any corporate action relating to or
the consummation of which would either frustrate the purposes of, or prevent
or delay the consummation of, the transactions contemplated by the Merger
Agreement.
4. Each of the Stockholders hereby irrevocably appoints MergerSub, during
the Agreement Period, as proxy for and on behalf of such Stockholder to vote
(including, without limitation, the taking of action by written consent) such
Stockholder's Schedule A Securities, for and in the name, place and stead of
such Stockholder for the matters and in the manner contemplated by paragraph
2 above.
5. From the date hereof until the termination hereof, such Stockholder
will not, directly or indirectly, (i) take any action to solicit, initiate or
encourage any Acquisition Proposal or (ii) engage in negotiations or
discussions with, or disclose any nonpublic information relating to the
Company or any Subsidiary or afford access to the properties, books or
records of the Company or any Subsidiary to, or
B-1
<PAGE>
otherwise assist, facilitate or encourage, any Third Party that may be
considering making, or has made, an Acquisition Proposal. Such Stockholder
will promptly notify MergerSub after receipt of any Acquisition Proposal or
any indication that any Third Party is considering making an Acquisition
Proposal or any request for nonpublic information relating to the Company or
any Subsidiary or for access to the properties, books or records of the
Company or any Subsidiary by any Third Party that may be considering making,
or has made, an Acquisition Proposal and will keep MergerSub fully informed
of the status and details of any such Acquisition Proposal, indication or
request. The foregoing provisions of this Section 5 shall not be construed to
limit actions taken, or to require actions to be taken, by any Stockholder
one or more of whose directors, partners, officers or employees is a director
or officer of the Company that are required or restricted by such director's
fiduciary duties or such officer's employment duties, or permitted by the
Merger Agreement, and that, in each case, are undertaken solely in such
person's capacity as a director or officer of the Company and, in the case of
an officer of the Company, as directed by the Board of Directors or with
respect to securities of the Company other than the Schedule A Securities
after the Board of Directors has delivered the notice contemplated by clause
(A) of the second proviso of Section 5.04(a) of the Merger Agreement. For the
purposes of this Section 5, an "ACQUISITION PROPOSAL" shall mean, with
respect to any Stockholder, an Acquisition Proposal as defined in the Merger
Agreement but only in respect of such Stockholder's Schedule A Securities.
6. Each of the Stockholders agrees to surrender to the Company
immediately prior to the Effective Time any Warrants owned by him in exchange
for payment immediately after the Effective Time of an amount equal to the
difference between the exercise price in respect of each share of Company
Common Stock for which such Warrant is exercisable and $23.00, multiplied by
the number of shares of Company Common Stock issuable upon exercise of such
Warrants, and upon such other terms and conditions satisfactory to MergerSub.
7. Each of the Stockholders agrees not to exercise any rights (including,
without limitation, under Section 262 of the Delaware Law) to demand
appraisal of any shares of Company Common Stock owned by such Stockholder
with respect to the Merger.
8. Each of the Stockholders hereby represents and warrants to MergerSub
that as of the date hereof:
(a) such Stockholder (i) owns beneficially all of the shares of Company
Common Stock, options and warrants therefor set forth opposite such
Stockholder's name in Schedule A hereto, (ii) has the full and
unrestricted legal power, authority and right to enter into, execute and
deliver this Voting Agreement and Irrevocable Proxy without the consent or
approval of any other person and (iii) has not entered into any voting
agreement with or granted any person any proxy (revocable or irrevocable)
with respect to such shares (other than this Voting Agreement and
Irrevocable Proxy).
(b) This Voting Agreement and Irrevocable Proxy is the valid and binding
agreement of the Stockholder. If the Stockholder is married and the shares
of Company Common Stock, options and warrants therefor set forth on
Schedule A hereto opposite such Stockholder's name constitute community
property under applicable laws, this Agreement has been duly authorized,
executed and delivered by and constitutes the valid and binding agreement
of, such Stockholder's spouse. If this Agreement is being executed in a
representative or fiduciary capacity, the person signing this Agreement
has full power and authority to enter into and perform such agreement.
(c) No investment banker, broker or finder is entitled to a commission or
fee from such Stockholder or the Company in respect of this Agreement
based upon any arrangement or agreement made by or on behalf of the
Stockholder.
9. If any provision of this Voting Agreement and Irrevocable Proxy shall
be invalid or unenforceable under applicable law, such provision shall be
ineffective to the extent of such invalidity or unenforceability only,
without in any way affecting the remaining provisions of this Voting
Agreement and Irrevocable Proxy.
