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, 1998
--------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period ended _____________________
DecisionOne Holdings Corp.
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(Exact name of registrant as specified in its charter)
Commission File Number 0-28090
-------
Delaware 13-3435409
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
DecisionOne Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Commission File Number 333-28411
---------
Delaware 23-2328680
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
50 East Swedesford Road, Frazer, Pennsylvania 19355
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (610) 296-6000
--------------
Indicate by check mark whether registrants (1) have 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 registrants were
required to file such reports), and (2) have been subject of such filing
requirements for the past 90 days. Yes X No
--- ---
As of March 31, 1998, 12,584,219 shares of DecisionOne Holdings Corp. common
stock were outstanding and one share of DecisionOne Corporation common stock was
outstanding.
DecisionOne Corporation meets the requirements set forth in General Instruction
H(1) of Form 10-Q and is therefore filing this form with the reduced disclosure
format.
<PAGE>
DecisionOne Holdings Corp. and Subsidiaries and
DecisionOne Corporation and Subsidiaries
FORM 10-Q May 15, 1998
Contents
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Page No.
--------
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements of
DecisionOne Holdings Corp. and Subsidiaries:
Condensed Consolidated Balance Sheets -
March 31, 1998 and June 30, 1997
(unaudited) 2
Condensed Consolidated Statements of
Operations - Three and Nine Months Ended
March 31, 1998 and 1997 (unaudited) 3
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended
March 31, 1998 and 1997 (unaudited) 4
Notes to Condensed Consolidated Financial
Statements (unaudited) 5
Condensed Consolidated Financial Statements
of DecisionOne Corporation and Subsidiaries:
Condensed Consolidated Balance Sheets -
March 31, 1998 and June 30, 1997
(unaudited) 9
Condensed Consolidated Statements of
Operations - Three and Nine Months Ended
March 31, 1998 and 1997 (unaudited) 10
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended
March 31, 1998 and 1997 (unaudited) 11
Notes to Condensed Consolidated
Financial Statements (unaudited) 12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations - Three and Nine Months Ended
March 31, 1998 and 1997 15
Part II. Other Information 27
<PAGE>
DecisionOne Holdings Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,090 $ 10,877
Accounts receivable, net of allowances of $11,116 and $14,869 137,980 127,462
Consumable parts, net of allowances of $13,240 and $15,976 29,162 29,052
Other 25,282 9,778
--------- ---------
Total current assets 201,514 177,169
Repairable Parts, Net of Accumulated Amortization of $166,757 and $156,468 212,012 205,366
Intangibles, Net of Accumulated Amortization of $62,225 and $42,632 183,324 191,366
Property, Plant and Equipment, Net of Accumulated Depreciation
of $47,567 and $36,305 30,081 34,227
Other 34,110 14,977
--------- ---------
Total Assets $ 661,041 $ 623,105
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt $ 11,694 $ 4,788
Accounts payable and accrued expenses 97,610 96,516
Deferred revenues 54,013 56,600
Other 10,165 11,513
--------- ---------
Total current liabilities 173,482 169,417
Revolving Credit Loan and Long-term Debt 738,603 232,721
Other Liabilities 5,505 6,079
Shareholders' Equity (Deficit):
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 12,584,219 and 27,817,832 shares 126 278
Additional paid-in capital (133,461) 258,331
Accumulated deficit (121,771) (42,432)
Other (1,443) (1,289)
--------- ---------
Total Shareholders' Equity (Deficit) (256,549) 214,888
--------- ---------
Total Liabilities and Shareholders' Equity (Deficit) $ 661,041 $ 623,105
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
DecisionOne Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 200,910 $ 205,070 $ 603,249 $ 572,749
Cost of Revenues 153,163 151,248 463,914 429,886
--------- --------- --------- ---------
Gross Profit 47,747 53,822 139,335 142,863
Operating Expenses:
Selling, general and administrative expenses 35,263 27,352 94,486 80,961
Merger expenses -- -- 69,046 --
Amortization of intangibles 6,861 6,390 20,007 16,861
--------- --------- --------- ---------
Total Operating Expenses 42,124 33,742 183,539 97,822
--------- --------- --------- ---------
Operating Income (Loss) 5,623 20,080 (44,204) 45,041
Interest Expense, Net of Interest Income 18,554 3,689 48,707 10,704
--------- --------- --------- ---------
Income (Loss) Before Income Taxes (12,931) 16,391 (92,911) 34,337
Provision (Benefit) for Income Taxes (1,937) 6,884 (13,572) 14,421
--------- --------- --------- ---------
Net Income (Loss) $ (10,994) $ 9,507 $ (79,339) $ 19,916
========= ========= ========= =========
Pro forma Information:
Pro forma Net Loss $ (10,994) $ (24,185)
Pro forma Net Loss Per Common Share $ (0.87) $ (1.93)
Pro forma Weighted Average Number of
Common Shares Outstanding 12,585 12,532
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
DecisionOne Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine months ended
March 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net income (loss) $(79,339) $ 19,916
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of repairable parts 59,955 45,642
Amortization of intangibles 20,007 16,861
Depreciation 11,785 9,836
Changes in assets and liabilities, net of effects of business acquisitions (26,484) (34,601)
-------- --------
Net cash provided by (used in) operating activities (14,076) 57,654
Investing Activities:
Business acquisitions (9,369) (34,433)
Capital expenditures, net of retirements (7,039) (6,093)
Repairable spare parts purchases, net (61,830) (64,803)
-------- --------
Net cash used in investing activities (78,238) (105,329)
Financing Activities:
Proceeds from issuance of common stock 228,622 434
Cash paid to redeem common stock (609,391) --
Cash paid to cancel common stock warrants (12,158) --
Issuance of common stock warrants 1,880 --
Net proceeds from borrowings 482,060 52,915
Net principal payments under capital leases (332) (961)
Other, net (154) (48)
-------- --------
Net cash provided by financing activities 90,527 52,340
-------- --------
Net change in cash and cash equivalents (1,787) 4,665
Cash and cash equivalents, beginning of period 10,877 8,221
-------- --------
Cash and cash equivalents, end of period $ 9,090 $ 12,886
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(For the three and nine month periods ended March 31, 1998 and 1997)
(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, 1997 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 results of operations for the three and nine month periods ended March 31,
1998 and 1997 are not necessarily indicative of operating results to be expected
for the full fiscal year. The financial statements should be read in conjunction
with the audited 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, 1997, as amended.
Certain reclassifications have been made in order to conform with the March 31,
1998 presentation.
Note 2: Recent Accounting Pronouncement
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), effective for
financial statements issued for periods ended after December 15, 1997. SFAS 128,
which supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share,
generally requires a dual presentation of basic and diluted net income (loss)
per share as well as disclosures including a reconciliation of the computation
of basic net income (loss) per share to diluted net income (loss) per share.
Basic net income (loss) per share excludes the dilutive impact of common stock
equivalents and is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding for the period. Diluted net
income per share includes the effect of potential dilution from the exercise of
outstanding common stock equivalents into common stock, using the treasury stock
method at the average market price of the Company's common stock for the period.
Pro forma basic loss per share of $0.87 and $1.93 is presented in the
accompanying Condensed Consolidated Statements of Operations for the three and
nine month periods ended March 31, 1998, respectively. In accordance with SFAS
128, pro forma diluted loss per share for these periods is not presented, as
these amounts would be anti-dilutive.
The pro forma per share information has been prepared to reflect the Company's
recapitalization and merger with Quaker Holding Co. ("Quaker") and related
transactions as if these had
5
<PAGE>
occurred on July 1, 1997 (see Note 3). Historical per share information is not
presented as this would not be meaningful.
Note 3: Merger, Recapitalization and Pro Forma Information
On August 7, 1997, the Company consummated a merger with Quaker Holding Co.
("Quaker"), an affiliate of DLJ Merchant Banking Partners II, L.P. The merger,
which was recorded as a recapitalization for accounting purposes as of the
consummation date, occurred pursuant to an Agreement and Plan of Merger between
the Company and Quaker dated May 4, 1997, as amended (the "Merger Agreement").
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and the holders of approximately 94.7% of shares of Company
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Company common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Company common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's revolving
credit facility.
In connection with the merger, the Company raised $85 million through the public
issuance of discount debentures, in addition to publicly issued subordinated
notes for approximately $150 million. The Company also entered into a new
syndicated credit facility (the "New Credit Facility") providing for term loans
of $470 million and revolving loans of up to $105 million. The proceeds of the
discount notes, subordinated notes, the initial borrowings under the new credit
facility and the purchase of approximately $225 million of Company common stock
by Quaker were used to finance the payments of cash to cash-electing
shareholders, to pay the holders of stock options and stock warrants canceled or
converted, as applicable, in connection with the merger, to repay the Company's
existing revolving credit facility and to pay expenses incurred in connection
with the merger.
As a result of the merger, the Company incurred various expenses, totaling
approximately $69.0 million on a pre-tax basis, in connection with consummating
the merger. These costs consisted primarily of compensation costs, professional
and advisory fees and other expenses. In addition to these expenses, the Company
also incurred approximately $22.3 million of capitalized debt issuance costs
associated with the merger financing. These costs are amortized to interest
expense over the terms of the related debt instruments.
