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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
DECISIONONE HOLDINGS CORP.
(exact name of registrant as specified in its charter)
DELAWARE 0-28090 13-3435409
(State or other jurisdiction of (Commission file #) (I.R.S. Employer
incorporation or organization) Identification No.)
DECISIONONE CORPORATION
(exact name of registrant as specified in its charter)
DELAWARE 333-28411 23-2328680
(State or other jurisdiction of (Commission file #) (I.R.S. Employer
incorporation or organization) Identification No.)
50 EAST SWEDESFORD ROAD
FRAZER, PENNSYLVANIA 19355
(610) 296-6000
(Address, including zip code and telephone number, including area code, of the
principal executive offices of registrants)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
DECISIONONE HOLDINGS CORP.:
11-1/2% Senior Discount Debentures due 2008
148,400 Warrants to Purchase Common Stock
Common Stock, $.01 par value
DECISIONONE CORPORATION:
9-3/4% Senior Subordinated Notes due 2007
Indicate by check mark whether DecisionOne Holdings Corp. (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark whether DecisionOne Corporation (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of the voting stock of DecisionOne Holdings
Corp. held by non-affiliates, based upon the closing price of Common Stock on
September 11, 1998, as reported by the Nasdaq National Market System, was
approximately $20,673,940. In making such calculation, registrant is not making
a determination of the affiliate or non-affiliate status of any holders of
shares of Common Stock. All of the voting stock of DecisionOne Corporation is
held by DecisionOne Holdings Corp.
At September 11, 1998, 12,584,219 shares of DecisionOne Holdings Corp.
common stock were outstanding and one share of DecisionOne Corporation common
stock was outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
DecisionOne Corporation meets the conditions set forth in General
Instruction I(1) (a) and (b) of Form 10-K and is therefore filing this form with
the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of DecisionOne Holdings Corp.'s Proxy Statement prepared in
connection with its 1998 Annual Meeting of Stockholders (Part III).
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PART I
ITEM 1. BUSINESS
Item 1. is presented with respect to both registrants submitting this
filing, DecisionOne Holdings Corp. and DecisionOne Corporation.
GENERAL
DecisionOne Holdings Corp., through its wholly owned operating
subsidiary, DecisionOne Corporation, and its subsidiaries (collectively, the
"Company") is the largest independent provider of multivendor computer
maintenance and technology support services in the United States, based on
Dataquest Incorporated ("Dataquest") estimates for calendar year 1997. The
Company offers its customers a single source solution for virtually all of their
computer maintenance and technology support requirements, including hardware
maintenance services, software support, end-user/help desk services, network
support and other technology support services. The Company believes it is the
most comprehensive independent (i.e., not affiliated with an original equipment
manufacturer, or "OEM") provider of these services across a broad range of
computing environments, including mainframes, midrange and distributed systems,
work groups, PCs and related peripherals. The Company provides support for over
15,000 hardware products manufactured by more than 1,000 OEMs. The Company also
supports most major operating systems and over 150 off-the-shelf software
applications. The Company delivers its services through an extensive field
service organization of approximately 4,000 field personnel in over 150
service locations throughout the United States and Canada and strategic
alliances in selected international markets.
The Company services over 51,000 customers at over 182,000 sites across
the United States and Canada. The Company's customers include a diverse group of
national and multinational corporations, including SABRE Group, Inc. (an
affiliate of American Airlines, Inc.), Sun Microsystems, Inc. ("Sun"),
NationsBank, DuPont Company ("DuPont"), Sequent Computer Corporation
("Sequent"), Southwestern Bell Corporation, and Netscape Communications
Corporation ("Netscape").
COMPANY HISTORY
The Company's roots extend back to 1969 when it was first known as
Decision Data, then a provider of keypunch machines. During the 1980's, its
operations expanded to include the sale of midrange computer hardware products
and related maintenance services. In 1992, the Company sold off its computer
hardware products business and focused primarily on providing computer
maintenance and technology support services.
Proceeds from the sale of the hardware business allowed the Company to
embark upon a strategy of selective acquisitions aimed at bolstering its
infrastructure and capabilities. The Company also acquired key "books of
business" designed to help it leverage its infrastructure by increasing the
geographic density of its customer base. Through this strategy, the Company
established a major presence in the servicing of midrange computer systems by
successfully acquiring and integrating nearly 30 companies in just over three
years. The first significant acquisition was the 1994 purchase of IDEA Servcom,
Inc., which raised the Company's customer base to 27,000 and, in following
months, increased the revenues to where they had been before the sale of the
hardware unit.
In October of 1995, the Company completed its largest acquisition --
that of Bell Atlantic Business Systems Services, Inc. ("BABSS"), with
approximately 4,400 employees and more than $500 million in sales. BABSS
possessed a breadth of services, market presence, blue-chip customer base and
over 30 years of experience in the computer service business that complemented
and strengthened the Company. Upon the acquisition, the Company changed its name
to DecisionOne.
In 1996, the Company purchased the assets of the U.S. service business
of Memorex Telex Corporation, a hardware manufacturer and computer service
company, with annual revenues of more than $100 million. In 1997, acquisitions
included certain assets of Xerox Technology Services (Canada) and the
maintenance business on several types of tape-drive storage machines from EMC(2)
Corporation ("EMC").
In October 1997, the Company acquired the network service and support
business of Gandalf Technologies, a provider of ISDN and frame relay remote
access equipment. As a result, the Company acquired key network technical
expertise to support its growing network service portfolio. Additionally, in
fiscal 1998, the Company acquired the assets of General Diagnostics
Incorporated, a hardware depot repair firm. This transaction added eight
additional depot repair centers spread across the United States to the Company's
network of repair centers.
MERGER AND RESTRUCTURING
On August 7, 1997, the Company consummated a merger (the "Merger") with
an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJ"). Pursuant to the
Merger, DLJ, certain funds affiliated with DLJ (collectively, with DLJ, the "DLJ
Funds"), and third-party investors who have entered into an agreement (the
"Investors' Agreement") with DLJ in respect of the voting and disposition of
shares acquired by them (collectively, the "DLJ Group"), acquired approximately
10.9 million shares, or 87.4%, of the Company's outstanding common stock in
exchange for approximately $225 million. Such equity proceeds,
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along with $145.5 million of net proceeds from the sale of 9 3/4% Senior
Subordinated Notes due 2007 (the "9 3/4% Notes"), $81.6 million of net proceeds
from the sale of 148,400 units consisting of 11 1/2% Senior Discount Debentures
due 2008 and Warrants to purchase 281,960 shares of Company common stock
exercisable at $23 per share (the "Units"), and borrowings of $470.0 million
under a $575 million senior secured loan facility were used to repurchase
approximately 26.5 million shares for approximately $609.7 million, cash out
existing options and warrants, repay the Company's then-existing revolving
credit facility, and pay fees and expenses incurred in connection with the
Merger. See "Merger and Recapitalization" included in Item 7 herein.
INDUSTRY BACKGROUND
According to Dataquest projections, the U.S. hardware maintenance and
technology support services market was approximately $43.3 billion in 1997 and
is projected to grow at a compound annual rate of 10.9% to $65.3 billion by the
year 2001. Within the market surveyed by Dataquest, Dataquest estimates that the
independent, multivendor segment was approximately $9.3 billion in 1997 and
projects the segment to grow at an 11% compound annual rate to $14.1 billion by
the year 2001. According to Dataquest, independent, multivendor service
providers such as the Company are taking market share from the OEM service
providers faster than OEMs are contracting new business. The Company believes
that this is occurring because: (i) customers are looking for single source
providers who support multiple computer hardware and software platforms, (ii)
independent service providers are viewed as being unbiased toward computer
purchase decisions and (iii) OEMs are increasingly outsourcing customer
maintenance service (including warranty and post warranty services) and
technical customer support such as help desk services to independents in order
to focus on their core design, technology and marketing competencies. According
to Dataquest, within the independent, multivendor segment, hardware maintenance
was the dominant service, accounting for approximately 73% of 1997 revenues,
with technology support services, including software support, network support
and end-user training, comprising the remaining 27% of 1997 revenues.
The Company believes that the independent, multivendor segment is also
fragmented and consolidating. Participants in the independent multivendor
segment include: (i) several large independent service providers, (ii) the
multivendor segments of OEM service organizations and (iii) hundreds of smaller
independent companies servicing either product niches or limited geographical
areas of the United States. The significant market position of OEMs is due
largely to their traditional role of servicing their own installed base of
equipment and their customers' former reliance on centralized, single vendor
solutions (i.e., mainframe systems).
COMPANY SERVICES
The Company has built a service portfolio and infrastructure that is
designed to offer its customers a single-source solution for virtually all of
their computer maintenance and technology support requirements. The Company's
portfolio includes services such as hardware support, software support, network
support, and planning and consulting services for customers with mainframe,
midrange, and distributed computing environments. The Company also provides
multivendor parts repair and refurbishment and inventory management services as
part of its logistics services portfolio, targeted at OEMs, resellers and other
third-party service providers.
While many of its services -- and its heritage -- are rooted in
providing equipment maintenance and technical support, the Company has expanded
its portfolio to optimize its customers' investments in information technology.
Companies today are struggling to cope with increasingly complex computing
environments that feature an abundance of networked computer equipment from a
multitude of manufacturers. This equipment is often used to perform the
companies' mission-critical operations, and can severely impact their businesses
when a failure occurs. The Company believes that it can leverage its
infrastructure and breadth of services to help customers reduce the cost of
supporting their computer equipment while increasing their systems'
availability.
The Company's marketing strategy is focused on services in three
different market segments: Enterprise customers (including Federal government
customers), which have complex computing environments including data centers and
tens of thousands of end users; Middle Market customers, which have included
large, medium and small businesses, primarily with desktop computing systems;
and Strategic Alliance customers, which include hardware and software original
equipment manufacturers who utilize the Company for a wide variety of services,
including depot repair, field service and support, and telephone technical
support services.
The Company's integrated portfolio of services is designed to appeal to
each of these customer segments, by helping to increase computer system
availability, enhance end user productivity and reduce the cost of running and
managing information technology systems. The Company has tailored service
portfolios to meet the unique needs of a number of computer environments,
including Desktop computing, Data Center computing, Midrange computing and
Logistics.
Integrated Services for the Distributed Computing Desktop Environment: One To 1
The Company's One To 1 offering for the workgroup environment is an
integrated package of life cycle services designed to reduce the cost of
workgroup computing, and increase system availability and end-user productivity.
One To 1 is aimed at providing desktop support that reduces a company's total
cost of ownership. The Company believes One To 1's
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strength lies in its ability to provide customers with a single-source solution
for effectively supporting large, complex desktop environments. By utilizing all
of the services in One To 1, customers leverage the Company's national and
international infrastructure, and its ability to compile valuable service data
to provide support at the desktop level. By purchasing all of these services
from one supplier, One To 1 customers can provide greater support to their end
users and organization while still reducing the total cost of owning desktop
assets. One To 1 includes:
Network Services: NetworkOne services help customers manage the total
life cycle of their complex network environments, from designing systems to
maintaining network hardware and wide area and local area networks. The Company
utilizes its network systems management engine, ControlOne, located at the
Company's headquarters facility, to assess and fix network problems. ControlOne
features state-of-the-art network management tools and is manned by a staff of
highly experienced network engineers and technicians. The Company also maintains
a backup network management facility in Dallas, Texas.
Consulting Services: ExpertOne services provide access to desktop
support experts who can analyze a desktop environment, recommend solutions,
manage their implementation, and audit the results.
Technical Support Services: CallOne services provide help desk support
on more than 150 shrink wrapped desktop software packages and a wide range of
operating systems. The Company's Customer Support Centers ("CSCs") handle more
than 130,000 calls per month for help desk and software support. Support ranges
from basic and network support for corporate end-users, to advanced operating
system support for systems administrators, to complete support for vertical
markets and software developers. CallOne services are available on a 24 hour, 7
day a week basis.
Hardware Services: The Company provides hardware maintenance,
installations, moves, adds and changes to thousands of different desktop
hardware devices, from hundreds of different manufacturers. Services are
provided at the customer's location through one of the largest service
infrastructures in the industry, or through the Company's network of depot
repair centers.
Asset Management Services: Through AssetOne, the Company can track
customers' information technology asset data, such as PC location and number of
software licenses, and provide information that leads to better asset management
practices.
Services for the Mainframe Environment: MainOne
The Company has an extensive history in providing services to the data
center. As part of its effort to standardize its offerings, and in response to
the changing life cycle needs of the data center marketplace, the Company
announced in May 1997 a complete suite of support services for the data center,
called MainOne. MainOne Services extend beyond critical hardware support to
services that meet the strategic needs of data center management, from planning
and consulting through operating systems and management support.
The Company offers a single source for maintaining the many brands and
types of mission-critical equipment found in the data center, through a full
suite of services that includes: remedial and preventative maintenance on the
mainframe and associated peripheral devices; equipment moves, adds and changes,
including data center relocations; migration assistance for customers changing
processors and/or software operating systems; assistance to customers in
managing and consolidating vendor relationships; environmental, financial and
disaster recovery services; and consulting expertise to assist customers in
reducing data center costs, improving equipment performance, and increasing
processor capacity.
Services for the Midrange Environment: MidrangeOne
The Company's MidrangeOne Services are designed to meet the support
requirements of complex midrange computing environments. For many customers,
midrange devices play the same mission-critical role as mainframe computers, as
well as drive the distributed computing environment.
The Company offers an integrated suite of services, MidrangeOne, that
addresses all the elements of today's more complex midrange environment,
including: remedial and preventative maintenance on midrange equipment from IBM,
Digital Equipment Corporation ("Digital"), Sun Microsystems, Hewlett-Packard,
and Memorex Telex, among others, as well as on a full range of peripheral
devices from hundreds of different manufacturers; problem resolution and
migration support for midrange operating systems; services to support remote
systems operations and backups; partnerships with industry leaders for
specialized services such as disaster recovery, environmental auditing, and
equipment financing; and advice from midrange experts to assist with increasing
system capacity, improving performance, and lowering cost of ownership.
Logistics Services: LogisticsOne
The Company's LogisticsOne Services provide information technology
companies such as OEMs, VARs, and other third-party maintainers with
cost-effective alternatives to internal parts repair and inventory pipeline
management. The company provides three distinct services under LogisticsOne:
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Hardware services: The Company repairs and refurbishes computer parts
and assemblies at its network of fifteen depot repair center across the United
States. In addition to supporting its own business, these services are provided
primarily for OEMs, distributors and other third party maintenance companies.
Systems Configuration Management Services: The Company assists
customers with technology transitions, from evaluating the current disposition
of equipment through configuring machines for a new technology roll-out. The
Company's services are backed by years of experience in installing and servicing
a multivendor, multi-platform technology base.
Inventory Life Cycle Management Services: These services, in support of
OEMs, support both in-production or end-of-life parts, and provide materials
management support for the entire life cycle of a product. These services help
companies acquire inventory and maintain optimal stocking levels, allowing them
to redirect funds normally spent on overstocking or replenishing the inventory.
SUPPORT PARTNER PROGRAMS
Customers are increasingly demanding truly turnkey services from
vendors who can meet the total lifecycle requirements of their systems. The
Company is a services-only company, meaning that it does not provide those
aspects of the systems lifecycle that are not service and support related. To
meet the needs of its customers, the Company maintains strategic alliances with
companies who have expertise in key areas of the industry. Together with these
support partners, the Company can offer customers the total lifecycle of
support, including such areas as equipment financing and leasing, disaster
recovery services, environmental analysis, wiring and cabling, system design,
and equipment procurement.
SALES AND MARKETING
The Company's core service capabilities are bundled to match the
support requirements of customers. Service portfolios exist for data center,
midrange and desktop environments. In addition, a product portfolio exists for
OEMs who seek support for parts sourcing and repair, inventory management, and
related logistics services.
The Company sells its services through a sales force of approximately
300 sales professionals aligned under several sales organizations: the Corporate
Accounts group focuses on enterprise customers, including large and
multinational corporate customers; Territory Managers and Telesales focus on
middle market customers; a Federal group, responsible for sales to government
units; and a Strategic Alliance Sales team that develops relationships with
hardware manufacturers such as Compaq Computer Corporation, Sun Microsystems,
Sequent and EMC - and software developers - like Netscape, Microsoft, Novell -
who utilize the Company to deliver service and support to their customers.
INTERNATIONAL BUSINESS PARTNERS
In order to provide international service to its multinational
customers, the Company supplements its broad North American infrastructure with
strategic alliances in selected international markets. The Company maintains
relationships with International Computers Limited ("ICL") and FBA Computer
Technology Services ("FBA"). The Company licenses many of its proprietary
multivendor support tools to FBA and to ICL Systems Service, which is ICL's
multivendor services group in Western Europe. As a result, the Company is able
to offer its multinational customers service in Western Europe, Asia and
Australia.
ICL is a leading information technology company that has approximately
23,000 employees operating in about 80 countries around the world. In Western
Europe, ICL Systems Service companies provide multivendor services in 17
countries with approximately 250 service locations and about 6,000 employees.
Several of the Company's major customers, including SABRE Group, Inc. and
DuPont, benefit from the agreement between the Company and ICL, whereby ICL
agrees to provide services at the European locations of the Company's
multinational customers. Through ICL, the Company utilizes the service branches
of both ICL and ICL's parent company, Fujitsu Ltd., to provide worldwide
multivendor support throughout Asia, the Pacific Rim, the Middle East and
Africa.
FBA, an affiliate of Fujitsu Ltd., provides multivendor services in
Australia and New Zealand from more than 20 locations with 600 employees. In
addition to providing technical support to FBA, the Company has supplied various
management and sales support personnel to FBA. FBA also provides services to
certain of the Company's multinational customers, including Sun.
SERVICE INFRASTRUCTURE
Centralized Dispatch
When a customer places a call for remedial maintenance, the Company
uses its Dispatch Data Gathering system ("DDG") to manage the process. When a
customer is identified, the DDG system displays the customer's service level
requirements and covered equipment. Specific information on the symptoms of the
problem and the products that are malfunctioning are entered into the system to
begin tracking the service event. The Company's Customer Support
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Representative ("CSR") selects, based upon the requirements of the service
event, the appropriate Customer Service Engineer ("CSE") from a list of
pre-assigned primary and back-up personnel and passes this information to the
selected CSE.
The Company maintains three CSCs in Malvern, Pennsylvania; Minneapolis,
Minnesota; and Tulsa, Oklahoma. Customers can reach the CSCs by calling one toll
free telephone number. The CSCs currently are staffed with over 600 CSRs and 29
staff/operations managers. There is a duty manager on call in each center at all
times. CSCs are available on a 24 hour, 7 day per week basis. Redundancy for
disaster recovery purposes is designed into the CSC system through the three
locations' use of automatic telecommunications switching. Two of the Company's
CSCs are used for centralized dispatch: Minneapolis and Tulsa. The CSEs in those
facilities answer nearly 50,000 service calls per month. The third CSC in
Malvern is dedicated to help desk and software support.
Parts Logistics
To meet the service needs of its customers, the Company stocks more
than 2.3 million units of repairable and consumable parts representing more than
100,000 different parts for more than 15,000 types of equipment. The Company
maintains more than 2,500 parts stocking locations to provide its technicians
with rapid access to needed parts to support customer requirements, including
locations at airports and overnight express hub locations to meet the needs of
mission-critical support.
In order to meet customer computer repair requirements, the Company
maintains a tiered approach to management of its consumable and repairable spare
parts. Parts or assemblies with low failure rates are stocked in either the
Company's central distribution center located in Malvern, Pennsylvania or in its
critical parts center in Dallas, Texas. The Company also maintains six regional
distribution centers in Atlanta, Georgia; Newark, New Jersey; Los Angeles,
California; San Francisco, California; Chicago, Illinois; and Wilmington, Ohio
for critical parts needed more frequently throughout the United States. In order
to service customers whose response time requirements are two to four hours,
higher usage parts are maintained at the Company's branch offices or local
attended stocking locations. Customer site parts storage is arranged when
customer response time requirements are two hours or less.
The Company's Field Inventory System ("FIS") is a real time system
which tracks the consumable and repairable parts assigned to its field workforce
and located at distribution centers, field offices or at customer sites. Parts
information processed through FIS is integrated with the Company's other key
systems, including DDG and International Support Information System ("ISIS").
Parts Repair
The Company repairs and refurbishes computer parts and assemblies at 15
depot repair centers in the United States. The Company's repair facilities are
located in : Phoenix (Arizona); Compton and San Francisco (California);
Plantation (Florida); Elk Grove and Elmhurst (Illinois); Boston (Massachusetts);
Nashua (New Hampshire); Grove City, Hilliard and Wilmington (Ohio); Tulsa
(Oklahoma); Malvern (Pennsylvania); Richardson (Texas); and Milwaukee
(Wisconsin). Many of these centers are certified to ISO-9002 quality processes
and standards.
In addition to supporting the Company's own business, these services
are provided primarily for OEMs, distributors, and other third party maintenance
companies. Subassemblies repaired include systems logic boards, hard drive
assemblies, peripherals, power supplies, and related equipment. Continued
investment in repair technology enhances the Company's ability to service
today's latest technology, such as flat-panel displays on laptop computers, and
to perform component-level repair on complex multi-level circuit boards and
subassemblies.
Field Service
The Company delivers support through one of the most extensive field
service infrastructures in the industry. Approximately, 3000 field service
technicians deliver service to more than 51,000 customers at over 182,000
customer sites. These field technicians are based out of more than 150 service
offices located across the United States and Canada. Based on customer
requirements, some Company personnel are based at customer sites.
Technical Support
The Company delivers help desk and software support at all three of its
CSCs. More than 130,000 calls for technical support are processed by these
centers each month, utilizing over 600 customer support representatives. Support
is provided for popular operating systems like Windows(R), MS DOS(R) and Sun
Microsystems Solaris(R), as well as support on network operating systems such as
Novell Netware(R) and Windows NT(R). Groupware products like Lotus Notes and
Internet browsers - including the Netscape Navigator(R) - are fully supported. A
wide variety of business productivity software products are also supported.
The Company is a Microsoft Authorized Support Center, providing help
desk support for a full range of Microsoft business software applications and
operating systems. Technical support is delivered through the CSCs and ranges
from
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basic end-user software support to second level professional support, and work
in conjunction with Microsoft desktop applications and operating systems, like
Microsoft Windows 95(R) and Windows NT(R).
Service Technology
The Company has developed several proprietary technologies for use in
service planning, support and delivery. These service tools include proprietary
databases, remote diagnostic and system monitoring software, and instructional
documentation. These technical support tools not only provide remote and on-site
predictive and remedial service support, but also enable the Company to collect
extensive, objective systems performance measurement information (on the
customer's environment as well as benchmarking against the Company's database)
which its customers can use to identify potential efficiencies, evaluate
competing products and technologies, and determine whether their requirements
are being met.
The Company's proprietary service technologies include ISIS, SERVICE
EDGE and MAXwatch(R). The Company licenses certain of these technologies and
provides other technical support to certain foreign multivendor service
providers, including ICL in Europe and FBA in Australia and New Zealand.
International Support Information System: ISIS is a database accessible
by the Company's CSEs which is comprised of diagnostic and symptom fix data for
thousands of products; service updates; service planning information, such as
machine performance and parts usage information; and remote support capabilities
for large IBM systems, including automatic "call home" to the Company. The
Company believes that ISIS is the most comprehensive service-related database of
any independent computer service organization.
SERVICE EDGE. SERVICE EDGE is a PC-based system installed at the
customer's site which monitors error messages and collects and reports service
data to help customers predict potential system failures and provide customers
with system performance information.
MAXwatch(R). MAXwatch(R) is an on-site program for products of Digital
which monitors system integrity, proactively detects and corrects certain system
errors, and automatically "calls home" for remote technical support when
pre-defined error thresholds are exceeded. A similar product, MAX400, is
available for IBM AS/400 systems.
DecisionOne(R), ISIS, Service Edge, MAXwatch(R), One to 1, NetworkOne,
ExpertOne,CallOne, AssetOne, MainOne, MidrangeOne, and LogisticsOne are service
marks or trademarks owned by the Company. All other brand names, service marks
or trademarks appearing herein are the property of their respective owners.
Training
The Company maintains the technical expertise of its CSEs through
training programs designed to teach the various techniques for determining the
status of a customer's total computer operations. The Company's training offers
support professionals a broad exposure to various computer system technologies.
The Company's training facilities include 22 classrooms, 23,000 square
feet of hands-on lab space, 17 full-time instructors and video specialists and a
curriculum of over 80 courses. The Company has six training centers and labs
located in Frazer, Pennsylvania; Malvern, Pennsylvania; Minneapolis, Minnesota;
Milwaukee, Wisconsin; Tulsa, Oklahoma and Phoenix, Arizona. Six months following
course work, the Company surveys the CSEs to gauge the effectiveness and
applicability of its training curriculum.
CUSTOMERS
The Company services over 51,000 customers at over 182,000 sites across
the United States and Canada. The Company sells services primarily to five types
of customers: large businesses that have complex computing support needs and
typically maintain a data center, distributed computing and work group
environments; medium-sized businesses that rely primarily on distributed systems
for their computing needs; small businesses that principally use LANs and WANs
for computing; individuals who use stand-alone computing systems; and OEMs and
software developers that contract with the Company for warranty services,
logistic support services or help desk support. A significant portion of the
Company's revenues are attributable to large businesses with complex computing
support needs.
COMPETITION
Competition among computer support service providers, both OEM and
independent service organizations, is intense. The Company believes that
approximately 80% of that portion of the hardware maintenance services market
that is related to mainframes and stand alone midrange systems is currently
serviced by OEM service organizations. In addition, the Company believes that
OEM service organizations provide a smaller, but still significant, portion of
the computer maintenance services related to distributed systems, work groups
and PCs. The remainder of the technology support services market is serviced by
a small number of larger, independent companies, such as the Company, offering a
broader range of service capabilities, as well as numerous small companies
focusing on narrower areas of expertise.
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The Company considers its principal competitors to include: IBM and its
affiliate Technology Service Solutions, Compaq/Digital, Unisys Corporation and
Wang Laboratories, Inc., the multivendor service divisions of certain other
OEMs, other national independent service organizations providing service that
are not affiliated with OEMs such as Vanstar Corporation, Entex Corporation, and
various regional service providers.
The Company believes that the primary competitive factors in the
computer services industry are the quality of a company's services, the ability
to service a wide range of products supplied by a variety of vendors, the
geographic coverage of a company's services and the cost to the customer of
those services. The Company believes that customers are increasingly looking for
service providers capable of providing a single source solution for their
increasingly complex multivendor systems. See "Risk Factors -- Competition and
the Competitive Advantages of OEMs."
EMPLOYEES
As of June 30, 1998, the Company had approximately 6,400 full-time and
100 part-time employees. None of the Company's employees is currently covered by
collective bargaining agreements. Management considers employee relations to be
good.
7
<PAGE> 9
Cautionary Statement Concerning Forward-Looking Statements
The information herein contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. These factors include,
but are not limited to, the competitive environment in the computer maintenance
and technology support services industry in general and in the Company's
specific market areas; changes in prevailing interest rates and the availability
of and terms of financing to fund the anticipated growth of the Company's
business; inflation; changes in costs of goods and services; economic conditions
in general and in the Company's specific market areas; demographic changes;
changes in or failure to comply with federal, state and/or local government
regulations; liability and other claims asserted against the Company; changes in
operating strategy or development plans; the ability to attract and retain
qualified personnel; the significant indebtedness of the Company; labor
disturbances; changes in the Company's acquisition and capital expenditure
plans; and other factors referenced herein. In addition, such forward looking
statements are necessarily dependent upon assumptions, estimates and dates that
may be incorrect or imprecise and involve known and unknown risks uncertainties
and other factors. Accordingly, any forward looking statements included herein
do not purport to be predictions of future events or circumstances and may not
be realized. Forward looking statements can be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma," "anticipates," or "intends" or
the negative of any thereof, or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward looking statements. The Company disclaims any obligations to
update any such factors or to publicly announce the results of any revisions to
any of the forward looking statements contained herein to reflect future events
or developments.
RISK FACTORS
LOSS OF CONTRACT-BASED REVENUE
As is customary in the computer services industry, the Company
experiences reductions in its contract based revenue, which accounted for
approximately 89% of the Company's revenues during fiscal 1998, as customers may
eliminate certain equipment or services from coverage under the contracts,
typically upon 30 days' notice, or either cancel or elect not to renew their
contracts upon 30, 60 or 90 days' notice. The Company believes the principal
reasons for the loss of contract based revenue are the replacement of the
equipment being serviced with new equipment covered under a manufacturer's
warranty, the discontinuance of the use of equipment being serviced for a
customer due to obsolescence or a customer's determination to utilize a
competitor's services or to move technical support services in house. There can
be no assurance that the Company will be able to offset the reduction of
contract based revenue and maintain revenue growth through acquisitions and new
contracts in the future. 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.