B-2
<PAGE>
10. This Voting Agreement and Irrevocable Proxy may be executed in two or
more counterparts each of which shall be an original with the same effect as
if the signatures hereto and thereto were upon the same instrument.
11. The parties hereto agree that if for any reason any party hereto shall
have failed to perform its obligations under this Voting Agreement and
Irrevocable Proxy, then the party seeking to enforce this Agreement against
such non-performing party shall be entitled to specific performance and
injunctive and other equitable relief, and the parties hereto further agree
to waive any requirement for the securing or posting of any bond in
connection with the obtaining of any such-injunctive or other equitable
relief. This provision is without prejudice to any other rights or remedies,
whether at law or in equity, that any party hereto may have against any other
party hereto for any failure to perform its obligations under this Voting
Agreement and Irrevocable Proxy.
12. This Voting Agreement and Irrevocable Proxy shall be governed by and
construed in accordance with the laws of the State of Delaware.
13. Each of the Stockholders will, upon request, execute and deliver any
additional documents deemed by MergerSub to be necessary or desirable to
complete and effectuate the Irrevocable Proxy granted herein.
14. This Agreement shall terminate upon the termination of the Agreement
Period.
B-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Voting
Agreement as of this 4th day of May, 1997.
QUAKER HOLDING CO.
By /s/ Peter T. Grauer
--------------------------------
Name: Peter T. Grauer
Title: President
DECISIONONE HOLDINGS CORP.
By /s/ Kenneth Draeger
--------------------------------
Name: Kenneth Draeger
Title: Chief Executive Officer
J.H. WHITNEY & CO.
By /s/ Michael C. Brooks
--------------------------------
Name: Michael C. Brooks
Title: General Partner
WELSH, CARSON, ANDERSON
& STOWE IV, L.P.
by WCAS IV PARTNERS,
GENERAL PARTNER
By /s/ Thomas E. McInerney
--------------------------------
Name: Thomas E. McInerney
Title: General Partner
WELSH, CARSON, ANDERSON
& STOWE VI, L.P.
by WCAS VI PARTNERS,
GENERAL PARTNER
By /s/ Thomas E. McInerney
--------------------------------
Name: Thomas E. McInerney
Title: General Partner
WCAS CAPITAL PARTNERS, L.P.
by WCAS CP PARTNERS,
GENERAL PARTNER
By /s/ Thomas E. McInerney
--------------------------------
Name: Thomas E. McInerney
Title: General Partner
B-4
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
SHARES OF OPTIONS TO WARRANTS TO
COMPANY ACQUIRE COMPANY ACQUIRE COMPANY
STOCKHOLDER COMMON STOCK COMMON STOCK COMMON STOCK
----------- ------------ ------------ ------------
<S> <C> <C> <C>
J.H. Whitney Regular Account ............. 1,809,496
J.H. Whitney "S" Account ................. 1,245,121
Welsh, Carson, Anderson & Stowe IV, L.P. 2,559,656
Welsh, Carson, Anderson & Stowe VI, L.P. 1,284,060
WCAS Capital Partners, L.P. .............. 1,447,016
</TABLE>
B-5
<PAGE>
ANNEX C
[LETTERHEAD OF SMITH BARNEY]
May 4, 1997
Board of Directors
DecisionOne Holdings Corp.
50 East Swedesford Road
Frazer, PA 19355
Members of the Board:
Decision One Holdings Corp., a Delaware corporation (the "Company"), and
Quaker Holding Co., a Delaware corporation ("Merger Sub") and a wholly-owned
subsidiary of DLJ Merchant Banking Partners II, L.P., DLJ Offshore Partners
II, C.V., DLJ Diversified Partners, L.P., DLJMB Funding II, Inc., UK
Investment Plan 1997 Partners and DLJ First ESC LLC propose to enter into an
agreement and plan of merger (the "Merger Agreement") pursuant to which
Merger Sub will be merged with and into the Company (the "Merger") and the
Company will be the surviving corporation. Pursuant to the Merger, each
outstanding share of common stock of the Company, par value $0.01 per share
(collectively, the "Shares") (other than Shares held by the Company as
treasury stock or owned by Merger Sub and Dissenting Shares (as defined in
the Merger Agreement)), will be converted, subject to the Merger Agreement
and certain proration provisions therein, into either the right to receive
$23.00 in cash or the right to retain at the election of the holder thereof
one Share. For purposes of this opinion, the term "Consideration" means the
aggregate amount of cash to be received and Shares to be retained by holders
of Shares in the Merger as set forth in the immediately preceding sentence.
