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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period ended
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Commission File Number 0-28090
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DECISIONONE HOLDINGS CORP.
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(Exact name of registrant as specified in its charter)
Delaware 13-3435409
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
50 East Swedesford Road, Frazer, Pennsylvania 19355
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 296-6000
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject of such filing
requirements for the past 90 days. Yes X No
--- ---
As of April 21, 1997 registrant had 27,817,830 shares of its Common Stock
outstanding.
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
FORM 10-Q MAY 15, 1997
CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets - 2
March 31, 1997 and June 30, 1996
(unaudited)
Condensed Consolidated Statements of 3
Operations - Three and Nine Months Ended
March 31, 1997 and 1996 (unaudited)
Condensed Consolidated Statements of 4
Cash Flows - Nine Months Ended
March 31, 1997 and 1996 (unaudited)
Notes to Condensed Consolidated 5-7
Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis 8-14
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION 15
</TABLE>
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
ASSETS 1997 1996
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<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 12,886 $ 8,221
Accounts receivable, net of allowances of $11,727 and $9,580 136,401 92,650
Inventories, net of allowances of $19,928 and $19,537 35,186 30,130
Other 7,637 12,770
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Total current assets 192,110 143,771
Repairable Parts, Net of Accumulated Amortization of $144,158 and $105,462 195,656 154,970
Intangibles, Net of Accumulated Amortization of $36,164 and $19,625 197,675 164,659
Property, Plant and Equipment, Net of Accumulated Depreciation
of $36,530 and $22,936 33,283 32,430
Other 22,953 18,680
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Total Assets $ 641,677 $ 514,510
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 4,756 $ 2,321
Accounts payable and accrued expenses 101,516 89,564
Deferred revenues 72,096 38,485
Other 3,691 479
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Total current liabilities 182,059 130,849
Revolving Credit Loan and Long-term Debt 241,915 188,582
Other Liabilities 16,608 14,286
Shareholders' Equity:
Preferred stock, no par value; authorized 5,000,000 shares; none outstanding
Common stock, $.01 par value, authorized 100,000,000 shares;
issued and outstanding 27,813,832 and 27,340,288 shares 278 273
Additional paid-in capital 255,691 255,262
Accumulated deficit (53,600) (73,516)
Other (1,274) (1,226)
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Total Shareholders' Equity 201,095 180,793
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Total Liabilities and Shareholders' Equity $ 641,677 $ 514,510
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues $205,070 $172,673 $572,749 $369,167
Cost of Revenues 150,372 129,962 427,969 272,708
-------- -------- -------- --------
Gross Profit 54,698 42,711 144,780 96,459
Operating Expenses:
Selling, general and administrative expenses 28,228 22,303 82,878 56,519
Amortization of intangibles 6,390 4,872 16,861 10,617
-------- -------- -------- --------
Total Operating Expenses 34,618 27,175 99,739 67,136
-------- -------- -------- --------
Operating Income 20,080 15,536 45,041 29,323
Interest Expense, Net of Interest Income 3,689 5,801 10,704 11,220
-------- -------- -------- --------
Income Before Income Taxes 16,391 9,735 34,337 18,103
Provision for Income Taxes 6,884 3,893 14,421 7,237
-------- -------- -------- --------
Net Income $ 9,507 $ 5,842 $ 19,916 $ 10,866
======== ======== ======== ========
Per Common Share:
Net Income $ 0.32 $ 0.25 $ 0.66 $ 0.46
Weighted Average Number of Common Shares
and Equivalent Shares Outstanding 30,062 23,469 30,066 23,424
</TABLE>
See notes to condensed consolidated financial statements.
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------
1997 1996
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<S> <C> <C>
Operating Activities:
Net income $ 19,916 $ 10,866
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 72,339 39,245
Changes in assets and liabilities, net of effects of business acquisitions (34,601) (14,622)
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Net cash provided by operating activities 57,654 35,489
Investing Activities:
Business acquisitions (34,433) (273,725)
Capital expenditures, net of retirements (6,093) (3,331)
Repairable spare parts purchases (64,803) (31,715)
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Net cash used in investing activities (105,329) (308,771)
Financing Activities:
Proceeds from issuance of common stock 434 1,631
Proceeds from issuance of redeemable preferred stock -- 31,392
Proceeds from issuance of subordinated debentures and warrants -- 30,126
Proceeds from borrowings 52,915 260,945
Payments on borrowings -- (48,062)
Principal payments under capital leases (961) --
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Net cash provided by financing activities 52,388 276,032
Effect of exchange rates on cash (48) (20)
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Net change in cash and cash equivalents 4,665 2,730
Cash and cash equivalents beginning of period 8,221 2,659
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Cash and cash equivalents end of period $ 12,886 $ 5,389
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 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.