FAILURE TO PRICE FIXED FEE CONTRACTS
Under many of the Company's contracts, the customer pays a fixed fee
for customized bundled services that are priced by the Company based on its best
estimates of various factors, including estimated future equipment failure
rates, cost of spare parts and labor expenses. There can be no assurance that
the Company will be able to estimate these factors accurately enough to be able
to price these fixed fee contracts on terms favorable to the Company. The
failure of the Company to price its fixed fee contracts accurately could have a
material adverse effect on the Company's profitability.
VARIABILITY OF PER INCIDENT REVENUES
Per incident revenues will increase or decrease from one month to the
next due to the nature of per incident revenue transactions. It is difficult for
management to estimate the impact or amount of future per incident revenues. The
Company may not be able to generate significant amounts of per incident revenue
in the future.
RESTRICTIONS RELATED TO, AND INABILITY TO SERVICE, MERGER FINANCING
In connection with the Merger, the Company entered into financings (the
"Merger Financing") including a new revolving credit facility (the "New Credit
Facility"), the terms of which include significant operating and financial
restrictions, such as limits on the Company's ability to incur indebtedness,
create liens, sell assets, engage in mergers or consolidations, make investments
and pay dividends. In addition, the New Credit Facility requires the Company to
meet certain minimum financial performance measurements. These measurements
include (1) Adjusted EBITDA, (2) Leverage Ratio, (3) Interest Coverage Ratio,
and (4) Fixed Charge Ratio. During fiscal 1998, the Company sought and obtained
amendments to the New Credit Facility. See "Note 9 to the Company's Consolidated
Financial Statements."
The level of the Company's indebtedness could have important
consequences to the Company, including: (i) limiting cash flow available for
general corporate purposes, including acquisitions, because a substantial
portion of the Company's cash
8
<PAGE> 10
flow from operations must be dedicated to debt service; (ii) limiting the
Company's ability to obtain additional debt financing in the future for working
capital, repairable parts purchases, capital expenditures or acquisitions; (iii)
limiting the Company's flexibility in reacting to competitive and other changes
in the industry and economic conditions generally; and (iv) exposing the Company
to risks inherent in interest rate fluctuations because certain of the Company's
borrowings are at variable rates of interest, which could result in higher
interest expense in the event of increases in interest rates. See "Item 7A
Quantitative and Qualitative Disclosures about Market Risk."
The Company's ability to make scheduled payments of principal of, to
pay interest on or to refinance its indebtedness and to satisfy its other debt
obligations will depend upon its future operating performance, which will be
affected by general economic, financial, competitive, legislative, regulatory,
business and other factors beyond its control. The Company currently anticipates
that its operating cash flow, together with borrowings under the New Credit
Facility, will be sufficient to meet its anticipated future operating expenses
and capital expenditures and to service its debt requirements as they become
due. However, if the Company's future operating cash flows are less than
currently anticipated it may be forced, in order to meet its debt service
obligations, to reduce or delay acquisitions, purchases of repairable parts or
capital expenditures, sell assets or reduce operating expenses, including, but
not limited to, investment spending such as selling and marketing expenses,
expenditures on management information systems and expenditures on new products.
If the Company were unable to meet its debt service obligations, it could
attempt to restructure or refinance its indebtedness or to seek additional
equity capital. There can be no assurance that the Company will be able to
effect any of the foregoing on satisfactory terms, if at all. In addition,
subject to the restrictions and limitations contained in the agreements relating
to the Merger Financing, the Company may incur significant additional
indebtedness to finance future acquisitions, which could further adversely
affect the Company's operating cash flows and its ability to service its
indebtedness. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations: Liquidity and Capital Resources."
DEPENDENCE ON COMPUTER INDUSTRY TRENDS
The Company's future success is dependent upon the continuation of a
number of trends in the computer industry, including the migration by
information technology end-users to multivendor and multisystem computing
environments, the overall increase in the sophistication and interdependency of
computing technology, and a focus by information technology managers on cost
efficient management. The Company believes these trends have resulted in a
movement by both end-users and OEMs towards outsourcing and an increased demand
for support service providers that have the ability to provide a broad range of
multivendor support services. There can be no assurance these trends will
continue into the future.
RAPID TECHNOLOGICAL CHANGE
Rapid technological change and compressed product life cycles are
prevalent in the computer industry, which may lead to the development of
improved or lower cost technologies, higher quality hardware with significantly
reduced failure rates and maintenance needs, or customer decisions to replace
rather than continue to maintain aging hardware, and which could result in a
reduced need for the Company's services in the future. Moreover, such rapid
technological changes could adversely affect the Company's ability to predict
equipment failure rates, and, therefore, to establish prices that provide
adequate profitability. Similarly, new computer systems could be built based
upon proprietary, as opposed to open, systems that could not be serviced by the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations: Loss on Asset Sales and Disposals."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends, to a large extent, upon the
efforts and abilities of key managerial employees, particularly the Company's
executive officers. Competition for qualified management personnel in the
industry is intense. The loss of the services of certain of these key employees
or the failure to retain qualified employees when needed could have a material
adverse effect on the Company's business. The Company does not currently
maintain key man insurance.
FAILURE TO MANAGE FUTURE GROWTH AND TO ADAPT TO CHANGES
The Company may not be able to manage its expanding domestic operations
and international affiliations and to adapt its operational and financial
systems to respond to changes in its business environment, while maintaining a
competitive cost structure. The acquisition strategy of the Company and the
expansion of the Company's service offerings have placed and will continue to
place significant demands on the Company and its management to improve the
Company's operational, financial and management information systems, to develop
further the management skills of the Company's managers and supervisors, and to
continue to retain, train, motivate and effectively manage the Company's
employees. For example, the Company's acquisition and integration of BABSS
resulted in the loss of certain members of its finance and accounting
organization which resulted in a difficulty in the timely performance of certain
internal reconciliations and account analyses. As the Company grows internally
or acquires new businesses, the Company may experience similar difficulties in
the future. The failure of the Company to manage its prior or any future growth
and to adapt its operational and financial systems to respond to changes in its
business environment effectively could have a material adverse effect on the
Company.
9
<PAGE> 11
INABILITY TO FUND FUTURE GROWTH
The Company may not be able to maintain and increase its revenue base
and to respond to shifts in customer demand and changes in industry trends if it
is not able to generate sufficient cash flow or obtain sufficient capital for
the purpose of, among other things, financing acquisitions, satisfying customer
contractual requirements and financing infrastructure growth, including a
significant investment in repairable parts, which are classified as non current
assets. There can be no assurance the Company will be able to generate
sufficient cash flow or that financing will be available on acceptable terms (or
permitted to be incurred under the terms of the Merger Financing and any future
indebtedness) to fund the Company's future growth.
FAILURE OF ACQUISITION GROWTH STRATEGY
The Company may not be able to continue its aggressive acquisition
strategy, which it has historically pursued by acquiring certain contracts and
assets in 40 transactions from the beginning of fiscal 1993 through June 30,
1998. Future acquisitions and/or internal revenue growth will be necessary to
offset expected declines in contract based revenues. As a result, the Company
expects to continue to evaluate acquisitions that can provide meaningful
benefits by expanding the Company's existing and future hardware maintenance and
technology support capabilities and leveraging its existing and future
infrastructure. However, risks associated with pursuing an acquisition strategy
of this nature include problems inherent in integrating new businesses,
including potential loss of customers and key personnel and potential disruption
of operations. There can be no assurance that the contracts acquired by the
Company will generate significant revenues and customers covered by such
acquired contracts may terminate such contracts at a rate that may be higher
than the rates at which the Company's contracts have historically been
terminated. There also can be no assurance that suitable acquisition candidates
will be available, that acquisitions can be completed on reasonable terms, that
the Company will successfully integrate the operations of any acquired entities
or that the Company will have access to adequate funds to effect any desired
acquisitions. Future acquisitions may be limited by restrictions in the
Company's indebtedness.
COMPETITION AND THE COMPETITIVE ADVANTAGES OF OEMS
Competition among computer support service providers, both OEM and
independent service organizations, is intense. The Company believes
approximately 80% of that portion of industry hardware maintenance services
related to mainframes and stand alone midrange systems is currently serviced by
OEM service organizations. In addition, the Company believes that OEM service
organizations provide a smaller, but still significant, portion of the computer
maintenance services related to distributed systems, work groups and PCs. The
remainder of the technology support services market is serviced by a small
number of larger, independent companies, such as the Company, offering a broader
range of service capabilities, as well as numerous small companies focusing on
narrower areas of expertise or serving limited geographic areas.
In many instances, OEM service organizations have greater resources
than the Company, and, because of their access to the OEM's engineering data,
may be able to respond more quickly to servicing equipment that incorporates new
or emerging technologies. Moreover, some OEMs, especially in the mainframe
environment, do not make available to end-users or independent service
organizations the technical information, repairable parts, diagnostics,
engineering changes and other support items required to service their products,
and design and sell their products in a manner so as to make it virtually
impossible for a third party to perform maintenance services without potentially
infringing upon certain proprietary rights of the OEM. In addition, OEMs are
sometimes able to develop proprietary remote diagnostic or monitoring systems
which the Company may not be able to offer. Therefore, OEM service organizations
sometimes have a cost and timing advantage over the Company because the Company
must first develop or acquire from another party the required support items
before the Company can provide services for that equipment. An OEM's cost
advantage, the unavailability of required support items or various proprietary
rights of the OEM may preclude the Company from servicing certain products.
Furthermore, OEMs usually provide warranty coverage for new equipment for
specified periods, during which it is not economically feasible for the Company
to compete for the provision of maintenance services. To the extent OEMs choose,
for marketing reasons or otherwise, to expand their warranty periods or terms,
the Company's business may be adversely affected.
POTENTIAL LITIGATION RELATED TO OEM SOFTWARE COPYRIGHTS
In connection with the Company's performance of most hardware
maintenance, the computer system which is being serviced must be turned on for
the purpose of service or repair. When the computer is turned on, the resident
operating system software and, in some cases diagnostic software, is transferred
from a peripheral storage device or a hard disk drive into the computer's random
access memory. Within the past several years, several OEMs have been involved in
litigation with independent service organizations, including the Company, in
which they have claimed such transfer constitutes the making of an unauthorized
"copy" of such software by the independent service organization which infringes
on the software copyrights held by the OEMs. The Company is aware of three cases
in this area which have been decided in favor of the OEM. Although the Company
was not a party in any of these cases, three similar claims have been asserted
against the Company, each of which has been resolved by settlement. Litigation
of this nature can be time consuming and expensive, and there can be no
assurance the Company will not be a party to similar litigation in the future,
or that such litigation would be resolved on terms that do not have a material
adverse effect on the Company.
TERMINATION OF THE IBM CONSENT DECREE
In June 1994, International Business Machines Corporation ("IBM") filed
in the United States District Court for the Southern District of New York (the
"Court") a motion to terminate a 1956 consent decree (the "IBM Consent Decree")
that, among other things, requires IBM to provide repairable parts,
documentation and other support items for IBM electronic data processing systems
to third parties on reasonable terms and places other restrictions on IBM's
conduct. On January 18, 1996, the Court entered an order approving a
modification of the IBM Consent Decree that, among other things, terminated the
IBM Consent Decree except insofar as it applies to the System 360/370/390
(mainframes) and AS/400 (midrange) families of IBM products. In July 1996, IBM
and the U.S. Department of Justice ("DOJ") reached an agreement in tentative
settlement of the remainder of IBM's motion and jointly moved to terminate, on a
phased basis, the remaining provisions of the IBM Consent Decree (the "Joint
Motion"). On May 1, 1997 the Court granted the Joint Motion. Portions of the
order granting the Joint Motion have been appealed. Consequently, certain of the
remaining provisions of the IBM Consent Decree (primarily relating to sales and
marketing restrictions on IBM) terminate either immediately upon, or within six
months of, entry of the Court order; all of the other remaining provisions
(including those requiring IBM to provide parts and other support items to third
parties) terminate on July 2, 2000 with respect to AS/400 systems and on July 2,
2001 with respect to System 360/370/390 mainframes.
10
<PAGE> 12
The impact, if any, upon the Company of the termination of such sales and
marketing restrictions is impossible to predict because it depends upon what
changes, if any, IBM will make in its sales and marketing policies and
practices. As a result of the termination of the IBM Consent Decree, the
Company's ability to service midrange and mainframe products may be adversely
affected. Furthermore, as the Company's business is highly dependent upon its
ability to service a wide variety of equipment in a multivendor environment, the
inability to compete effectively for the service of IBM mainframes and midrange
products could cause the loss of a substantial portion of the Company's customer
base to IBM or an IBM affiliate, which would have a material adverse effect on
the Company's business.
DIFFICULTIES IN MANAGING INVENTORIES OF CONSUMABLE AND REPAIRABLE PARTS
In order to service its customers, the Company is required to maintain
a high level of consumable and repairable parts for extended periods of time.
Any decrease in the demand for the Company's maintenance services could result
in a substantial portion of the Company's consumable and repairable parts
becoming excess, obsolete or otherwise unusable. In addition, rapid changes in
technology could render significant portions of the Company's consumable and
repairable parts obsolete, thereby giving rise to write-offs and a reduction in
profitability. The inability of the Company to manage its consumable and
repairable parts or the need to write them off in the future could have a
material adverse effect on the Company's business, financial results and results
of operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations: Loss on Asset Sales and Disposals."
SINGLE SUPPLIERS FOR CONSUMABLE AND REPAIRABLE PARTS
Consumable and repairable parts purchases are made from OEMs and other
vendors. The Company from time to time will have only a single supplier for a
particular part which, in some cases, may be the Company's OEM customer. Should
a supplier be unwilling or unable to supply any part or component in a timely
manner, the Company's business could be adversely affected. In addition, the
Company is dependent upon IBM for obtaining certain parts that are critical to
the maintenance of certain IBM mainframe and midrange systems that IBM is
currently required to make available to third parties pursuant to the IBM
Consent Decree. There can no assurance that IBM will continue to make parts
available for AS/400 Systems after July 2, 2000 and for System 360/370/390
mainframes after July 2, 2001. Even if such parts or components are available, a
shortage of supply could result in an increase in procurement costs which, if
not passed on to the customer, may adversely affect the Company's profitability.
CONTROL BY DLJ
Approximately 87.4% of the outstanding shares of the Company's common
stock are currently held by the DLJ Group. As a result of its stock ownership
and the Investors' Agreement (which includes members of management to the extent
their shares are acquired through the Company's Direct Investment Program), the
DLJ Funds control the Company and have the power to elect a majority of the
Company's directors, appoint new management and approve any action requiring the
approval of the holders of the Company's common stock, including adoption of
certain amendments to the Company's certificate of incorporation and approving
mergers or sales of all or substantially all of the Company's assets. The
directors elected by the DLJ Funds have the authority to effect decisions
affecting the capital structure of the Company, including the issuance of
additional capital stock, the implementation of stock repurchase programs and
the declaration of dividends. Following the Merger, there has been a limited
market for the Company's common stock because of the significant ownership of
the DLJ Group. As a result, stockholders may experience difficulty selling
shares or obtaining prices that reflect the value thereof.
DILUTION
On August 7, 1997, the Company granted 1,179,000 options to purchase
shares of Company Common Stock to members of the Company's management, and
granted an additional 725,828 options during the remainder of fiscal 1998. The
aggregate number of shares of Company Common Stock reserved for issuance
pursuant to the Company's Management Incentive Plan was 1,698,280 as of June 30,
1998, which includes approximately 256,000 shares to accommodate options rolled
over from the Company's previous stock option plan. In July 1998, subject to
stockholder approval, the Company's Board of Directors increased the aggregate
number of shares of Company Common Stock reserved for issuance to the Management
Incentive Plan by 250,000 shares for a total of 1,948,280 shares. The exercise
price of any options granted pursuant to the Management Incentive Plan may be
less than the fair market value of the shares of Company Common Stock. Any such
grant or exercise of any stock option, will dilute the equity ownership
percentage of Company stockholders may result in a decrease of the book value of
the Company Common Stock per share. In addition, pursuant to the Company's
Direct Investment Program, certain members of management purchased approximately
97,520 shares of Company Common Stock at the time of the Merger. The aggregate
number of shares reserved for issuance pursuant to the Direct Investment Plan is
238,095. These purchases, and any future purchases under the plan, would also
dilute the equity ownership percentage of Company stockholders.
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<PAGE> 13
ITEM 2. PROPERTIES
Item 2 is presented with respect to both registrants submitting this
filing, DecisionOne Holdings Corp. and DecisionOne Corporation.
FACILITIES
The Company leases certain office and warehouse facilities under
operating leases and subleases that expire at various dates through May 31,
2006. The Company's executive offices are located at the Frazer, Pennsylvania
facilities listed below. The principal facilities currently leased or subleased
by the Company are as follows:
SQUARE LEASE
FOOTAGE EXPIRATION
------- ----------
Frazer, Pennsylvania (Office) 109,800 December 2005
Frazer, Pennsylvania (Office) 35,968 June 2003
Malvern, Pennsylvania (Depot/Call Center) 200,000 February 2006
Richfield, Minnesota (Call Center) 83,360 May 2006
Hayward, California (Depot) 112,904 September 1999
Northborough, Massachusetts (Depot) 52,778 July 2001
Grove City, Ohio (Depot) 116,573 July 2002
Phoenix, Arizona (Depot) 60,000 April 2001
In addition, the Company owns a facility located in Tulsa, Oklahoma
(multipurpose) and a facility located in the suburbs of Milwaukee, Wisconsin
(logistics services). The Company's management believes that its current
facilities will be adequate to meet its projected growth for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
Item 3 is presented with respect to both registrants submitting this
filing, DecisionOne Holdings Corp. and DecisionOne Corporation.
The Company is a party, from time to time, to lawsuits arising in the
ordinary course of business. The Company believes it is not currently a party to
any material legal proceedings. However, within the past several years, several
OEMs have been involved in litigation with independent service organizations,
including the Company, in which such OEMs have claimed infringement of software
copyrights held by the OEMs. The Company currently is not involved in any such
litigation. See "Risk Factors -- Potential Litigation Related to OEM Software
Copyrights."
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 United
States Environmental Protection Agency as Superfund Sites: (i) PAS Irwin Dump
Site, Oswego, New York (and six satellite sites, including the Fulton Terminals
Site, Fulton, New York); (ii) North Penn Area 6 Site, Lansdale, Pennsylvania;
(iii) Revere Chemical Site, Nockamixon, Pennsylvania; and (iv) Malvern TCE site,
Malvern, Pennsylvania. In addition, the Company received a notice several years
ago that it may be a potentially responsible party with respect to the Boarhead
Farms Site, Bridgeton, Pennsylvania, at a site related to the Revere Chemical
site, but has not received any additional communication with respect to that
site. Under applicable law, all parties responsible for disposal of hazardous
substances at those sites are jointly and severally liable for clean up costs.
The Company has estimated that its share of the costs of the clean up of one of
the sites will be approximately $500,000, which has been accrued for in the
accompanying consolidated balance sheets as of June 30, 1998 and 1997. Complete
information as to the scope of required clean up at these sites is not yet
available and, therefore, management's evaluation may be affected as further
information becomes available. However, in light of information currently
available to management, including information regarding assessments of the
sites to date and the nature of involvement of the Company's alleged predecessor
at the sites, it is management's opinion that the Company's potential additional
liability, if any, for the cost of clean up of these sites will not be material
to the consolidated financial position, results of operations or liquidity of
the Company. See Note 16 to the Company's Consolidated Financial Statements.
12
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1998.
13
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE OF THE COMMON STOCK
The Common Stock of DecisionOne Holdings Corp. is quoted on the Nasdaq
National Market System under the symbol "DOCI". As of September 9, 1998, there
were 80 stockholders of record. The following table shows, for the periods
indicated, the high and low sale prices of a share of the Company Common Stock
as reported by the Nasdaq National Market System.
HIGH LOW
---- ---
1996
Second Quarter* 29 3/8 20
Third Quarter 26 1/4 13
Fourth Quarter 16 3/4 13 1/4
1997
First Quarter 19 14 3/4
Second Quarter 22 3/4 14 3/4
Third Quarter 30 22 3/8
Fourth Quarter 34 5/8 24 1/2
1998
First Quarter 27 3/8 17 1/2
Second Quarter 23 1/2 17 1/2
Third Quarter** 20 1/8 14
* The Common Stock has been quoted and traded on the Nasdaq National
Market System since April 4, 1996.
** Through September 9, 1998.
Since its initial public offering in 1996, the Company has not paid any
cash dividends on its Common Stock and it does not have any present intention to
commence payment of any cash dividends. The Company intends to retain earnings
to provide funds for the operation and expansion of the Company's business and
to repay outstanding indebtedness. The Company's debt agreements and other
agreements to which it is a party contain certain covenants restricting the
payment of dividends on, or repurchases of, Company Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data sets forth, for the
periods and the dates indicated, selected consolidated financial data of the
Company, derived from the historical consolidated financial statements of the
Company. The consolidated financial data of the Company for the years ended June
30, 1998, 1997 and 1996 and as of June 30, 1998 and 1997 are derived from the
Company's audited consolidated financial statements included elsewhere herein.
The information set forth below is qualified by reference to and should be read
in conjunction with the Company's and DecisionOne Corporation and Subsidiaries'
Consolidated Financial Statements and Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
14
<PAGE> 16
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------------
THE COMPANY 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PRO FORMA LOSS PER COMMON SHARE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (1)(4)
Revenues $ 805,717 $ 785,950 $ 540,191 $ 163,020 $ 108,416
Income (loss) before discontinued operations and
extraordinary item (183,130) 31,084 20,789 41,415 10,112
Net Income (loss) (2) (183,130) 31,084 18,862 42,528 10,112
Pro forma net loss (unaudited) (3) (124,266)
Pro forma loss per common share (unaudited) (3) (9.91)
BALANCE SHEET DATA: (1)(4)
Consumable parts $ 23,097 $ 29,052 $ 29,770 $ 3,455 $ 3,584
Repairable parts 142,446 205,366 154,970 27,360 9,473
Total assets 541,987 623,105 514,510 135,553 35,469
Debt, less current portion 731,012 232,721 188,582 6,157 2,366
Redeemable preferred stock -- -- -- 6,811 6,436
Total shareholders' equity (deficit) (361,606) 214,888 180,793 14,677 (27,627)
</TABLE>
(1) The Selected Financial Data presented includes the results of
operations and balance sheet data of the Company, including the
following acquisitions: Servcom from September 1, 1994, BABSS from
October 20, 1995 and certain assets of the U.S. computer service
business of Memorex Telex from November 15, 1996.
(2) The year ended June 30, 1994 includes income taxes based on an
effective tax rate substantially less than the 40% effective tax rate
for the year ended June 30, 1996 and the 41% effective tax rate for the
year ended June 30, 1997. The years ended June 30, 1998 and 1995
includes a $15.8 million and $23.1 million, respectively net benefit
arising from the recognition of future tax benefits of tax loss
carryforwards and temporary timing differences. See Note 10 to the
Company's Consolidated Financial Statements for additional information.
(3) Pro forma net loss and loss per common share information for the fiscal
year ended June 30, 1998 is presented to reflect the Merger and related
transactions as if these had occurred on July 1, 1997. Historical per
share data is not presented as this would not be meaningful. See Note 3
to the Company's Consolidated Financial Statements for additional
information.
(4) Certain reclassifications have been made to prior years' data in order
to conform to the 1998 presentation.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------------
DECISIONONE CORPORATION 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (1)(4)
Revenues $ 805,717 $ 785,950 $ 540,191 $ 163,020 $ 108,416
Income (loss) before discontinued operations and
extraordinary item (171,641) 31,084 20,789 41,415 10,112
Net Income (loss) (2) (171,641) 31,084 18,862 42,528 10,112
Pro forma net loss (unaudited) (3) (111,357)
BALANCE SHEET DATA: (1)(4)
Consumable parts $ 23,097 $ 29,052 $ 29,770 $ 3,455 $ 3,584
Repairable parts 142,446 205,366 154,970 27,360 9,473
Total assets 606,439 623,105 514,510 135,553 35,469
Debt, less current portion 638,766 232,721 188,582 6,157 2,366
Redeemable preferred stock -- -- -- 6,811 6,436
Total shareholder's equity (deficit) (204,468) 214,888 180,793 14,677 (27,627)
</TABLE>
(1) The Selected Financial Data presented includes the results of
operations and balance sheet data of DecisionOne Corporation, including
the following acquisitions: Servcom from September 1, 1994, BABSS from
October 20, 1995 and certain assets of the U.S. computer service
business of Memorex Telex from November 15, 1996.
(2) The year ended June 30, 1994 includes income taxes based on an
effective tax rate substantially less than the 40% effective tax rate
for the year ended June 30, 1996 and the 41% effective tax rate for the
year ended June 30, 1997. The years ended June 30, 1998 and 1995
includes a $14.8 million and $23.1 million, respectively net benefit
arising from the recognition of future tax benefits of tax loss
carryforwards and temporary timing differences. See Note 10 to
DecisionOne Corporation's Consolidated Financial Statements for
additional information.
15
<PAGE> 17
(3) Pro forma net loss for the fiscal year ended June 30, 1998 is presented
to reflect the Merger and related transactions as if these had occurred
on July 1, 1997. See Note 3 to DecisionOne Corporation's Consolidated
Financial Statements for additional information.
(4) Certain reclassifications have been made to prior years' data in order
to conform to the 1998 presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements, DecisionOne Corporation and
Subsidiaries' Consolidated Financial Statements and the respective Notes
thereto, as included in Item 8 herein. Item 7 and 7A are presented with respect
to both registrants submitting this filing, DecisionOne Holdings Corp. and
DecisionOne Corporation. (As used in this Item 7, 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.)
This discussion contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" in Item 1.
COMPANY HISTORY
Founded in 1969, the Company began operations as a provider of key
punch machines under the tradename "Decision Data". During the 1980s, its
operations expanded to include the sale of midrange computer hardware and
related maintenance services. During fiscal 1993, the Company decided to focus
on providing computer maintenance and support services and sold its computer
hardware products business.
Since the beginning of fiscal 1993, the Company established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of 40
complementary businesses. Significant acquisitions included IDEA Servcom, Inc.,
certain assets and liabilities of which were acquired in August 1994 for cash
consideration of approximately $29.5 million and 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
were acquired in November 1996 for cash consideration of approximately $24.4
million after certain purchase price adjustments. These acquisitions were
accounted for as purchase transactions.
At the time of its acquisition by the Company, BABSS was among the
largest independent, multivendor service organizations servicing end-user
organizations and OEMs. Prior to the acquisition of BABSS, the Company had
higher gross margins than BABSS principally because approximately 30% of the
Company's revenues in fiscal 1995 were attributable to higher margin contracts
involving systems that can be serviced by a limited number of service providers
("proprietary systems"), whereas BABSS had limited revenues from proprietary
systems.
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 during fiscal 1998
were derived from maintenance contracts covering a broad spectrum of computer
hardware. These contracts typically have a stipulated monthly fee over a fixed
initial term (typically one year) and continue thereafter unless canceled by
either party. Such contracts generally provide that customers may eliminate
certain equipment and services from the contract upon notice to the Company. In
addition, the Company enters into per-incident arrangements with its customers.
Per incident contracts can cover a range of bundled services for computer
maintenance or support services or for a specific service, such as network
support or equipment relocation services. Another form of per incident service
revenues includes time and material billings for services as needed, principally
maintenance and repair, provided by the Company.
Furthermore, the Company derives 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.
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 revenue "reduction" to grow its
revenues and seeks revenue growth from two principal sources: internally
generated sales from its direct and indirect sales force and the acquisition of
contracts and assets of other service providers. While the Company historically
has been able to offset the erosion of contract-based revenue and maintain
revenue growth through acquisitions and new contracts, notwithstanding the
reduction in contract based revenue, there can be no assurance it will continue
to do so in the future, and any failure to consummate acquisitions, enter into
new contracts or add additional services and equipment to existing contracts
could have a material adverse effect on the Company's profitability.
16
<PAGE> 18
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 the Merger with Quaker
Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II. 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 among the Company and Quaker dated May 4, 1997, as amended (the "Merger
Agreement").
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 the Company, and the holders of approximately 94.7% of shares of
DecisionOne Holdings Corp. common stock outstanding immediately prior to the
Merger received $23 in cash in exchange for these shares. Holders of
approximately 5.3% of shares of DecisionOne Holdings Corp. 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 was
approximately $940 million, including refinancing of DecisionOne Corporation's
revolving credit facility (See Note 3 and Note 9 to the Company's Consolidated
Financial Statements).
As a result of the Merger, the Company incurred various expenses,
aggregating approximately $69.0 million on a pretax basis (approximately $63.5
million after related tax benefit), subject to adjustment, in connection with
consummating the transaction. These costs consisted primarily of compensation
costs, underwriting discounts and commissions, professional and advisory fees
and other expenses. The Company reported this one-time charge during the first
quarter of fiscal 1998. In addition to these expenses, the Company also incurred
approximately $22.3 million of capitalized debt issuance costs associated with
the Merger Financing. These costs will be charged to expense over the terms of
the related debt instruments (see "Liquidity and Capital Resources" and Note 9
to the Company's Consolidated Financial Statements.)
RESULTS OF OPERATIONS
The following discussion of results of operations is presented for the
fiscal years ended June 30, 1998, 1997 and 1996. The results of operations of
the Company include the operations of Memorex Telex from November 15, 1996, and
BABSS from October 20, 1995.