The following summarized unaudited pro forma information as of June 30, 1997 and
for the nine month period ended March 31, 1998, assumes that the merger had
occurred on July 1, 1997. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the financial
condition or of the results of operations which actually would have resulted had
the merger occurred as of July 1, 1997 or which may result in the future.
6
<PAGE>
(In Thousands)
June 30, 1997
--------------
Pro Forma Balance Sheet Information:
Total Assets ................................................... $ 652,085
Long Term Indebtedness (including current portion) 724,500
Other Liabilities .............................................. 170,708
Shareholders' (Deficit)......................................... (243,123)
(In Thousands Except
Per Share Amounts)
Nine Months Ended
March 31, 1998
--------------------
Pro Forma Income Statement Information:
Revenues........................................................ $603,249
Operating Income................................................ 24,842
Loss from Continuing Operations before Income Tax Benefit....... (28,975)
Net Loss........................................................ (24,185)
Loss per Common Share........................................... $ (1.93)
Weighted Average Shares of Common Stock Outstanding............. 12,532
The pro forma net loss for the nine month period ended March 31, 1998 reflects
(1) a net increase in interest expense of approximately $5.1 million
attributable to additional financing incurred in connection with the merger, net
of the repayment of the Company's existing revolving credit facility; (2) the
elimination of the non-recurring merger expenses of approximately $69.0 million
and (3) the elimination of the net tax benefit related to these adjustments of
approximately $8.8 million, including the effect of valuation allowances against
certain deferred tax assets (see Note 5).
Pro forma weighted average common shares outstanding includes 12,499,979 common
stock shares outstanding immediately subsequent to the merger on August 7, 1997,
in addition to shares subsequently issued and outstanding.
Note 4: Debt Covenants
The New Credit Facility contains various terms and covenants which, among other
things, place certain restrictions on the Company's ability to pay dividends and
incur additional indebtedness, and which require the Company to meet certain
minimum financial performance measurements. During the three months ended March
31, 1998, the Company sought and obtained amendments to the New Credit Facility.
The revised interest rate applicable to the New Credit Facility varies, at the
Company's option, based upon LIBOR (plus applicable margins not to exceed 3.0%)
or Prime Rate (plus applicable margin not to exceed 1.75%). The Company incurred
fees of approximately $1.4 million in connection with the amendments. These
costs will be amortized to interest expense over the remaining term of the
related debt instruments. The Company is in compliance with its covenants under
the amended New Credit Facility as of March 31, 1998.
7
<PAGE>
Note 5: Income Taxes
The Company expects that the merger will result in significant additional tax
loss carryforwards and carrybacks arising in fiscal 1998, due largely to $69.0
million of non-recurring expenses incurred in consummating the merger (see Note
3). Net anticipated tax benefits and corresponding net deferred tax assets of
approximately $13.6 million, primarily attributable to the merger, have been
fully reflected in the nine month period ended March 31, 1998. The anticipated
net deferred tax assets have been reduced significantly, due primarily to
management's projections of additional tax losses and the length of the period
during which the anticipated tax benefits are expected to be realized.
The Company expects that its tax provision (benefit) in future periods will
reflect effective tax rates which vary significantly from enacted statutory tax
rates and from the Company's effective tax rate of 41.4% for fiscal 1997,
principally as a result of additional unrecognized tax benefits on newly-arising
net deferred tax assets. Future effective tax rates may also be subject to
volatility as a result of valuation allowance changes which arise from
differences between management's projections of future taxable income,
newly-arising net deferred tax assets and reversals of net deferred tax assets
and corresponding actual results.
8
<PAGE>
DecisionOne Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,896 $ 10,877
Accounts receivable, net of allowances of $11,116 and $14,869 137,980 127,462
Consumable parts, net of allowances of $13,240 and $15,976 29,162 29,052
Other 24,541 9,778
--------- ---------
Total current assets 199,579 177,169
Repairable Parts, Net of Accumulated Amortization of $166,757 and $156,468 212,012 205,366
Intangibles, Net of Accumulated Amortization of $62,225 and $42,632 183,324 191,366
Property, Plant and Equipment, Net of Accumulated Depreciation
of $47,567 and $36,305 30,081 34,227
Loan receivable from parent company 59,100 --
Other 41,849 14,977
--------- ---------
Total Assets $ 725,945 $ 623,105
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt $ 11,694 $ 4,788
Accounts payable and accrued expenses 97,110 96,516
Deferred revenues 54,013 56,600
Other 14,114 11,513
--------- ---------
Total current liabilities 176,931 169,417
Revolving Credit Loan and Long-term Debt 646,776 232,721
Other Liabilities 5,565 6,079
Shareholder's Equity (Deficit):
Common stock, no par value; one share authorized, issued
and outstanding -- --
Additional paid-in capital 12,323 258,609
Accumulated deficit (114,207) (42,432)
Other (1,443) (1,289)
--------- ---------
Total Shareholder's Equity (Deficit) (103,327) 214,888
--------- ---------
Total Liabilities and Shareholder's Equity (Deficit) $ 725,945 $ 623,105
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
9
<PAGE>
DecisionOne Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 200,910 $ 205,070 $ 603,249 $ 572,749
Cost of Revenues 153,163 151,248 463,914 429,886
--------- --------- --------- ---------
Gross Profit 47,747 53,822 139,335 142,863
Operating Expenses:
Selling, general and administrative expenses 35,263 27,352 94,486 80,961
Merger expenses -- -- 69,046 --
Amortization of intangibles 6,861 6,390 20,007 16,861
--------- --------- --------- ---------
Total Operating Expenses 42,124 33,742 183,539 97,822
--------- --------- --------- ---------
Operating Income (Loss) 5,623 20,080 (44,204) 45,041
Interest Expense, Net of Interest Income 14,021 3,689 37,825 10,704
--------- --------- --------- ---------
Income (Loss) Before Income Taxes (8,398) 16,391 (82,029) 34,337
Provision (Benefit) for Income Taxes (365) 6,884 (10,254) 14,421
--------- --------- --------- ---------
Net Income (Loss) $ (8,033) $ 9,507 $ (71,775) $ 19,916
========= ========= ========= =========
Pro forma Information:
Pro forma Net Loss $ (8,033) $ (15,773)
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
10
<PAGE>
DecisionOne Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine months ended
March 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net income (loss) $(71,775) $ 19,916
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of repairable parts 59,955 45,642
Amortization of intangibles 20,007 16,861
Depreciation 11,785 9,836
Changes in assets and liabilities, net of effects of business acquisitions (43,815) (34,601)
-------- --------
Net cash provided by (used in) operating activities (23,843) 57,654
Investing Activities:
Business acquisitions (9,369) (34,433)
Capital expenditures, net of retirements (7,039) (6,093)
Repairable spare parts purchases, net (61,830) (64,803)
-------- --------
Net cash used in investing activities (78,238) (105,329)
Financing Activities:
Capital contributions 349 434
Payment of dividend to parent company (244,000) --
Loan made to parent company (59,100) --
Net proceeds from borrowings 402,337 52,915
Net payments under capital lease obligations (332) (961)
Other, net (154) (48)
-------- --------
Net cash provided by financing activities 99,100 52,340
-------- --------
Net change in cash and cash equivalents (2,981) 4,665
Cash and cash equivalents, beginning of period 10,877 8,221
-------- --------
Cash and cash equivalents, end of period $ 7,896 $ 12,886
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
11
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(For the three and nine month periods ended March 31, 1998 and 1997)
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings
Corp.; "Holdings") 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, 1997 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 results of operations for the three and nine month periods ended March 31,
1998 and 1997 are not necessarily indicative of the operating results to be
expected for the full fiscal year. The financial statements should be read in
conjunction with the audited 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, 1997, as amended.
Certain reclassifications have been made in order to conform with the March 31,
1998 presentation.
Note 2: Merger, Recapitalization and Pro Forma Information
On August 7, 1997, the Company and Holdings consummated a merger with Quaker
Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II, L.P.
The merger, which was recorded as a recapitalization for accounting purposes as
of the consummation date, occurred pursuant to an Agreement and Plan of Merger
between the Company, Holdings and Quaker dated May 4, 1997, as amended (the
"Merger Agreement").
In accordance with the terms of the Merger Agreement, which was formally
approved by Holdings' shareholders on August 7, 1997, Quaker merged with and
into Holdings, and the holders of approximately 94.7% of shares of Holdings'
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Holdings' common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Holdings' common stock. The aggregate value of the merger
transaction was approximately $940 million, including refinancing of the
Company's revolving credit facility.