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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.
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 $52,500,000, comprised
of the assumption of certain liabilities under contracts of the Business (the
"Deferred Revenues"), which were estimated at closing to be $26,015,000, and
base cash consideration of $26,485,000, 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 $2,300,000.
The primary source of funds used for the acquisition was the Company's revolving
credit facility, which was increased from $225 million to $300 million 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 $3.4 million pre-tax charge for estimated
future employee severance costs, and a $0.9 million pre-tax charge for
unutilized lease/contract losses ("exit costs"), primarily associated with
duplicate facilities to be closed. The $3.4 million charge, recorded in
accordance with 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
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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 $6.9 million, and estimated future employee severance
costs of $0.1 million. During the fourth quarter of fiscal 1996, the Company
reversed $3.4 million of these employee severance and exit cost liabilities. The
reversal was primarily the result of the Company's ability to utilize and
sublease various facilities identified in the original $7.0 million combined
liability. Such information was unknown to the Company when the original
liability was recorded.
NOTE 5: SUBSEQUENT EVENT
On May 4, 1997, the Company and Quaker Holding Co. ("Quaker") an affiliate of
DLJ Merchant Bankers II, 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 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 (the
"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 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 Company has previously filed both the Merger Agreement and the Voting
Agreement in a Current Report on Form 8-K, filed on May 5, 1997 with the
Securities and Exchange Commission.
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 $924 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, the Company and Quaker will incur various
costs, currently estimated to range between $30 million and $50 million, on a
pretax basis, in connection with consummating the transaction. These costs
consist primarily of professional fees, registration 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.
7
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ITEM 2.
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 1997
This report contains, in addition to historical information, statements by the
Company with regard to its expectations as to financial results and other
aspects of its business that involve risks and uncertainties and may constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include statements regarding
certain risks associated with the Company's practice of entering into interest
rate swap agreements in an effort to minimize interest exposure and the
sufficiency of the Company's liquidity and capital resources. Although the
Company makes such statements based on assumptions which it believes to be
reasonable and management's current expectations, such statements are subject to
a number of risks and uncertainties and there can be no assurance that actual
results will not differ materially from those described in such statements.
Factors that may cause such a difference include, but are not limited to, those
identified under "Risk Factors" in the Company's Annual Report on Form 10-K for
the year ended June 30, 1996, as amended.
OVERVIEW AND SIGNIFICANT EVENTS:
THE BUSINESS
Since the beginning of fiscal 1993, when the Company decided to focus
principally on its current core business of providing computer maintenance and
technology support services, DecisionOne has experienced significant growth,
primarily through acquisition of complementary businesses as well as through
growth in its existing business. The most significant of these business
acquisitions was that of Bell Atlantic Business Systems Services ("BABSS"),
which was acquired in October, 1995. Since the Company's initial public offering
(the "Offering") in April, 1996, the Company has continued its growth through
strategic acquisitions. The most significant of these was the acquisition of the
U.S. computer service business of Memorex Telex Corporation and certain of its
affiliates (collectively, "Memorex Telex") in November, 1996. These
acquisitions, which have been accounted for as purchase transactions, are
included in the accompanying unaudited Condensed Consolidated Financial
Statements from the dates of acquisition.
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PROPOSED RECAPITALIZATION
As described in Note 5 to the accompanying unaudited condensed consolidated
financial statements, on May 4, 1997, the Company and Quaker Holding Co.
("Quaker") an affiliate of DLJ Merchant Bankers II, 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 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 (the "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 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 Company has previously filed both the Merger Agreement and the Voting
Agreement in a Current Report on Form 8-K, filed on May 5, 1997 with the
Securities and Exchange Commission.