The following tables set forth, for the periods indicated, certain
operating data expressed in dollar amounts and as a percentage of revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 805,717 $ 785,950 $ 540,191
Cost of Revenues 613,806 584,755 402,316
--------- --------- ---------
Gross Profit 191,911 201,195 137,875
Selling, general and administrative expenses 142,462 105,675 69,137
Amortization of intangibles 27,169 23,470 15,673
Merger expenses 69,046 -- --
Loss on asset sales and disposals 87,458 -- --
Employee severance and unutilized lease losses -- 4,300 3,692
--------- --------- ---------
Total operating expenses 326,135 133,445 88,502
--------- --------- ---------
Operating income (loss) (134,224) 67,750 49,373
Interest expense, net of interest income 64,683 14,698 14,714
Provision (benefit) for income taxes (15,777) 21,968 13,870
Extraordinary item - loss on early extinguishment of debt -- -- (1,927)
--------- --------- ---------
Net income (loss) $(183,130) $ 31,084 $ 18,862
========= ========= =========
OTHER DATA:
EBITDA (1) $ 166,834 $ 172,939 $ 114,816
Less: Amortization of repairable parts (81,597) (63,870) (37,869)
--------- --------- ---------
Adjusted EBITDA (1) 85,237 109,069 76,947
========= ========= =========
Net cash provided by operating activities 13,337 88,974 51,894
Net cash (used in) investing activities (98,629) (129,244) (346,354)
Net cash provided by financing activities 80,830 42,926 300,022
</TABLE>
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<PAGE> 19
(1) "EBITDA" represents income (loss) from continuing operations before
interest expense, interest income, income taxes (benefit),
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 fiscal year ended
June 30, 1997), merger expenses (approximately $69.0 million for the
year ended June 30, 1998), loss on asset sales and disposals
(approximately $87.5 million for the year ended June 30, 1998), a
special charge to the provision for uncollectible receivables
(approximately $12.3 million for the year ended June 30, 1998), and
incremental charges related to the Company's ongoing service delivery
re-engineering program (approximately $7.7 million during the fiscal
year ended June 30, 1998). "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 by the Company in connection with the merger, and
because the Company believes that Adjusted EBITDA is a more-consistent
indicator of the Company's ability to meet its debt service, capital
expenditure and working capital requirements.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues 100.0% 100.0% 100.0%
Cost of Revenues 76.2% 74.4% 74.5%
----- ----- -----
Gross Profit 23.8% 25.6% 25.5%
Selling, general & administrative expenses 17.7% 13.4% 12.8%
Amortization of intangibles 3.4% 3.0% 2.9%
Merger expenses 8.6% -- --
Loss on asset sales and disposals 10.9%
Employee severance and unutilized lease losses 0.0% 0.5% 0.7%
Total operating expenses 40.5% 17.0% 16.4%
Operating income (loss) (16.7)% 8.6% 9.1%
Interest expense, net of interest income 8.0% 1.9% 2.7%
Provision (benefit) for income taxes (2.0)% 2.8% 2.6%
Extraordinary item - loss on early extinguishment of debt -- -- (0.4)%
===== ===== =====
Net income (loss) (22.7)% 4.0% 3.5%
===== ===== =====
</TABLE>
Overview
The Company reported net income (loss) of $(183.1) million, $31.1
million, and $18.9 million in fiscal 1998, 1997 and 1996, respectively.
Operating income (loss) for the respective periods was ($134.2) million, $67.8
million, and $49.4 million. Operating loss for the fiscal year ended June 30,
1998 includes merger expenses totaling $69.0 million, a non-recurring loss on
asset sales and disposals of $87.5 million, a special charge to the provision
for uncollectible receivables of $12.3 million and $7.7 million for incremental
charges related to the Company's ongoing service delivery re-engineering
program. Operating income for the fiscal period ended June 30, 1997 and 1996
included special charges for employee severance and unutilized lease losses of
$4.3 and $3.7 million respectively. Excluding the respective charges in the
1998, 1997 and 1996 periods, operating income was $42.3 million for fiscal 1998
compared to $72.1 million for fiscal 1997 and $53.1 million for fiscal 1996.
The Company's fiscal year ended 1998 EBITDA -- as defined in footnote
(1) above -- was $166.8 million, as compared to EBITDA of $172.9 million for the
fiscal year ended June 30, 1997 and EBITDA of $114.8 million for the fiscal year
ended June 30, 1996. Adjusted EBITDA was $85.2 million, $109.1 million, and
$76.9 million in fiscal 1998, 1997 and 1996, respectively.
A more detailed discussion of items affecting the comparison of
operating results is provided below.
Fiscal 1998 Compared to Fiscal 1997
Revenues: Revenues increased by $19.7 million, or 2.5%, to $805.7
million for the fiscal year ended June 30, 1998 from $786.0 million for the
fiscal year ended June 30, 1997. This increase is attributable primarily to the
inclusion of revenues for service contracts acquired from Memorex Telex on
November 15, 1996 for an additional 4.5 months during fiscal 1998. Excluding the
Memorex Telex related increase, revenues declined during the fiscal year ended
June 30, 1998 principally due to lower monthly maintenance contract-based
revenues as a result of equipment cancellations exceeding sales of new
contracts.
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<PAGE> 20
The Company has taken actions to update its sales approach to the
market including the recent employment of important executive and other sales
management. While the Company expects these actions and the future acquisition
of service contracts from other business to result in revenue growth from
current levels, the timing of such revenue growth, if any, is uncertain.
Cost of Revenues: Cost of revenues increased by $29.0 million, or 5.0%,
to $613.8 million for the fiscal year ended June 30, 1998 from $584.8 million
for the fiscal year ended June 30, 1997. This increase is due principally to a
$17.7 million increase in the amortization of repairable parts from $63.9
million for the year ended June 30, 1997 to $81.6 million for the year ended
June 30, 1998. The parts amortization increase resulted primarily from higher
average levels of repairable parts on hand in fiscal 1998 in comparison to
fiscal 1997 and the use of shorter lives for personal computer parts purchased
in fiscal 1998. The inclusion of the costs of servicing contracts acquired from
Memorex Telex on November 15, 1996 for an additional 4.5 months during fiscal
1998 compared to fiscal 1997 also contributed to the increase in cost of
revenues.
Gross Profit Percentage: As a percentage of revenues, gross profit
decreased from 25.6% for the fiscal year ended June 30, 1997 to 23.8% for the
fiscal year ended June 30, 1998. The decline in gross profit percentage is
primarily attributable to the aforementioned increase in the amortization of
repairable parts. Future margin performance is difficult to predict as it will
be driven by the results of the aforementioned actions taken by the Company to
generate revenue growth.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by $36.8 million, or 34.8%, to $142.5 million
for the fiscal year ended June 30, 1998 from $105.7 million for the fiscal year
ended June 30, 1997. This increase is primarily attributable to (1) a special
charge to the provision for uncollectible receivables of $12.3 million as a
result of changes in management's estimates used to assess the adequacy of the
uncollectible receivable allowance, (2) incremental consulting fees of
approximately $7.7 million incurred in connection with the Company's
re-engineering efforts, (3) the inclusion of an additional 4.5 months of costs
related to the acquisition of Memorex Telex service contracts, (4) the
development of new information systems for the Company's central dispatch and
service contract administration processes and (5) increases in sales employment
costs.
Amortization of Intangibles: Amortization of intangible assets
increased by $3.7 million, or 15.7%, from $23.5 million for the fiscal year
ended June 30, 1997 to $27.2 million for the fiscal year ended June 30, 1998.
This increase was attributable principally to the amortization of intangibles
resulting from the Memorex Telex acquisition and the acquisition of service
contracts of several other complementary businesses.
Loss on Asset Sales and Disposals: Management determined that over 1.2
million of its computer parts were obsolete during its annual fourth quarter
physical inventory. These parts were retired and subsequently sold to salvage
dealers for nominal scrap value. The parts obsolescence was principally due to
the convergence of significant changes in the Company's business operations and
the computer service industry, which the Company expects will continue. The
significant changes include: (1) accelerated technology migration trends as
customers modify their computing environments to remediate year 2000 ("Y2K")
problems, (2) increasing shifts in demand from data center and midrange systems
to desktop computing environments, and (3) declining life cycles of the products
under current and anticipated service contracts due to increasingly rapid
changes in technology. The abnormal nature of this retirement and subsequent
sale required immediate loss recognition of $75 million.
As a result of the abnormal retirement of computer parts and related
life studies, the Company will revise the useful lives of repairable parts and
increase the obsolescence provision for consumable parts prospectively.
Effective July 1, 1998, the Company will amortize its existing composite group
of repairable parts and future repairable parts purchases over an estimated
average remaining life of three years. Management expects the reduction in
future amortization expense that will result from the abnormal retirement will
be substantially offset by the increased amortization and obsolescence charges
on its remaining group of parts and future parts purchases.
In connection with the aforementioned acquisition of BABSS, the Company
acquired contractual profit participation rights pursuant to an existing
agreement between BABSS and ICL Sorbus Limited ("ICL"). On June 29, 1998, the
Company sold all of its contractual profit participation rights back to ICL at a
pretax loss of approximately $12.5 million. Operating income reflects $0.5
million, $1.7 million, and $0.0 million in 1998, 1997, and 1996, respectively,
for amounts earned pursuant to these rights.
Interest Expense: The Company's interest expense, net of interest
income, increased by $50.0 million from $14.7 million for the fiscal year ended
June 30, 1997 to $64.7 million for the fiscal year ended June 30, 1998.
19
<PAGE> 21
DecisionOne Corporation interest expense, net of interest income, increased by
$37.5 million from $14.7 million for the fiscal year ended June 30, 1997 to
$52.2 million for the fiscal year ended June 30, 1998. The respective increases
are primarily attributable to the Company's increased debt levels as a result of
the Merger (see "Liquidity and Capital Resources"). The interest expense, net of
interest income, is higher for the Company than DecisionOne Corporation as a
result of interest expense on $85 million of 11-1/2% Senior Discount Debentures
issued by Holdings in connection with the Merger and interest income on a $59.1
million parent company loan receivable held by DecisionOne Corporation.
Income Taxes: The Company's income tax provision for the fiscal year
ended June 30, 1998 reflects an estimated effective income tax benefit of
approximately 8%, while the effective income tax expense for the fiscal year
ended June 30, 1997 was approximately 41%. The change in the Company's
anticipated effective income tax rate was due primarily to the recording of a
valuation allowance for financial reporting purposes to reduce the tax benefit
recognized on operating loss carryforwards generated during fiscal 1998.
Fiscal 1997 Compared to Fiscal 1996
Revenues: Revenues increased by $245.8 million, or 45.5%, to $786.0
million for the fiscal year ended June 30, 1997 from $540.2 million for the
fiscal year ended June 30, 1996. This increase is attributable primarily to the
full period effect of the BABSS acquisition, which occurred on October 20, 1995.
To a lesser degree, this increase is attributable to the acquisition of the
service contracts of several complementary businesses, principally Memorex Telex
on November 15, 1996.
Cost of Revenues: Cost of revenues increased by $182.5 million, or
45.4%, to $584.8 million for the fiscal year ended June 30, 1997 from $402.3
million for the fiscal year ended June 30, 1996. This increase is attributable
primarily to the full period effect of the BABSS acquisition, which occurred on
October 20, 1995. To a lesser degree, this increase is attributable to the
acquisition of the service contracts of several complementary businesses,
principally Memorex Telex on November 15, 1996.
Gross Profit Percentage: As a percentage of revenues, gross profit
increased slightly from 25.5% for the fiscal year ended June 30, 1996 to 25.6%
for the fiscal year ended June 30, 1997.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by $36.6 million, or 53.0%, to $105.7 million
for the fiscal year ended June 30, 1997 from $69.1 million for the fiscal year
ended June 30, 1996. This increase is primarily attributable to the full period
effect in fiscal 1997 of the BABSS acquisition, and to a lesser degree, to the
acquisition of Memorex Telex in fiscal 1996. As a percentage of revenues,
selling, general and administrative expenses increased to 13.4% for the fiscal
year ended June 30, 1997 from 12.8% for the fiscal year ended June 30, 1996.
Amortization of Intangibles: Amortization of intangible assets
increased by $7.8 million, or 49.7%, from $15.7 million for the fiscal year
ended June 30, 1996 to $23.5 million for the fiscal year ended June 30, 1997.
This increase was attributable principally to the amortization of intangibles
resulting from the BABSS and Memorex Telex acquisitions.
Employee severance and unutilized lease costs: During the fiscal year
ended June 30, 1997, the Company recorded $4.3 million in employee severance and
unutilized lease/contract costs, in connection with specific acquisitions.
During fiscal 1996, the Company recorded $3.7 million in employee severance and
unutilized lease costs. These costs were related principally to future rent
obligations and related costs for facilities of the Company that the Company
determined were no longer required as a result of the acquisition of BABSS. (See
Note 16 to the Company's Consolidated Financial Statements for additional
information).
Interest Expense: Interest expense, net of interest income, equaled
approximately $14.7 million for each of the fiscal years ended June 30, 1997 and
1996. This was the result of two offsetting factors, as the Company's reduced
average borrowing rate on long-term indebtedness, (approximately 6.4% for the
fiscal year ended June 30, 1997 as compared to 9.0% for the fiscal year ended
June 30, 1996) substantially offset the increase in average borrowings during
the fiscal year ended June 30, 1997. The reduced average borrowing rate resulted
from the refinancing of the Company's revolving credit facility in April, 1996.
The increased average borrowings during fiscal 1997 were attributable primarily
to the funding requirements of several acquisitions, principally Memorex Telex.
Income Taxes: The Company's income tax provision for the fiscal year
ended June 30, 1997 reflects an estimated effective income tax rate of
approximately 41%, while the effective income tax rate for the fiscal year ended
June 30, 1996 was approximately 40%. This increase in the Company's anticipated
effective income tax rate was due primarily to the prior-year impact of certain
non-recurring foreign income tax benefits relating to net operating loss
carryforwards.
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS AND OTHER TAX CREDITS
As of June 30, 1998, the Company had tax loss carryforwards of
approximately $130.4 million, $109.9 million and $4.0 million for Federal, state
and foreign income tax purposes, respectively, which are scheduled to expire
between 1999 and 2013. The Company also had minimum tax credits of approximately
$2.8 million as of June 30, 1998, with no applicable expiration period. These
carryforwards and credits may be utilized, as applicable, to reduce future
taxable income.
20
<PAGE> 22
As a result of the Company's merger with Quaker on August 7, 1997 an
"ownership change" occurred pursuant to Section 382 of the Internal Revenue
Code. Accordingly, for U.S. Federal income tax purposes, net operating loss and
tax credit carryforwards of approximately $27.9 million arising prior to the
ownership change are limited during any future period to the Section 382
"limitation amount" of approximately $9.0 million per annum. For financial
reporting purposes, the tax benefit recognized for these carryforwards has been
reduced by a valuation allowance (See Note 10 to the Company's Consolidated
Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flow from
operations and borrowings under its new $105 million revolving credit facility
("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, LIBOR (plus
applicable margins not to exceed 3.0%, as amended) or the Prime Rate (plus
applicable margin not to exceed 1.75%). (See Note 9 to the Company's
Consolidated Financial Statements.) 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 Revolving
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 on August 7, 1997. As of June 30, 1998, the Company had outstanding
approximately $744.3 million of debt, as compared to approximately $237.5
million as of June 30, 1997. (See Note 9 to the Company's Consolidated Financial
Statements.) The Company's significant debt service obligations could, under
certain circumstances, have material consequences to security holders of the
Company. See "Risk Factors", included herein under Item 1.
In connection with the Merger, Holdings received proceeds of $85
million from the issuance 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 a new syndicated credit facility providing 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), 9-3/4% Notes, the
initial borrowings under the new credit facility and the purchase of
approximately $225 million of Holdings common stock by the DLJ Group have been
used to finance the payments of cash to cash-electing shareholders, to pay the
holders of stock options and stock warrants canceled or converted, as
applicable, in connection with the merger, to repay DecisionOne Corporation's
existing revolving credit facility and to pay expenses incurred in connection
with the merger. See Note 3 and Note 9 to the Company's and DecisionOne
Corporation's Consolidated Financial Statements 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 to revise certain financial performance measurements. The
Company is in compliance with its covenants under the amended New Credit
Facility as of June 30, 1998. (See Note 9 to the Company's Consolidated
Financial Statements.)
The Company incurred approximately $4.7 million in incremental
expenditures for information systems and related re-engineering initiatives in
fiscal 1998 and has budgeted to incur an additional $16.0 million in fiscal
1999. The initiatives that are being funded include the following: (i)
enhancements to the Company's service entitlement process which will further
ensure that customers are billed for all work performed; (ii) improvements to
the Company's dispatch system and field engineer data collection, technical
support tools and service delivery processes, all of which are designed to
increase productivity; (iii) enhancements to the Company's help desk and central
dispatch systems to provide an integrated support solution to the customer base,
and (iv) improvements to the Company's field inventory tracking system which
will facilitate increased transfer of consumable and repairable parts among
field locations and reduce purchases of repairable parts. There can be no
assurance that the 1999 budgeted amounts will be so expended by the Company, nor
when these amounts will be so expended.
The Company currently anticipates that its operating cash flow,
together with borrowings under the New Credit Facility, will be sufficient to
meet its anticipated future operating expenses and capital expenditures and to
service its debt requirements as they become due. However, the Company's ability
to make scheduled payments of principal of, to pay interest on or to refinance
its indebtedness and to satisfy its other debt obligations will depend upon its
future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory, business and other factors
beyond its control. See "Risk Factors", included herein under Item 1.
21
<PAGE> 23
Financial Condition: Cash flow from operating activities, exclusive of
non-recurring Merger expenses which were funded entirely through the proceeds of
the merger financing, for the fiscal year ended June 30, 1998 was approximately
$13.3 million. These funds, together with borrowings under the New Credit
Facility, provided the required capital to fund repairable part purchases and
capital expenditures of approximately $88.5 million as well as the acquisition
of contracts and assets of complementary businesses for approximately $10.2
million.
In fiscal years 1997 and 1996, the Company generated net cash flow from
operating activities of $89.0 million and $51.9 million, respectively. Cash
required to fund the purchase of repairable parts and for capital expenditures
totaled $97.0 million and $70.8 million, during fiscal years 1997 and 1996,
respectively. Cash required to fund the acquisition of contracts and assets of
complimentary businesses were approximately $32.3 million and $275.6 million
during fiscal years 1997 and 1996, respectively.
The most significant of the Company's acquisitions during the fiscal
year ended June 30, 1997 was the Memorex Telex acquisition on November 15, 1996.
The adjusted purchase price was $52.7 million, comprised of the Company's
assumption of $28.3 million of liabilities under acquired customer maintenance
contracts, and $24.4 million in cash, excluding transactions and closing costs,
after taking into account certain purchase price adjustments.
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 accrued for in the accompanying consolidated balance sheets as of June
30,1998 and 1997. 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 the sites to date and the nature of involvement of the Company's
alleged 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. See Note 17 to the Company's
Consolidated Financial Statements.
EFFECT OF INFLATION; SEASONALITY
Inflation has not been a material factor affecting the Company's
business. In recent years, the cost of electronic components has remained
relatively stable due to competitive pressures within the industry, which has
enabled the Company to contain its service costs. The Company's general
operating expenses, such as salaries, employee benefits, and facilities costs,
are subject to normal inflationary pressures.
The operations of the Company are generally not subject to seasonal
fluctuations.
YEAR 2000 COMPLIANCE
As in the case with most other businesses, the Company is in the
process of evaluating and addressing Year 2000 compliance of both its
information technology systems and its non-information technology systems
(collectively referred to as "Systems"). Such Year 2000 compliance efforts are
designed to identify, address and resolve issues that may be created by computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. If this situation occurs, the potential exists for System failure or
miscalculations by computer programs, which could cause disruption of
operations.
The Company has completed an assessment of both its information
technology systems and its non-information technology systems. The Company has
four mission critical information technology systems, two of which have been
remediated and are Year 2000 compliant and are currently being placed into
service. Remediation has begun on the other two mission critical information
technology systems and is expected to be complete by April 1999. The Company has
identified approximately 70 non-mission critical information technology systems,
which the Company plans to remediate using in-house personnel or will obtain
certifications and or upgrades from its vendors. Subsequently, all of the
systems will be compliance tested by in-house personnel. The Company believes it
is approximately 40% complete with the above remediation processes and will be
100% complete by June 1999. The Company expects that remediation of its
non-information technology systems will commence in the fall of 1998 and be
complete by June 1999.
22
<PAGE> 24
The Company has initiated communications with all of its significant
business partners via a Vendor Readiness Survey to determine their plans to
comply with Year 2000. All responses are evaluated as received to determine if
additional action is required to ensure compliance of the business partner.
The Company continues to use both internal and external resources to
comply with Year 2000. The Company has recently engaged a consultant to assess
the Company's processes in place to achieve Year 2000 compliance. The Company
has in place a Year 2000 Steering Committee, which meets regularly and
periodically reports the progress of Year 2000 compliance to the Company's
executive management and the Board of Directors. Currently, the Company does not
have any contingency plans. However, it recognizes the need to develop
contingency plans and expects to have these plans secured by September 1999.
As of June 30, 1998 the Company has incurred costs of approximately
$2.1 million and expects to incur approximately $3.2 million thereafter to
remediate all of the Company's Systems. This represents approximately 7.5% of
the Company's information technology budget. No significant information
technology projects have been deferred due to the Company's Year 2000 efforts.
The future remediation costs to be incurred are based on management's best
estimates, which were derived using assumptions of future events including the
continued availability of resources and the reliability of third party
modification plans. There can be no assurance that this estimate will be
achieved and actual results may be materially different. Specific factors that
might cause such material differences include, but not limited to, the
availability and cost of personnel with appropriate skills and the ability to
locate and correct all non-compliant Systems.
The Company is aware of the potential for claims against it and other
companies for damages for products and services that were not Year 2000
compliant. Since the Company is neither a hardware manufacturer nor a software
developer, the Company believes that it does not have significant exposure to
liability for such claims.
While the Company does not believe that the Year 2000 matters discussed
above will have a material impact on its business, financial condition or
results of operations, it is uncertain whether or to what extent the Company may
be affected by such matters.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses its revolving credit facility, term loans, senior
discount debentures, and senior subordinated notes to finance a significant
portion of its operations. These on-balance sheet financial instruments, to the
extent they provide for variable rates of interest, expose the Company to
interest rate risk resulting from changes in LIBOR or the prime rate. The
Company uses off-balance sheet interest rate swap and collar agreements to
partially hedge interest rate exposure associated with on-balance sheet
financial instruments. All of the Company's derivative financial instrument
transactions are entered into for non-trading purposes. The terms and
characteristics are matched with the underlying on-balance instruments, subject
to the terms of the New Credit Facility.
To the extent that the Company's financial instruments expose the
Company to interest rate risk and market risk, they are presented in the table
below. The table presents principal cash flows and related interest rates by
year of maturity for the Company's revolving credit facility, term loans, senior
discount debentures, and senior subordinated notes in effect at June 30, 1998
and, in the case of the senior discount notes, exclude the potential exercise of
the redemption feature. For interest rate swaps and collars, the table presents
notional amounts and the related reference interest rates by year of maturity.
Fair values included herein have been determined based on (1) quoted market
prices for the term loans, senior discount debentures, and senior subordinated
notes; (2) the carrying value for the revolving credit facility as interest
rates are reset periodically; and (3) estimates obtained from dealers to settle
interest rate swap and collar agreements. Note 9 to the consolidated financial
statements contain descriptions of the Company's new revolving credit facility,
term loans, senior discount debentures, senior subordinated notes and interest
rate risk management agreements and should be read in conjunction with the table
below (amounts in thousands).
<TABLE>
<CAPTION>
Year of Maturity
---------------- Total Due Fair Value
Interest Rate Sensitivity 1999 2000 2001 2002 2003 Thereafter At Maturity at June 30, 1998
------ ------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed Rate -- -- -- -- -- 298,400 298,400 233,790
Average Interest Rate -- -- -- -- -- 10.6% -- --
Variable Rate 10,550 19,325 36,875 49,062 73,438 309,388 498,638 490,148
Average Interest Rate 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% -- --
Interest Rate
Instruments:
Variable to Fixed Swaps -- 50,000 60,000 -- -- -- 110,000 (687)
Average Pay Rate -- 6.0% 6.0% -- -- -- -- --
Average Receive Rate -- 5.7% 5.7% -- -- -- -- --
Collars: -- -- 125,000 -- -- -- 125,000 (538)
Average Cap Rate -- -- 6.7% -- -- -- -- --
Average Floor Rate -- -- 5.7% -- -- -- -- --
</TABLE>
23
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and a part of this report are the consolidated
financial statements and supplementary data for DecisionOne Holdings Corp. and
DecisionOne Corporation listed in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE> 26
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF REGISTRANT
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed by the Company with the Securities and Exchange Commission on or before
October 28, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed by the Company with the Securities and Exchange Commission on or before
October 28, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed by the Company with the Securities and Exchange Commission on or before
October 28, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed by the Company with the Securities and Exchange Commission on or before
October 28, 1998.
25
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Index to Financial Statements appearing on Page
F-1.
(2) Financial Statement Schedules
Schedule I--Condensed Financial Information of
Registrant (DecisionOne Holdings Corp. only)
Schedule II--Valuation and Qualifying Accounts
(3) Exhibits
DECISIONONE HOLDINGS CORP.
EXHIBIT
NO. DESCRIPTION
--- -----------
2.1 Agreement and Plan of Merger, dated May 4, 1997 between the Company
and Quaker Holding Co.(5) (appears as Annex A)
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of
July 15, 1997(5) (appears as Annex A-1)
3.1 Amended and Restated Certificate of Incorporation (Exhibit 3.1)(1)
3.2 Amended and Restated Bylaws (Exhibit 3.2)(1)
4.1 Specimen of DecisionOne Corporation's 9 3/4% Senior Subordinated
Notes due 2007 (included in Exhibit 4.2)(6)
4.2 9 3/4% Senior Subordinated Note Indenture dated as of August 7, 1997
between DecisionOne Corporation and State Street Bank and Trust
Company as Trustee(6)
4.3 Specimen of the Company's 11 1/2% Senior Discount Debenture due 2008
(included in Exhibit 4.4) (6)
4.4 11 1/2% Senior Discount Debenture Indenture dated as of August 7,
1997 by and between Quaker Holding Co. and State Street Bank and
Trust as Trustee (6)
4.5 Form of Warrant (included in Exhibit 4.6) (6)
4.6 Warrant Agreement dated as of August 7, 1997 between Quaker Holding
Co. and State Street Bank and Trust as Warrant Agent (6)
4.7 Debenture Agreement dated as of August 7, 1997 between the Company
and State Street Bank and Trust as Trustee (included in Exhibit 4.4)
(6)
4.8 Warrant Assumption dated as of August 7, 1997 between the Company
and State Street Bank and Trust as Warrant Agent (included in
Exhibit 4.6) (6)
10.1+ Management Incentive Plan (6)
26
<PAGE> 28
EXHIBIT
NO. DESCRIPTION
--- -----------
10.2+ Direct Investment Program (6)
10.3 Investors' Agreement dated August 7, 1997 (6)
10.4 U.S. $575,000,000 Credit Agreement ("Credit Agreement") dated as of
August 7, 1997 by and among DecisionOne Corporation, various
financial institutions, DLJ Capital Funding Inc. (as Syndication
Agent), Nations Bank of Texas, N.A. (as Administrative Agent) and
BankBoston, N.A. (as Documentation Agent)(6)
10.5 Amendment No. 2, dated January 12, 1998 to the Credit Agreement (7)
10.6 Amendment No. 3, dated March 18, 1998 to the Credit Agreement (8)
10.7+ Employment Agreement with Kenneth Draeger (Exhibit 10.7)(1)
10.8+ Employment Letter with Stephen J. Felice (Exhibit 10.8)(1)
10.9 Amended and Restated Registration Rights Agreement (Exhibit
10.11)(1)
10.10 First Amendment to Amended and Restated Registration Rights
Agreement (Exhibit 10.12)(1)
10.11 Lease for Frazer, Pennsylvania executive offices (East)(Exhibit
10.14)(1)
10.12 Lease for Frazer, Pennsylvania executive offices (West)(Exhibit
10.15)(1)
10.13 Lease for Malvern, Pennsylvania depot and call center (Exhibit
10.16)(1)
10.14+ Employment Letter with Joseph S. Giordano (Exhibit 10.17)(2)
10.15 Lease for Hayward, California depot (Exhibit 10.19)(2)
10.16 Lease for Northborough, Massachusetts depot (Exhibit 10.20)(2)
10.17+ Employment Letter with Thomas J. Fitzpatrick (Exhibit 10.22)(3)
10.18+ Employment Letter with Thomas M. Molchan(4)
10.19+ Employment Letter with Dwight T. Wilson(4)
10.20 Intercompany Note made by the Company in favor of DecisionOne
Corporation dated as of August 7, 1997(6)
10.21 Form of Purchase Agreement dated as of August 7, 1997(6)
10.22 Form of Option Agreement dated as of August 7, 1997(6)
10.23 Lease for Richfield, Minnesota call center (7)
10.24 Lease for Grove City, Ohio depot
10.25 Lease for Phoenix, Arizona depot
10.26+ Employment Letter for James S. Burkhardt
10.27+ Employment Letter for Dennis M. Callagy
10.28 Form of Tax Sharing Agreement(9)
27
<PAGE> 29
12 Computation of Ratios of Earnings to Fixed Charges(5)
21 Subsidiaries of the Registrant (Exhibit 21)(1)
23 Consent of Deloitte & Touche LLP
24 Power of Attorney
27 Financial Data Schedule
+ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to Registration Statement No. 333-1256 on Form
S-1 filed with the Securities and Exchange Commission on February 9,
1996.