In connection with the merger, Holdings raised $85 million through the public
issuance of
12
<PAGE>
discount debentures, in addition to subordinated notes for approximately $150
million issued publicly by the Company. The Company also entered into a new
syndicated credit facility (the "New Credit Facility") providing for term loans
of $470 million and revolving loans of up to $105 million. The proceeds of the
discount notes, subordinated notes, the initial borrowings under the new credit
facility along with a loan of approximately $59.1 million from the Company to
Holdings and the purchase of approximately $225 million of Company common stock
by Quaker were used to finance the payments of cash to cash-electing
shareholders, to pay the holders of stock options and stock warrants canceled or
converted, as applicable, in connection with the merger, to repay the Company's
existing revolving credit facility and to pay expenses incurred in connection
with the merger.
As a result of the merger, the Company and Holdings incurred various expenses,
totaling $69.0 million on a pre-tax basis, in connection with consummating the
merger. These costs consisted primarily of compensation costs, professional and
advisory fees and other expenses. In addition to these expenses, the Company and
Holdings also incurred approximately $22.3 million of capitalized debt issuance
costs (of which approximately $18.9 million were incurred by the Company)
associated with the merger financing. These costs are amortized to interest
expense over the terms of the related debt instruments.
The following summarized unaudited pro forma information as of June 30, 1997 and
for the nine month period ended March 31, 1998 assumes that the merger had
occurred on July 1, 1997. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the financial
condition or of the results of operations which actually would have resulted had
the merger occurred as of July 1, 1997 or which may result in the future.
(In Thousands)
June 30, 1997
--------------
Pro Forma Balance Sheet Information:
Total Assets.................................................... $ 707,785
Long Term Indebtedness (including current portion).............. 641,376
Other Liabilities............................................... 170,708
Shareholder's (Deficit)......................................... (104,299)
(In Thousands)
Nine Months Ended
March 31, 1998
-----------------
Pro Forma Income Statement Information:
Revenues........................................................ $603,249
Operating Income................................................ 24,842
Loss from Continuing Operations before Income Tax Benefit....... (16,574)
Net Loss........................................................ (15,773)
The pro forma net loss for the nine month period ended March 31, 1998 reflects
(1) a net increase in interest expense of approximately $3.6 million
attributable to additional financing
13
<PAGE>
incurred in connection with the merger, net of the repayment of the Company's
existing revolving credit facility, (2) the elimination of the non-recurring
merger expenses of approximately $69 million and (3) the elimination of the net
tax benefit related to these adjustments of approximately $9.5 million,
including the effect of valuation allowances against certain deferred tax assets
(see Note 4).
Note 3: Debt Covenants
The New Credit Facility contains various terms and covenants which, among other
things, place certain restrictions on the Company's ability to pay dividends and
incur additional indebtedness, and which require the Company to meet certain
minimum financial performance measurements. During the three months ended March
31, 1998, the Company sought and obtained amendments to the New Credit Facility.
The revised interest rate applicable to the New Credit Facility varies, at the
Company's option, based upon LIBOR (plus applicable margin not to exceed 3.0%)
or Prime Rate (plus applicable margin not to exceed 1.75%). The Company incurred
fees of approximately $1.4 million in connection with the amendments. These
costs will be amortized to interest expense over the remaining term of the
related debt instruments. The Company is in compliance with its covenants under
the amended New Credit Facility as of March 31, 1998.
Note 4: Income Taxes
The Company expects that the merger will result in significant additional tax
loss carryforwards and carrybacks arising in fiscal 1998, due largely to $69.0
million of non-recurring expenses incurred in consummating the merger (see Note
2). Net anticipated tax benefits and corresponding net deferred tax assets of
approximately $10.3 million, primarily attributable to the merger, have been
fully reflected in the nine month period ended March 31, 1998. The anticipated
net deferred tax assets have been reduced significantly, due primarily to
management's projections of additional tax losses and the length of the period
during which the anticipated tax benefits are expected to be realized.
The Company expects that its tax provision (benefit) in future periods will
reflect effective tax rates which vary significantly from enacted statutory tax
rates and from the Company's effective tax rate of 41.4% for fiscal 1997,
principally as a result of additional unrecognized tax benefits on newly-arising
net deferred tax assets. Future effective tax rates may also be subject to
volatility as a result of valuation allowance changes which arise from
differences between management's projections of future taxable income,
newly-arising net deferred tax assets and reversals of net deferred tax assets
and corresponding actual results.
14
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three and Nine Months Ended March 31, 1998 and 1997
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements of DecisionOne Holdings Corp. and
Subsidiaries, the audited Consolidated Financial Statements of DecisionOne
Corporation and Subsidiaries, and the respective Notes thereto, filed with these
registrants' Annual Report on Form 10-K for the year ended June 30, 1997, as
amended. Item 2 is presented with respect to both registrants noted above. (As
used within this Item 2, the term "Company" refers to DecisionOne Holdings Corp.
and its wholly-owned subsidiaries, including DecisionOne Corporation, and the
term "Holdings" refers to DecisionOne Holdings Corp.)
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 in "Risk Factors" in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997, as amended. 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", "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, readers 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.
15
<PAGE>
Business Overview
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 has established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of over 40
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, and Bell Atlantic Business Systems
Services, Inc. ("BABSS") which was acquired in October 1995 for cash
consideration of approximately $250.0 million. In addition, certain assets of
the U.S. computer service business of Memorex Telex Corporation and certain of
its affiliates (collectively, "Memorex Telex") 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 original equipment manufacturers. 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.
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 89% of the Company's revenues are derived from
contracts covering a broad spectrum of computer services. Maintenance 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 additional 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.
16
<PAGE>
The Company provides computer maintenance and technology support services
across a wide range of computing environments, including larger mainframe-based
platforms, midrange systems and client/server platforms. Reflecting a general
industry trend toward more flexible, less-centralized computing environments,
the Company's customer service base includes an increasing number of
decentralized structures and non-mainframe data centers. The Company continually
evaluates its service offerings, labor and parts requirements in response to
these industry trends.
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
in-house. The Company must more than offset this 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 typically
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), consumable parts cost recognition, amortization and
repair costs for 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 consumable and
repairable parts in the same proportion as increases in acquired revenues.
Merger and Recapitalization
On August 7, 1997, the Company consummated a merger with Quaker Holding Co.
("Quaker"), an affiliate of DLJ Merchant Banking Partners II, L.P. (the
"Merger"). The Merger, which has been recorded as a recapitalization as of the
consummation date for accounting purposes, occurred pursuant to an Agreement and
Plan of Merger between the Company and Quaker dated May 4, 1997, as amended (the
"Merger Agreement"). The respective unaudited Condensed Consolidated Financial
Statements of DecisionOne Holdings Corp. and DecisionOne Corporation and their
respective subsidiaries as of and for the nine months ended March 31, 1998,
included herein, reflect transactions related to the consummation of the Merger.
In accordance with the terms of the Merger Agreement, which was approved by
the Company's shareholders on August 7, 1997, Quaker merged with and into
Holdings, and the holders of approximately 94.7% of shares of Holdings' common
stock outstanding immediately
17
<PAGE>
prior to the Merger received $23 in cash in exchange for these shares. Holders
of approximately 5.3% of shares of Holdings' common stock outstanding
immediately prior to the Merger retained such shares in the merged Company, as
determined based upon shareholder elections and stock proration factors
specified in the Merger Agreement. The aggregate value of the Merger transaction
was approximately $940 million, including refinancing of DecisionOne
Corporation's revolving credit facility.
The Company incurred various expenses, aggregating $69.0 million on a
pretax basis, in connection with consummating the Merger transaction. These
costs consisted primarily of compensation costs, professional and advisory fees
and other expenses. This one-time charge is reflected in the accompanying
unaudited consolidated statements of operations of the Company and of
DecisionOne Corporation for the nine months ended March 31, 1998. In addition to
these expenses, the Company also incurred $22.3 million of capitalized debt
issuance costs associated with financing incurred in connection with the Merger
(the "Merger Financing"). These costs are amortized to interest expense over the
terms of the related debt instruments (see "Liquidity and Capital Resources").
Results of Operations
The following discussion of consolidated results of operations is presented
with respect to the Company and with respect to DecisionOne Corporation for the
three and nine month periods ended March 31, 1998 and 1997. These results of
operations include the acquisition of Memorex Telex from November 15, 1996.