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 $924 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, the Company and Quaker will incur various
costs, currently estimated to range between $30 million and $50 million, on a
pretax basis, in connection with consummating the transaction. These costs
consist primarily of professional fees, registration 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.
RESULTS OF OPERATIONS:
Reported net income for the three and nine months ended March 31, 1997 was $9.5
million, or $.32 per share, and $19.9 million, or $.66 per share, respectively,
compared to $5.8 million, or $.25 per share and $10.9 million, or $.46 per share
for the same periods a year ago. Net income, excluding charges for employee
severance and unutilized lease/contract losses, was $22.4 million, or $.74 per
share, for the nine months ended March 31, 1997 compared to $15.1 million, or
$.64 per share, for the same period in fiscal 1996.
The following discussion of results of operations is presented for the Company
for the fiscal quarters ended March 31, 1997 and 1996, and for the nine month
periods then ended.
Revenues: Revenues for the three months ended March 31, 1997 increased by $32.4
million, or 18.8%, to $205.1 million as compared to revenues for the same period
a year earlier of
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$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 quarter ended March 31, 1996.
For the nine months ended March 31, 1997, revenues increased to $572.7 million,
as compared to revenues of $369.2 million for the same nine month period in the
prior fiscal year. This 55.1% increase was due primarily to the BABSS
acquisition, which occurred on October 20, 1995.
Gross Profit: Gross profit increased to $54.7 million from $42.7 million for the
third quarter of the prior fiscal year, an increase of $12.0 million, or 28.1%.
This increase is due principally to the Memorex Telex acquisition, which
occurred during the second quarter of fiscal 1997. For the nine month periods
ended March 31, 1997 and 1996, gross profit equaled $144.8 million and $96.5
million, respectively, with this 50.1% increase attributable primarily to the
BABSS acquisition, and to a lesser degree, to the Memorex Telex acquisition.
As a percentage of revenues, gross profit for the quarters ended March 31, 1997
and March 31, 1996 was 26.7% and 24.7%, respectively. For the nine month periods
ended March 31, 1997 and 1996, gross profit as a percentage of revenues was
25.3% and 26.1%, respectively. Efficiency and productivity gains made a positive
contribution to gross margin for the quarter ended March 31, 1997 compared to
the same period a year earlier. Increases in the Company's customer base, both
by internal sales and by acquisition, have assisted in leveraging resources in
the Company's infrastructure.
The decrease in gross margin percentage for the nine months ended March 31, 1997
versus the same period in the previous fiscal year is attributable to the change
in mix of the Company's services resulting from the BABSS acquisition, as
higher-margin revenue contracts for servicing proprietary systems (i.e. systems
that can only be serviced by a limited number of service providers), which
represented approximately 30% of total revenues prior to the BABSS acquisition,
currently account for a significantly smaller portion of total revenues. The
impact of this service mix-related decrease in gross profits versus the prior
year nine month period was largely offset by improved gross profits achieved
during the second and third quarters of fiscal 1997 on the Company's current
customer base.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses increased by $5.9 million, or 26.5%, to $28.2
million for the three months ended March 31, 1997 from $22.3 million for the
three months ended March 31, 1996. This increase is primarily attributable to
growth associated with the Memorex Telex acquisition, including increased sales
salaries and commissions, as well as increased travel and bad debt expenses.
For the nine months ended March 31, 1997 and 1996, respectively, SG&A expenses
totaled $82.9 million and $56.5 million, resulting in an increase of $26.4
million, or 46.7%. Included in SG&A expenses for each of these respective
periods were charges for estimated future employee severance costs and
unutilized lease/contract losses in connection with
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specific acquisitions. For the nine months ended March 31, 1997 and 1996, these
charges totaled $4.3 million and $7.0 million, resulting from the Memorex Telex
and BABSS acquisitions, respectively (see Note 4 to the accompanying unaudited
condensed consolidated financial statements for further information). Exclusive
of these charges, SG&A expenses for the nine months ended March 31, 1997
increased by $29.1 million, or 58.8%, to $78.6 million as compared to $49.5
million for the same period in the prior fiscal year. This increase was due
primarily to the acquisition of BABSS in October, 1995.