(2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
Statement No. 333-1256 on Form S-1 filed with the Securities and
Exchange Commission on March 14, 1996.
(3) Filed as an Exhibit to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on September 30, 1996.
(4) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on May 15, 1997.
(5) Filed as an Exhibit to Registration Statement No. 333-28265 on Form
S-4 filed with the Securities and Exchange Commission on June 2,
1997.
(6) Filed as an Exhibit to the Annual Report on Form 10-K for
DecisionOne Holdings Corp. filed with the Securities and Exchange
Commission on September 29, 1997.
(7) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on February 12, 1998.
(8) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on May 15, 1998.
(9) Filed as an Exhibit to Registration Statement No. 333-28411 on
Form S-1 filed with the Securities and Exchange Commission on
June 3, 1997.
28
<PAGE> 30
DECISIONONE CORPORATION
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended.(1)
3.2 Amended and Restated Bylaws of the Company.(1)
4.1 Specimen of the Company's 9 3/4 Senior Subordinated Notes due 2007
(included in Exhibit 4.2).(4)
4.2 9 3/4% Senior Subordinated Note Indenture dated as of August 7, 1997
between the Company and State Street Bank and Trust as Trustee.(4)
10.1+ Employment Agreement with Kenneth Draeger.(2)
10.2+ Employment Letter with Stephen J. Felice.(2)
10.3 Lease for Frazer, Pennsylvania executive offices (East).(2)
10.4 Lease for Frazer, Pennsylvania executive offices (West).(2)
10.5 Lease for Malvern, Pennsylvania depot and call center.(2)
10.6 Lease for Hayward, California depot.(3)
10.7 Lease for Northborough, Massachusetts depot.(3)
10.8 Form of Tax Sharing Agreement.(1)
10.9 U.S. $575,000,000 Credit Agreement dated as of August 7, 1997 by and
among the Company, various finance institutions, DLJ Capital Funding
Inc. (as Syndication Agent), NationsBank of Texas, N.A. (as
Administrative Agent) and BankBoston, N.A. (as Documentation
Agent).(4)
10.10 Intercompany Note made by DecisionOne Holdings Corp. in favor of the
Company dated as of August 7, 1997.(4)
12.1 Statement Regarding Computation of Ratios.(1)
23 Consent of Deloitte & Touche LLP
24.1 Power of Attorney
27 Financial Data Schedule.
+ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to Registration Statement No. 333-28411 on Form
S-1 filed with the Securities and Exchange Commission on June 3,
1997.
(2) Filed as an Exhibit to Registration Statement No. 333-1256 on Form
S-1 filed with the Securities and Exchange Commission on February 9,
1996.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
Statement No. 333-1256 on Form S-1 filed with the Securities and
Exchange Commission on March 14, 1996.
(4) Filed as an Exhibit to the Annual Report on Form 10-K filed by
DecisionOne Corporation with the Securities and Exchange Commission
on September 29, 1997.
29
<PAGE> 31
(b) Current Reports on Form 8-K filed during the quarter ended June 30,
1998:
None
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in Frazer, Pennsylvania
on September 28, 1998.
DECISIONONE HOLDINGS CORP.
By: /s/ STEPHEN J. FELICE
-------------------------------------
Stephen J. Felice
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the indicated persons and by Stephen J.
Felice as attorney-in-fact for the specific persons in the capacities with
Registrant on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEPHEN J. FELICE Chief Executive Officer and President September 28, 1998
- ------------------------------
Stephen J. Felice (Principal Executive Officer)
/s/ THOMAS J. FITZPATRICK Executive Vice President and Chief Financial Officer September 28, 1998
- ------------------------------
Thomas J. Fitzpatrick (Principal Financial and Accounting Officer)
/s/ * Director and Chairman of the Board September 28, 1998
- ------------------------------
Peter T. Grauer
/s/ * Director September 28, 1998
- ------------------------------
Lawrence M.v.D. Schloss
/s/ * Director September 28, 1998
- ------------------------------
Kirk B. Wortman
*By: /s/ STEPHEN J. FELICE
--------------------------
Stephen J. Felice
Attorney-in-Fact
</TABLE>
31
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in Frazer, Pennsylvania
on September 28, 1998.
DECISIONONE CORPORATION
By: /s/ STEPHEN J. FELICE
-------------------------------------
Stephen J. Felice
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the indicated persons and by Stephen J.
Felice as attorney-in-fact for the specific persons in the capacities with
Registrant on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEPHEN J. FELICE Chief Executive Officer and President September 28, 1998
- ------------------------------
Stephen J. Felice (Principal Executive Officer)
/s/ THOMAS J. FITZPATRICK Executive Vice President and Chief Financial Officer September 28, 1998
- ------------------------------
Thomas J. Fitzpatrick (Principal Financial and Accounting Officer)
/s/ * Director September 28, 1998
- ------------------------------
Peter T. Grauer
/s/ * Director September 28, 1998
- ------------------------------
Giles D. Harlow
/s/ * Director September 28, 1998
- ------------------------------
Kirk B. Wortman
/s/ * Director September 28, 1998
- ------------------------------
Richard C. Yancey
*By: /s/ STEPHEN J. FELICE
-------------------------
Stephen J. Felice
Attorney-in-Fact
</TABLE>
32
<PAGE> 34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE HOLDINGS CORP.:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended
June 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity (Deficit) for
the Years Ended June 30, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE CORPORATION:
Independent Auditors' Report F-23
Consolidated Balance Sheets as of June 30, 1998 and 1997 F-24
Consolidated Statements of Operations for the Years
Ended June 30, 1998, 1997 and 1996 F-25
Consolidated Statements of Shareholder's Equity (Deficit) for
the Years Ended June 30, 1998, 1997 and 1996 F-26
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996 F-27
Notes to Consolidated Financial Statements F-28
FINANCIAL STATEMENT SCHEDULES:
Schedule I--Condensed Financial Information of Registrant
(DecisionOne Holdings Corp. only) S-1
Schedule II--Valuation and Qualifying Accounts S-5
F-1
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of DecisionOne Holdings Corp.:
We have audited the accompanying consolidated balance sheets of DecisionOne
Holdings Corp. and subsidiaries (the "Company") as of June 30, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the three years in the period ended June
30, 1998. Our audits also included the financial statement schedules listed in
the Index at Item 14. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of DecisionOne Holdings Corp. and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
September 4, 1998
F-2
<PAGE> 36
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,415 $ 10,877
Accounts receivable, net of allowances of $ 22,572 and $14,869 114,082 127,462
Consumable parts, net of allowances of $ 9,271 and $15,976 23,097 29,052
Prepaid expenses and other assets 28,106 4,542
--------- ---------
Total current assets 171,700 171,933
REPAIRABLE PARTS, Net of accumulated amortization of $135,277 and $156,468 142,446 205,366
PROPERTY AND EQUIPMENT 29,095 34,227
INTANGIBLES 154,029 191,366
DEFERRED TAX ASSET 25,360 18,064
OTHER ASSETS 19,357 2,149
--------- ---------
TOTAL ASSETS $ 541,987 $ 623,105
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of debt $ 13,311 $ 4,788
Accounts payable and accrued expenses 101,851 96,516
Deferred revenues 40,758 56,600
Income taxes and other liabilities 10,925 11,513
--------- ---------
Total current liabilities 166,845 169,417
DEBT 731,012 232,721
OTHER LIABILITIES 5,736 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 shares in 1998 and 27,817,832 shares in 1997 126 278
Additional paid-in capital 242,181 258,331
Accumulated deficit (601,195) (42,432)
Other (2,718) (1,289)
--------- ---------
Total shareholders' equity (deficit) (361,606) 214,888
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 541,987 $ 623,105
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 37
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES $ 805,717 $ 785,950 $ 540,191
COST OF REVENUES 613,806 584,755 402,316
--------- --------- ---------
GROSS PROFIT 191,911 201,195 137,875
OPERATING EXPENSES:
Selling, general and administrative expenses 142,462 109,975 72,829
Amortization of intangibles 27,169 23,470 15,673
Merger expenses 69,046
Loss on asset sales and disposals 87,458
--------- --------- ---------
OPERATING INCOME (LOSS) (134,224) 67,750 49,373
INTEREST EXPENSE, Net of interest
income of $1,417 in 1998, $197 in 1997 and $239 in 1996 64,683 14,698 14,714
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (BENEFIT) AND EXTRAORDINARY ITEM (198,907) 53,052 34,659
PROVISION (BENEFIT) FOR INCOME TAXES (15,777) 21,968 13,870
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (183,130) 31,084 20,789
EXTRAORDINARY ITEM, NET OF TAX BENEFIT
OF $1,284 -- -- 1,927
--------- --------- ---------
NET INCOME (LOSS) $(183,130) $ 31,084 $ 18,862
========= ========= =========
PRO FORMA INFORMATION (UNAUDITED) - See Note 3:
Pro forma net loss $(124,266)
Pro forma net loss per share $ (9.91)
Pro forma weighted average number of common shares outstanding 12,545
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 38
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
NUMBER OF PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 8,935,348 $ 89 $ 107,991 $ (92,378) $ 680
Net income 18,862
Adjustment to pension liability
Common stock issued:
Exercise of preemptive rights 384,502 4 1,526
Public offering 6,300,000 63 106,250
Exercise of stock options 329,850 3 300
Exercise of warrants 118,664 1 598
Conversion of redeemable preferred stock 11,271,924 113 37,529
Stock issuance costs (1,573)
Issuance of warrants 126
Issuance of warrants attached to subordinated debentures 3,400
Foreign currency translation adjustment (58)
Accrued dividends on redeemable preferred stock (885)
------------ --------- --------- --------- ---------
BALANCE, JUNE 30, 1996 27,340,288 273 255,262 (73,516) 622
Net income 31,084
Adjustment to pension liability
Tax benefit--disqualifying stock disposition 2,635
Foreign currency translation adjustment (38)
Exercise of stock options 477,544 5 434
------------ --------- --------- --------- ---------
BALANCE, JUNE 30, 1997 27,817,832 278 258,331 (42,432) 584
Net loss (183,130)
Adjustment to pension liability
Foreign currency translation adjustment (912)
Repurchase of common stock and warrants in
connection with recapitalization (26,506,705) (265) (244,639) (375,633)
Issuance of common stock in connection
with recapitalization 11,108,354 111 226,472
Purchase and retirement of common stock (23,026) (85)
Issuance of warrants 1,880
Exercise of stock options 187,764 2 222
------------ --------- --------- --------- ---------
BALANCE, JUNE 30, 1998 $ 12,584,219 $ 126 $ 242,181 $(601,195) $ (328)
============ ========= ========= ========= =========
<CAPTION>
TOTAL
SHARE-
PENSION HOLDERS'
LIABILITY (DEFICIT)
ADJUSTMENT EQUITY
------- ---------
<S> <C> <C>
BALANCE, JUNE 30, 1995 $(1,705) $ 14,677
Net income 18,862
Adjustment to pension liability (143) (143)
Common stock issued:
Exercise of preemptive rights 1,530
Public offering 106,313
Exercise of stock options 303
Exercise of warrants 599
Conversion of redeemable preferred stock 37,642
Stock issuance costs (1,573)
Issuance of warrants 126
Issuance of warrants attached to subordinated debentures 3,400
Foreign currency translation adjustment (58)
Accrued dividends on redeemable preferred stock (885)
------- ---------
BALANCE, JUNE 30, 1996 (1,848) 180,793
Net income 31,084
Adjustment to pension liability (25) (25)
Tax benefit--disqualifying stock disposition 2,635
Foreign currency translation adjustment (38)
Exercise of stock options 439
------- ---------
BALANCE, JUNE 30, 1997 (1,873) 214,888
Net loss (183,130)
Adjustment to pension liability (517) (517)
Foreign currency translation adjustment (912)
Repurchase of common stock and warrants in
connection with recapitalization (620,537)
Issuance of common stock in connection
with recapitalization 226,583
Purchase and retirement of common stock (85)
Issuance of warrants 1,880
Exercise of stock options 224
------- ---------
BALANCE, JUNE 30, 1998 $(2,390) $(361,606)
======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 39
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(183,130) $ 31,084 $ 18,862
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss on asset sales and disposals 87,458
Depreciation 15,729 13,549 8,309
Amortization of repairable parts 81,597 63,870 37,869
Amortization of intangibles 27,169 23,470 15,673
Provision for uncollectible receivables 15,515 7,849 3,434
Provision for consumable parts obsolescence 1,852 2,554 1,171
Extraordinary item 1,927
Changes in operating assets and liabilities, net of effects
from companies acquired, which provided (used) cash:
Accounts receivable (802) (38,365) (1,900)
Consumable parts (1,889) (6,038) (1,248)
Accounts payable and accrued expenses 4,581 3,885 256
Deferred revenues (20,311) (25,427) (33,928)
Net changes in other assets and liabilities (14,432) 12,543 1,469
--------- --------- ---------
Net cash provided by operating activities 13,337 88,974 51,894
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (10,222) (10,540) (7,278)
Repairable spare parts purchases, net (78,239) (86,446) (63,514)
Acquisitions of companies and contracts (10,168) (32,258) (275,562)
--------- --------- ---------
Net cash used in investing activities (98,629) (129,244) (346,354)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 31,392
Proceeds from issuance of subordinated debentures 30,000
Proceeds from issuance of common stock in connection with
recapitalization 226,583 439 106,313
Payment of subordinated debentures (30,000)
Redemption of common stock in connection with recapitalization (609,654)
Redemption of common stock warrants in connection with
recapitalization (12,149)
Issuance of warrants 1,880
Net proceeds from borrowings 476,918 43,625 165,711
Principal payments under capital leases (480) (1,075) (3,423)
Other (2,268) (63) 29
--------- --------- ---------
Net cash provided by financing activities 80,830 42,926 300,022
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,462) 2,656 5,562
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 10,877 8,221 2,659
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,415 $ 10,877 $ 8,221
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Net cash paid during the year for:
Interest $ 41,644 $ 15,640 $ 14,838
Income taxes 4,031 8,381 5,344
Noncash investing/financing activities:
Issuance of seller notes in connection with acquisitions 2,224 587
Issuance of seller notes in exchange for repairable parts 1,855
Repairable parts received in lieu of cash for accounts
receivable 1,124
Repairable parts received in exchange for the assumption of
liabilities 2,100
Accretion of accrued dividends 885
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 40
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. NATURE OF BUSINESS
DecisionOne Holdings Corp. and its wholly-owned subsidiaries (the
"Company") are providers of multivendor computer maintenance and technology
support services. The Company offers its customers a single-source, independent
(i.e., not affiliated with an original equipment manufacturer, or "OEM")
solution for computer maintenance and technology support requirements, including
hardware maintenance services, software support, end-user/help desk services,
network support and other technology support services. These services are
provided by the Company across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, personal
computers ("PCs") and related peripherals. In addition, the Company provides
outsourcing services for OEMs, software publishers, system integrators and other
independent service organizations. The Company delivers its services through an
extensive field service organization of approximately 4,000 field personnel in
over 150 service locations throughout North America and through strategic
alliances in selected international markets.
Historically, the Company's services predominantly involved the
provision of maintenance services to the midrange computer market. On October
20, 1995, the Company acquired Bell Atlantic Business Systems Services, Inc.
("BABSS") (see Note 5). BABSS provided computer maintenance and technology
support services for computer systems ranging from the data center, which
includes both mainframe and midrange systems, to desk top. Subsequent to the
acquisition, the Company's principal operating subsidiary, Decision Servcom,
Inc., was merged into BABSS, which had changed its name to DecisionOne
Corporation. As a result, DecisionOne Corporation is the principal operating
subsidiary of the Company.
The Company's wholly owned, direct international subsidiaries are not
significant to the Company's consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation--The consolidated financial statements include the
accounts of DecisionOne Holdings Corp. and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Pro Forma Information (Unaudited)--The pro forma information included
in the accompanying statement of operations and in Note 3 has been prepared to
reflect the Company's recapitalization and merger with Quaker Holding Co.
("Quaker") and related transactions as if these had occurred on July 1, 1997.
Historical earnings per share data for the fiscal years ended June 30, 1998,
1997 and 1996 is not presented as this would not be meaningful.
Cash and Cash Equivalents--Cash and cash equivalents are highly liquid
investments with remaining maturities of three months or less at the time of
purchase. Cash equivalents, consisting primarily of repurchase agreements with
banks, are stated at cost, which approximates fair market value.
Consumable Parts and Repairable Parts -- In order to provide
maintenance and repair services to its customers, the Company is required to
maintain significant levels of computer parts. These parts are classified as
consumable parts or as repairable parts.
Consumable parts, which are expended during the repair process, are
stated principally at weighted average cost, less an allowance for obsolescence
and shrinkage. Consumable parts are reflected in the cost of revenues during the
period utilized.
Repairable (rotable) parts, which can be refurbished and reused, are
stated at original weighted average cost less accumulated amortization. Monthly
amortization of repairable parts is reflected in cost of revenues. The costs of
refurbishing parts are also included in the cost of revenues as incurred.
Amortization of repairable costs is based principally on the composite group
method, using straight-line whole life and remaining life composite rates.
Repairable parts generally have an economic life that corresponds to the
estimated normal life cycle of the related products.
As consumable and repairable parts are retired, the weighted average
gross amounts at which such parts have been carried are removed from the
respective asset accounts, and charged to the accumulated allowance or
accumulated amortization accounts as applicable. Periodic revisions to
amortization and allowance estimates are required, based upon the evaluation of
several factors, including changes in estimated product life cycles, usage
levels, and technology changes. Changes in these estimates are reflected on a
prospective basis unless such changes result from an abnormal retirement
(including sales, disposals and shrinkage) which requires immediate loss
recognition. In addition, impairment is recognized when the net carrying value
of the parts exceeds the estimated current and anticipated undiscounted net cash
flows. Measurement of the amount of impairment if any is calculated based upon
the difference between carrying value and fair value.
F-7
<PAGE> 41
The Company has amortized the majority of its composite group of
repairable parts over an estimated average useful life of five years based
principally on historic product life cycle studies. As a result of the recent
abnormal retirement of computer parts (see Note 4) and related life studies, the
Company will revise the useful lives of repairable parts and increase the
obsolescence provision for consumable parts prospectively. Effective July 1,
1998 the Company will amortize its existing composite group of repairable parts
and future repairable part purchases over an estimated average remaining life of
three years.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is provided for principally using the straight-line composite group
method over the estimated useful lives of the depreciable asset group.
Capitalized equipment leases and leasehold improvements are amortized over the
shorter of the related lease terms or asset lives. Maintenance and repairs are
charged to expense as incurred. Upon retirement or disposition of property and
equipment, the cost and related accumulated depreciation are removed from the
respective asset accounts, and charged to accumulated depreciation and
amortization accounts as applicable.
Business and Contract Acquisitions--Business and contract acquisitions
have been accounted for as purchase transactions, with the purchase price of
each acquisition allocated to the assets acquired and liabilities assumed based
upon their respective estimated fair values at the dates of acquisition.
Consistent with the Company's parts retirement accounting methods, the gross
value of parts acquired is generally stated at weighted average cost. Fair value
adjustments, if any, are reflected as adjustments to the respective accumulated
amortization or allowance accounts. The excess of the purchase price over
identified net assets acquired is amortized, on a straight-line basis, over the
expected period of future benefit (see Note 7).
Typical contract acquisitions are comprised primarily of customer
maintenance and support contracts of complementary entities, along with the
accompanying consumable and repairable parts required to support these contracts
and other identifiable intangibles, such as noncompete agreements. Liabilities
assumed in business and contract acquisitions consist primarily of prepaid
amounts related to multi-period customer maintenance and support contracts.
These liabilities are recorded as deferred revenues at acquisition dates and are
recognized as revenues when earned in accordance with the terms of the
respective contracts.
Intangible Assets--Intangible assets are comprised of excess purchase
price over the fair value of net assets acquired, acquired customer lists and
other intangible assets, including the fair value of contractual profit
participation rights and amounts assigned to noncompete agreements.
Intangible assets, which arise principally from acquisitions, are
generally amortized on a straight-line basis over their respective estimated
useful lives (see Note 7). The Company evaluates the carrying value of
intangible assets whenever events or changes in circumstances indicate that
these carrying values may not be recoverable within the amortization period.
Impairment is recognized when the net carrying value of the intangible asset
exceeds the estimated future undiscounted net cash flows. Measurement of the
amount of impairment, if any, is calculated based upon the difference between
carrying value and fair value.
Revenue--The Company enters into maintenance contracts whereby it
services various manufacturers' equipment. Revenues from these contracts are
recognized ratably over the terms of such contracts. Prepaid revenues from
multi-period contracts are recorded as deferred revenues and are recognized
ratably over the term of the contracts.
Revenues derived from the maintenance of equipment not under contract
are recognized as the service is performed. Revenues derived from other
technology support services are recognized as the service is performed or
ratably over the term of the contract.
Foreign Currency Translation--Gains and losses resulting from foreign
currency translation are accumulated as a separate component of shareholders'
equity (deficit). Gains and losses resulting from foreign currency transactions
are included in operations, except for intercompany foreign currency
transactions which are of a long-term nature and are accumulated as a separate
component of shareholders' equity (deficit).
Credit Risk--Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base and their dispersion across many industries.
Fair Value of Financial Instruments--The following disclosures of the
estimated fair value of financial instruments were made in accordance with the
requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies.
Cash and Cash Equivalents, Accounts Receivable, and Accounts
Payable--The carrying amount of these items are a reasonable estimate
of their fair value.
F-8
<PAGE> 42
Debt--As more fully described in Note 9, the fair values of
debt such as the New Credit Facility, the senior discount debentures
and the senior subordinated notes and the fair values of interest rate
swaps and collars are based on quoted market prices.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates and
assumptions.
Stock-Based Compensation--Effective July 1, 1996, the Company adopted
the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS
No. 123 encourages, but does not require, companies to record compensation cost
for stock-based compensation plans at fair value. The Company has elected to
continue to account for stock-based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, as permitted by SFAS 123. Compensation
expense for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock (see Note 12).
Derivative Financial Instruments--Derivative financial instruments,
which constitute interest rate swap and collar agreements (see Note 9), are
periodically used by the Company in the management of its variable interest rate
exposure. Amounts to be paid or received under interest rate swap and collar
agreements are recognized as interest expense or interest income during the
period in which these accrue. Gains or losses realized, if any, on the early
termination of interest rate swap or collar contracts are deferred, to be
recognized upon the termination of the related asset or liability or expiration
of the original term of the swap or collar contract, whichever is earlier. The
Company does not hold any derivative financial instruments for trading purposes.
Recent Accounting Pronouncements--In February 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 128, Earnings Per Share.
Effective for the fiscal quarter ended December 31, 1997, the Company adopted
the provisions of SFAS No. 128. SFAS No. 128, which supersedes APB No. 15,
Earnings Per Share, requires a dual presentation of basic and diluted earnings
per share as well as disclosures including a reconciliation of the computation
of basic earnings per share to diluted earnings per share. Basic earnings per
share excludes the dilutive impact of common stock equivalents and is computed
by dividing net income by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share 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. In accordance with SFAS No. 128,
diluted earnings per share is not presented because the effect of the potential
exercise of outstanding common stock equivalents is antidilutive as a result of
the net loss incurred for the fiscal year ended June 30, 1998. Had the
presentation of diluted earnings per share been dilutive, the total weighted
average common stock equivalents that would have been used to determine diluted
earnings per share as of June 30, 1998 were as follows: common stock options of
1,568,020 and common stock warrants of 313,047.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, which are both effective for fiscal years beginning after
December 15, 1997. The Company intends to adopt the pronouncements in fiscal
1999. Both will require additional disclosure but will not have a material
effect on the Company's financial position or results of operations. SFAS No.
130 will first be reflected in the Company's first quarter of fiscal 1999
interim financial statements. Components of comprehensive income for the Company
include such items as net income and foreign currency translation. SFAS No. 131
requires segments to be determined based on how management measures performance
and makes decisions about allocating resources. The Company is evaluating
whether the adoption of SFAS No. 131 will result in any changes to its
presentation of financial data for interim and financial periods in fiscal 1999.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. The Company has recently committed to acquire and develop new
Customer Information and Dispatch Data Gathering Systems in connection with its
contract administration and call dispatch. The Company believes a significant
portion of the costs to be incurred in fiscal 1999 and fiscal 2000 will be
capitalizable in accordance with SOP 98-1.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those statements at fair value. This statement is effective
for fiscal years beginning after June 15, 1999, although early adoption is
encouraged. The Company is evaluating the effect that the adoption of SFAS No.
133 will have on its consolidated financial position or results of operations.
F-9
<PAGE> 43
Reclassifications--Certain reclassifications have been made to prior
year data in order to conform with the 1998 presentation.
3. MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION
On August 7, 1997, the Company consummated a merger with Quaker Holding
Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II. The merger,
which was recorded as a recapitalization for accounting purposes as of the
consummation date, occurred pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") between the Company and Quaker dated May 4, 1997.
In accordance with the terms of the Merger Agreement, which was
formally approved by the Company's shareholders on August 7, 1997, Quaker merged
with and into the Company, and the holders of approximately 94.7% of shares of
Company common stock outstanding immediately prior to the merger received $23 in
cash in exchange for each of these shares. Holders of approximately 5.3% of
shares of Company common stock outstanding immediately prior to the merger
retained such shares in the merged Company, as determined based upon shareholder
elections and stock proration factors specified in the Merger Agreement.
Immediately following the merger, continuing shareholders owned approximately
11.9% of shares of outstanding Company common stock. The aggregate value of the
merger transaction was approximately $940 million, including refinancing of the
Company's revolving credit facility (see Note 9).
In connection with the merger, the Company raised $85 million through
the public issuance of senior discount debentures, in addition to publicly
issued senior subordinated notes for approximately $150 million. The Company
also entered into a new syndicated credit facility providing for term loans of
$470 million and revolving loans of up to $105 million. The proceeds of the
senior discount notes, senior subordinated notes, the initial borrowings under
the new credit facility and the purchase of approximately $225 million of
Company common stock by Quaker have been used to finance the payments of cash to
cash-electing shareholders, to pay the holders of stock options and stock
warrants canceled or converted, as applicable, in connection with the merger, to
repay the Company's existing revolving credit facility and to pay expenses
incurred in connection with the merger.
As a result of the merger, the Company incurred various expenses,
aggregating approximately $69.0 million on a pretax basis (approximately $63.5
million after related tax benefit) in connection with consummating the
transaction. These costs consisted primarily of compensation costs, underwriting
discounts and commissions, professional and advisory fees and other expenses.
The Company reported this one-time charge during the first quarter of fiscal
1998. In addition to these expenses, the Company also incurred approximately
$22.3 million of capitalized debt issuance costs associated with the merger
financing. These costs will be charged to expense over the terms of the related
debt instruments.
The following summarized unaudited pro forma information for the year
ended June 30, 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 results of operations which actually would have
resulted had the merger occurred as of July 1, 1997 or which may result in the
future.
<TABLE>
<CAPTION>
UNAUDITED
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
1998
----
<S> <C>
PRO FORMA LOSS STATEMENT INFORMATION:
Revenues $ 805,717
Operating loss (65,178)
Loss from continuing operations before income tax benefit (134,971)
Net loss (124,266)
Loss per common share (9.91)
Weighted average common shares outstanding 12,545
</TABLE>
The pro forma net loss 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 tax
benefit related to these adjustments of approximately $5.1 million, including
the effect of valuation allowances against certain deferred tax assets (see Note
10). Pro forma weighted average common shares outstanding includes 12,499,978
shares outstanding immediately subsequent to the merger on August 7, 1997 in
addition to shares subsequently issued and outstanding.
F-10
<PAGE> 44
4. LOSS ON ASSET SALES AND DISPOSALS
Management determined that over 1.2 million of its computer parts were
obsolete during its annual fourth quarter physical inventory. These parts were
retired and subsequently sold to salvage dealers for nominal scrap value. The
parts obsolescence was principally due to the convergence of significant changes
in the Company's business operations and the computer service industry, which
the Company expects will continue. The significant changes include: (1)
accelerated technology migration trends as customers modify their computing
environments to remediate year 2000 ("Y2K") problems, (2) increasing shifts in
demand from data center and midrange systems to desktop computing environments,
and (3) declining life cycles of the products under current and anticipated
service contracts due to increasingly rapid changes in technology. The abnormal
nature of this retirement and subsequent sale required immediate loss
recognition of $75 million.