The following tables set forth, for the three and nine month periods ended
March 31, 1998 and 1997, respectively, certain consolidated operating data of
the Company and of DecisionOne Corporation:
<TABLE>
<CAPTION>
DecisionOne Holdings Corp. DecisionOne Corporation
Three Months Ended Three Months Ended
March 31, March 31,
--------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $200,910 $205,070 $200,910 $205,070
Gross Profit 47,747 53,822 47,747 53,822
Operating Income 5,623 20,080 5,623 20,080
Net Income (loss) $(10,994) $ 9,507 $ (8,033) $ 9,507
======== ======== ======== ========
Other Data:
EBITDA (1) $ 40,333 $ 46,420 $ 40,333 $ 46,420
Less: Amortization of repairable parts (21,167) (16,358) (21,167) (16,358)
-------- -------- -------- --------
Adjusted EBITDA (1) 19,166 30,062 19,166 30,062
Net cash provided by operating activities 17,579 36,667 17,568 36,667
Net cash used in investing activities (25,174) (34,569) (25,174) (34,569)
Net cash provided by financing activities 8,090 2,479 8,090 2,479
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
DecisionOne Holdings Corp. DecisionOne Corporation
Nine Months Ended Nine Months Ended
March 31, March 31,
--------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 603,249 $572,749 $ 603,249 $ 572,749
Gross Profit 139,335 142,863 139,335 142,863
Operating Income excluding Merger
Expenses 24,842 45,041 24,842 45,041
Operating Income (loss) (44,204) 45,041 (44,204) 45,041
Net Income (loss) $ (79,339) $ 19,916 $ (71,775) $ 19,916
========= ======== ========= =========
Other Data:
EBITDA (1) $ 121,469 $121,679 $ 121,469 $ 121,679
Less: Amortization of repairable parts (59,955) (45,642) (59,955) (45,642)
--------- -------- --------- ---------
Adjusted EBITDA (1) 61,514 76,037 61,514 76,037
Net cash provided by (used in) operating
activities (14,076) 57,654 (23,843) 57,654
Net cash used in investing activities (78,238) (105,329) (78,238) (105,329)
Net cash provided by financing activities 90,527 52,340 99,100 52,340
</TABLE>
- ----------
(1) "EBITDA" represents income (loss) from continuing operations before
interest expense, interest income, income taxes, depreciation, amortization
of intangibles, amortization of repairable parts, amortization of discounts
and capitalized expenditures related to indebtedness, non-recurring charges
for employee severance costs and unutilized leases (approximately $4.3
million for the nine month period ended March 31, 1997), Merger expenses
and certain consulting charges related to the Company's ongoing service
delivery re-engineering program (approximately $2.7 million and $4.9
million for the three and nine month periods ended March 31, 1998,
respectively.) "Adjusted EBITDA" represents EBITDA reduced by the
amortization of repairable parts. Adjusted EBITDA is presented because it
is relevant to certain covenants contained in debt agreements entered into
by the Company in connection with the Merger, and because the Company
believes that Adjusted EBITDA is a more consistent indicator than EBITDA of
the Company's ability to meet its debt service, capital expenditure and
working capital requirements.
Overview
The Company reported gross profit of $47.7 million and $53.8 million for
the three months ended March 31, 1998 and 1997, respectively. Income (loss) from
continuing operations before income taxes was ($12.9) million and $16.4 million
for the three months ended March 31, 1998 and 1997, respectively. Adjusted
EBITDA was $19.2 million and $30.1 million for the three months ended March 31,
1998 and 1997, respectively.
Gross profit for the nine month periods ended March 31, 1998 and 1997 was $139.3
million and $142.9 million, respectively. Excluding pre-tax charges of
approximately $4.3 million for employee severance and unutilized lease costs in
the nine months ended March 31, 1997, and excluding approximately $69.0 million
of non-recurring Merger expenses and approximately $4.9 million of certain
consulting charges related to an ongoing service delivery re-engineering program
in the nine months ended March 31, 1998, income (loss) from continuing
operations before income taxes was ($19.0) million and $38.6 million for the
nine months ended March 31, 1998 and 1997, respectively. Adjusted EBITDA was
$61.5 million and $76.0 million for the nine months ended March 31, 1998 and
1997, respectively.
19
<PAGE>
Three and Nine Month Periods Ended March 31, 1998 Compared to Three and Nine
Month Periods Ended March 31, 1997
Revenues: Revenues decreased by $4.2 million, or 2.0%, to $200.9 million
for the three months ended March 31, 1998 from $205.1 million for the three
months ended March 31, 1997. Revenues increased by $30.5 million, or 5.3%, to
$603.2 million for the nine months ended March 31, 1998 from $572.7 million for
the nine months ended March 31, 1997. The increase in revenues for the nine
month period ended March 31, 1998 is primarily attributable to the inclusion of
revenues for service contracts acquired from Memorex Telex on November 15, 1996
for an additional 4.5 months. Excluding these Memorex Telex-related increases,
revenues declined for the nine-month period ended March 31, 1998. Revenue
reductions from comparable periods resulted primarily from lower contract-based
revenues due to lower sales of new contracts. While the Company has taken
actions which it expects will improve sales growth from current levels, revenues
may continue to be lower relative to comparable fiscal 1997 periods.
Gross Profit: Gross profit decreased by $6.1 million, or 11.3%, from $53.8
million for the three months ended March 31, 1997 to $47.7 million for the three
months ended March 31, 1998. This decrease is principally attributable to the
aforementioned decline in revenues during the quarter ended March 31, 1998,
without a proportionate reduction in related cost of revenues during this
period. Amortization of repairable parts increased $4.8 million from $16.4
million for the three months ended March 31, 1997 to $21.2 million for the three
months ended March 31, 1998, due to higher average levels of repairable parts on
hand in fiscal 1998 in comparison to the comparable period in fiscal 1997. The
increase in amortization of repairable parts was partially offset by a $2.4
million decrease in employment costs from $76.4 million for the three months
ended March 31, 1997 to $74.0 million for the three months ended March 31, 1998.
Gross profit decreased to $139.3 million for the nine months ended March
31, 1998 from $142.9 million for the nine months ended March 31, 1997, a
decrease of $3.6 million, or 2.5%. Gross profits declined for the nine month
period ended March 31, 1998 compared to the nine month period ended March 31,
1997 as a result of the aforementioned revenue declines without a proportionate
decrease in costs. Additionally, amortization of repairable parts increased by
$14.4 million from $45.6 million for the nine months ended March 31, 1997 to
$60.0 million for the nine months ended March 31, 1998, due to higher average
levels of repairable parts on hand in fiscal 1998 in comparison to the
comparable period in fiscal 1997. These reductions were substantially offset by
an increase attributable to the inclusion of gross profit from Memorex Telex
service contracts for an additional 4.5 months in the nine months ended March
31, 1998.
As a percentage of revenues, gross profit decreased from 26.2% for three
months ended March 31, 1997 to 23.8% for the three months ended March 31, 1998.
Gross profit as a percentage of revenues similarly declined from 24.9% for the
nine months ended March 31, 1997 to 23.1% for the nine months ended March 31,
1998. These decreases are attributable to the factors previously noted for the
three and nine-month periods ended March 31, 1998. The Company has begun
implementing initiatives to improve the service delivery process, reduce
20
<PAGE>
associated costs and improve gross profit margins. The timing and impact of
gross profit improvements are difficult to predict and gross profit margins are
expected to be lower relative to comparable fiscal 1997 periods.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses increased by $7.9 million, or 28.8%, to $35.3
million for the three months ended March 31, 1998 from $27.4 million for the
three months ended March 31, 1997. Included in SG&A expenses for the quarter
ended March 31, 1998 were incremental consulting fees incurred in connection
with the Company's re-engineering efforts of approximately $2.7 million (see
"Liquidity and Capital Resources" for additional information with respect to
these expenditures). Excluding these costs, SG&A expenses increased by $5.2
million, or 19.0%. A significant portion of this increase is attributable to the
development of new information systems for the Company's central dispatch and
service contract administration processes and increases in sales employment
costs, in the three month period ended March 31, 1998.
SG&A expenses increased by $13.5 million, or 16.7%, to $94.5 million for
the nine months ended March 31, 1998 from $81.0 million for the nine months
ended March 31, 1997. Included in SG&A expenses for the nine months ended March
31, 1997 were non-recurring employee severance and unutilized lease costs of
approximately $4.3 million. Included in SG&A expenses for the nine months ended
March 31, 1998 were incremental consulting fees incurred in connection with the
Company's re-engineering efforts of approximately $4.9 million. Excluding these
costs, SG&A expenses increased by $12.9 million, or 16.8%. This increase is
primarily attributable to the nine month effect of the acquisition of Memorex
Telex service contracts, the development of new information systems for the
Company's central dispatch and service contract administration processes and
increases in sales employment costs, in the nine month period ended March 31,
1998.
Merger Expenses: In connection with the Merger, which was consummated on
August 7, 1997, the Company incurred a one-time pre-tax charge of $69.0 million,
comprised of expenses directly related to the Merger transaction. See "Merger
and Recapitalization" for additional information with respect to these Merger
expenses.
Amortization of Intangibles: Amortization of intangible assets increased by
$0.5 million, or 7.8%, from $6.4 million for the three months ended March 31,
1997 to $6.9 million for the three months ended March 31, 1998. Amortization of
intangible assets increased by $3.1 million, or 18.3%, from $16.9 million for
the nine month period ended March 31, 1997 to $20.0 million for the nine month
period ended March 31, 1998. These increases were attributable principally to
the amortization of intangibles resulting from the acquisition of the service
contracts of several complementary businesses. The Memorex Telex acquisition in
November, 1996 accounts for the majority of the increase in the comparable nine
month periods.