We also understand that pursuant to the Merger Agreement, all of the
outstanding options and warrants of the Company will be converted into the
right to receive, for each Share subject to such option or warrant, cash in
an amount equal to $23.00 less the per share exercise price of the option or
warrant.
The Merger is expected to be considered by the stockholders of the Company at
a special stockholders meeting to be held as soon as practicable after the
date hereof and to be consummated on or shortly after the date of such
meeting. In connection with the Merger, we understand that certain
stockholders of the Company have entered into a voting agreement with the
Company and Merger Sub and have granted an irrevocable proxy to Merger Sub
(the "Voting Agreement") whereby, subject to the terms of the Voting
Agreement, such stockholders have agreed to, among other things, vote a
portion of their Shares equal to approximately 30% of the outstanding Shares
in favor of the Merger.
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of Shares (other than Merger Sub and its affiliates) of
the proposed Consideration to be received by such holders pursuant to the
Merger.
In arriving at our opinion, we reviewed the Merger Agreement dated May 4,
1997, and the Voting Agreement dated May 4, 1997, and held discussions with
certain senior officers, directors and other representatives and advisors of
the Company concerning the business, operations and prospects of the Company.
We examined certain publicly available business and financial information
relating to the Company as well as certain financial forecasts and other data
for the Company, which were provided to us by the management of the Company,
including certain pro forma effects on the Company's capital structure after
giving effect to the Merger. We reviewed the financial terms of the Merger as
set forth in the Merger Agreement in relation to, among other things: current
and historical market prices and trading volumes of the Shares; the Company's
historical and projected earnings; and the capitalization and financial
condition of the Company. We considered, to the extent publicly available,
the financial terms of certain other similar transactions recently effected
which we considered comparable to the Merger and analyzed certain financial,
stock market and other publicly available information relating to the
businesses of other companies whose operations we considered relevant in
evaluating those of the Company. In
C-1
<PAGE>
addition to the foregoing, we conducted such other analyses and examinations
and considered such other financial, economic and market criteria as we
deemed necessary to arrive at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. With respect to financial forecasts and other information
prepared by the Company and provided to or otherwise reviewed by or discussed
with us, we have been advised by the management of the Company that such
forecasts and other information were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the management of the
Company as to the expected future financial performance of the Company,
including the pro forma financial impact of the Merger on the Company. We
have not made or been provided with an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of the Company nor have
we made any physical inspection of the properties or assets of the Company.
We have not been asked to consider, and our opinion does not address, the
relative merits of the Merger as compared to any alternative business
strategies that might exist for the Company or the effect of any other
transaction in which the Company might engage. Our opinion is necessarily
based upon information available to us, and financial, stock market and other
conditions and circumstances existing and disclosed to us, as of the date
hereof.
In connection with the preparation of this opinion, we have not been
authorized by the Company or the Board of Directors to solicit, nor have we
solicited, third party indications of interest for the acquisition of all or
any part of the Company. In addition, we express no opinion as to what the
trading price of the Shares will be after consummation of the Merger.
We have, in the past, provided financial advisory and financing services to
the Company and certain of its stockholders and have received fees for the
rendering of such services. In particular, we acted as the lead managing
underwriter for the Company's initial public offering of Shares in April 1996
(the "Offering"). In preparation for the Offering we made certain
investigations of the Company and became generally familiar with its
business. Prior to the filing of the registration statement in connection
with the Offering with the Securities and Exchange Commission in February
1996 we explored the possibility of a sale of the Company and made selected
inquires with parties having a potential interest in connection therewith.
We have been engaged solely for the purpose of rendering an opinion in
connection with the Merger and will receive a fee upon the delivery of this
opinion. In the ordinary course of our business, we may hold and actively
trade the equity securities of the Company for our own account or for the
account of our customers and, accordingly, may at any time hold a long or
short position in such securities. In addition, we and our affiliates
(including The Travelers Inc. and its affiliates) may maintain business
relationships with the Company in the ordinary course of business.
Our advisory services and the opinion expressed herein are provided for the
use of the Board of Directors of the Company in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder
should vote on the proposed Merger or as to whether any stockholders should
elect to receive cash or retain the Shares.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the proposed Consideration to
be received by the holders of the Shares (other than Merger Sub and its
affiliates) in the Merger is fair to such holders from a financial point of
view.
Very truly yours,
/s/ Smith Barney Inc.
C-2
<PAGE>
ANNEX C-1
[SMITH BARNEY LETTERHEAD]
July 16, 1997
Board of Directors
DecisionOne Holdings Corp.