In connection with the acquisition of BABSS, the Company acquired
contractual profit participation rights pursuant to an existing agreement
between BABSS and ICL Sorbus, Ltd. (ICL) (See Note 5). On June 29, 1998, the
Company sold its contractual profit participation rights back to ICL at a pretax
loss of approximately $12.5 million.
5. BUSINESS AND CONTRACT ACQUISITIONS
During the years ended June 30, 1998, 1997 and 1996, the Company
acquired certain net assets of other service companies as follows (in
thousands):
<TABLE>
<CAPTION>
EXCESS
PURCHASE
CONSIDERATION PRICE
------------- OVER FAIR
TOTAL VALUE OF
NUMBER OF PURCHASE OTHER NET ASSETS
YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTANGIBLES ACQUIRED
- ----------- ------------ ---- ----- ----- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Significant business
acquisitions:
June 30, 1996 1 $250,549 $250,549 $72,581 $60,533
Nonsignificant business or
maintenance contract
acquisitions:
June 30, 1996 5 14,853 578 15,431 6,522 6,318
June 30, 1997 9 31,749 2,224 33,973 231 47,200
June 30, 1998 4 10,168 4,538 14,706 4,600 7,385
</TABLE>
On October 20, 1995, the Company acquired all of the outstanding common
stock of BABSS, a subsidiary of Bell Atlantic Corporation ("BAC") for
approximately $250,549,000. The acquisition was funded with the proceeds from
the issuance of $30,000,000 of Series C preferred stock, $30,000,000 of
subordinated debentures and the balance from additional bank borrowings (see
Notes 9 and 14). The excess of asset purchase price over the fair value of net
assets acquired at the date of purchase was initially recorded as approximately
$58,796,000. Subsequent to the acquisition, the Company recorded a net
adjustment increasing the initial amount by $1,737,000 and adjusted other
balance sheet accounts principally by the same amount. This resulted from the
adjustment and reclassification of certain tax accruals offset by favorable
negotiations on certain leased facilities. As part of the acquisition, the
Company purchased from BAC contractual profit participation rights whereby the
Company would receive a fixed percentage of the annual operating profits (3.2%
or 3.5%, depending upon the level of profits) earned by a former foreign
affiliate of BAC which provides computer maintenance and technology support
services in Europe. The estimated value of the discounted estimated future cash
flows over a twenty-year period from the acquisition date from these contractual
profit participation rights was $25,000,000.
Included in nonsignificant maintenance contract acquisitions is the
acquisition of substantially all of the contracts and related assets, including
spare parts of the U.S. computer service business of Memorex Telex Corporation
and certain of its affiliates (collectively, "Memorex Telex"). Memorex Telex had
filed a petition in bankruptcy in the United States Bankruptcy Court (the
"Court") in the District of Delaware on October 15, 1996; the Court approved the
sale to the Company on November 1, 1996. The adjusted purchase price was $52.7
million, comprised of the assumption of certain liabilities under contracts of
the service business, which were valued at $28.3 million, and base cash
consideration of approximately $24.4 million, after certain purchase price
adjustments, excluding transaction and closing costs.
F-11
<PAGE> 45
The estimated fair market values of certain assets acquired during
fiscal 1998, as well as liabilities assumed, are subject to further adjustment
as additional information becomes available to the Company.
The following summarized unaudited pro forma information for
significant acquisitions that have a material effect on the Company's results of
operations for the year ended June 30, 1996 assumes that the acquisition
occurred as of July 1, 1995. The nonsignificant business and maintenance
contract acquisitions are not considered material individually or in the
aggregate. The pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the significant acquisitions been in effect on
the dates indicated or which may result in the future.
<TABLE>
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
YEAR ENDED JUNE 30, 1996
------------------------
<S> <C>
Revenues $697,676
Income from continuing operations before extraordinary item 31,080
Net income 29,153
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land and buildings $ 6,312 $ 6,318
Equipment 15,335 13,234
Computer hardware and software 32,459 37,611
Furniture and fixtures 9,628 8,465
Leasehold improvements 5,190 4,629
-------- --------
68,924 70,257
Accumulated depreciation and amortization (39,829) (36,030)
-------- --------
$ 29,095 $ 34,227
======== ========
</TABLE>
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (20-40); equipment (3-10);
computer hardware and software (3-5); furniture and fixtures (5-10) and
leasehold improvements (term of related leases).
Depreciation and amortization expense was approximately $15,729,000,
$13,549,000, and $8,309,000 for the fiscal years ended 1998, 1997 and 1996,
respectively.
7. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Excess purchase price over fair value of net assets acquired $ 137,241 $ 130,548
Customer lists 60,370 64,688
Contractual profit participation rights -- 25,000
Noncomplete agreements 9,231 4,631
Other intangibles 8,014 9,131
--------- ---------
214,856 233,998
Accumulated amortization (60,827) (42,632)
--------- ---------
$ 154,029 $ 191,366
========= =========
</TABLE>
F-12
<PAGE> 46
The periods (in years) used in determining the amortization rates of
intangible assets are: excess purchase price over fair value of net assets
acquired (4-20); customer lists (3-8); contractual profit participation rights
(20); noncompete agreements (3-5) and other (1-6).
Amortization expense relating to intangibles was approximately
$27,169,000, $23,470,000, and $15,673,00, for the fiscal years ended 1998, 1997
and 1996, respectively.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accounts payable $56,040 $55,723
Compensation and benefits 20,928 22,706
Interest 11,485 563
Unused leases 175 878
Pension accrual 1,515 1,371
Accrued accounting and legal fees 568 1,435
Non-income taxes and other 11,140 13,840
-------- -------
$101,851 $96,516
======== =======
</TABLE>
Accrued interest expense increased due to additional borrowings
outstanding at June 30, 1998 as a result of the merger and recapitalization (See
Notes 3 and 9).
9. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Revolving credit loans $ 30,700 $231,671
Term loans 467,938 --
Senior discount debentures, 11-1/2%, due 2008 92,246 --
Senior subordinated notes, 9-3/4%, due 2007 150,000 --
Seller noninterest-bearing notes payable 2,179 2,922
Seller note payable - purchase of spare parts 508 1,608
Capitalized lease obligations, payable in varying installments at interest
rates ranging from 7.71% to 15.00% at June 30, 1998 752 1,308
-------- --------
744,323 237,509
Less current portion 13,311 4,788
-------- --------
$731,012 $232,721
======== ========
</TABLE>
In connection with the Company's merger with Quaker (see Note 3), the
revolving credit loans outstanding immediately prior to the merger were repaid
in full, including all interest due thereon. This refinancing was accomplished,
in part, through the issuance of certain new debt instruments, consisting of a
New Credit Facility, senior discount notes, and senior subordinated notes which,
in the aggregate, provided financing of approximately $810 million, subject to
certain conditions.
The Company had average borrowings of approximately $699,873,000 during
1998 at an average interest rate of 9.0%. Maximum borrowings during 1998 were
approximately $751,016,000. The Company had average borrowings of $221,069,000
and $172,065,000 during 1997 and 1996, respectively, at an average interest rate
of 6.4% and 8.69%, respectively. Maximum borrowings during 1997 and 1996 were
$243,350,000 and $268,748,000, respectively.
The Company's Canadian subsidiary has available a $5.0 million
(Canadian) revolving line of credit agreement with a local financial
institution. At June 30, 1998 and 1997, approximately $0 and $471,000,
respectively (in U.S. dollars) was outstanding under this agreement.
Annual maturities on long-term debt outstanding at June 30, 1998, are
as follows (in thousands): 1999, $13,311; 2000, $19,953; 2001, $36,899; 2002,
$49,081; 2003, $73,445; 2004 and beyond, $607,788.
F-13
<PAGE> 47
NEW CREDIT FACILITY
The New Credit Facility provides for term loans of $470,000,000 (term
loan A - $195,000,000 and term loan B - $275,000,000) and revolving loans of up
to $105,000,000. Term loan A expires in August 2003 with uneven quarterly
principal payments commencing in September 1998. Term loan B expires in August
2005 with uneven quarterly principal payments commencing in December 1997. The
revolving loans expire in August 2003. The Company pays a quarterly commitment
fee on the unused amount of the revolving loans. The unused amount of the
revolving loans was $74,300,000 as of June 30, 1998. The Company incurred debt
issuance costs of approximately $14,375,000 in connection with the New Credit
Facility. These costs have been deferred and are being amortized to interest
expense over the term of the facility.
The interest rate applicable to the New Credit Facility varies, at the
Company's option, based upon LIBOR plus applicable margins (2.75% for term loan
A and the revolving loans and 3.0% for term loan B) or based upon Prime Rate
plus applicable margins (1.5% for term loan A and the revolving loans and 1.75%
for term loan B). The applicable weighted average interest rates at June 30,
1998 were 8.47%, 8.71% and 8.96% for term loan A, term loan B, and the revolving
loans, respectively.
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. These measurements
include (1) Adjusted EBITA, (2) Leverage Ratio, (3) Interest Coverage Ratio, and
(4) Fixed Charge Ratio. During the third quarter of fiscal 1998, the Company
sought and obtained amendments to the New Credit Facility. The amendments
revised certain financial performance measurements and increased the borrowing
rate by 0.25%. The Company incurred fees of approximately $1,400,000 in
connection with the amendments. These costs have been deferred and are being
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 June 30, 1998.
The estimated fair value of the funded portion of the New Credit
Facility was approximately $490.1 million and is based on quoted market prices
as of June 30, 1998.
SENIOR DISCOUNT DEBENTURES
The Company received proceeds of $85,003,520 from the sale of
$148,400,000 principal amount at maturity of its 11 1/2% senior discount
debentures due 2008. The debentures accrete at a rate of 11 1/2% per annum,
compounded semi-annually, to an aggregate principal amount at maturity of
$148,400,000 by August 1, 2002. Commencing on February 1, 2003, cash interest on
the debentures will be payable, semi-annually in arrears on each February 1 and
August 1. The Company incurred debt issuance costs of $3,400,141 in connection
with the senior discount debentures. These costs have been deferred and are
being amortized to interest expense over the life of the debentures.
Each unit ($1,000 principal amount) was issued with a warrant which
allows the holder, subject to certain conditions, to purchase 1.9 shares of
common stock, for a total of 281,960 shares, at an exercise price of $23.00 per
share, subject to adjustment under certain circumstances. The warrants expire on
August 1, 2007.
The Company is required to be in compliance with certain non-financial
covenants in connection with the senior discount debentures. The Company is in
compliance with those covenants as of June 30, 1998.
The estimated fair value of the senior discount debentures and the
related warrants as of June 30, 1998 was approximately $89.0 million and is
based on quoted market prices for that publicly traded debt.
SENIOR SUBORDINATED NOTES
The 9-3/4% senior subordinated notes mature on August 1, 2007.
Interest on the notes is payable semi-annually on February 1 and August 1 of
each year, commencing on February 1, 1998. The Company incurred debt issuance
costs of $4,500,000 in connection with the senior subordinated notes. These
costs have been deferred and are being amortized to interest expense over the
life of the notes.
The estimated fair value of the senior subordinated notes as of June
30, 1998 was approximately $144.8 million and is based on quoted market prices.
SELLER NOTES PAYABLE
In connection with certain acquisitions (see Note 5), the Company
issued noninterest-bearing notes, the principal of which is primarily due upon
settlement of contingent portions of the acquisition purchase price within a
specified period subsequent to closing, generally not exceeding one year from
the acquisition date. Contingencies typically pertain to actual amounts of
monthly maintenance contract revenues acquired and prepaid contract liabilities
assumed in comparison to amounts
F-14
<PAGE> 48
estimated in acquisition agreements. The Company imputes interest, based upon
market rates, for long-term, non-interest-bearing obligations.
During 1997, the Company issued a secured note payable to the seller
for the purchase of repairable parts in the original amount of $1,854,000. The
note accrues interest at an interest rate of approximately 8%, and requires
quarterly payments of principal and interest of approximately $273,000 until
maturity in December 1998.
REVOLVING CREDIT LOANS - 1997 AND PRIOR
On October 20, 1995, in connection with the BABSS acquisition (see Note
5) the Company entered into a Credit Agreement which provided for a term loan
(the "1995 Term Loan") of $230,000,000 and a revolving credit facility of up to
a maximum of $30,000,000. The 1995 Term Loan provided for 19 equal quarterly
principal payments of $10,000,000 to be due and payable on the last day of each
calendar quarter commencing December 31, 1995 with a final payment due on
September 30, 2000. Loans under the revolving credit facility were to mature on
September 30, 2000. Interest on the 1995 Term Loan and the revolving credit
facility were at varying rates based, at the Company's option, on the Eurodollar
rate or the Alternative Base Rate (NationsBanc prime rate), plus the Applicable
Margins. Margins were based on the ratio of Total Funded Debt to EBITDA; the
Eurodollar Margin ranged from 1.75% to 2.5%, while the Alternative Base Rate
Margin ranged from 0.5% to 1.25%.
In April 1996, the Company completed an initial public offering (see
Note 14). The Company used a portion of the proceeds to repay approximately $70
million of the 1995 Term Loan.
Also in April 1996, the Company converted the 1995 Term Loan and the
existing $30 million Revolving Credit Facility into a $225 million variable
rate, unsecured revolving credit facility ("the 1996 Revolving Credit
Facility"). During fiscal 1997, the 1996 Revolving Credit Facility commitment
was increased to $300 million, in connection with the acquisition of certain
contracts and assets. The 1996 Revolving Credit Facility was at floating
interest rates, based either on the LIBOR or prime rate, in either case plus an
Applicable Margin, at the Company's option. As of June 30, 1997, the applicable
rate was LIBOR plus .75% or approximately 6.5%. To offset the variable rate
characteristics of the borrowings, the Company entered into interest rate swap
agreements with two banks resulting in fixed interest rates of 5.4% on $40.0
million notional principal amount through December 1997 and 5.5% on another
$40.0 million notional principal amount through December 1998. During fiscal
1997, the Company terminated these swap agreements, resulting in an
insignificant gain which was deferred to the first quarter of fiscal 1998, when
the related debt instruments were terminated.
INTEREST RATE RISK MANAGEMENT
The use of interest rate risk management instruments, such as Swaps and
Collars, is required under the terms of the New Credit Facility. The Company
manages interest costs using a mix of fixed and variable rate debt. Using Swaps,
the Company agrees to exchange, at specified intervals, the difference between
fixed and variable interest rate amounts calculated by reference to an
agreed-upon notional principal amount. Collars limit the Company's exposure to
and benefits from interest rate fluctuations on variable rate debt to within a
certain range of rates.
The following table summarizes the terms of the Company's
existing Swaps and Collars as of June 30, 1998:
<TABLE>
<CAPTION>
Notional Amount Maturities Average Interest Rate Estimated Fair Value
--------------- ---------- --------------------- --------------------
<S> <C> <C> <C> <C>
Variable to Fixed Swaps $ 110,000,000 2000 - 2001 6.0% $ (686,605)
Collars $ 125,000,000 2000 5.7% - 6.7% $ (537,737)
</TABLE>
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts. While
Swaps and Collars represent an integral part of the Company's interest rate risk
management, their incremental effect on interest expense for the year ended June
30, 1998 was not significant.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ (8,209) $ 10,909 $ 2,892
State 100 3,616 1,595
Foreign (372) 1,080 548
Deferred:
Federal (6,991) 6,460 8,945
State (917) 16 641
Foreign 612 (113) (751)
-------- -------- --------
Provision (benefit) for income taxes $(15,777) $ 21,968 $ 13,870
======== ======== ========
</TABLE>
F-15
<PAGE> 49
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable $ 7,869 $ 4,771
Inventory 2,819 2,195
Accrued expenses 6,348 7,000
Unused leases (277) 390
Fixed assets 1,714 --
Intangibles 17,049 6,196
Debt issuance costs 3,743 --
Other 1,298 --
Operating loss carryforwards 53,554 4,868
Tax credit carryforwards 2,969 1,670
-------- --------
Gross deferred tax assets 97,086 27,090
Valuation allowance (57,833) --
-------- --------
Gross deferred tax assets less valuation allowance 39,253 27,090
Gross deferred tax liabilities:
Repairable spare parts (13,893) (8,918)
Fixed assets -- (108)
-------- --------
Gross deferred tax liabilities (13,893) (9,026)
-------- --------
Net deferred tax asset $ 25,360 $ 18,064
======== ========
</TABLE>
Net operating loss and minimum tax credit carryforwards available at
June 30, 1998 expire in the following years:
<TABLE>
<CAPTION>
YEAR OF
AMOUNT EXPIRATION
------ ----------
(IN THOUSANDS)
<S> <C> <C>
Federal operating losses $130,388 2006-2013
State operating losses 109,910 1999-2013
Foreign operating losses 4,008 1999-2005
Investment tax credit 134 2004
Minimum tax credit 2,835 INDEFINITE
</TABLE>
A reconciliation between the provision (benefit) for income taxes,
computed by applying the statutory federal income tax rate of 35% for 1998, 1997
and 1996 to income before income taxes, and the actual provision (benefit) for
income taxes follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate (35.0%) 35.0% 35.0%
State income taxes, net of federal income tax provision (3.9) 5.0 4.6
Foreign income taxes (0.4) 0.4
Benefit of operating loss carryforward (0.8)
Change in valuation allowance 29.1 (1.4)
Other 2.3 1.0 2.6
---- ---- ----
Actual income tax provision (benefit) effective tax rate (7.9%) 41.4% 40.0%
==== ==== ====
</TABLE>
F-16
<PAGE> 50
As a result of the Company's merger with Quaker on August 7, 1997 (see
Note 3), an "ownership change" occurred pursuant to Section 382 of the Internal
Revenue Code. Accordingly, for Federal income tax purposes, net operating loss
and tax credit carryforwards of approximately $27.9 million arising prior to the
ownership change are limited during any future period to the Section 382
"limitation amount" of approximately $9.0 million per annum. The federal, state
and foreign net operating loss carryforwards expire in varying amounts between
1999 and 2013.
The Company recorded a valuation allowance of $57,833,000 during the
year ended June 30, 1998. The valuation allowance reduces the gross deferred tax
assets to the level where management believes that it is more likely than not
that the tax benefit will be realized. The ultimate realization of deferred tax
benefits is dependant upon the generation of future taxable income during the
periods in which the temporary differences become deductible.
11. OTHER LIABILITIES
Other (noncurrent) liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accrued severance $2,973 $2,756
Other noncurrent liabilities 2,763 3,323
------ ------
$5,736 $6,079
====== ======
</TABLE>
Accrued severance reflects the actuarial determined liability for the
separation of employees who are entitled to severance benefits under
pre-existing separation pay plans.
Other noncurrent liabilities include deferred operating lease
liabilities related to scheduled rent increases, recorded in accordance with the
provisions of SFAS No. 13, Accounting for Leases. Also included in other
noncurrent liabilities are provisions relating to various tax matters and
unutilized lease losses.
12. STOCK-BASED COMPENSATION PLANS
In connection with the Company's merger with Quaker on August 7, 1997
(see Note 3), all vested and unvested options then outstanding under the Stock
Option and Restricted Stock Purchase Plan were cancelled, and the holders of
these options received the right to receive cash payments equal to the excess,
if any, of $23.00 over the exercise price of each option. Certain option holders
elected to convert 255,828 options under the Stock Option and Restricted Stock
Purchase Plan into options to purchase common stock of the merged Company, in
lieu of cash payments. The converted options were fully vested.
MANAGEMENT INCENTIVE PLAN
The 1997 Management Incentive Plan (Incentive Plan), a stock option
plan, was created concurrently with the Quaker Merger. Under the Incentive Plan,
officers, directors and key employees may be granted options to purchase the
Company's common stock at an exercise price determined by the Compensation
Committee at the time of the grant. On August 7, 1997, the Company granted
1,179,000 options and granted an additional 725,828 options during the remainder
of fiscal 1998. The aggregate number of shares of Company common stock permitted
for issuance pursuant to the Incentive Plan was 1,698,280 as of June 30, 1998.
In July 1998, subject to stockholder approval, the Company's Board of Directors
increased the aggregate number of shares of Company Common Stock reserved for
issuance to the Management Incentive Plan by 250,000 shares for a total of
1,948,280 shares. Options generally vest and become exercisable either in
installments of 25% per year on each of the first through fourth anniversaries
of the grant date or as defined corporate performance goals are met. All options
become fully vested in seven years. Options generally expire upon the earlier of
termination of employment (with a defined period to exercise vested options) or
ten years from date of grant.
A summary of the Incentive Plan activity is as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
------- EXERCISE PRICE
--------------
<S> <C> <C>
Balance, June 30, 1997 0 $ 0.00
Options granted 1,904,828 $ 19.09
Options exercised (107,264) $ 0.96
Options cancelled (212,790) $ 22.58
---------
Balance, June 30, 1998 1,584,774 $ 19.86
=========
</TABLE>
The following tables summarize information about options outstanding at June 30,
1998:
F-17
<PAGE> 51
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------
RANGE OF EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE
PRICES NUMBER OF SHARES CONTRACTUAL LIFE EXERCISE PRICE
------ ---------------- ---------------- --------------
<S> <C> <C> <C>
$0.45 - $7.17 46,178 7.4 $7.17
$12.54 - $15.01 94,596 8.3 $14.16
$20.61 - $21.83 1,439,000 9.3 $20.61
$26.75 - $28.29 5,000 9.0 $26.75
---------
Total 1,584,774 9.2 $19.86
=========
</TABLE>
<TABLE>
<CAPTION>
EXERCISABLE OPTIONS
-------------------
RANGE OF EXERCISE WEIGHTED AVERAGE
PRICES NUMBER OF OPTIONS EXERCISE PRICE
------ ----------------- --------------
<S> <C> <C>
$0.45 - $7.17 46,178 $7.17
$12.54 - $15.01 94,596 $14.16
$20.61 - $21.83 55,979 $20.61
$26.75 - $28.29 5,000 $26.75
-----
Total 201,753 $14.66
=======
</TABLE>
All stock option grants to date have been issued with an exercise price
equal to or in excess of the market price of the underlying stock at the date of
the grant. As a result, and in accordance with APB Opinion 25, no compensation
expense is recognized in the Company's financial statements. Had compensation
expense for the Incentive Plan been determined based on the fair value at the
grant dates under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's pro forma net loss and pro forma loss per share
(see Note 3) would have been increased to the following adjusted pro forma
amounts (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998
----
<S> <C>
Pro forma net loss--as reported $ (124,266)
Pro forma net loss--as adjusted $ (126,743)
Pro forma basic loss per share--as reported $ (9.91)
Pro forma basic loss per share--as adjusted $ (10.10)
</TABLE>
The weighted average fair value of options granted during fiscal 1998
is estimated as $10.88 on the date of the grant using the Black-Scholes option
pricing model with the following assumptions: volatility of 46.0%, risk-free
interest rate of 5.52%, dividend yield of 0.0% and an expected life of 5 years.
STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
Under the plan, the Company, at the discretion of the Board of
Directors, issued restricted stock, incentive stock options and non-qualified
options for shares of the Company's common stock. Vesting of the restricted
stock and stock options was at the discretion of the Board of Directors and
generally occurred at a rate of 25% per year. No such options were granted at
prices less then 100% of the fair value of common shares at the date of
issuance. Options were to expire through February 2007.
Presented below is the activity in the Plan for the years ended June
30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
------- -----------
<S> <C> <C>
Balance, June 30, 1995 2,263,320 $.50-$6.00
Options exercised (329,850) $.50-$6.00
Options granted 803,000 $8.00-$27.50
Options cancelled (125,000) $1.25-$8.00
-----------
Balance, June 30, 1996 2,611,470 $.50-$27.50
Options exercised (477,544) $.50-$8.00
Options granted 1,254,000 $14.00-$22.13
Options cancelled (532,579) $ 1.25-$27.50
-----------
Balance, June 30, 1997 2,855,347 $.50-$26.75
Options exercised (80,500) $0.50-$6.00
Options cancelled (2,774,847) $0.45-$26.75
-----------
Balance, June 30, 1998 0 $0.00
-----------
</TABLE>
F-18
<PAGE> 52
The fair value of the options granted were estimated using the
Black-Scholes option pricing model. The fair values of the options granted
during 1997 and 1996 were $9.61 and $11.56, respectively. The assumptions used
to determine the fair values were as follows: risk-free interest rate of 6.58%
in 1997 and 6.45% in 1996; expected volatility of 27.1% in 1997 and 27.0% in
1996; and an expected life of 10 years for 1997 and 1996.
Had compensation expense for the Plan been determined based on the fair
value at the grant dates under the provisions of SFAS No. 123, the pre-tax pro
forma compensation expense in 1997 and 1996 would have been approximately $4.4
million and $1.7 million, respectively.
13. LEASE COMMITMENTS
The Company conducts its operations primarily from leased warehouses
and office facilities and uses certain computer, data processing and other
equipment under operating lease agreements expiring on various dates through
2006. The future minimum lease payments for operating leases having initial or
remaining noncancelable terms in excess of one year for the five years
succeeding June 30, 1998 and thereafter are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $18,688
2000 15,123
2001 11,525
2002 7,708
2003 5,712
Thereafter 6,771
-------
$65,527
</TABLE>
Rental expense amounted to approximately $19,379,000, $17,367,000, and
$13,149,000, for the fiscal years ended 1998, 1997 and 1996, respectively.
14. SHAREHOLDERS' EQUITY (DEFICIT)
During fiscal 1994 and 1996, the Company issued three classes of
redeemable preferred stock (Series A, Series B and Series C preferred stock;
collectively, the "Preferred Stock"), aggregating 376,416 preferred stock
shares, in exchange for cash or in settlement of certain debt obligations. The
Preferred Stock, which was valued at $100 per share, accrued dividends at rates
ranging between $4 per share per annum and $6 per share per annum, to be paid as
declared by the Company's Board of Directors. Additionally, the Preferred Stock
was to be automatically converted into Company common stock if the Company were
to complete a public offering of common stock which met certain specified
criteria.
On February 9, 1996, the Company amended its Certificate of
Incorporation to increase the number of authorized shares of common stock to
100,000,000 shares and to authorize 5,000,000 shares of Preferred Stock.
In April 1996, the Company completed a public offering of 6,300,000
shares of common stock at $18.00 per share (the "Offering"). Prior to the
Offering, there was no public market for the Company's common stock. The common
stock is listed on the Nasdaq National Market under the symbol "DOCI".
The net proceeds of the offering, after deducting applicable issuance
costs and expenses were $104,740,000. The proceeds were used to repay
approximately $70,000,000 of the 1995 Term Loan, $30,000,000 in Affiliate Notes,
approximately $1,446,000 in accrued and declared dividends to holders of the
Preferred Stock and for other general corporate purposes. In connection with the
offering, the Preferred Stock was automatically converted into 11,271,924 shares
of common stock.
During the year ended June 30, 1996, certain shareholders exercised
their preemptive right to subscribe for and purchase additional shares of common
stock or other securities so issued at the same price as originally issued on
certain occasions from 1992 through 1995. On December 4, 1995, the following
securities were purchased: (a) 382,578 shares of common stock at a price of $4
per share; (b) 999 shares of Series A Preferred Stock, at a price of $100 per
share; (c) 1,776 shares of Series B Preferred Stock, at a price of $100 per
share; (d) 1,924 shares of common stock at a price of $.50 per share; (e)
311,141 shares of Series C Preferred Stock, at a price of $100 per share; and
(f) 17,407 Common Stock Purchase Warrants at a price of $7.25333 per warrant
which entitles the holder to purchase 17,407 shares of common stock at an
exercise price of $.10 per share. The 17,407 Common Stock Purchase Warrants were
exercised in 1996. As a result, the Company recorded an extraordinary loss in
the amount of $3,211,000, net of taxes of $1,284,000, due to the acceleration of
the related amortization of original issue discount.
F-19
<PAGE> 53
In consideration of his service as a director and Chairman of the
Board, the Company, in a prior year, granted an individual warrants to purchase
an aggregate of 66,667 shares of common stock at an exercise price of $4.00 per
share. In connection with the Company's merger with Quaker in August 1997, these
warrants were converted into cash, with the holder receiving an amount equal to
$23 less the exercise price. As a result, the Company recorded compensation
expense of approximately $1.3 million during fiscal 1998 (see Note 3).
As more fully described in Note 3, the Company merged with Quaker on
August 7, 1997. In accordance with the terms of the Merger Agreement, which was
formally approved by the Company's shareholders on August 7, 1997, Quaker merged
with and into the Company, and the holders of approximately 94.7% of shares of
Company common stock outstanding immediately prior to the merger received $23 in
cash in exchange for these shares. Holders of approximately 5.3% of shares of
Company common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Company common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's revolving
credit facility (see Note 9).
In connection with the merger, certain executive management employees
were given the option to acquire common stock shares at current market prices.
The Company provided non-recourse interest bearing loans to those key executives
who elected to acquire common stock. Total loans outstanding at June 30, 1998
were $1,328,851. The Company has recorded the employee loans receivable as a
reduction to shareholders' equity (deficit).