Interest Expense: The Company's interest expense, net of interest income,
increased to $18.6 million for the three months ended March 31, 1998 from $3.7
million for the three months ended March 31, 1997, an increase of $14.9 million,
or 402.7%. Net interest expense increased by $38.0 million, or 355.1%, from
$10.7 million for the nine months ended March 31, 1997 to $48.7 million for the
nine months ended March 31, 1998. As more fully described in Note 3 to
21
<PAGE>
the Company's unaudited Condensed Consolidated Financial Statements for the nine
months ended March 31, 1998, this increase is due to the Company's significantly
increased average borrowings as a result of the Merger, which was consummated on
August 7, 1997. These increased average borrowings of approximately $746.1
million and $638.2 million for the three and nine month periods ended March 31,
1998, respectively, as compared to approximately $243.5 million and $220.7 for
the three and nine month periods ended March 31, 1997, respectively, coupled
with higher average debt interest rates (9.6% and 6.4% for the respective nine
month periods;10.0% and 6.4% for the respective three month periods), resulted
in the significant increase in net interest expense during the three and nine
months ended March 31, 1998.
Consolidated interest expense, net of interest income, for DecisionOne
Corporation increased to $14.0 million for the three months ended March 31, 1998
from $3.7 million for the three months ended March 31, 1997, an increase of
278.4%. Consolidated interest expense, net of interest income, for DecisionOne
Corporation increased to $37.8 million for the nine months ended March 31, 1998
from $10.7 million for the nine months ended March 31, 1997, an increase of
253.3%. This increase was attributable to significantly increased average
borrowings and to higher interest rates as a result of the Merger. Average
borrowings for DecisionOne Corporation, on a consolidated basis, were $654.0
million and $566.3 million for the three and nine month periods ended March 31,
1998, respectively, as compared to $243.5 million and $220.7 million for the
three and nine month periods ended March 31, 1997.
The increases in consolidated net interest expense for DecisionOne
Corporation during the three and nine month periods ended March 31, 1998 were
lower than the aforementioned increases for the Company, primarily due to
interest incurred with respect to approximately $85.0 million of 11-1/2% Senior
Discount Debentures issued by Holdings in connection with the Merger (see
"Liquidity and Capital Resources").
Income Taxes: The Company expects that the Merger will result in
significant additional tax loss carryforwards and carrybacks arising in fiscal
1998, due principally to $69.0 million of non-recurring expenses incurred in
consummating the merger. Net anticipated tax benefits and corresponding net
deferred tax assets of approximately $13.6 million ($10.3 million for
DecisionOne Corporation, on a consolidated basis), primarily attributable to the
merger, have been fully reflected in the nine month period ended March 31, 1998.
The anticipated net deferred tax assets have been reduced significantly, for
financial reporting purposes, due primarily to management's projections of
future taxable income and the length of the period during which the anticipated
tax benefits are expected to be realized.
The Company expects that its tax provision (benefit) in future periods will
reflect effective tax rates which vary significantly from enacted statutory tax
rates and from the Company's effective tax rate of 41.4% for fiscal 1997,
principally as a result of additional unrecognized tax benefits on newly-arising
net deferred tax assets. Future effective tax rates may also be subject to
volatility as a result of valuation allowance changes which arise from
differences between management's projections of future taxable income,
newly-arising net deferred tax assets and reversals of net deferred tax assets
and corresponding actual results.
22
<PAGE>
As of June 30, 1997, the Company had tax loss carryforwards of
approximately $12.9 million and $8.7 million for Federal and state income tax
purposes, respectively, which are scheduled to expire between 1998 and 2008. The
Company also had alternative minimum tax credit carryforwards of approximately
$1.5 million as of June 30, 1997, with no applicable expiration period. These
loss and credit carryforwards may be utilized, as applicable, to reduce future
income taxes. The Company's initial public offering in April, 1996 resulted in
an "ownership change" pursuant to Section 382 of the Internal Revenue Code
("Code"), which in turn limited the future utilization of these loss
carryforwards and credits to approximately $20 million per annum for Federal
income tax purposes. Some states also impose the same or similar limitations on
the utilization of loss carryforwards subsequent to an ownership change.
In addition, the Company's Merger in August, 1997 represents another
"ownership change" under Section 382 of the Code, and the Company, therefore,
estimates that, for U.S. federal income tax purposes, the limitation on its use
of the pre-existing carryforwards as well as a limited amount of certain
carryforwards arising during fiscal 1998 will be reduced to approximately $9.0
million per annum for any post-Merger period. The Company anticipates that
expenses incurred in connection with the Merger during the nine months ended
March 31, 1998, in addition to anticipated losses from continuing operations
during fiscal 1998 (excluding Merger expenses) will result in a tax loss
carryback and additional tax loss carryforwards arising in fiscal 1998. The
Company expects that a significant portion of the tax loss carryforward arising
in fiscal 1998 will not be subject to future limitation pursuant to Section 382.
Liquidity and Capital Resources
Financing and Leverage
Current (Post-Merger): The Company's principal sources of liquidity are
cash flow from operations and borrowings under its new $105 million revolving
credit facility (the "New Credit Facility"), which was entered into in
connection with the Merger. The New Credit Facility is scheduled to expire on
August 7, 2003. The interest rate applicable to the Facility varies, at the
Company's option, based upon LIBOR (plus applicable margins not to exceed 3.0%,
as amended) or the Prime Rate (plus applicable margin not to exceed 1.75%). As
of March 31, 1998, the weighted average interest rate applicable to loans under
the Facility was 8.6%. The Company's principal uses of cash are debt service
requirements, capital expenditures, purchases of repairable parts, 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 borrowings under the New Credit Facility. To
finance 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 incurred substantial indebtedness in connection with the
Merger. As of March 31, 1998, the Company had outstanding approximately $750.3
million of long-term indebtedness, as compared to approximately $237.5 million
as of June 30, 1997. (See Note 3 to the Company's unaudited Condensed
Consolidated Financial Statements for the nine months ended March 31, 1998). The
Company's significant debt service obligations could, under certain
circumstances, have material consequences to security holders of the Company.
23
<PAGE>
See "Risk Factors", included in the Company's Annual Report on Form 10-K for the
year ended June 30, 1997, as amended.
In connection with the Merger, Holdings raised $85 million of 11-1/2%
Senior Discount Debentures due 2008 (the "11-1/2% Notes"), and DecisionOne
Corporation issued $150 million of 9-3/4% Senior Subordinated Notes due 2007
(the "9-3/4% Notes"). DecisionOne Corporation also entered into the New Credit
Facility, which provides for term loans of $470 million and revolving loans of
up to $105 million. The proceeds of the 11-1/2% Notes (which were issued with
attached warrants), the 9-3/4% Notes, the initial borrowings under the New
Credit Facility and the purchase of approximately $225 million of Holdings
common stock by Quaker were used to finance the payments of cash to
cash-electing shareholders, to pay the holders of stock options and stock
warrants canceled or converted, as applicable, in connection with the Merger, to
repay DecisionOne Corporation's existing revolving credit facility and to pay
expenses incurred in connection with the Merger. (See Note 3 to the Company's
unaudited Condensed Consolidated Financial Statements for the nine months ended
March 31, 1998 for additional information.)
The New Credit Facility contains various terms and covenants which, among
other things, place certain restrictions on the Company's ability to pay
dividends and incur additional indebtedness, and which require the Company to
meet certain minimum financial performance measurements. During the three months
ended March 31, 1998, the Company sought and obtained amendments to the New
Credit Facility. The Company incurred fees of approximately $1.4 million in
connection with the amendments. These costs will be amortized to interest
expense over the remaining term of the related debt instruments. The Company is
in compliance with its covenants under the amended New Credit Facility as of
March 31, 1998.
The Company currently expects to spend approximately $12 million ($9
million in fiscal 1998) in certain consulting charges related to the Company's
ongoing service delivery re-engineering program. The initiatives to be funded
include improvements to the Company's dispatch system and field engineer data
collection and technical support tools which, combined with related process
re-engineering strategies, are designed to increase productivity. As noted in
"Results of Operations" above, the Company incurred approximately $4.9 million
of consulting fees in connection with these re-engineering initiatives during
the nine months ended March 31, 1998 ($2.7 million during the three months ended
March 31, 1998).
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.
Historical: 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.
24
<PAGE>
The Company has historically 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 (the
"Offering"), raising $106 million through the issuance of 6.3 million shares of
common stock. Subsequent to the Offering, the Company converted its
then-existing term loan as well as its $30 million revolving credit facility
into a $225 million variable rate, unsecured revolving credit facility (the
"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 Facility, raising the total loan
commitment to $300 million.
The commitments under the Facility were scheduled to terminate on April 26,
2001. The interest rate applicable to the Facility varied, at the Company's
option, based upon LIBOR (plus an applicable margin not to exceed 1%) or the
prime rate. As of June 30, 1997, the interest rate applicable to loans under the
Facility was LIBOR plus .75%, or an effective rate of approximately 6.5%, and
available borrowings under the Facility were $65.7 million.
The borrower under the Facility was DecisionOne Corporation. The
obligations of DecisionOne Corporation thereunder were guaranteed by the Company
and certain subsidiaries, except for its Canadian subsidiary. In connection with
the Merger in August, 1997, all indebtedness outstanding under the Facility was
repaid.