50 East Swedesford Road
Frazer, PA 19355
Members of the Board:
Reference is made to our opinion, dated May 4, 1997 (the "Opinion"), as to
the fairness, from a financial point of view, to the holders (other than
Merger Sub and its affiliates) of common stock, par value $0.01 per share, of
DecisionOne Holdings Corp., a Delaware corporation (the "Shares"), of the
proposed Consideration to be received by such holders in connection with
the Merger referred to in our Opinion. Capitalized terms used and not
otherwise defined herein shall have the meaning ascribed to them in the
Opinion.
Based on and subject to the terms, conditions and qualifications set forth
in the Opinion, this will confirm that we are of the opinion, that as of the
date hereof, the proposed Consideration to be received by the holders of the
Shares (other than Merger Sub and its affiliates) in the Merger is fair to
such holders from a financial point of view.
Very truly yours,
/s/ Smith Barney Inc.
C-1-1
<PAGE>
ANNEX D
SECTION 262 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of
this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this section.
As used in this section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest of
a member of a nonstock corporation: and the words "depository receipt" mean a
receipt or other instrument issued by a depository representing an interest
in one or more share, or fractions thereof, solely of stock of a corporation,
which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were wither (i) listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or (ii) held of record by more than 2,000 holders; and further provided
that no appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to Section Section 251, 252, 254, 257, 258, 263 and 264 of this title to
accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at
the effective date of the merger or consolidation will be either
listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or held of record by
more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a and b of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
D-1
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights
are available pursuant to subsections (b) or (c) hereof that appraisal
rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of his shares shall
deliver to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares. Such demand
will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger
or consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or
of the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided,
that if the notice is given on or after the
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effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall
be entitled to receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs thereof
shall by borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and
may proceed to trial upon the appraisal prior to the final determination of
the stockholder entitled to an appraisal. Any stockholder whose name appears
on the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of
stock to the Register in Chancery, if such is required, may participate fully
in all proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
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(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger
or consolidation as provided in subsection (e) of this section or thereafter
with the written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by
Ch. 299, L. '96, eff. 2-1-'96 and Ch. 349, L. '96, eff. 7-1-'96.)
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DECISIONONE HOLDINGS CORP.
FORM OF PROXY
Proxy Solicited on Behalf of the Board of Directors for the Special Meeting
of Stockholders held on August 6, 1997
The undersigned hereby appoint(s) Kenneth Draeger, Stephen J. Felice and
Thomas M. Molchan, or any of them, each with full power of substitution, as
proxies to vote all stock in DecisionOne Holdings Corp. that the undersigned
would be entitled to vote on all matters that may come before the Special
Meeting of Stockholders on August 6, 1997 and any adjournments thereof.
Returned proxy forms will be voted: (1) as specified on the matter listed on
the reverse side of this form; (2) in accordance with the Directors'
recommendations when a choice is not specified; and (3) in accordance with
the judgment of the proxies on any other matters that properly come before
the meeting.
Your shares will not be voted unless your signed Proxy Form is returned to
DecisionOne Holdings Corp. or you otherwise vote at the meeting. You may
revoke your proxy at any time prior to the time it is voted at the Special
Meeting.
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FOLD AND DETACH HERE
<PAGE>
PLEASE MARK [X]
YOUR VOTES AS
INDICATED IN
THIS EXAMPLE
DECISIONONE HOLDINGS CORP. MERGER PROPOSAL:
Approval and adoption of the Agreement and Plan of Merger (the "Merger
Agreement") dated as of May 4, 1997 among DecisionOne Holdings Corp. (the
"Company") and Quaker Holding Co., a Delaware corporation ("MergerSub"),
pursuant to which MergerSub will be merged with and into the Company (the
"Merger"). If the Merger is consummated, each share of Company Common Stock
outstanding immediately prior to the Effective Time (as defined in the Merger
Agreement), other than shares of Company Common Stock for which appraisal
rights have been exercised or shares held by the Company as treasury stock or
owned by MergerSub, will be converted at the election of the holder thereof,
subject to certain limitations, into (x) the right to receive $23.00 in cash
or (y) the right to retain one share of Company Common Stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
DECISIONONE HOLDINGS CORP. MERGER PROPOSAL
Please sign as requested and return promptly in the enclosed envelope.
Executors, trustees and others signing in a representative capacity should
include their names and the capacity in which they sign.
Dated:______________ , 1997 Signature:______________ Signature: ______________
PLEASE MARK, SIGN AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENVELOPE
PROVIDED.
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FOLD AND DETACH HERE