15. RETIREMENT PLANS
The Company maintains a 401(k) plan for its employees. Under this plan,
eligible employees may contribute amounts through payroll deductions
supplemented by employer contributions for investment in various investments
specified in the plan. The Company's contribution to this plan for fiscal 1998
was $1,012,563. A similar plan exists for former employees of an acquired
company for which eligibility and additional contributions were frozen in
September 1988.
In addition, the Company assumed the liability of the defined benefit
pension plan applicable to employees of a company acquired in 1986. The
eligibility and benefits were frozen as of the date of the acquisition.
Pension expense for the defined benefit pension plan was computed as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost $ 611 $ 521 $ 495
Actual return on plan assets (1,506) (409) (449)
Net amortization and deferral 1,128 9 72
------- ------- -------
Periodic pension costs $ 233 $ 121 $ 118
======= ======= =======
</TABLE>
The discount rate used in determining the actuarial present value of
the projected benefit obligation was 7.0% for 1998 and 7.5% for 1997 and 1996.
The expected long-term rate of return on assets was 8.5% for 1998, 1997 and
1996. The mortality table used for 1998 was the 1983 Group Annuity Mortality
Table for Males and Females and the mortality table used for 1997 and 1996 was
the UP-1984 Unisex Mortality Table.
The following table sets forth the funded status of the frozen pension
plan as of May 1, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefits (100% vested) $ 9,155 $ 7,290
Fair value of plan assets 7,857 6,128
------- -------
Unfunded projected benefit obligation 1,298 1,162
Unrecognized net loss 2,390 1,873
Unrecognized net transition obligation 438 470
Adjustment to recognized minimum liability (2,828) (2,343)
------- -------
Accrued pension costs $ 1,298 $ 1,162
======= =======
</TABLE>
16. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
F-20
<PAGE> 54
During the second quarter of fiscal 1997, in connection with the
Memorex Telex acquisition (see Note 5), the Company recorded a $3.4 million
pre-tax charge for estimated future employee severance costs, and a $0.9 million
pre-tax charge for unutilized lease/contract losses ("exit costs"), primarily
associated with duplicate facilities to be closed. The $3.4 million charge,
recorded in accordance with SFAS No. 112, Employers' Accounting for
Postemployment Benefits, reflects the actuarially determined benefit costs for
the separation of employees who are entitled to benefits under pre-existing
separation pay plans. These costs are included in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the year ended June 30, 1997.
In the second quarter of fiscal 1996, in connection with the
acquisition of BABSS, the Company recorded pre-tax charges for exit costs of
$6.9 million, and estimated future employee severance costs of $0.1 million.
During the fourth quarter of fiscal 1996, the Company reversed $3.4 million of
these employee severance and exit cost liabilities. The reversal was primarily
the result of the Company's ability to utilize and sublease various facilities
identified in the original $7.0 million combined liability. Such information was
unknown to the Company when the original liability was recorded.
See Note 11 for further information regarding accrued severance and
unutilized lease losses.
17. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect to four waste disposal sites that have been identified by the United
States Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party with respect to a fifth, related site, but has not received
any other communication with respect to that site. Under applicable law, all
parties responsible for disposal of hazardous substances at those sites are
jointly and severally liable for clean-up costs. The Company originally
estimated that its share of the costs of the clean-up of one of these sites
would be approximately $500,000 which is accrued in the accompanying
consolidated balance sheets as of June 30, 1998 and 1997. Complete information
as to the scope of required clean-up at these sites is not yet available and,
therefore, management's evaluation may be affected as further information
becomes available. However, in light of information currently available to
management, including information regarding assessments of the sites to date and
the nature of involvement of the Company's alleged predecessor at the sites, it
is management's opinion that the Company's potential additional liability, if
any, for the cost of clean-up of these sites will not be material to the
consolidated financial position, results of operations or liquidity of the
Company.
The Company is also party to various legal proceedings incidental to
its business. Certain claims, suits and complaints arising in the ordinary
course of business have been filed or are pending against the Company. In the
opinion of management, these actions can be successfully defended or resolved
without a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
During the fourth quarter of fiscal 1997, the Company received $2.0
million in full settlement of a claim against its former insurance carrier,
related to unreimbursed losses. This settlement was reflected as a reduction of
selling, general and administrative costs in the accompanying statement of
operations.
18. RELATED PARTY TRANSACTIONS
In connection with the Quaker Merger (See Note 3), DecisionOne
Corporation made a loan to DecisionOne Holdings Corp. for $59,100,000 which was
used to finance the merger. The subordinated promissory note accrues interest at
an annual interest rate of 8 -1/4%. Interest and principal are both due upon
maturity in August 2010. Interest income recorded by DecisionOne Corporation and
interest expense recorded by DecisionOne Holdings Corp. was approximately
$4,381,000 in fiscal 1998.
During the year ended June 30, 1998, the Company paid the DLJ Group
approximately $500,000 for financial advisory services.
Prior to 1994, the Company entered into an agreement to purchase
printer products from Genicom Corporation (Genicom). The Company and Genicom
were under common ownership prior to the August 7, 1997 Merger. Purchases from
Genicom for the period July 1, 1997 through August 7, 1997 were approximately
$121,000. Purchases from Genicom for the years ended June 30, 1997 and 1996 were
approximately $472,000 and $1,512,000, respectively. Accounts payable to Genicom
amounted to approximately $0 and $30,000 as of June 30, 1998 and 1997,
respectively.
During the year ended June 30, 1996, the Company paid approximately
$125,000 for expense reimbursements to certain shareholders for services
rendered in connection with an acquisition in 1988. The amount was accrued for
in prior years.
In connection with the Company's financing of the BABSS acquisition on
October 20, 1995, the Company issued subordinated debentures and redeemable
preferred stock to certain related parties (see Notes 9 and 14).
F-21
<PAGE> 55
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial
information for the fiscal years ended 1998 and 1997:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
SEPT. 30 (1), DEC. 31, MARCH 31, JUNE 30 (2),
------------- -------- --------- ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1998
<S> <C> <C> <C> <C>
Revenues $ 202,264 $ 200,075 $ 200,910 $ 202,468
Gross profit 44,819 46,769 47,747 52,576
Net loss (57,627) (10,718) (10,994) (103,791)
Pro forma net income (loss) 1,237 (10,718) (10,994) (103,791)
Pro forma earnings (loss) per share 0.09 (0.86) (0.87) (8.25)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
SEPT. 30, DEC. 31 (3), MARCH 31, JUNE 30,
--------- ------------ --------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997
<S> <C> <C> <C> <C>
Revenues $176,426 $191,253 $205,070 $213,201
Gross profit 41,861 47,642 53,822 58,332
Net income 5,455 4,954 9,507 11,168
</TABLE>
(1) Net loss for the first quarter of 1998 includes $69.0 million of
pre-tax merger expenses (See Note 3).
(2) Net loss for the fourth quarter of 1998 includes $87.5 million of
pre-tax loss on asset sales and disposals and a $12.3 million pre-tax
special charge to the provision for uncollectible receivables (See Note
4).
(3) Net income for the second quarter of 1997 includes a $3.4 million
pre-tax charge for estimated future employee severance costs, and a
$0.9 million pre-tax charge for unutilized lease/contract losses,
primarily associated with duplicate facilities to be closed in
connection with the Memorex Telex acquisition (see Note 16).
F-22
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder
of DecisionOne Corporation:
We have audited the accompanying consolidated balance sheets of DecisionOne
Corporation (a wholly-owned subsidiary of DecisionOne Holdings Corp.) and
subsidiaries (the "Company") as of June 30, 1998 and 1997, and the related
consolidated statements of operations, shareholder's equity (deficit) and cash
flows for each of the three years in the period ended June 30, 1998. Our audits
also included the related financial statement schedule listed in the Index at
Item 14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of DecisionOne Corporation and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
September 4, 1998
F-23
<PAGE> 57
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 5,205 $ 10,877
Accounts receivable, net of allowances of $22,572 and $14,869 114,082 127,462
Consumable parts, net of allowances of $9,271 and $15,976 23,097 29,052
Prepaid expenses and other assets 27,797 4,542
--------- ---------
Total current assets 170,181 171,933
REPAIRABLE PARTS, Net of accumulated amortization of $135,277 and $156,468 142,446 205,366
PROPERTY AND EQUIPMENT 29,095 34,227
INTANGIBLES 154,029 191,366
PARENT COMPANY LOAN RECEIVABLE 69,867
DEFERRED TAX ASSET 24,370 18,064
OTHER ASSETS 16,451 2,149
--------- ---------
TOTAL ASSETS $ 606,439 $ 623,105
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of debt $ 13,311 $ 4,788
Accounts payable and accrued expenses 101,351 96,516
Deferred revenues 40,758 56,600
Income taxes and other liabilities 10,925 11,513
--------- ---------
Total current liabilities 166,345 169,417
DEBT 638,766 232,721
OTHER LIABILITIES 5,796 6,079
SHAREHOLDER'S EQUITY(DEFICIT):
Common stock, no par value; one share authorized, issued and outstanding
in 1998 and 1997 -- --
Additional paid-in capital 12,323 258,609
Accumulated deficit (214,073) (42,432)
Other (2,718) (1,289)
--------- ---------
Total shareholder's equity (deficit) (204,468) 214,888
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT) $ 606,439 $ 623,105
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-24
<PAGE> 58
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES $ 805,717 $ 785,950 $ 540,191
COST OF REVENUES 613,806 584,755 402,316
--------- --------- ---------
GROSS PROFIT 191,911 201,195 137,875
OPERATING EXPENSES:
Selling, general and administrative expenses 142,462 109,975 72,829
Amortization of intangibles 27,169 23,470 15,673
Merger expenses 69,046
Loss on asset sales and disposals 87,458
--------- --------- ---------
OPERATING INCOME (LOSS) (134,224) 67,750 49,373
INTEREST EXPENSE, Net of interest
income of $206 in 1998, $197 in 1997 and $239 in 1996 52,204 14,698 14,714
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (BENEFIT) AND
EXTRAORDINARY ITEM (186,428) 53,052 34,659
PROVISION (BENEFIT) FOR INCOME TAXES (14,787) 21,968 13,870
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (171,641) 31,084 20,789
EXTRAORDINARY ITEM, NET OF TAX BENEFIT
OF $1,284 -- -- 1,927
--------- --------- ---------
NET INCOME (LOSS) $(171,641) $ 31,084 $ 18,862
========= ========= =========
PRO FORMA INFORMATION (UNAUDITED) - See Note 3:
Pro forma net loss $ (111,357)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-25
<PAGE> 59
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
TOTAL
FOREIGN SHARE-
ADDITIONAL CURRENCY PENSION HOLDERS'
PAID-IN ACCUMULATED TRANSLATION LIABILITY (DEFICIT)
CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT EQUITY
------- ------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 $114,891 $(92,378) $680 $(1,705) $21,488
Net income 18,862 18,862
Adjustment to pension liability (143) (143)
Contributed capital 142,090 142,090
Foreign currency translation adjustment (58) (58)
Dividends declared (1,446) (1,446)
-------- --------- ---- -------- ---------
BALANCE, JUNE 30, 1996 255,535 (73,516) 622 (1,848) 180,793
Net income 31,084 31,084
Adjustment to pension liability (25) (25)
Foreign currency translation adjustment (38) (38)
Tax benefit - disqualifying stock disposition 2,635 2,635
Contributed capital 439 439
-------- ------- --- -------- ---------
BALANCE, JUNE 30, 1997 258,609 (42,432) 584 (1,873) 214,888
Net loss (171,641) (171,641)
Adjustment to pension liability (517) (517)
Foreign currency translation adjustment (912) (912)
Dividends declared (244,000) (244,000)
Contributed capital 349 349
Reversal of tax benefit - disqualifying
stock disposition (2,635) (2,635)
-------- --------- ---- -------- ---------
BALANCE, JUNE 30, 1998 $12,323 $(214,073) $(328) $(2,390) $(204,468)
======== ========= ===== ======= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-26
<PAGE> 60
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(171,641) $ 31,084 $ 18,862
Adjustments to reconcile net
income to net cash provided by
operating activities:
Loss on asset sales and disposals 87,458
Depreciation 15,729 13,549 8,309
Amortization of repairable parts 81,597 63,870 37,869
Amortization of intangibles 27,169 23,470 15,673
Provision for uncollectible receivables 15,515 7,849 3,434
Provision for consumable parts obsolescence 1,852 2,554 1,171
Extraordinary item 1,927
Changes in operating assets and liabilities, net of effects from companies
acquired, which provided (used) cash:
Accounts receivable (802) (38,365) (1,900)
Consumable parts (1,889) (6,038) (1,248)
Accounts payable and accrued expenses 4,081 3,885 256
Deferred revenues (20,311) (25,427) (33,928)
Net changes in other assets and liabilities (26,631) 12,543 1,469
--------- --------- ---------
Net cash provided by operating activities 12,127 88,974 51,894
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (10,222) (10,540) (7,278)
Repairable spare parts purchases, net (78,239) (86,446) (63,514)
Acquisitions of companies and contracts (10,168) (32,258) (275,562)
--------- --------- ---------
Net cash used in investing activities (98,629) (129,244) (346,354)
--------- --------- ---------
FINANCING ACTIVITIES:
Capital contributions 349 439 142,090
Proceeds from issuance of subordinated
debentures 30,000
Payment of dividends to Parent (244,000)
Payment of dividends (1,446)
Payment of subordinated debentures (30,000)
Loans made to Parent (69,617)
Net proceeds from borrowings 397,195 43,625 162,772
Principal payments under capital leases (480) (1,075) (3,423)
Other (2,617) (63) 29
--------- --------- ---------
Net cash provided by financing activities 80,830 42,926 300,022
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,672) 2,656 5,562
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,877 8,221 2,659
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,205 $ 10,877 $ 8,221
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the year for:
Interest $ 38,472 $ 15,640 $ 14,838
Income taxes 4,031 8,381 5,344
Noncash investing/financing activities:
Issuance of seller notes in connection with acquisitions 2,224 587
Issuance of seller notes in exchange for repairable parts 1,855
Repairable parts received in lieu of cash for accounts receivable 1,124
Repairable parts received in exchange for the assumption of liabilities 2,100
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-27
<PAGE> 61
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. NATURE OF BUSINESS
DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne
Holdings Corp., herein called "Holdings") and its wholly-owned subsidiaries (the
"Company") are providers of multivendor computer maintenance and technology
support services. The Company offers its customers a single-source, independent
(i.e., not affiliated with an original equipment manufacturer, or "OEM")
solution for computer maintenance and technology support requirements, including
hardware maintenance services, software support, end-user/help desk services,
network support and other technology support services. These services are
provided by the Company across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, personal
computers ("PCs") and related peripherals. In addition, the Company provides
outsourcing services for OEMs, software publishers, system integrators and other
independent service organizations. The Company delivers its services through an
extensive field service organization of approximately 4,000 field personnel in
over 150 service locations throughout North America and through strategic
alliances in selected international markets.
Historically, the Company's services predominantly involved the
provision of maintenance services to the midrange computer market. On October
20, 1995, the Company acquired Bell Atlantic Business Systems Services, Inc.
("BABSS") (see Note 5). BABSS provided computer maintenance and technology
support services for computer systems ranging from the data center, which
includes both mainframe and midrange systems, to desk top. Subsequent to the
acquisition, Holding's principal operating subsidiary, Decision Servcom, Inc.,
was merged into BABSS, which had changed its name to DecisionOne Corporation. As
a result, DecisionOne Corporation is the principal operating subsidiary of the
Holdings.
On May 29, 1997, Holdings completed a restructuring of the legal
organization of its subsidiaries (the "Corporate Reorganization"). The Corporate
Reorganization involved Holdings' contribution to DecisionOne Corporation of
ownership interests in its subsidiaries, all of which were under Holdings'
control (the "Contributed Subsidiaries"). The Corporate Reorganization has been
accounted for in a manner similar to a pooling of interests. Accordingly, the
Company's consolidated financial statements include the accounts of the
Contributed Subsidiaries for the years ended June 30, 1997 and 1996.
The Company's wholly owned, direct international subsidiaries are not
significant to the Company's consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation--The consolidated financial statements include the
accounts of DecisionOne Corporation and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Pro Forma Information (Unaudited)--The pro forma information included
in the accompanying statement of operations and in Note 3 has been prepared to
reflect the Company's and Holding's recapitalization and merger with Quaker
Holding Co. ("Quaker") and related transactions as if these had occurred on July
1, 1997.
Cash and Cash Equivalents--Cash and cash equivalents are highly liquid
investments with remaining maturities of three months or less at the time of
purchase. Cash equivalents, consisting primarily of repurchase agreements with
banks, are stated at cost, which approximates fair market value.
Consumable Parts and Repairable Parts -- In order to provide
maintenance and repair services to its customers, the Company is required to
maintain significant levels of computer parts. These parts are classified as
consumable parts or as repairable parts.
Consumable parts, which are expended during the repair process, are
stated principally at weighted average cost, less an allowance for obsolescence
and shrinkage. Consumable parts are reflected in the cost of revenues during the
period utilized.
Repairable (rotable) parts, which can be refurbished and reused, are
stated at original weighted average cost less accumulated amortization. Monthly
amortization of repairable parts is reflected in cost of revenues. The costs of
refurbishing parts are also included in the cost of revenues as incurred.
Amortization of repairable costs is based principally on the composite group
method, using straight-line whole life and remaining life composite rates.
Repairable parts generally have an
F-28
<PAGE> 62
economic life that corresponds to the estimated normal life cycle of the related
products.
As consumable and repairable parts are retired, the weighted average
gross amounts at which such parts have been carried are removed from the
respective asset accounts, and charged to the accumulated allowance or
accumulated amortization accounts as applicable. Periodic revisions to
amortization and allowance estimates are required, based upon the evaluation of
several factors, including changes in estimated product life cycles, usage
levels, and technology changes. Changes in these estimates are reflected on a
prospective basis unless such changes result from an abnormal retirement
(including sales, disposals and shrinkage) which requires immediate loss
recognition. In addition, impairment is recognized when the net carrying value
of the parts exceeds the estimated current and anticipated undiscounted net cash
flows. Measurement of the amount of impairment if any is calculated based upon
the difference between carrying value and fair value.
The Company has amortized the majority of its composite group of
repairable parts over an estimated average useful life of five years based
principally on historic product life cycle studies. As a result of the recent
abnormal retirement of computer parts (See Note 4) and related life studies the
Company will revise the useful lives of repairable parts and increase
obsolescence provision for consumable parts prospectively. Effective July 1,
1998, the Company will amortize its existing composite group of repairable parts
and future repairable part purchases over an estimated average remaining life of
three years.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is provided for principally using the straight-line composite group
method over the estimated useful lives of the depreciable asset group.
Capitalized equipment leases and leasehold improvements are amortized over the
shorter of the related lease terms or asset lives. Maintenance and repairs are
charged to expense as incurred. Upon retirement or disposition of property and
equipment, the cost and related accumulated depreciation are removed from the
respective asset accounts, and charged to accumulated depreciation and
amortization accounts as applicable.
Business and Contract Acquisitions--Business and contract acquisitions
have been accounted for as purchase transactions, with the purchase price of
each acquisition allocated to the assets acquired and liabilities assumed based
upon their respective estimated fair values at the dates of acquisition.
Consistent with the Company's parts retirement accounting methods, the gross
value of parts acquired is generally stated at weighted average cost. Fair value
adjustments, if any, are reflected as adjustments to the respective accumulated
amortization or allowance accounts. The excess of the purchase price over
identified net assets acquired is amortized, on a straight-line basis, over the
expected period of future benefit (see Note 7).
Typical contract acquisitions are comprised primarily of customer
maintenance and support contracts of complementary entities, along with the
accompanying consumable and repairable parts required to support these contracts
and other identifiable intangibles, such as noncompete agreements. Liabilities
assumed in business and contract acquisitions consist primarily of prepaid
amounts related to multi-period customer maintenance and support contracts.
These liabilities are recorded as deferred revenues at acquisition dates and are
recognized as revenues when earned in accordance with the terms of the
respective contracts.
Intangible Assets--Intangible assets are comprised of excess purchase
price over the fair value of net assets acquired, acquired customer lists and
other intangible assets, including the fair value of contractual profit
participation rights and amounts assigned to noncompete agreements.
Intangible assets, which arise principally from acquisitions, are
generally amortized on a straight-line basis over their respective estimated
useful lives (see Note 7). The Company evaluates the carrying value of
intangible assets whenever events or changes in circumstances indicate that
these carrying values may not be recoverable within the amortization period.
Impairment is recognized when the net carrying value of the intangible asset
exceeds the estimated future undiscounted future net cash flows. Measurement of
the amount of impairment, if any, is calculated based upon the difference
between carrying value and fair value.
Revenue--The Company enters into maintenance contracts whereby it
services various manufacturers' equipment. Revenues from these contracts are
recognized ratably over the terms of such contracts. Prepaid revenues from
multi-period contracts are recorded as deferred revenues and are recognized
ratably over the term of the contracts.
Revenues derived from the maintenance of equipment not under contract
are recognized as the service is performed. Revenues derived from other
technology support services are recognized as the service is performed or
ratably over the term of the contract.
Foreign Currency Translation--Gains and losses resulting from foreign
currency translation are accumulated as a separate component of shareholders'
equity (deficit). Gains and losses resulting from foreign currency transactions
are included in operations, except for intercompany foreign currency
transactions which are of a long-term nature and are accumulated as a separate
component of shareholders' equity (deficit).
F-29
<PAGE> 63
Credit Risk--Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base and their dispersion across many industries.
Fair Value of Financial Instruments--The following disclosures of the
estimated fair value of financial instruments were made in accordance with the
requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies.
Cash and Cash Equivalents, Accounts Receivable, and Accounts
Payable--The carrying amount of these items are a reasonable estimate
of their fair value.
Debt -- As more fully described in Note 9, fair values of debt
such as the New Credit Facility, the senior discount debentures and the
senior subordinated notes and the fair values of interest rate swaps
and collars are based on quoted market prices.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates and
assumptions.
Derivative Financial Instruments--Derivative financial instruments,
which constitute interest rate swap and collar agreements (see Note 9), are
periodically used by the Company in the management of its variable interest rate
exposure. Amounts to be paid or received under interest rate swap and collar
agreements are recognized as interest expense or interest income during the
period in which these accrue. Gains or losses realized, if any, on the early
termination of interest rate swap or collar contracts are deferred, to be
recognized upon the termination of the related asset or liability or expiration
of the original term of the swap or collar contract, whichever is earlier. The
Company does not hold any derivative financial instruments for trading purposes.
Recent Accounting Pronouncements -- In June 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive
Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, which are both effective for fiscal years beginning after
December 15, 1997. The Company intends to adopt the pronouncements in fiscal
1999. Both will require additional disclosure but will not have a material
effect on the Company's financial position or results of operations. SFAS No.
130 will first be reflected in the Company's first quarter of 1999 interim
financial statements. Components of comprehensive income for the Company include
such items as net income and foreign currency translation. SFAS No. 131 requires
segments to be determined based on how management measures performance and makes
decisions about allocating resources. The Company is evaluating whether the
adoption of SFAS No. 131 will result in any changes to its presentation of
financial data for interim and financial periods in fiscal 1999.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. The Company has recently committed to acquire and develop new
Customer Information and Dispatch Data Gathering Systems in connection with its
contract administration and call dispatch. The Company believes a significant
portion of the costs to be incurred in fiscal 1999 and fiscal 2000 will be
capitalizable in accordance with SOP 98-1.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133".) This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those statements at fair value. This statement is effective
for fiscal years beginning after June 15, 1999, although early adoption is
encouraged. The Company is evaluating the effect that the adoption of SFAS No.
133 will have on its consolidated financial position or results of operations.
Reclassifications--Certain reclassifications have been made to prior
year data in order to conform with the 1998 presentation.
3. MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION
On August 7, 1997, the Company and Holdings consummated a merger with
Quaker Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II.
The merger was recorded as a recapitalization for accounting purposes as of the
consummation date, occurred pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") by and among the Company, Holdings and Quaker dated May 4,
1997.
F-30
<PAGE> 64
In accordance with the terms of the Merger Agreement, which was
formally approved by the Company's shareholders on August 7, 1997, Quaker merged
with and into Holdings, and the holders of approximately 94.7% of shares of
Holdings common stock outstanding immediately prior to the merger received $23
in cash in exchange for each of these shares. Holders of approximately 5.3% of
shares of Holdings common stock outstanding immediately prior to the merger
retained such shares in the merged Holdings, as determined based upon
shareholder elections and stock proration factors specified in the Merger
Agreement. Immediately following the merger, continuing shareholders owned
approximately 11.9% of shares of outstanding Holdings common stock. The
aggregate value of the merger transaction was approximately $940 million,
including refinancing of the Company's revolving credit facility (see Note 9).
In connection with the merger, Holdings raised $85 million through the
public issuance of senior discount debentures, and the Company issued publicly
held senior subordinated notes for approximately $150 million. The Company also
entered into a new syndicated credit facility providing for term loans of $470
million and revolving loans of up to $105 million. The proceeds of the senior
discount notes, senior subordinated notes and the initial borrowings under the
new credit facility along with a loan of approximately $59.1 million from the
Company to Holdings and the purchase of approximately $225 million of Holdings
common stock by Quaker have been used to finance the payments of cash to
cash-electing Holdings shareholders, to pay the holders of Holdings stock
options and stock warrants canceled or converted, as applicable, in connection
with the merger, to repay the Company's existing revolving credit facility and
to pay expenses incurred in connection with the merger.
As a result of the merger, the Company and Holdings incurred various
expenses, aggregating approximately $69.0 million on a pretax basis
(approximately $63.5 million after related tax benefit) in connection with
consummating the transaction. These costs consisted primarily of compensation
costs, underwriting discounts and commissions, professional and advisory fees
and other expenses. The Company reported this one-time charge during the first
quarter of fiscal 1998. In addition to these expenses, the Company and Holdings
also incurred approximately $22.3 million of capitalized debt issuance costs
associated with the merger financing. These costs will be charged to expense
over the terms of the related debt instruments.
The following summarized unaudited pro forma information for the year
ended June 30, 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 results of operations which actually would have
resulted had the merger occurred as of July 1, 1997 or which may result in the
future.
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
YEAR ENDED JUNE 30,
1998
----
<S> <C>
PRO FORMA LOSS STATEMENT INFORMATION:
Revenues $ 805,717
Operating Loss (65,178)
Loss from continuing operations before income taxes (120,972)
Net Loss (111,357)
</TABLE>
The pro forma net loss reflects (1) a net increase in interest expense of
approximately $3.6 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 $5.2 million, including
the effect of valuation allowances against certain deferred tax assets (see Note
10).
4. LOSS ON ASSET SALES AND DISPOSALS
Management determined that over 1.2 million of its computer parts were
obsolete during its annual fourth quarter physical inventory. These parts were
retired and subsequently sold to salvage dealers for nominal scrap value. The
parts obsolescence was principally due to the convergence of significant changes
in the Company's business operations and the computer service industry, which
the Company expects will continue. The significant changes include: (1)
accelerated technology migration trends as customers modify their computing
environments to remediate year 2000 ("Y2K") problems, (2) increasing shifts in
demand from data center and midrange systems to desktop computing environments,
and (3) declining life cycles of the products under current and anticipated
service contracts due to increasingly rapid changes in technology. The abnormal
nature of this retirement and subsequent sale required immediate loss
recognition of $75 million.
In connection with the acquisition of BABSS, the Company acquired
contractual profit participation rights pursuant to an existing agreement
between BABSS and ICL Sorbus, Ltd. (ICL) (See Note 5). On June 29, 1998, the
Company sold its contractual profit participation rights back to ICL at a pretax
loss of approximately $12.5 million.
F-31
<PAGE> 65
5. BUSINESS AND CONTRACT ACQUISITIONS
During the years ended June 30, 1998, 1997 and 1996, the Company
acquired certain net assets of other service companies as follows (in
thousands):
<TABLE>
<CAPTION>
EXCESS
PURCHASE
CONSIDERATION PRICE
------------- OVER FAIR
TOTAL VALUE OF
NUMBER OF PURCHASE OTHER NET ASSETS
YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTIGIBLES ACQUIRED
- ----------- ------------ ---- ----- ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Significant business acquisitions:
June 30, 1996 1 $250,549 $250,549 $72,581 $60,533
Nonsignificant business or
maintenance contract acquisitions:
June 30, 1996 5 14,853 578 15,431 6,522 6,318
June 30, 1997 9 31,749 2,224 33,973 231 47,200
June 30, 1998 4 10,168 4,538 14,706 4,600 7,385
</TABLE>
On October 20, 1995, the Company acquired all of the outstanding common
stock of BABSS, a subsidiary of Bell Atlantic Corporation ("BAC") for
approximately $250,549,000. The acquisition was funded with the proceeds from
the issuance of $30,000,000 of Series C preferred stock, $30,000,000 of
subordinated debentures and the balance from additional bank borrowings (see
Note 9). The excess of asset purchase price over the fair value of net
assets acquired at the date of purchase was initially recorded as approximately
$58,796,000. Subsequent to the acquisition, the Company recorded a net
adjustment increasing the initial amount by $1,737,000 and adjusted other
balance sheet accounts principally by the same amount. This resulted from the
adjustment and reclassification of certain tax accruals offset by favorable
negotiations on certain leased facilities. As part of the acquisition, the
Company purchased from BAC contractual profit participation rights whereby the
Company will receive a fixed percentage of the annual operating profits (3.2% or
3.5%, depending upon the level of profits) earned by a former foreign affiliate
of BAC which provides computer maintenance and technology support services in
Europe. The estimated value of the discounted estimated future cash flows over a
twenty-year period from these contractual profit participation rights was
$25,000,000.