Financial Condition:
Cash flow from operating activities, exclusive of non-recurring Merger
expenses, for the nine months ended March 31, 1998 was approximately $55.0
million, as compared to $57.7 million for the nine months ended March 31, 1997.
These funds, together with borrowings under the New Credit Facility, provided
the required capital to fund repairable part purchases and capital expenditures
of approximately $68.9 million during the nine months ended March 31, 1998, as
well as the acquisition of the service contracts and certain assets of
complementary businesses for $9.4 million during this period.
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 four 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 fifth 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 cleanup 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 cleanup 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
25
<PAGE>
the sites to date and the nature of involvement of the Company's predecessor at
the sites, it is management's opinion that the Company's potential additional
liability, if any, for the cost of cleanup of these sites will not be material
to the consolidated financial position, results of operations or liquidity of
the Company.
26
<PAGE>
DecisionOne Holdings Corp. and Subsidiaries
DecisionOne Corporation and Subsidiaries
Part II - Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
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
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description of Document
------ -----------------------
10.1 Amendment No. 3, dated as of March 18, 1998,
to Credit Agreement by and among DecisionOne
Corporation, various financial institutions, DLJ
Capital Funding Inc. (as Syndication Agent),
NationsBank of Texas, N.A. (as Administrative Agent)
and BankBoston, N.A. (as Documentation Agent)
27 Financial data schedules
(b) Reports on Form 8-K
None.
27
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their 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, 1998
DecisionOne Corporation
/s/ Thomas J. Fitzpatrick
-------------------------------------------
Thomas J. Fitzpatrick
Duly Authorized and Chief Financial Officer
Date: May 15, 1998
28
AMENDMENT NO. 3 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT (this "Amendment No. 3"),
dated as of March 18, 1998, is made among DECISIONONE CORPORATION, a Delaware
corporation (the "Borrower"), the various financial institutions from time to
time parties thereto (collectively, the "Lenders"), DLJ CAPITAL FUNDING, INC.,
as syndication agent (the "Syndication Agent") for the Lenders, BANKBOSTON,
N.A., as documentation agent (the "Documentation Agent") for the Lenders, and
NATIONSBANK OF TEXAS, N.A., as administrative agent (the "Administrative Agent",
and, together with the Syndication Agent, the "Agents") for the Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders and the Agents are parties to a
Credit Agreement, dated as of August 7, 1997 and amended as of September 17,
1997 and January 12, 1998 (as modified and supplemented and in effect from time
to time, the "Credit Agreement"); and
WHEREAS, the Borrower has requested that the Lenders amend certain
pricing terms, financial covenants and other provisions contained in the Credit
Agreement; and
WHEREAS, the Lenders have agreed, subject to the terms and conditions
hereinafter set forth, to amend the Credit Agreement as set forth herein;
NOW, THEREFORE, in consideration of the agreements herein contained,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
<PAGE>
I. PART
DEFINITIONS
A. SUBPART Certain Definitions. Unless otherwise defined herein or the context
otherwise requires, terms used in this Amendment No. 3, including its preamble
and recitals, have the following meanings (such meanings to be equally
applicable to the singular and plural forms thereof):
"Administrative Agent" is defined in the preamble.
<PAGE>
"Agents" is defined in the preamble.
"Amendment No. 3" is defined in the preamble.
"Borrower" is defined in the preamble.
"Credit Agreement" is defined in the first recital.
"Documentation Agent" is defined in the preamble.
"Lenders" is defined in the preamble.
"Syndication Agent" is defined in the preamble.
"Third Amendment Effective Date" is defined in Subpart 3.1.
A. SUBPART Other Definitions. Unless otherwise defined herein or the context
otherwise requires, terms used in this Amendment No. 3, including its preamble
and recitals, have the meanings ascribed thereto in the Credit Agreement.
I. PART
AMENDMENTS TO CREDIT AGREEMENT
Effective on (and subject to the occurrence of) the Third Amendment
Effective Date, the Credit Agreement is hereby amended in accordance with this
Part II. Except to the extent amended by this Amendment No. 3, the Credit
Agreement is and shall continue to be in full force and effect and is hereby
ratified and confirmed in all respects.
A. SUBPART Amendment to Section 1.1. Section 1.1 of the Credit Agreement is
hereby amended as set forth in this Subpart 2.1.
a) The definition of "Applicable Margin" contained in Section 1.1 of the Credit
Agreement is hereby amended to read in its entirety as set forth below:
"`Applicable Margin' means at all times during the applicable
periods set forth below,
(a) from the Closing Date through (but excluding) the Third
Amendment Effective Date, with respect to the unpaid principal amount
of
<PAGE>
each Term-B Loan maintained as a (i) Base Rate Loan, 1.50% per annum
and (ii) LIBO Rate Loan, 2.75% per annum;
(b) from the Third Amendment Effective Date through (but
excluding) September 30, 1998, with respect to the unpaid principal
amount of each Term-B Loan maintained as a (i) Base Rate Loan, 1.75%
per annum and (ii) LIBO Rate Loan, 3.00% per annum;
(c) at all times on or after September 30, 1998, with respect to
the unpaid principal amount of each Term-B Loan, the rate determined
by reference to the applicable Leverage Ratio and at the applicable
percentage per annum set forth below under the column entitled
"Applicable Margin for Base Rate Loans", in the case of Base Rate
Loans, or by reference to the applicable Leverage Ratio and at the
applicable percentage per annum set forth below under the column
entitled "Applicable Margin for LIBO Rate Loans", in the case of LIBO
Rate Loans:
Applicable Margin for Term-B Loans
Applicable Margin Applicable Margin
For Base for LIBO
Leverage Ratio Rate Loans Rate Loans
-------------- ---------- ----------
greater than or equal to 6.0:1 1.75% 3.00%
less than 6.0:1 1.50% 2.75%
<PAGE>
(d) from the Closing Date through (but excluding) the date upon
which the Compliance Certificate for the second full Fiscal Quarter
ending after the Closing Date is delivered by the Borrower to the
Administrative Agent pursuant to clause (c) of Section 7.1.1, with
respect to the unpaid principal amount of each (i) Swing Line Loan
(each of which shall be borrowed and maintained only as a Base Rate
Loan) and each Revolving Loan and Term-A Loan maintained as a Base
Rate Loan, 1.25% per annum, and (ii) Revolving Loan and Term-A Loan
maintained as a LIBO Rate Loan, 2.50% per annum;
(e) from the date of the delivery of the Compliance Certificate
described in clause (d) above through (but excluding) the Third
Amendment Effective Date, with respect to the unpaid principal amount
of each Swing Line Loan (each of which shall be borrowed and
maintained only as a Base Rate Loan) and each Revolving Loan and
Term-A Loan, the rate determined by reference to the applicable
Leverage Ratio and at the applicable percentage per annum set forth
below under the column entitled "Applicable Margin for Base Rate
Loans", in the case of Base Rate Loans, or by reference to the
applicable Leverage Ratio and at the applicable percentage per annum
set forth below under the column entitled "Applicable Margin for LIBO
Rate Loans", in the case of LIBO Rate Loans:
Applicable Margin
for Revolving Loans Applicable Applicable
and Term-A Loans Margin for Base Margin for LIBO
Leverage Ratio Rate Loans Rate Loans
-------------- ---------- ----------
greater than or equal to 5.0:1 1.25% 2.50%
greater than or equal to
4.0:1 and less than 5.0:1 0.75% 2.00%
greater than or equal to
3.0:1 and less than 4.0:1 0.25% 1.50%
less than 3.0:1 0.00% 1.00%
<PAGE>
(f) from the Third Amendment Effective Date through (but not
excluding) September 30, 1998, with respect to the unpaid principal
amount of each (i) Swing Line Loan (each of which shall be borrowed
and maintained only as a Base Rate Loan) and each Revolving Loan and
Term-A Loan maintained as a Base Rate Loan, 1.50% per annum and (ii)
Revolving Loan and Term-A Loan maintained as a LIBO Rate Loan, 2.75%
per annum; and
(g) at all times on or after September 30, 1998, with respect to
the unpaid principal amount of each Swing Line Loan (each of which
shall be borrowed and maintained only as a Base Rate Loan) and each
Revolving Loan and Term-A Loan, the rate determined by reference to
the applicable Leverage Ratio and at the applicable percentage per