As a percentage of revenues, SG&A expenses increased slightly, to 13.8% for the
quarter ended March 31, 1997 as compared to 12.9% for the quarter ended March
31, 1996. Excluding the previously-noted special charges, SG&A expenses as a
percentage of revenue for the nine month periods ended March 31, 1997 and 1996
remained relatively flat, representing 13.7% and 13.4% of revenues for these
periods, respectively.
Amortization of Intangibles: Amortization of intangible assets increased by $1.5
million, or 30.6%, from $4.9 million for the three months ended March 31, 1996
to $6.4 million for the three months ended March 31, 1997. This increase is
attributable principally to the amortization of intangibles, primarily goodwill,
arising from additional acquisitions, principally Memorex Telex in November,
1996.
For the nine months ended March 31, 1997, amortization of intangible assets
increased to $16.9 million as compared to $10.6 million for the same nine-month
period a year earlier, reflecting a $6.3 million, or 59.4%, increase associated
principally with the amortization of intangibles resulting from the BABSS and
Memorex Telex acquisitions.
Interest Expense: Interest expense, net of interest income, for the three months
ended March 31, 1997 decreased by $2.1 million, or 36.2%, to $3.7 million as
compared to $5.8 million for the three months ended March 31, 1996. This
decrease was primarily attributable to the Company's reduced average borrowing
rate on long-term indebtedness, which equaled approximately 6.4% and 9.0%,
respectively, for the corresponding periods. The decrease in the average
borrowing rate resulted from the Company's conversion of its existing credit
facility to its current Revolving Credit Facility in April, 1996 (see "Liquidity
and Capital Resources" for further information). This interest rate-related
decrease, coupled with lower average outstanding borrowings in the quarter
ended March 31, 1997 compared to the same quarter of the prior year, resulted in
decreased overall interest expense.
Similarly, interest expense, net of interest income, for the nine months ended
March 31, 1997 decreased by $0.5 million, or 4.6%, to $10.7 million from $11.2
million for the nine months ended March 31, 1996. This decrease was also due
primarily to the factors noted above.
Provision for Income Taxes: The Company's income tax provisions for the three
and nine month periods ended March 31, 1997 reflect an estimated effective
income tax rate of approximately 42%, while the effective income tax rate for
the three and nine month periods ended March 31, 1996 was approximately 40%.
This increase in the Company's anticipated effective income tax rate is due
primarily to the prior-year impact of certain non-recurring foreign income tax
benefits relating to net operating loss carryforwards.
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As of June 30, 1996, the Company had tax net operating loss (NOL) 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
Offering resulted in an "ownership change" pursuant to Section 382 of the
Internal Revenue Code, which in turn results in the limitation on the usage of
these carryforwards and credits during any future period to approximately $20
million per annum. See Note 11 to the Company's Consolidated Financial
Statements for the year ended June 30, 1996, included in its Annual Report on
Form 10-K, as amended, dated September 30, 1996. The Company does not anticipate
that the consummation of the proposed merger transaction with Quaker, as
described above, will result in a material adverse impact on its ability to
utilize these carryforwards in future periods.
LIQUIDITY AND CAPITAL RESOURCES:
Financing: Historically, the Company's principal sources of capital have been
borrowings from banks (primarily to finance acquisitions), financing from
principal stockholders through debt and equity securities, and cash flow from
operations. In April, 1996, the Company significantly improved its liquidity and
capital structure through i.) the Offering, which raised approximately $106
million by the issuance of 6.3 million shares of common stock, and ii.) the
restructuring of the Company's revolving credit debt, each of which is more
fully discussed below.
The Company used the proceeds of the Offering to repay approximately $70 million
of its existing 1995 Term Loan as well as to repay the then-existing balance of
its subordinated notes of approximately $30 million. Further, in connection with
the Offering, the Company's mandatorily-redeemable Series A, B and C Preferred
Stock were automatically converted to common stock.
Subsequent to the Offering, the Company converted the remaining balance of its
1995 Term Loan and its then-existing $30 million revolving credit facility into
a new $225 million, unsecured variable rate revolving credit facility (the
"Facility"). During November, 1996, in connection with the acquisition of the
computer service business of Memorex Telex, the Company's lender approved a $75
million increase to the Facility, raising the total loan commitment to $300
million (see Note 3 to the accompanying unaudited Condensed Consolidated
Financial Statements).