Included in nonsignificant maintenance contract acquisitions is the
acquisition of substantially all of the contracts and related assets, including
spare parts of the U.S. computer service business of Memorex Telex Corporation
and certain of its affiliates (collectively, "Memorex Telex"). Memorex Telex had
filed a petition in bankruptcy in the United States Bankruptcy Court (the
"Court") in the District of Delaware on October 15, 1996; the Court approved the
sale to the Company on November 1, 1996. The adjusted purchase price was $52.7
million, comprised of the assumption of certain liabilities under contracts of
the service business, which were valued at $28.3 million, and base cash
consideration of approximately $24.4 million, after certain purchase price
adjustments, excluding transaction and closing costs. During the third quarter
of fiscal 1997, the Company recorded an adjustment increasing the deferred
revenues assumed in the Memorex Telex acquisition by approximately $2,300,000,
to revise the estimated fair value of certain contract liabilities of the
business assumed by the Company.
The estimated fair market values of certain assets acquired, as well as
liabilities assumed, are subject to further adjustment as additional information
becomes available to the Company.
The following summarized unaudited pro forma information for
significant acquisitions that have a material effect on the Company's results of
operations for the year ended June 30, 1996 assumes that the acquisition
occurred as of July 1, 1995. The nonsignificant business and maintenance
contract acquisitions are not considered material individually or in the
aggregate. The pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the significant acquisitions been in effect on
the dates indicated or which may result in the future.
<TABLE>
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
YEAR ENDED JUNE 30, 1996
------------------------
<S> <C>
Revenues $697,676
Income from continuing operations before extraordinary item 31,080
Net income 29,153
</TABLE>
F-32
<PAGE> 66
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land and buildings $ 6,312 $ 6,318
Equipment 15,335 13,234
Computer hardware and software 32,459 37,611
Furniture and fixtures 9,628 8,465
Leasehold improvements 5,190 4,629
------- --------
68,924 70,257
Accumulated depreciation and amortization (39,829) (36,030)
-------- ---------
$ 29,095 $ 34,227
======== ========
</TABLE>
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (20-40); equipment (3-10);
computer hardware and software (3-5); furniture and fixtures (5-10) and
leasehold improvements (term of related leases).
Depreciation and amortization expense was approximately $15,729,000,
$13,549,000, and $8,309,000 for the fiscal years ended 1998, 1997 and 1996,
respectively.
7. INTANGIBLES
<TABLE>
<CAPTION>
Intangibles consisted of the following: JUNE 30,
--------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Excess purchase price over fair value of net assets acquired $ 137,241 $ 130,548
Customer lists 60,370 64,688
Contractual profit participation rights -- 25,000
Noncompete agreements 9,231 4,631
Other intangibles 8,014 9,131
--------- ---------
214,856 233,998
---------
Accumulated amortization (60,827) (42,632)
--------- ---------
$ 154,029 $ 191,366
========= =========
</TABLE>
The periods (in years) used in determining the amortization rates of
intangible assets are: excess purchase price over fair value of net assets
acquired (4-20); customer lists (3-8); contractual profit participation rights
(20); noncompete agreements (3-5) and other (1-6).
Amortization expense relating to intangibles was approximately
$27,169,00, $23,470,000, and $15,673,000, for the fiscal years ended 1998, 1997
and 1996, respectively.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accounts payable $ 56,040 $ 55,723
Compensation and benefits 20,928 22,706
Interest 11,485 563
Unused leases 175 878
Pension accrual 1,515 1,371
Accrued accounting and legal fees 568 1,435
Non-income taxes and other 10,640 13,840
-------- --------
$101,351 $ 96,516
======== ========
</TABLE>
F-33
<PAGE> 67
Accrued interest expense increased due to additional borrowings
outstanding at June 30, 1998 as a result of the merger and recapitalization (See
Notes 3 and 9).
9. DEBT
<TABLE>
<CAPTION>
Debt consists of the following:
JUNE 30,
--------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Revolving credit loans $ 30,700 $231,671
Term loans 467,938 --
Senior subordinated notes, 9-3/4%, due 2007 150,000 --
Seller noninterest-bearing notes payable 2,179 2,922
Seller note payable--purchase of spare parts 508 1,608
Capitalized lease obligations, payable in varying
installments at interest rates ranging from 7.25% to 13.01% at June 30, 1998 752 1,308
-------- --------
652,077 237,509
Less current portion 13,311 4,788
-------- --------
$638,766 $232,721
======== ========
</TABLE>
In connection with the Company's merger with Quaker (see Note 3), the revolving
credit loans outstanding immediately prior to the merger were repaid in full,
including all interest due thereon. This refinancing was accomplished, in part,
through the issuance of certain new debt instruments, consisting of a New Credit
Facility, senior discount notes, and senior subordinated notes which, in the
aggregate, provide financing of approximately $810 million, subject to certain
conditions.
The Company had average borrowings of approximately $609,629,000 during
1998 at an average interest rate of 8.2%. Maximum borrowings during 1998 were
approximately $659,732,000. The Company had average borrowings of $221,069,000
and $172,065,000 during 1997 and 1996, respectively, at an average interest rate
of 6.4% and 8.69%, respectively. Maximum borrowings during 1997 and 1996 were
$243,350,000 and $268,748,000, respectively.
The Company's Canadian subsidiary has available a $5.0 million
(Canadian) revolving line of credit agreement with a local financial
institution. At June 30, 1998 and 1997, approximately $0 and $471,000,
respectively (in U.S. dollars) was outstanding under this agreement.
Annual maturities on long-term debt outstanding at June 30, 1998, are
as follows:1999, $13,311; 2000, $19,953; 2001, $36,899; 2002, $49,081; 2003,
$73,445; 2004 and beyond, $459.388.
NEW CREDIT FACILITY
The New Credit Facility provides for term loans of $470,000,000 (term
loan A - $195,000,000 and term loan B - $275,000,000) and revolving loans of up
to $105,000,000. Term loan A expires in August 2003 with uneven quarterly
principal payments commencing in September 1998. Term loan B expires in August
2005 with uneven quarterly principal payments commencing in December 1997. The
revolving loans expire in August 2003. The Company pays a quarterly commitment
fee on the unused amount of the revolving loans. The unused amount of the
revolving loans was $74,300,000 as of June 30, 1998. The Company incurred debt
issuance costs of approximately $14,375,000 in connection with the New Credit
Facility. These costs have been deferred and are being amortized to interest
expense over the term of the facility.
The interest rate applicable to the New Credit Facility varies, at the
Company's option, based upon LIBOR plus applicable margins (2.75% for term loan
A and the revolving loans and 3.0% for term loan B) or based upon Prime Rate
plus applicable margins (1.5% for term loan A and the revolving loans and 1.75%
for term loan B). The applicable weighted average interest rates at June 30,
1998 were 8.47%, 8.71% and 8.96% for term loan A, term loan B, and the revolving
loans, respectively.
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. These measurements
include (1) Adjusted EBITA, (2) Leverage Ratio, (3) Interest Coverage Ratio, and
(4) Fixed Charge Ratio. During the third quarter of fiscal 1998, the Company
sought and obtained amendments to the New Credit Facility. The amendments
revised certain financial performance measurements and increased the borrowing
rate by 0.25%. The Company incurred fees of approximately $1,400,000 in
connection with the amendments.
F-34
<PAGE> 68
These costs have been deferred and are being 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 June 30, 1998.
The estimated fair value of the funded portion of the New Credit
Facility was approximately $490.1 million and is based on quoted market prices,
as of June 30, 1998.
SENIOR SUBORDINATED NOTES
The 9 -3/4% senior subordinated notes mature on August 1, 2007.
Interest on the notes is payable semi-annually on February 1 and August 1 of
each year, commencing on February 1, 1998. The Company incurred debt issuance
costs of $4,500,000 in connection with the senior subordinated notes. These
issuance costs have been deferred and are being amortized over the life of the
notes.
The estimated fair value of the senior subordinated notes as of June
30, 1998 was approximately $144.8 million and is based on quoted market prices.
SELLER NOTES PAYABLE
In connection with certain acquisitions (see Note 5), the Company
issued noninterest-bearing notes, the principal of which is primarily due upon
settlement of contingent portions of the acquisition purchase price within a
specified period subsequent to closing, generally not exceeding one year from
the acquisition date. Contingencies typically pertain to actual amounts of
monthly maintenance contract revenues acquired and prepaid contract liabilities
assumed in comparison to amounts estimated in acquisition agreements. The
Company imputes interest, based upon market rates, for long-term,
non-interest-bearing obligations.
During 1997, the Company issued a secured note payable to the seller
for the purchase of repairable parts in the original amount of $1,854,000. The
note accrues interest at an interest rate of approximately 8%, and requires
quarterly payments of principal and interest of approximately $273,000 until
maturity in December 1998.
REVOLVING CREDIT LOANS - 1997 AND PRIOR
On October 20, 1995, in connection with the BABSS acquisition (see Note
5) the Company entered into a Credit Agreement which provided for a term loan
(the "1995 Term Loan") of $230,000,000 and a revolving credit facility of up to
a maximum of $30,000,000. The 1995 Term Loan provided for 19 equal quarterly
principal payments of $10,000,000 to be due and payable on the last day of each
calendar quarter commencing December 31, 1995 with a final payment due on
September 30, 2000. Loans under the revolving credit facility were to mature on
September 30, 2000. Interest on the 1995 Term Loan and the revolving credit
facility were at varying rates based, at the Company's option, on the Eurodollar
rate or the Alternative Base Rate (NationsBanc prime rate), plus the Applicable
Margins. Margins were based on the ratio of Total Funded Debt to EBITDA; the
Eurodollar Margin ranged from 1.75% to 2.5%, while the Alternative Base Rate
Margin ranged from 0.5% to 1.25%.
In April 1996, the Company completed an initial public offering. The
Company used a portion of the proceeds to repay approximately $70 million of the
1995 Term Loan.
Also in April 1996, the Company converted the 1995 Term Loan and the
existing $30 million Revolving Credit Facility into a $225 million variable
rate, unsecured revolving credit facility ("the 1996 Revolving Credit
Facility"). During fiscal 1997, the 1996 Revolving Credit Facility commitment
was increased to $300 million, in connection with the acquisition of certain
contracts and assets. The 1996 Revolving Credit Facility was at floating
interest rates, based either on the LIBOR or prime rate, in either case plus an
Applicable Margin, at the Company's option. As of June 30, 1997, the applicable
rate was LIBOR plus .75% or approximately 6.5%. To offset the variable rate
characteristics of the borrowings, the Company entered into interest rate swap
agreements with two banks resulting in fixed interest rates of 5.4% on $40.0
million notional principal amount through December 1997 and 5.5% on another
$40.0 million notional principal amount through December 1998. During fiscal
1997, the Company terminated these swap agreements, resulting in an
insignificant gain which has been deferred to the first quarter of fiscal 1998,
when the debt instruments were terminated.
INTEREST RATE RISK MANAGEMENT
The use of interest rate risk management instruments, such as Swaps and
Collars, is required under the terms of the New Credit Facility. The Company
manages interest costs using a mix of fixed and variable rate debt. Using Swaps,
the Company agrees to exchange, at specified intervals, the difference between
fixed and variable interest rate amounts calculated by reference to an
agreed-upon notional principal amount. Collars limit the Company's exposure to
and benefits from interest rate fluctuations on variable rate debt to within a
certain range of rates.
F-35
<PAGE> 69
The following table summarizes the terms of the Company's existing
Swaps and Collars as of June 30, 1998:
<TABLE>
<CAPTION>
Notional Amount Maturities Average Interest Rate Estimated Fair Value
--------------- ---------- --------------------- --------------------
<S> <C> <C> <C> <C>
Variable to Fixed Swaps $ 110,000,000 2000 - 2001 6.0% $ (686,605)
Collars $ 125,000,000 2000 5.7% - 6.7% $ (537,737)
</TABLE>
The notional amounts of interest rate instruments, as presented in the above
table, are used to measure interest to be paid or received and do not represent
the amount of exposure to credit loss. The estimated fair value approximates the
proceeds (costs) to settle the outstanding contracts. While Swaps and Collars
represent an integral part of the Company's interest rate risk management, their
incremental effect on interest expense for the year ended June 30, 1998 was not
significant.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ (8,209) $ 10,909 $ 2,892
State 100 3,616 1,595
Foreign (372) 1,080 548
Deferred:
Federal (6,315) 6,460 8,945
State (603) 16 641
Foreign 612 (113) (751)
-------- -------- --------
Provision (benefit) for income taxes $(14,787) $ 21,968 $ 13,870
======== ======== ========
</TABLE>
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable $ 7,869 $ 4,771
Inventory 2,819 2,195
Accrued expenses 6,348 7,000
Unused leases (277) 390
Fixed assets 1,714 --
Intangibles 17,049 6,196
Other 1,298 --
Operating loss carryforwards 52,278 4,868
Tax credit carryforwards 2,969 1,670
-------- --------
Gross deferred tax assets 92,067 27,090
Valuation allowance (53,804) --
-------- --------
Gross deferred tax assets less valuation allowance 38,263 27,090
Gross deferred tax liabilities:
Repairable spare parts (13,893) (8,918)
Fixed assets -- (108)
-------- --------
Gross deferred tax liabilities (13,893) (9,026)
-------- --------
Net deferred tax asset $ 24,370 $ 18,064
======== ========
</TABLE>
Net operating loss and minimum tax credit carryforwards available at
June 30, 1998 expire in the following years:
F-36
<PAGE> 70
<TABLE>
<CAPTION>
AMOUNT YEAR OF EXPIRATION
(IN THOUSANDS)
<S> <C> <C>
Federal operating losses $127,215 2006-2013
State operating losses 109,910 1999-2013
Foreign operating losses 4,008 1999-2005
Investment tax credit 134 2004
Minimum tax credit 2,835 INDEFINITE
</TABLE>
A reconciliation between the provision (benefit) for income taxes,
computed by applying the statutory federal income tax rate of 35% for 1998, 1997
and 1996 to income before income taxes, and the actual provision (benefit) for
income taxes follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate (35.0%) 35.0% 35.0%
State income taxes, net of federal income tax provision (3.8) 5.0 4.6
Foreign income taxes (0.4) 0.4
Unused lease credit
Benefit of operating loss carryforward (0.8)
Change in valuation allowance 30.0 (1.4)
Other 2.4 1.0 2.6
---- --- ----
Actual income tax provision (benefit)
effective tax rate (6.8%) 41.4% 40.0%
===== ===== =====
</TABLE>
As a result of the Company's merger with Quaker on August 7, 1997 (see
Note 3), an "ownership change" occurred pursuant to Section 382 of the Internal
Revenue Code. Accordingly, for Federal income tax purposes, net operating loss
and tax credit carryforwards of approximately $27.6 million arising prior to the
ownership change are limited during any future period to the Section 382
"limitation amount" of approximately $9.0 million per annum. The federal, state
and foreign net operating loss carryforwards expire in varying amounts between
1999 and 2013.
The Company recorded a valuation allowance of $53,804,000 during the
year ended June 30, 1998. The valuation allowance reduces the gross deferred tax
assets to the level where management believes that it is more likely than not
that the tax benefit will be realized. The ultimate realization of deferred tax
benefits is dependant upon the generation of future taxable income during the
periods in which the temporary differences become deductable.
DecisionOne Corporation is a wholly owned subsidiary of Holdings and
is included in Holdings' consolidated tax returns. DecisionOne Corporation
participates in a tax sharing agreement with Holdings, whereby consolidated
income tax expense or benefit, is allocated to the Company.
11. OTHER LIABILITIES
Other (noncurrent) liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accrued severance $2,973 $2,756
Other noncurrent liabilities 2,823 3,323
------ ------
$5,796 $6,079
====== ======
</TABLE>
Accrued severance reflects the actuarial determined liability for the
separation of employees who are entitled to severance benefits under
pre-existing separation pay plans.
Other noncurrent liabilities include deferred operating lease
liabilities related to scheduled rent increases, recorded in accordance with the
provisions of SFAS No. 13, Accounting for Leases. Also included in other
noncurrent liabilities are provisions relating to various tax matters and
unutilized lease losses.
12. LEASE COMMITMENTS
The Company conducts its operations primarily from leased warehouses
and office facilities and uses certain computer, data processing and other
equipment under operating lease agreements expiring on various dates through
2005. The future
F-37
<PAGE> 71
minimum lease payments for operating leases having initial or remaining
noncancelable terms in excess of one year for the five years succeeding June 30,
1998 and thereafter are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $18,688
2000 15,123
2001 11,525
2002 7,708
2003 5,712
Thereafter 6,771
-------
$65,527
=======
</TABLE>
Rental expense amounted to approximately $19,379,000, $17,367,000, and
$13,149,000,for the fiscal years ended 1997, 1996 and 1995, respectively.
13. RETIREMENT PLANS
The Company maintains a 401(k) plan for its employees. Under this plan,
eligible employees may contribute amounts through payroll deductions
supplemented by employer contributions for investment in various investments
specified in the plan. The Company's contribution to this plan for fiscal 1998
was $1,012,563. A similar plan exists for former employees of an acquired
company for which eligibility and additional contributions were frozen in
September 1988.
In addition, the Company assumed the liability of the defined benefit
pension plan applicable to employees of a company acquired in 1986. The
eligibility and benefits were frozen as of the date of the acquisition.
Pension expense for the defined benefit pension plan was computed as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost $ 611 $ 521 $ 495
Actual return on plan assets (1,506) (409) (449)
Net amortization and deferral 1,128 9 72
------- ------- -------
Periodic pension costs $ 233 $ 121 $ 118
======= ======= =======
</TABLE>
The discount rate used in determining the actuarial present value of
the projected benefit obligation was 7.0% for 1998 and 7.5% for 1997 and 1996.
The expected long-term rate of return on assets was 8.5% for 1998, 1997 and
1996. The mortality table used for 1998 was the 1983 Group Annuity Mortality
Table for Males and Females and the mortality table used for 1997 and 1996 was
the UP-1984 Unisex Mortality Table.
The following table sets forth the funded status of the frozen pension
plan as of May 1, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefits (100% vested) $ 9,155 $ 7,290
Fair value of plan assets 7,857 6,128
------- -------
Unfunded projected benefit obligation 1,298 1,162
Unrecognized net loss 2,390 1,873
Unrecognized net transition obligation 438 470
Adjustment to recognized minimum liability (2,828) (2,343)
------- -------
Accrued pension costs $ 1,298 $ 1,162
======= =======
</TABLE>
14. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
During the second quarter of fiscal 1997, in connection with the
Memorex Telex acquisition (see Note 5), the Company recorded a $3.4 million
pre-tax charge for estimated future employee severance costs, and a $0.9 million
pre-tax charge for unutilized lease/contract losses ("exit costs"), primarily
associated with duplicate facilities to be closed. The $3.4 million charge,
recorded in accordance with SFAS No. 112, Employers' Accounting for
Postemployment Benefits, reflects the actuarially determined benefit costs for
the separation of employees who are entitled to benefits under pre-existing
separation pay plans. These costs are included in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the year ended June 30, 1997.
F-38
<PAGE> 72
In the second quarter of fiscal 1996, in connection with the
acquisition of BABSS, the Company recorded pre-tax charges for exit costs of
$6.9 million, and estimated future employee severance costs of $0.1 million.
During the fourth quarter of fiscal 1996, the Company reversed $3.4 million of
these employee severance and exit cost liabilities. The reversal was primarily
the result of the Company's ability to utilize and sublease various facilities
identified in the original $7.0 million combined liability. Such information was
unknown to the Company when the original liability was recorded.
See Note 11 for further information regarding accrued severance and
unutilized lease losses.
15. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect to four waste disposal sites that have been identified by the United
States Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party with respect to a fifth, related site, but has not received
any other communication with respect to that site. Under applicable law, all
parties responsible for disposal of hazardous substances at those sites are
jointly and severally liable for clean-up costs. The Company originally
estimated that its share of the costs of the clean-up of one of these sites
would be approximately $500,000 which is accrued in the accompanying
consolidated balance sheets as of June 30, 1998 and 1997. Complete information
as to the scope of required clean-up at these sites is not yet available and,
therefore, management's evaluation may be affected as further information
becomes available. However, in light of information currently available to
management, including information regarding assessments of the sites to date and
the nature of involvement of the Company's alleged predecessor at the sites, it
is management's opinion that the Company's potential additional liability, if
any, for the cost of clean-up of these sites will not be material to the
consolidated financial position, results of operations or liquidity of the
Company.
The Company is also party to various legal proceedings incidental to
its business. Certain claims, suits and complaints arising in the ordinary
course of business have been filed or are pending against the Company. In the
opinion of management, these actions can be successfully defended or resolved
without a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
During the fourth quarter of fiscal 1997, the Company received $2.0
million in full settlement of a claim against its former insurance carrier,
related to unreimbursed losses. This settlement was reflected as a reduction of
selling, general and administrative costs in the accompanying statement of
operations.
During the year ended June 30, 1998, DecisionOne Corporation declared
and paid dividends of $244,000,000 to DecisionOne Holdings Corp.
16. RELATED PARTY TRANSACTIONS
In connection with the Quaker Merger (See Note 3), DecisionOne
Corporation made a loan to DecisionOne Holdings Corp. for $59,100,000 which was
used to finance the merger. The subordinated promissory note accrues interest at
an annual interest rate of 8 -1/4%. Interest and principal are both due upon
maturity in August 2010. Interest income recorded by DecisionOne Corporation and
interest expense recorded by DecisionOne Holdings Corp. was approximately
$4,381,000 in fiscal 1998.
During the year ended June 30, 1998, DecisionOne Corporation declared
and paid dividends of $244,000,000 to DecisionOne Holdings Corp.
During the year ended June 30, 1998, the Company paid the DLJ Group
approximately $500,000 for financial advisory services.
Prior to 1994, the Company entered into an agreement to purchase
printer products from Genicom Corporation (Genicom). The Company and Genicom
were under common ownership prior to the August 7, 1997 Merger. Purchases from
Genicom for the period July 1, 1997 through August 7, 1997 were approximately
$121,000. Purchases from Genicom for the years ended June 30, 1997 and 1996 were
approximately $472,000 and $1,512,000, respectively. Accounts payable to Genicom
amounted to approximately $0 and $30,000 as of June 30, 1998 and 1997,
respectively.
During the year ended June 30, 1996, the Company paid approximately
$125,000 for expense reimbursements to certain shareholders for services
rendered in connection with an acquisition in 1988. The amount was accrued for
in prior years.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial
information for the fiscal years ended 1998 and 1997:
F-39
<PAGE> 73
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
SEPT. 30 (1), DEC. 31, MARCH 31, JUNE 30 (2),
------------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
1998
<S> <C> <C> <C> <C>
Revenues $ 202,264 $ 200,075 $ 200,910 $ 202,468
Gross profit 44,819 46,769 47,747 52,576
Net loss (57,117) (6,625) (8,033) (99,866)
Proforma net loss (824) (6,625) (8,033) (95,875)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
SEPT. 30, DEC. 31 (3), MARCH 31, JUNE 30 (2),
--------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
1997
<S> <C> <C> <C> <C>
Revenues $176,426 $191,253 $205,070 $213,201
Gross profit 41,861 47,642 53,822 58,332
Net income 5,455 4,954 9,507 11,168
</TABLE>
(1) Net loss for the first quarter of 1998 includes $69.0 million of
pre-tax merger expenses (See Note 3).
(2) Net loss for the fourth quarter of 1998 includes $87.5 million of
pre-tax loss on asset sales and disposals and a $12.3 million pre-tax
special charge to the provision for uncollectible receivables (See Note
4).
(3) Net income for the second quarter of 1997 includes a $3.4 million
pre-tax charge for estimated future employee severance costs, and a
$0.9 million pre-tax charge for unutilized lease/contract losses,
primarily associated with duplicate facilities to be closed in
connection with the Memorex Telex acquisition (see Note 16).
F-40
<PAGE> 74
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets $ 1,519 $ -- --
Other assets 3,896 -- --
Investments in equity of subsidiaries -- -- 214,888
--------- ---------
Total assets $ 5,415 $ 214,888
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Investment in deficit of subsidiaries $ 204,468 $ -- --
Senior discount debentures 92,246 -- --
Intercompany loan and payables 69,867 -- --
Other liabilities 440 -- --
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 shares in 1998 and 27,817,832 shares in 1997 126 278
Additional paid-in capital 242,181 258,331
Accumulated deficit (601,195) (42,432)
Other (2,718) (1,289)
--------- ---------
Total shareholders' equity (deficit) (361,606) 214,888
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 5,415 $ 214,888
========= =========
</TABLE>
See notes to condensed financial information.
S-1
<PAGE> 75
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Equity in net income (loss) of subsidiaries $(171,641) $ 31,084 $ 18,862
Interest expense, net of interest income of $1,210 in 1998 12,479 -- --
--------- --------- ---------
Income (loss) before provision (benefit) for income taxes (184,120) 31,084 18,862
Provision (benefit) for income taxes (990) -- --
--------- --------- ---------
Net income (loss) $(183,130) $ 31,084 $ 18,862
========= ========= =========
</TABLE>
See notes to condensed financial information.
S-2
<PAGE> 76
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Equity in net income (loss) of subsidiary $(171,641) $ 31,084 $ 18,862
Other adjustments, net 172,851 (31,084) (17,462)
--------- --------- ---------
Net cash provided by operating activities 1,210 -- 1,446
--------- --------- ---------
Investing Activities - contribution to capital of subsidiaries -- (439) (142,090)
--------- --------- ---------
Financing Activities:
Proceeds from issuance of common stock 226,583 -- --
Proceeds from issuance of senior discount debentures 79,723 -- --
Proceeds from related party loans 69,617 -- --
Issuance of warrants 1,880 439 110,698
Recapitalization (621,803) -- --
Dividends received from subsidiary 244,000 -- --
Issuance of preferred stock -- -- 31,392
Preferred stock dividends -- -- (1,446)
--------- --------- ---------
Net cash provided by financing activities -- 439 140,644
--------- --------- ---------
Net change in cash 1,210 -- --
Cash, beginning of year -- -- --
--------- --------- ---------
Cash, end of year $ 1,210 $ -- $ --
========= ========= =========
</TABLE>
See notes to condensed financial information.
S-3
<PAGE> 77
SCHEDULE I
DECISIONONE HOLDINGS CORP.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
DecisionOne Holdings Corp. (the Parent) and on an equity basis its subsidiaries
and should be read in conjunction with the consolidated financial statements of
DecisionOne Holdings Corp. and Subsidiaries (the "Company") and the notes
thereto.
2. SENIOR DISCOUNT DEBENTURES
The Company received net proceeds of $85,003,520 from the sale of
$148,400,000 principal amount at maturity of its 11 1/2% senior discount
debentures due 2008. The debentures accrete at a rate of 11 1/2% per annum,
compounded semi-annually, to an aggregate principal amount at maturity of
$148,400,000 by August 1, 2002. Commencing on February 1, 2003, cash interest on
the debentures will be payable, semi-annually in arrears on each February 1 and
August 1. The Company incurred debt issuance costs of $3,400,141 in connection
with the senior discount debentures. These costs have been deferred and are
being amortized to interest expense over the life of the debentures.
3. RELATED PARTY TRANSACTIONS
In connection with the Quaker Merger (See Note 3), DecisionOne
Corporation made a loan to DecisionOne Holdings Corp. for $59,100,000 which was
used to finance the merger. The subordinated promissory note accrues interest at
an annual interest rate of 8 1/4%. Interest and principal are both due upon
maturity in August 2010. Interest income recorded by DecisionOne Corporation and
interest expense recorded by DecisionOne Holdings Corp. was approximately
$4,381,000 in fiscal 1998.
During the year ended June 30, 1998, DecisionOne Corporation declared
and paid dividends of $244,000,000 to DecisionOne Holdings Corp.
4. INCOME TAXES
The Parent and its wholly owned subsidiaries file a consolidated tax
return. The Parent participates in a tax sharing agreement with the
consolidated group whereby consolidated income tax expense or benefit is
allocated to the Parent.
S-4
<PAGE> 78
SCHEDULE II
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
DECISIONONE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING OF CORP. AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 1996:
Accounts receivable
Allowance for uncollectible accounts $ 6,616 $ 3,434 $ (470)(a) $ 9,580
Consumable parts--
Allowance for Obsolescence $11,788 $1,171 $10,193 (b) $(3,615) $19,537
Year Ended June 30, 1997:
Accounts Receivable--
Allowance for uncollectible accounts $ 9,580 $7,848 $1,593 (b) $(4,152)(a) $14,869
Consumable parts--
Allowance for Obsolescence $19,537 $2,554 $3,849 (b) $(9,964) $15,976
Year Ended June 30, 1998:
Accounts Receivable--
Allowance for uncollectible accounts $14,869 $3,170 $12,345 (c) $(7,812)(a) $22,572
Consumable parts--
Allowance for Obsolescence $15,976 $7,000 -- $(13,705) $9,271
</TABLE>
(a) Amount primarily represents net recoveries (write-offs) during the
year.