annum set forth below under the column entitled "Applicable Margin for
Base Rate Loans", in the case of Base Rate Loans, or by reference to
the applicable Leverage Ratio and at the applicable percentage per
annum set forth below under the column entitled "Applicable Margin for
LIBO Rate Loans", in the case of LIBO Rate Loans:
Applicable Margin for
Revolving Loans and Applicable Applicable
Term-A Loans Margin for Base Margin for LIBO
Leverage Ratio Rate Loans Rate Loans
-------------- ---------- ----------
greater than or equal to 6.0:1 1.50% 2.75%
greater than or equal to
5.0:1 and less than 6.0:1 1.25% 2.50%
greater than or equal to
4.0:1 and less than 5.0:1 0.75% 2.00%
greater than or equal to
3.0:1 and less than 4.0:1 0.25% 1.50%
less than 3.0:1 0.00% 1.00%
<PAGE>
The Leverage Ratio used to compute the Applicable Margin for
Swing Line Loans, Revolving Loans and Term-A Loans for any day
referred to in clause (e) or (g) above, or for Term-B Loans for any
day referred to in clause (c) above, shall be the Leverage Ratio set
forth in the Compliance Certificate most recently delivered by the
Borrower to the Administrative Agent on or prior to such day pursuant
to clause (c) of Section 7.1.1. Changes in the Applicable Margin for
Swing Line Loans, Revolving Loans, Term-A Loans and Term-B Loans
resulting from a change in the Leverage Ratio shall become effective
(as of the first day following the Fiscal Quarter in respect of which
such Compliance Certificate was required to be delivered) upon
delivery by the Borrower to the Administrative Agent of a new
Compliance Certificate pursuant to clause (c) of Section 7.1.1. In the
event such Compliance Certificate indicates a Leverage Ratio that
would result in an Applicable Margin which is greater or lesser than
the Applicable Margin theretofore in effect, then (A) such greater or
lesser Applicable Margin shall be deemed to be in effect for all
purposes of this Agreement from the first day following the Fiscal
Quarter in respect of which such Compliance Certificate was required
to be delivered by the Borrower to the Administrative Agent pursuant
to clause (c) of Section 7.1.1 and (B) if the Borrower shall have
theretofore made any payment of interest in respect of Swing Line
Loans, Revolving Loans, Term-A Loans or Term-B Loans, or of Letter of
Credit fees pursuant to the first sentence of Section 3.3.3, in any
such case in respect of the period from the first day following the
Fiscal Quarter in respect of which such Compliance Certificate was
required to be delivered to the actual date of delivery of such
Compliance Certificate, then, on the next Quarterly Payment Date,
either (x) if the new Applicable Margin rate is greater than the
Applicable Margin rate theretofore in effect, the Borrower shall pay
as a supplemental payment of interest and/or Letter of Credit
<PAGE>
fees, an amount which equals the difference between the amount of
interest and Letter of Credit fees that would otherwise have been paid
based on such new Leverage Ratio and the amount of such interest and
Letter of Credit fees actually so paid, or (y) if the new Applicable
Margin rate is less than the Applicable Margin rate theretofore in
effect, an amount shall be deducted from the interest on Revolving
Loans, Commitment Fees and Letter of Credit fees (in the case of
differences in respect of interest on Revolving Loans and Letter of
Credit fees) or from the interest on Term-A Loans (in the case of
differences in respect of interest on Term-A Loans) or from the
interest on Term-B Loans (in the case of differences in respect of
interest on Term-B Loans) thereafter payable by the Borrower in an
amount which equals the difference between the amount of interest and
Letter of Credit fees so paid and the amount of interest and Letter of
Credit fees that would otherwise have been paid based on such new
Leverage Ratio (or, if no such payment by the Borrower to the
Revolving Lenders, Term-A Lenders or Term-B Lenders, as the case may
be, will thereafter accrue hereunder, or if the amount that so accrues
is less than such difference, then (i) in the case of interest on
Revolving Loans and Term-A Loans and Letter of Credit fees, the
Revolving Lenders or Term-A Lenders, as the case may be, will promptly
pay to the Borrower an amount equal to such difference, less the
amount, if any, of such accrued and unpaid payments, and (ii) in the
case of interest on Term-B Loans, if (but only if) there are any
Term-B Loans outstanding at the time that any such amount is
determined, an amount equal to such difference, less the amount, if
any, of such accrued and unpaid payments, shall be credited against
the principal of such Term-B Loans then outstanding).".
(b) Clause (b)(iii) of the definition of "Excess Cash Flow" contained
in Section 1.1 of the Credit Agreement is hereby amended by replacing the words
"actually paid" contained in the first line thereof with the words "actually
(without duplication) paid or payable".
(c) Clause (b)(v) of the definition of "Fixed Charge Coverage Ratio"
contained in Section 1.1 of the Credit Agreement is hereby amended by replacing
the words "actually paid" contained in the first line thereof with the words
"actually (without duplication) paid or payable".
A. SUBPART Amendment to Section 6.6. Section 6.6 of the Credit Agreement is
hereby amended by replacing the date of "June 30, 1996" contained in the first
line thereof with the date of "December 31, 1997".
<PAGE>
B. SUBPART Amendment to Section 7.2.4. Section 7.2.4 of the Credit Agreement is
hereby amended in its entirety to read as set forth below:
"SECTION 7.2.4. Financial Covenants.
a) Adjusted EBITDA. The Borrower will not permit Adjusted EBITDA for the period
of four consecutive Fiscal Quarters ending on the last day of any Fiscal Quarter
occurring during any period set forth below to be less than the amount set forth
opposite such period:
Period Adjusted EBITDA
Closing Date to 3/31/98 $87,500,000
4/1/98 to 9/30/98 $80,000,000
10/1/98 to 12/31/98 $85,000,000
1/1/99 to 3/31/99 $90,000,000
4/1/99 to 6/30/99 $95,000,000
7/1/99 to 9/30/99 $100,000,000
10/1/99 to 12/31/99 $102,500,000
1/1/00 to 3/31/00 $105,000,000
4/1/00 to 6/30/00 $107,500,000
7/1/00 to 9/30/00 $110,000,000
10/1/00 to 12/31/00 $115,000,000
1/1/01 to 3/31/01 $117,500,000
4/1/01 to 6/30/01 $120,000,000
7/1/01 to 9/30/01 $122,500,000
10/1/01 to 12/31/01 $125,000,000
1/1/02 to 3/31/02 $127,500,000
4/1/02 to 6/30/02 $130,000,000
7/1/02 to 6/30/03 $140,000,000
7/1/03 to 6/30/04 $150,000,000
7/1/04 and thereafter $175,000,000
a) Leverage Ratio. The Borrower will not permit the Leverage Ratio as of the end
of any Fiscal Quarter occurring during any period set forth below to be greater
than the ratio set forth opposite such period:
<PAGE>
Period Leverage Ratio
Closing Date to 3/31/98 6.75:1
4/1/98 to 9/30/98 7.75:1
10/1/98 to 12/31/98 7.25:1
1/1/99 to 3/31/99 6.75:1
4/1/99 to 6/30/99 6.50:1
7/1/99 to 9/30/99 6.25:1
10/1/99 to 12/31/99 6.00:1
1/1/00 to 3/31/00 5.75:1
4/1/00 to 9/30/00 5.50:1
10/1/00 to 3/31/01 5.25:1
4/1/01 to 6/30/01 5.00:1
7/1/01 to 9/30/01 4.75:1
10/1/01 to 12/31/01 4.50:1
1/1/02 to 6/30/02 4.25:1
7/1/02 to 6/30/03 3.75:1
7/1/03 to 6/30/04 3.50:1
7/1/04 and thereafter 3.00:1
a) Interest Coverage Ratio. The Borrower will not permit the Interest Coverage
Ratio as of the end of any Fiscal Quarter ending after the Closing Date and
occurring during any period set forth below to be less than the ratio set forth
opposite such period:
Interest Coverage
Period Ratio
-----
Closing Date to 3/31/98 1.75:1
4/1/98 to 6/30/98 1.50:1
7/1/98 to 9/30/98 1.40:1
10/1/98 to 12/31/98 1.45:1
1/1/99 to 9/30/99 1.50:1
10/1/99 to 12/31/99 1.60:1
1/1/00 to 3/31/00 1.70:1
4/1/00 to 6/30/00 1.80:1
7/1/00 to 9/30/00 2.00:1
10/1/00 to 3/31/01 2.10:1
4/1/01 to 12/31/01 2.25:1
1/1/02 to 6/30/02 2.50:1
7/1/02 to 6/30/03 2.75:1
7/1/03 and thereafter 3.50:1
a) Fixed Charge Coverage Ratio. The Borrower will not permit the Fixed Charge
Coverage Ratio as of the end of any Fiscal Quarter occurring during any period
set forth below to be less than the ratio set forth opposite such period:
<PAGE>
Period Fixed Charge Coverage Ratio
Closing Date to 6/30/98 1.10:1
7/1/98 and thereafter 1.00:1".
I. PART
CONDITIONS TO EFFECTIVENESS
A. SUBPART Effective Date. This Amendment No. 3 shall be and become effective
upon the prior or concurrent satisfaction of each of the conditions precedent
set forth in this Subpart 3.1 (the "Third Amendment Effective Date").
1. SUBPART Execution of Counterparts. The Agents shall have received
counterparts of this Amendment No. 3 duly executed by the Borrower and each of
the Required Lenders (or evidence thereof satisfactory to the Agents). The
delivery of an executed counterpart hereof by the Borrower shall constitute a
representation and warranty by the Borrower that, on the Third Amendment
Effective Date, after giving effect to this Amendment No. 3, all statements set
forth in Section 5.2.1 of the Credit Agreement, as amended by this Amendment No.
3, are true and correct as of such date.