The Facility enables the Company to borrow up to $300 million in the form of
revolving credit loans with a maturity date of April 26, 2001 for all principal
borrowed. The interest rate applicable to the Facility varies, at the Company's
option, based upon LIBOR (plus an applicable margin not to exceed 1%) or the
prime rate. As of March 31, 1997, the applicable interest rate was LIBOR plus
.75%, for an effective rate of approximately 6.5%, and available borrowings
under the Facility were $55.5 million.
12
<PAGE> 14
New borrowings under the Facility were approximately $2.6 million and $52.9
million for the three and nine month periods ended March 31, 1997, respectively.
New borrowings during the nine month period ended March 31, 1997 included
substantially all of the funding required with respect to the Memorex Telex
acquisition. As noted below, the Company's proposed merger with Quaker, if
consummated, would result in the refinancing of the Facility. The Company also
has attempted to minimize its interest exposure by entering into two interest
rate swap agreements with major financial institutions. Although it may be
exposed to losses in the event of nonperformance by counterparties, the Company
does not expect such losses, if any, to be material.
If consummated, the Company's proposed merger with Quaker, as described in Note
5 to the accompanying unaudited condensed consolidated financial statements,
would have a substantial impact on the Company's current capital structure. Upon
consummation of the merger, the recapitalized Company would be significantly
higher-leveraged in comparison to its current capital structure.
Cash Flow and Leverage: For the quarter ended March 31, 1997, the Company's cash
flow from operating activities equaled $36.7 million. Operating cash flow was
$57.7 million for the first nine months of fiscal 1997. These operating funds,
together with borrowings under the Facility, provided the required capital to
fund the Company's capital expenditures, totaling approximately $31.0 million
and $70.9 million for the three and nine month periods ended March 31, 1997,
respectively, as well as the acquisition of complementary businesses for
approximately $3.5 million and $34.4 million for the same respective periods.
Included in these acquisitions was that of Memorex Telex in November 1996, as
described below.
Reducing cash flow from operating activities for the three and nine months
ended March 31, 1997 was the Company's payment of approximately $1.8 million 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.
Consistent with prior operating periods, the majority of the Company's capital
expenditures consist of purchases of repairable spare parts needed to meet the
service requirements of customers under computer maintenance contracts. These
spare parts are generally purchased from original equipment manufacturers and
other third parties. As of March 31, 1997, the Company had no material
commitments for purchases of spare parts or for capital expenditures other than
those in the ordinary course of business.
13
<PAGE> 15
The most significant of the Company's business acquisitions during the nine
months ended March 31, 1997 was the Memorex Telex acquisition on November 15,
1996. The base purchase price was $52.5 million, comprised of the Company's
assumption of $26.0 million of liabilities under acquired customer maintenance
contracts, and $26.5 million in cash, before certain potential adjustments and
transaction costs, which was paid at closing.
As of March 31, 1997, the Company maintained working capital of approximately
$10.1 million and a current ratio (current assets to current liabilities) of
approximately 1.06 to 1. These calculations exclude the Company's investment in
repairable spare part inventories, which are classified as non-current assets in
the accompanying unaudited Condensed Consolidated Balance Sheet as of March 31,
1997. As of March 31, 1997, the Company's debt-to-equity ratio was approximately
1.2 to 1.
As previously noted (see "Liquidity and Capital Resources" above), the proposed
merger with Quaker would result in substantial changes to the Company's current
capitalization, including but not limited to its debt-to-equity ratio and its
related debt service requirements.
The Company expects that its ongoing working capital requirements, requirements
for the purchase of repairable spare parts and other capital expenditures, and
debit service requirements will be funded by its ongoing operations, together
with cash availability under the Facility. Expansion of the Company's business
through acquisitions, however, may require additional funds. While the Company
will seek such financing as may be required to fund any future acquisitions,
including but not limited to that which may become available pursuant to the
proposed merger with Quaker, there can be no assurance that such financing will
be available on reasonable terms.
14
<PAGE> 16
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
On April 30, 1997, the United States District
Court for the Southern District of New York
granted the joint motion of the U.S. Department
of Justice and IBM, approving the proposed
settlement of the IBM Consent Decree litigation.
A summary of the terms of the settlement, and the
possible effects on the Company's business, is set
forth at pages 8-9 of the Company's Annual Report
on Form 10-K for the fiscal year ended June 30,
1996, as amended, under "Risk Factors --
Competition; Competitive Advantage of OEMs".
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS:
<TABLE>
<CAPTION>
Number Description of Documents
------ ------------------------
<S> <C> <C>
10.1 Employment Letter with Thomas M.
Molchan
10.2 Employment Letter with Dwight T. Wilson
11 Computation of net income per share
27 Financial data schedule
</TABLE>
(b) REPORTS ON FORM 8-K:
None
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DecisionOne Holdings Corp.
/s/ Thomas J. Fitzpatrick
-----------------------------------------------
Thomas J. Fitzpatrick
Duly Authorized and Chief Financial Officer
DATE: May 15, 1997
<PAGE> 1
Exhibit 10.1
PERSONAL AND CONFIDENTIAL
May 1, 1997
Mr. Thomas M. Molchan
714 Larchwood Lane
Villanova, PA 19085
Dear Tom:
This is to confirm the severance agreement between you and DecisionOne
Corporation (the "Company").
If your employment by the Company is involuntarily terminated without
cause, other than by reason of death or disability, and you are not offered
employment in an executive capacity by another DecisionOne Holdings Corp.
company, the Company will pay to you, during the twelve (12) month period
commencing with the effective date on which your employment is so terminated
(the "Severance Period"), in lieu of all other severance payments from the
Company, an aggregate amount equal to your then current annual base salary,
payable in equal biweekly installments in accordance with the Company's normal
payroll practices, provided, however, that if you shall become employed by
another organization at any time during the Severance Period, then during the
remainder of the Severance Period, each such installment payment shall be
reduced to one-half the amount otherwise so payable, and the total shall be
reduced accordingly. In addition, during the Severance Period, you will be
entitled to continue to receive the standard medical, dental, and life
insurance coverage paid by the Company as in effect on the date of termination,
provided, however, that if you shall become employed by another organization
during the Severance Period as aforesaid, such benefits shall forthwith cease
and terminate at the time you become eligible for coverage under the medical
insurance plan of such organization, but in no case shall the Company's
obligation to provide standard medical, dental and life insurance coverage go
beyond the Severance Period.
For the purposes of this letter, "cause" shall mean a determination by
the Board of Directors or the Chief Executive Officer of DecisionOne that you
(i) failed to obey the reasonable and lawful orders of the Board of Directors,
(ii) acted with gross negligence in the performance of your duties,
(iii) willfully breached or habitually neglected your duties, or (iv) committed
a felony or any act involving dishonesty, fraud, or moral turpitude.
<PAGE> 2
Mr. Thomas M. Molchan
Page 2
May 1, 1997
You will continue to be an "at-will" employee of the Company and no
statements contained herein or otherwise made to you by any officer or employee
of the Company can change that status.
Please indicate your acceptance of the foregoing by signing the
attached copy of this letter and returning it to me.
Sincerely,
Accepted and agreed:
- --------------------------------- -----------------------------------
Thomas M. Molchan Date
<PAGE> 1
Exhibit 10.2
PERSONAL AND CONFIDENTIAL
May 1, 1997
Mr. Dwight T. Wilson
282 N. Phoenixville Pike
Malvern, PA 19355
Dear Dwight:
This is to confirm the severance agreement between you and DecisionOne
Corporation (the "Company").
If your employment by the Company is involuntarily terminated without
cause, other than by reason of death or disability, and you are not offered
employment in an executive capacity by another DecisionOne Holdings Corp.
company, the Company will pay to you, during the twelve (12) month period
commencing with the effective date on which your employment is so terminated
(the "Severance Period"), in lieu of all other severance payments from the
Company, an aggregate amount equal to your then current annual base salary,
payable in equal biweekly installments in accordance with the Company's normal
payroll practices, provided, however, that if you shall become employed by
another organization at any time during the Severance Period, then during the
remainder of the Severance Period, each such installment payment shall be
reduced to one-half the amount otherwise so payable, and the total shall be
reduced accordingly. In addition, during the Severance Period, you will be
entitled to continue to receive the standard medical, dental, and life
insurance coverage paid by the Company as in effect on the date of termination,
provided, however, that if you shall become employed by another organization
during the Severance Period as aforesaid, such benefits shall forthwith cease
and terminate at the time you become eligible for coverage under the medical
insurance plan of such organization, but in no case shall the Company's
obligation to provide standard medical, dental and life insurance coverage go
beyond the Severance Period.