II. PART
MISCELLANEOUS
A. SUBPART Cross-References. References in this Amendment No. 3 to any Part or
Subpart are, unless otherwise specified, to such Part or Subpart of this
Amendment No. 3. References in this Amendment No. 3 to any Article or Section
are, unless otherwise specified, to such Article or Section of the Credit
Agreement.
B. SUBPART Loan Document Pursuant to Credit Agreement. This Amendment No. 3 is a
Loan Document executed pursuant to the Credit Agreement and shall (unless
otherwise expressly indicated herein) be construed, administered and applied in
accordance with the terms and provisions of the Credit Agreement, as amended
hereby, including Article X thereof.
C. SUBPART Counterparts, etc. This Amendment No. 3 may be executed by the
parties hereto in several counterparts, each of
<PAGE>
which shall be deemed to be an original and all of which shall constitute
together but one and the same Agreement.
D. SUBPART Governing Law. THIS AMENDMENT NO. 3 SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
E. SUBPART Successors and Assigns. This Amendment No. 3 shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
SUBPART 4.6 Limitation. Except as expressly provided hereby, all of the
representations, warranties, terms, covenants and conditions of the Credit
Agreement and each other Loan Document shall remain unamended and unwaived and
shall continue to be, and shall remain, in full force and effect in accordance
with their respective terms. The amendments, modifications and consents set
forth herein shall be limited precisely as provided for herein, and shall not be
deemed to be a waiver of, amendment of, consent to or modification of any other
term or provision of the Credit Agreement or of any term or provision of any
other Loan Document or other instrument referred to therein or herein, or of any
transaction or further or future action on the part of the Borrower or any other
Person which would require the consent of the Agents or any of the Lenders under
the Credit Agreement or any such other Loan Document or instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3
to be executed by their respective officers hereunto duly authorized as of the
day and year first above written.
DECISIONONE CORPORATION
By:
Title:
<PAGE>
DLJ CAPITAL FUNDING, INC.,
as the Syndication Agent
and as Lender
By:
Title:
NATIONSBANK OF TEXAS, N.A.,
as the Administrative Agent
and as Lender
By:
Title:
BANKBOSTON, N.A.,
as the Documentation Agent
and as Lender
By:
Title:
<PAGE>
LENDERS:
BANK OF MONTREAL
By: ___________________________
Name:
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By:________________________________
Name:
Title:
<PAGE>
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
By: _______________________________
Name:
Title:
<PAGE>
BANQUE FRANCAISE DU COMMERCE
EXTERIEUR
By: _____________________________
Name:
Title:
<PAGE>
CORESTATES BANK, N.A.
By: _____________________________
Name:
Title:
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By: ____________________________
Name:
Title:
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By: _____________________________
Name:
Title:
<PAGE>
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By: ____________________________
Name:
Title:
<PAGE>
IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION
By: ____________________________
Name:
Title:
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By: _____________________________
Name:
Title:
<PAGE>
MERITA BANK LTD. - NEW YORK BRANCH
By: ____________________________
Name:
Title:
<PAGE>
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By: ____________________________
Name:
Title:
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
By: __________________________
Name:
Title:
<PAGE>
BEAR, STEARNS INVESTMENT
PRODUCTS INC.
By: ___________________________
Name:
Title:
<PAGE>
THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH
By: ____________________________
Name:
Title:
<PAGE>
WELLS FARGO BANK, N.A.
By: ____________________________
Name:
Title:
<PAGE>
CAPTIVA FINANCE LTD.
By: ____________________________
Name:
Title:
<PAGE>
CAPTIVA II FINANCE LTD.
By: ____________________________
Name:
Title:
<PAGE>
KZH HOLDING CORPORATION III
By: ____________________________
Name:
Title:
<PAGE>
INDOSUEZ CAPITAL FUNDING III, LIMITED
By: Indosuez Capital Luxembourg,
as Collateral Manager
By: _____________________
Name:
Title:
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By: _________________________
Name:
Title:
<PAGE>
CYPRESSTREE INVESTMENT PARTNERS I,
LTD.,
By: CypressTree Investment Management
Company, as Portfolio Manager
By: ____________________________
Name:
Title:
<PAGE>
PARAMOUNT COMPANY
By: Pilgrim America Investments, Inc.
As its Investment Manager
By: ____________________________
Name:
Title:
<PAGE>
By: PPM AMERICA, INC., as attorney
in fact,
on behalf of Jackson National Life
Insurance Company
By: _____________________________
Name:
Title:
<PAGE>
CIBC INC.
By: ____________________________
Name:
Title:
<PAGE>
DEEPROCK & COMPANY
By: Eaton Vance Management
as Investment Advisor
By: ___________________________
Name:
Title:
<PAGE>
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company
Its Investment Manager
By: _________________________
Name:
Title:
<PAGE>
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By: _____________________________
Name:
Title:
<PAGE>
NEW YORK LIFE INSURANCE COMPANY
By: ____________________________
Name:
Title:
<PAGE>
NEW YORK LIFE INSURANCE AND
ANNUITY CORPORATION
By: ____________________________
Name:
Title:
<PAGE>
PRIME INCOME TRUST
By: ___________________________
Name:
Title:
<PAGE>
KZH-ING-I CORPORATION
By: ____________________________
Name:
Title:
<PAGE>
ROYALTON COMPANY
By: Pacific Investment Management
Company, as its Investment
Advisor
By: _______________________
Name:
Title:
<PAGE>
DELANO COMPANY
By: Pacific Investment Management
Company, as its Investment
Advisor
By: __________________________
Name:
Title:
<PAGE>
DEBT STRATEGIES FUND, INC.
By: __________________________
Name:
Title:
<PAGE>
ALLSTATE INSURANCE COMPANY
By: ___________________________
Name:
Title:
<PAGE>
GCB INVESTMENT PORTFOLIO
by CITIBANK, N.A.
By: __________________________
Name:
Title:
<PAGE>
KZH-SOLEIL CORPORATION
By: _________________________
Name:
Title:
<PAGE>
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
By: __________________________
Name:
Title:
<PAGE>
FLOATING RATE PORTFOLIO
By: Chancellor LGT Senior Secured
Management Inc., as attorney
in fact
By: __________________________
Name:
Title:
<PAGE>
KZH-CRESCENT CORPORATION
By: ________________________
Name:
Title:
<PAGE>
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (E)
By: TCW Asset Management Company
as Attorney-in-Fact
By: __________________________
Name:
Title:
By: ________________________
Name:
Title:
<PAGE>
ARCHIMEDES FUNDING, L.L.C.
By: ING Capital Advisors Inc.,
as Collateral Manager
By: __________________________
Name:
Title:
<PAGE>
MELLON BANK, N.A.
By: _________________________
Name:
Title:
<PAGE>
BANKBOSTON, N.A.
By: ___________________________
Name:
Title:
<PAGE>
Merrill Lynch Global Investment
Series:
INCOME STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management,
L.P., as Investor Advisor
By: _________________________
Name:
Title:
<PAGE>
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By: __________________________
Name:
Title:
<PAGE>
OCTAGON CREDIT INVESTORS LOAN
PORTFOLIO (a unit of the Chase
Manhattan Bank)
By: __________________________
Name:
Title:
<PAGE>
VAN KAMPEN CLO I, LIMITED
By: ___________________________
Name:
Title:
<PAGE>
OSPREY INVESTMENTS PORTFOLIO
by CITIBANK, N.A., as Manager
By: _______________________
Name:
Title:
<PAGE>
KZH-PAMCO CORPORATION
By: _____________________
Name:
Title:
<PAGE>
CREDIT SUISSE FIRST BOSTON INC.
By: _________________________
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001007588
<NAME> DECSIONSONE CORP AND SUBSIDIARIES
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
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<SECURITIES> 0
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<CURRENT-ASSETS> 201,514
<PP&E> 77,648
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<CURRENT-LIABILITIES> 173,482
<BONDS> 241,827
0
0
<COMMON> 126
<OTHER-SE> (256,675)
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<OTHER-EXPENSES> 183,539
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<INCOME-TAX> (13,572)
<INCOME-CONTINUING> (79,339)
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<NET-INCOME> (79,339)
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<EPS-DILUTED> (1.93)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001040354
<NAME> DECSIONSONE CORP AND SUBSIDIARIES
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
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<SECURITIES> 0
<RECEIVABLES> 149,096
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<PP&E> 77,648
<DEPRECIATION> 47,567
<TOTAL-ASSETS> 725,945
<CURRENT-LIABILITIES> 176,931
<BONDS> 150,000
0
0
<COMMON> 0
<OTHER-SE> (103,327)
<TOTAL-LIABILITY-AND-EQUITY> 725,945
<SALES> 603,249
<TOTAL-REVENUES> 603,249
<CGS> 463,914
<TOTAL-COSTS> 463,914
<OTHER-EXPENSES> 183,539
<LOSS-PROVISION> 2,191
<INTEREST-EXPENSE> 37,825
<INCOME-PRETAX> (82,029)
<INCOME-TAX> (10,254)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71,775)
<EPS-PRIMARY> 0
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</TABLE>