For the purposes of this letter, "cause" shall mean a determination by
the Board of Directors or the Chief Executive Officer of DecisionOne that you
(i) failed to obey the reasonable and lawful orders of the Board of Directors,
(ii) acted with gross negligence in the performance of your duties, (iii)
willfully breached or habitually neglected your duties, or (iv) committed a
felony or any act involving dishonesty, fraud, or moral turpitude.
<PAGE> 2
Mr. Dwight T. Wilson
Page 2
May 1, 1997
You will continue to be an "at-will" employee of the Company and no
statements contained herein or otherwise made to you by any officer or employee
of the Company can change that status.
Please indicate your acceptance of the foregoing by signing the
attached copy of this letter and returning it to me.
Sincerely,
Accepted and agreed:
- -------------------------------------- -----------------------------------
Dwight T. Wilson Date
<PAGE> 1
Exhibit 11
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
(UNAUDITED) COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 9,507 $ 5,842 $19,916 $10,866
======= ======= ======= =======
Primary Income Per Share:
Weighted average number of common shares:
Shares outstanding, beginning of period 27,721 9,523 27,340 8,935
Average number of shares related to common
stock equivalents 2,274 1,925 2,465 2,019
Average number of shares issued for
employee stock options exercised 67 261 122
Average number of shares issued 127
Shares related to SAB 83 749 949
Shares from automatic conversion of
redeemable preferred stock related to
SAB 64 11,272 11,272
------- ------- ------- -------
Total weighted average common
and common equivalent shares outstanding 30,062 23,469 30,066 23,424
======= ======= ======= =======
Net income per common share $ 0.32 $ 0.25 $ 0.66 $ 0.46
======= ======= ======= =======
Fully Diluted Income Per Share:
Weighted average number of common shares:
Shares outstanding, beginning of period 27,721 9,523 27,340 8,935
Average number of shares related to common
stock equivalents 2,188 1,983 2,357 2,078
Average number of shares issued for
employee stock options exercised 67 261 122
Average number of shares issued 127
Shares related to SAB 83 749 949
Shares from automatic conversion of
redeemable preferred stock related to
SAB 64 11,272 11,272
------- ------- ------- -------
Total weighted average common
and common equivalent shares outstanding 29,966 23,527 29,958 23,483
======= ======= ======= =======
Net income per common share $ 0.32 $ 0.25 $ 0.66 $ 0.46
======= ======= ======= =======
</TABLE>
Note to Exhibit:
Fully diluted earnings per share calculation is presented in accordance with
Regulation S-K item 601 (b)(11), although not required by Paragraph 40 of
Accounting Principles Board Opinion No. 15 because it is either anti-dilutive,
or results in additional dilution of less than 3%, for the periods presented.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE HOLDINGS CORP. AND
SUBSIDIARIES AT AND FOR THE NINE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 12,886
<SECURITIES> 0
<RECEIVABLES> 148,128
<ALLOWANCES> 11,727
<INVENTORY> 35,186
<CURRENT-ASSETS> 192,110
<PP&E> 69,813
<DEPRECIATION> 36,530
<TOTAL-ASSETS> 641,677
<CURRENT-LIABILITIES> 182,059
<BONDS> 0
0
0
<COMMON> 278
<OTHER-SE> 200,817
<TOTAL-LIABILITY-AND-EQUITY> 641,677
<SALES> 572,749
<TOTAL-REVENUES> 572,749
<CGS> 427,969
<TOTAL-COSTS> 427,969
<OTHER-EXPENSES> 97,012
<LOSS-PROVISION> 2,727
<INTEREST-EXPENSE> 10,704
<INCOME-PRETAX> 34,337
<INCOME-TAX> 14,421
<INCOME-CONTINUING> 19,916
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,916
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
</TABLE>