(b) Amount primarily represents allowance recorded as a result of
acquisitions during the year.
(c) Amount represents a special charge as a result of changes in
management's estimates used to assess the adequacy of the receivable
allowance.
S-5
<PAGE> 1
Exhibit 10.24
DRAFT #3
4/1/97
SOUTH PARK BULK VII
===============================================================================
LEASE AGREEMENT
BETWEEN
3423 SOUTHPARK PLACE DEVELOPMENT COMPANY
("LANDLORD")
AND
DECISIONONE CORP.
("TENANT")
===============================================================================
<PAGE> 2
LEASE SUMMARY
-------------
A. DATE OF EXECUTION OF LEASE: March __, 1997
B. LANDLORD: 3423 SouthPark Place Development
Company
C. ADDRESS OF LANDLORD: c/o Pizzuti Management Inc.
Suite 1900
250 East Broad Street
Columbus, Ohio 43215
D. TENANT: DecisionOne Corp.
E. ADDRESS OF TENANT: Attn: Director, Real Estate
50 East Swedesford Road
Frazer, Pennsylvania 19355
F. LAND: The approximately 17.5 acre parcel
of land located in SouthPark in
Grove City, Ohio.
G. BUILDING: The 393,969 square foot building
located on the Land and known as the
Bulk VII Building
H. LEASED PREMISES: That portion of the Building
outlined on Exhibit A. The Leased
Premises will initially contain
58,597 square feet of rentable space
("INITIAL LEASED PREMISES") and will
ultimately be expanded, per the term
of "Special Terms", Exhibit F, by an
additional 57,596 square feet of
rentable space ("EXPANSION SPACE").
I. PERMITTED USE: Computer repair and general office
and warehouse use.
J. LEASE TERM: Five years commencing on the
Commencement Date and terminating on
the Termination Date.
K. COMMENCEMENT DATE: Except as otherwise expressly
provided in Section 9, the date of
"substantial completion" of the
improvements to be constructed to
the Leased Premises (as the term
"substantial completion" is defined
in Section 9 of the Lease).
L. TERMINATION DATE: Fifth anniversary of Commencement
Date
BASE RENT: As to Initial Leased Premises,
$14,405 per month,$172,860 per year
and $2.95 prsf. The Base Rent for
the Expansion Space is specified in
"Special Terms", Exhibit F.
N. TENANT'S PROPORTIONATE SHARE
OF OPERATING EXPENSES: 14.87% as to Initial Leased Premises
only, increased to 29.49% on
commencement date of Tenant's
leasing of Expansion Space.
O. INITIAL ESTIMATED OPERATING
EXPENSE PAYMENT: As to Initial Leased Premises,
$1,563 per month, $18,756 per year
and $.32 prsf. The Estimated
Operating Payment applicable to the
Expansion Space will be determined
on commencement date of Tenant's
leasing of the Expansion Space, per
Section 2 of the Lease Agreement.
P. GUARANTOR: None
Q. GUARANTOR'S ADDRESS: Not applicable.
The following exhibits are attached to and made a part of the Lease:
EXHIBIT A - Description of Leased Premises
EXHIBIT B - Examples of Operating Expenses
EXHIBIT C - SouthPark Rules and Regulations
EXHIBIT D - Leasehold Improvements
EXHIBIT E - Agency Disclosure Statement
EXHIBIT F - Special Terms
Exhibit G - Rider
THE PROVISIONS OF THIS LEASE SUMMARY ARE INCORPORATED BY
THIS REFERENCE INTO THE LEASE.
<PAGE> 3
LEASE AGREEMENT
---------------
Landlord hereby leases the Leased Premises to Tenant for the duration of the
Lease Term. The leasing of the Leased Premises to Tenant will be upon the terms
and conditions set forth in this Lease.
SECTION 1. BASE RENT. For each month of the Lease Term, Tenant will pay Base
Rent in an amount equal to the monthly installment set forth in the Lease
Summary, which Lease Summary is attached hereto and incorporated herein by this
reference.
SECTION 2. OPERATING EXPENSE PAYMENT. Tenant will pay its Proportionate
Share of all Operating Expenses incurred by Landlord during the Lease Term in
connection with the operation, management, maintenance and repair of the Land
and the Building. Illustrative examples of those expenses which are included
within the definition of "Operating Expenses" are set forth in Exhibit B.
Tenant's Proportionate Share of such Operating Expenses will be paid by Tenant
in advance based upon Landlord's estimate of the actual Operating Expenses which
will be incurred during each calendar year during the Lease Term. The Estimated
Operating Expense Payment for the first such calendar year is set forth in the
Lease Summary. The Estimated Operating Expense Payment for each calendar year
thereafter will be adjusted based upon Landlord's estimate of its Operating
Expenses for such calendar year. Landlord will use its best efforts to notify
Tenant by December 1 of each year during the Lease Term of any adjustment in the
monthly Estimated Operating Expense Payment for the upcoming calendar year.
As soon as reasonably practicable after the end of each calendar year,
Landlord will deliver to Tenant a written statement showing its actual Operating
Expenses for such calendar year and Tenant's actual Proportionate Share thereof.
If the sum of the Estimated Operating Expense Payments paid by Tenant during
such calendar year exceeds Tenant's Proportionate Share of the actual Operating
Expenses incurred during such year, then Landlord will apply the excess toward
the next succeeding monthly Estimated Operating Expense Payment(s) due from
Tenant. If the sum of the Estimated Operating Expense Payments paid by Tenant
during such calendar year is less than Tenant's Proportionate Share of the
actual Operating Expenses incurred during such year, then Tenant will pay the
deficiency to Landlord within ten business days after Tenant's receipt of
Landlord's written demand for the payment thereof.
SECTION 3. MANNER AND TIMING OF RENT PAYMENTS. The first monthly installment
of Base Rent and Estimated Operating Expense Payments will be paid by Tenant on
or before the Commencement Date. Thereafter, monthly installments of Base Rent
and Estimated Operating Expense Payments will be due and payable in advance on
or before the first day of each calendar month during the Lease Term. Each such
installment will be paid to Landlord at its address set forth in the Lease
Summary (or such other address as Landlord may designate from time to time). If
the Lease Term commences on a day other than the first day of the month or
terminates on a day other than the last day of the month, then the installments
of Base Rent and Estimated Operating Expense Payments for such month(s) will be
adjusted accordingly. If any installment of Base Rent or any Estimated Operating
Expense Payment is not received by Landlord within five days after its due date,
then a late payment charge of 5% of such past due amount will be immediately due
and payable from Tenant. All installments of Base Rent and Estimated Operating
Expense Payments will be paid by Tenant without demand and without any rights of
reduction, counterclaim or offset. Tenant hereby agrees to pay as additional
rent any sales, use or other tax (other than income taxes) now or hereafter
imposed by any governmental authority upon the rent and other sums payable by
Tenant hereunder.
SECTION 4. UTILITIES. Tenant will pay all costs associated with the
provision of all utility services to the Leased Premises, including, without
limitation, telephone, gas, electricity, water and sewer service. To the extent
possible, all utility services will be separately metered to the Leased Premises
and placed in Tenant's name. If it is not possible to place a utility service on
a separate meter in Tenant's name, then all costs associated with the provision
of such utility service to the Leased Premises will be billed directly by
Landlord to Tenant and will be paid by Tenant within 15 days after its receipt
of such billing. Landlord will not be liable to Tenant, nor will Tenant be
relieved of any obligation hereunder if any utility service to the Leased
Premises is interrupted for any reason beyond Landlord's control.
SECTION 5. MAINTENANCE AND REPAIR. Tenant will at its sole expense maintain
the Leased Premises in a first-class condition and order of repair. Tenant's
maintenance obligation will extend to and include the repair and replacement, if
necessary, of all structural and non-structural elements and mechanical systems
located wholly within and solely serving the Leased Premises. Any repairs or
replacements made to the Leased Premises by Tenant pursuant to this Section 5
will be made in a workmanlike manner with materials at least equal in quality
and grade to those originally contained within the Leased Premises. Tenant will
also contract for its own janitorial and trash removal services and will
promptly pay all costs associated with such services.
1
<PAGE> 4
Landlord will maintain, repair and, if necessary, replace, the roof, roof
membrane and exterior walls of the Building (including exterior glass), all
structural and mechanical systems located within the Building (including
plumbing, heating, HVAC and electrical systems) unless the maintenance and
repair of the same are Tenant's responsibility under the immediately preceding
paragraph, and all common areas serving the Building (including, without
limitation, the parking lot, driveways and loading dock areas) in a first-class
condition and order of repair. Except as otherwise expressly provided in this
Section 5 and Section 9, Landlord will not at any time during the Lease Term be
required to make any improvements, repairs, replacements or alterations to the
Leased Premises.
SECTION 6. USE OF PREMISES. Tenant will use the Leased Premises solely for
the Permitted Use. Tenant will not cause or permit any waste or damage to the
Leased Premises, the Building or the Land and will not occupy or use the Leased
Premises for any business or purpose which is unlawful, hazardous, unsanitary,
noxious or offensive or which unreasonably interferes with the business
operations of other tenants in the Building. If the nature of Tenant's use or
occupancy of the Leased Premises (other than the Permitted Use defined in the
Lease Summary) causes any increase in Landlord's insurance premiums over and
above those chargeable for the least hazardous type of occupancy legally
permitted in the Leased Premises, then Tenant will pay the resulting increase
within ten days after its receipt of a statement from Landlord setting forth the
amount thereof. Tenant will comply with the Rules and Regulations for the
SouthPark which are set forth in Exhibit C (and any reasonable modifications
thereto which are consistent with the provisions of this Lease).
SECTION 7. GOVERNMENTAL REQUIREMENTS. Tenant will at its sole expense comply
with all laws and other governmental requirements which are now or hereafter in
force pertaining to the Leased Premises and Tenant's occupancy and use thereof,
including, without limitation, the Americans with Disabilities Act, the
Comprehensive Environmental Response, Compensation and Liability Act the Clean
Air Act, the Hazardous Materials Transportation Act, the Resource Conservation
and Recovery Act and the Water Pollution Control Act. Landlord hereby represents
and warrants that the Building will, as of the date on which Tenant first
occupies any portion of the Building, be in full compliance with all applicable
laws and other governmental requirements, including, without limitation, the
laws referred to in the immediately preceding sentence.
SECTION 8. SIGNS. Tenant will not place any sign or other advertising
material on the exterior or interior of the Leased Premises or the Building,
without the prior written consent of Landlord.
SECTION 9. LEASEHOLD IMPROVEMENTS. Attached to this Lease as Exhibit D are
either: (a) the preliminary specifications for the improvements to be made to
the Initial Leased Premises ("Improvements"); or (b) a tenant improvement
allowance for such Improvements. To the extent Exhibit D simply sets forth a
tenant improvement allowance for such Improvements, Landlord and Tenant agree
that, promptly following the parties' execution of this Lease, they will meet to
develop approved preliminary specifications for the Improvements. Once Landlord
and Tenant have approved preliminary specifications (either by the initial
attachment of the same hereto as Exhibit D or as a product of their meeting
promptly following the execution of this Lease), Landlord will proceed with the
preparation of the final architectural and engineering drawings, plans and
specifications for the Improvements. Once those drawings, plans and
specifications are completed, Landlord will deliver a full set thereof to Tenant
for its review and approval. The approved final drawings, plans and
specifications ("Final Plans") are incorporated herein by this reference.
If Exhibit D simply sets forth a tenant improvement allowance number and if
the cost of constructing the Improvements in accordance with the approved Final
Plans (as determined by Landlord's general contractor) exceeds the amount of
such tenant improvement allowance, and if, following Tenant's receipt of written
notice from Landlord of the amount of such excess costs and Tenant nonetheless
authorizes Landlord to proceed to incur such excess costs, then, in such event,
Tenant will pay any such excess costs upon completion of said improvements and
within ten days after Landlord's written demand for the payment thereof. If,
following the approval of the Final Plans, Tenant expresses a desire to make any
revisions thereto, Tenant will so notify Landlord and Landlord will then ask its
general contractor to prepare a cost estimate for the making of such changes.
Landlord will promptly notify Tenant of any increased costs or savings resulting
from such changes and Tenant will have the right to require Landlord to cause
such a change to be made to the Final Plans; provided, however, that such
changes will not unreasonably affect the structural integrity or value of the
Building. If the aggregate of all such changes results in a net increase in the
cost of the construction of the Improvements, (net of any savings), then Tenant
will pay such net increase to Landlord within 10 business days after Landlord's
written demand for the payment thereof.
Landlord will cause the Improvements to be constructed in accordance with
the Final Plans. Landlord will use its best efforts to substantially complete
construction of the Improvements on or before the targeted Commencement Date set
forth in the Lease Summary, subject to delays caused by the occurrence of events
beyond its reasonable control, including, without limitation, labor troubles,
inability to procure materials, restrictive governmental laws and
pronouncements, acts of God, unseasonable weather, Tenant's failure to timely
respond to any matter submitted for its review and Tenant's requested change
orders ("Delay Events"). The establishment of the substantial completion date
referred in the immediately preceding sentence is predicated upon the various
Milestone Dates referred to in Exhibit D
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<PAGE> 5
being met in a timely manner with respect to the preparation, submission and
approval of all preliminary specifications and Final Plans. Tenant agrees that
it will review and either approve or specify its objections to any documents or
drawings submitted to it for its review and approval hereunder within five
business days after its receipt of the same.
If Landlord's inability to substantially complete the Improvements on or
before the targeted Commencement Date set forth in the Lease Summary is
attributable to any Delay Event (other than those tenant-caused delays referred
to in the immediately succeeding sentence), then the Commencement Date will be
deferred by the number of days of the delay in substantially completing the
Improvements which is caused by the occurrence of any such Delay Events. If
Landlord is unable to substantially complete construction of improvements on or
before the date which is 120 days after both parties' execution of the Lease,
for any reason other than the occurrence of a Delay Event, then Tenant will
thereafter have the right for 30 days after the expiration of such 120 day
period to terminate this Lease by delivery of written notice to such effect to
Landlord. Notwithstanding anything to the contrary contained herein, if
Landlord's inability to substantially complete the improvements on or before the
targeted Commencement Date set forth in the Lease Summary is attributable to
Tenant-caused delays (including, without limitation, Tenant's failure to timely
respond to any manner submitted for its review, delays caused by Tenant's
requested change orders, as verified by Landlord's general contractor, or
Tenant's failure to meet the Milestone Dates referred to in the Lease Summary),
then the Commencement Date will remain as set forth in Exhibit F,
notwithstanding the fact that the Improvements are not yet substantially
completed, and Tenant will, from and after the Commencement Date, have an
obligation to pay Base Rent, Estimated Operating Expense Payments and perform
all of its other obligations and duties hereunder. For the purposes of this
Lease, the Improvements will be deemed substantially completed on the earlier of
the date on which Tenant occupies the Leased Premises or the date on which a
temporary or permanent certificate of occupancy for the Improvements is issued
by the appropriate governmental authority. Landlord will be responsible for
securing a certificate of occupancy for the improvements from the appropriate
governmental authority.
SECTION 10. ALTERATIONS. Except for "Minor Alterations" (as that term is
hereafter defined). Tenant may not at any time prior to or during the Lease Term
make any alterations, additions or improvements to the Leased Premises without
the prior written consent of Landlord. For the purposes of this Section 10,
"Minor Alterations" will mean any alteration, addition or improvement to the
Leased Premises which costs less than $10,000, and which does not alter the
exterior aesthetics pr structural integrity of the Building. All improvements,
alterations and additions made at one time in connection with any one job will
be aggregated for the purposes of determining whether the $10,000 limit has been
exceeded. Any alterations, addition or improvement made to the Leased Premises
in accordance with this Section 10 will at all times remain the property of
Landlord. If Landlord consents to any proposed alteration, addition or
improvement, the same shall be made at Tenant's sole expense.
SECTION 11. MECHANICS LIENS. Tenant will indemnify and hold Landlord
harmless from any liability or expense associated with its construction of any
alteration, addition or improvement to the Leased Premises, unless Landlord is
itself constructing any such alteration, addition or improvement. Tenant will
immediately discharge any mechanics lien filed against the Leased Premises, the
Building or the Land in connection with any work performed by or at the request
of Tenant.
SECTION 12. ASSIGNMENT AND SUBLETTING. Tenant will not assign this Lease or
sublet all or any part of the Leased Premises without the prior written consent
of Landlord. Unless otherwise agreed to by Landlord, Landlord's consent to any
such assignment or sublease will not relieve Tenant from its obligations under
this Lease. Notwithstanding anything to the contrary contained herein, Tenant
may, without having to obtain the prior written consent of Landlord, assign this
Lease or sublet all or any part of the Leased Premises to any parent, affiliate
or subsidiary of Tenant, so long as Tenant remains fully liable for the
performance of all of its obligations hereunder notwithstanding such assignment
or sublease. If Landlord consents to any sublease by Tenant, then Tenant will be
permitted to retain all rent payable in connection with such sublease.
SECTION 13. SUBORDINATION. Tenant's rights and interests under this Lease
will be subordinate to all mortgages and other encumbrances now or hereafter
affecting any portion of the Building or the Land. In the event of the
foreclosure of any mortgage or other encumbrance, Tenant will, upon request of
any person succeeding to the interest of Landlord, attorn to and automatically
become the tenant of such successor-in-interest without change in the terms or
conditions of this Lease; provided, however, that such successor-in-interest
will not be liable for any act or omission of any prior landlord or subject to
any offsets or defenses which Tenant may have against any such prior landlord.
The obligations of Tenant under this Section 13 will be expressly conditioned
upon its receipt of an acceptable subordination, non-disturbance and attornment
agreement from any mortgagee of Landlord, which subordination, non-disturbance
and attornment agreement will expressly provide that Tenant will be entitled to
the undisturbed possession of the Leased Premises, so long as it is in full
compliance with all of its obligations under this Lease. Within ten business
days after its receipt of Landlord's request therefor, Tenant will execute and
deliver to Landlord a certificate prepared by Landlord confirming such
subordination and attornment and setting forth the current status and facts
related to this Lease and Tenant's occupancy of the Leased Premises.
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SECTION 14. LIMITATION OF LANDLORD'S PERSONAL LIABILITY. Tenant will look
solely to Landlord's interest in the Leased Premises, the Building and the Land
for the recovery of any judgment against Landlord; it being the express intent
of the parties hereto that neither Landlord, nor any of its shareholders,
directors, officers or employees will ever be personally liable for any such
judgment.
SECTION 15. INDEMNIFICATION AND INSURANCE. Landlord will not be liable for
and Tenant will indemnify and hold Landlord harmless from any liability or
expense associated with any damage or injury to any person or property
(including any person or property of Tenant or any one claiming under Tenant)
which arises directly or indirectly in connection with the Tenant's use or
occupancy of the Leased Premises; provided, however, that Tenant will not be
obligated to indemnify Landlord as to any liability or expense occasioned by the
fault or negligence of Landlord.
All property stored or placed by Tenant in or about the Leased Premises will
be so stored or placed at the sole risk of Tenant. Tenant will at its sole
expense maintain in full force and effect at all times during the Lease Term:
(a) comprehensive public liability insurance for personal injury and property
damage with liability limits of not less than $5,000,000 for injury to one
person, $10,000,000 for injury from one occurrence and $2,000,000 for property
damage; and (b) extended coverage insurance on all property stored or placed by
Tenant in or about the Leased Premises in an amount equal to the full
replacement value thereof. Each insurance policy required to be maintained by
Tenant hereunder will name Landlord and Landlord's mortgagee, if any, as
additional insureds and will specifically provide that such insurance policy
cannot be terminated without giving at least 30 days prior written notice to
Landlord and Landlord's mortgagee, if any.
SECTION 16. HAZARDOUS SUBSTANCES. Tenant will not use, store or dispose of
any Hazardous Substance (as that term is hereafter defined on or about the
Leased Premises, except for immaterial amounts that are exempt from or do not
give rise to any violation of applicable law. Tenant agrees to indemnify and
hold Landlord harmless from any liability or expense (Including, without
limitation, the fees of Landlord's attorneys and consultants and the cost of any
required remediation or clean-up) incurred by or claimed against Landlord as a
result of Tenant's breach of the covenant contained in this paragraph. The
foregoing covenant will survive the termination of this Lease for 12 months
after such termination. For the purposes of this Section 17, the term "Hazardous
Substance" means any "hazardous substance", "toxic substance" (as those terms
are defined in the Comprehensive Environmental Response, Compensation and
Liability Act), "hazardous waste" (as that term is defined in the Resource
Conservation Recovery Act), polychlorinated biphenyls, asbestos, radioactive
material or any other pollutant, contaminant or hazardous, dangerous or toxic
material or substance which is regulated by any federal, state or local law,
regulation, ordinance or requirement. Landlord represents and warrants that, as
of the Commencement Date, there will not be any Hazardous Substances in or about
the Building or the Leased Premises, except for immaterial amounts that are
exempt from or do not give rise to any violation of applicable law. Landlord
agrees to indemnify and hold Tenant harmless from any liability or expense
(including, without limitation, fees of Tenant's attorneys and consultants and
the cost of any required remediation or clean-up) incurred by or claimed against
Tenant as a result of Landlord's breach of the representation and warranty
contained in this paragraph.
SECTION 17. SURRENDER OF PREMISES. Upon the termination of Tenant's right of
possession under this Lease, Tenant will immediately surrender possession of the
Leased Premises to Landlord in good repair and "broom clean" condition,
reasonable wear and tear and fire and casualty excepted. Tenant will at the same
time remove all of its movable trade fixtures from the Leased Premises. Tenant
will promptly repair any damage caused to the Leased Premises by the removal of
any of such movable trade fixtures.
SECTION 18. CASUALTY. If the Leased Premises are damaged by fire or other
casualty, Landlord shall promptly give written notice to Tenant whether the
Leased Premises can reasonably be repaired within 180 days after the date of the
occurrence of such fire or other casualty. If Landlord notifies Tenant that it
does not believe that the Leased Premises can reasonably be repaired within such
180-day period, then both Landlord and Tenant will have the option of
terminating this Lease by giving written notice thereof to the other at any time
within 30 days after the date of Tenant's receipt of the aforementioned notice
from Landlord. If Landlord determines that the Leased Premises can reasonably be
repaired within such 180-day period or if neither party elects to terminate this
Lease despite the fact that Landlord has determined that the Leased Premises
cannot be reasonably repaired within such 180-day period, then Landlord will
proceed to repair the Leased Premises at its sole expense; provided, however,
that Landlord will in no event be required to repair any improvements previously
made to or any fixtures previously installed in the Leased Premises by Tenant
(other than the improvements initially constructed to the Leased Premises by
Landlord pursuant to Section 9 and Exhibit D). If the Leased Premises are
rendered untenantable in whole or in part as a result of a fire or other
casualty, then all rent accruing after the occurrence of any such fire or other
casualty and prior to the completion of the repair of the Leased Premises will
be equitably and proportionately abated to reflect the untenantable portion of
the Leased Premises. Landlord will not be liable to Tenant for any inconvenience
or interruption to Tenant's business occasioned by such fire or other casualty
or the concomitant repair of the Leased Premises.
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SECTION 19. CONDEMNATION. If all or any substantial portion of the Leased
Premises or the Building is taken by or under threat of condemnation so as to
render the Leased Premises wholly untenantable, then this Lease will
automatically terminate as of the date of the vesting of title to such property
in the condemning authority. If such taking does not render the Leased Premises
wholly untenantable, then this Lease will not terminate but will continue in
full force and effect in accordance with its terms, except that the Base Rent
and Tenant's Proportionate Share will be adjusted to fairly reflect the portion
of the Leased Premises or the Building which was so taken. Landlord will not be
liable to Tenant for any inconvenience or interruption to Tenant's business
occasioned by any such taking. Landlord will be entitled to receive the entire
award made by the condemning authority for any such taking.
SECTION 20. HOLDING OVER. Tenant will not hold over in its occupancy of the
Leased Premises after the expiration of the Lease Term, without the prior
written consent of Landlord. If Tenant holds over without the prior written
consent of Landlord, then Tenant will pay 125% of the Base Rent and Estimated
Operating Expense Payment then in effect for each month during the entire
holdover term. Any holding over with the consent of Landlord will constitute
this Lease as a lease from month-to-month.
SECTION 21. DEFAULT. If Tenant fails to pay any installment of Base Rent,
any Estimated Operating Expense Payment or any other sum payable by it hereunder
on or before the date when due, or if Tenant defaults in the performance of any
of its other obligations under this Lease and such default continues for 30 days
after written notice thereof is given to Tenant (or if such default is not
capable of being cured within 30 days, then only if Tenant fails to commence a
cure of such default within such 30 day period and at all times thereafter
proceed with due diligence to cure the same), then, in addition to any other
legal rights and remedies available to Landlord at law or in equity, Landlord
may: (a) terminate this Lease and declare all Base Rent, Estimated Operating
Expense Payments and other sums payable over the remainder of the Lease Term to
be immediately due and payable; or (b) re-enter and attempt to relet the Leased
Premises without terminating this Lease, in which event Tenant will remain
obligated to pay to Landlord any deficiency between all sums payable by Tenant
pursuant to this Lease and any sums collected by Landlord from any reletting of
the Leased Premises (net of any sums paid by Landlord in connection with such
reletting, including, without limitation, leasing commissions, attorneys' fees
and costs of improvements to the Leased Premises). Notwithstanding anything to
the contrary contained in this Section , Landlord will not have the right to
pursue any of the aforementioned legal rights and remedies in the event of a
monetary default by Tenant hereunder unless, on not more than two occasions in
any 12 month period, Landlord has first delivered written notice of non-payment
of any monetary sum to Tenant and Tenant has failed to cure such non-payment
within ten days after its receipt of such written notice.
SECTION 22. PREVAILING PARTY'S FEES. If any legal action is commenced by
either Landlord or Tenant, to enforce its rights hereunder, then all attorneys'
fees and other expenses incurred by the prevailing party in such action shall be
promptly paid by the non-prevailing party.
SECTION 23. SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and
inure to the benefit of the successors and assigns of Landlord and the
successors and permitted assigns of Tenant.
SECTION 24. NO WAIVER. No waiver of any covenant or condition of this Lease
by either party will be deemed to constitute a future waiver of the same or any
other covenant or condition of this Lease. In order to be effective, any such
waiver must be in writing and must be delivered to the other party to this
Lease.
SECTION 25. BROKERAGE COMMISSIONS. Each of Landlord and Tenant hereby
represents and warrants that it has not dealt or consulted with any real estate
broker or agent in connection with this Lease other than those real estate
brokers and agents specifically identified in the Agency Disclosure Statement
attached hereto as Exhibit E. Each of Landlord and Tenant agrees to indemnify
and hold the other harmless from and against any liability or expense occasioned
by a breach of the foregoing representation.
SECTION 26. REASONABLENESS OF CONSENT. Landlord will not unreasonably
withhold any consent or approval which is required to be given by it pursuant to
the terms of this Lease.
SECTION 27. AMENDMENT. This Lease may not be amended except by a written
instrument signed by both Landlord and Tenant.
SECTION 28. GOVERNING LAW. This Lease will be governed by and construed in
accordance with the laws of the State of Ohio.
SECTION 29. NOTICES. All notices required or permitted under this Lease must
be in writing and must be delivered to Landlord and Tenant at their addresses
set forth in the Lease Summary (or such other address as may hereafter be
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designated by such party). Any such notice must be personally delivered or sent
by either registered or certified mail or overnight courier.
SECTION 30. SPECIAL TERMS. Exhibit F sets forth those special provisions, if
any, which supplement the provisions of this Lease.
[SIGNATURES AND ACKNOWLEDGMENTS APPEAR ON NEXT PAGE]
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SIGNATURES AND ACKNOWLEDGMENTS
Landlord and Tenant have executed this Lease as of the date specified in the
Lease Summary.
Signed and acknowledge in
the presence of:
LANDLORD:
3423 SOUTHPARK PLACE DEVELOPMENT COMPANY
By: Pizzuti Management Inc.
By /s/ RICHARD C. DALEY
- ----------------------------------- -----------------------------------
Richard C. Daley
Vice President
- -----------------------------------
TENANT:
DECISIONONE CORP.
- -----------------------------------
By /s/ Thomas J. Fitzpatrick
- ----------------------------------- -----------------------------------
Thomas J. Fitzpatrick
Vice President and CFO
STATE OF OHIO
COUNTY OF FRANKLIN: SS
Before me, a notary public in and for said state and county, personally
appeared Richard C. Daley, the Vice President of Pizzuti Management Inc., the
duly authorized representative of the Landlord in the foregoing Lease, who
acknowledged the signing of the Lease to be his free act and deed on behalf of
the Landlord.
Date: 4/10/97 NOVA S. WITTE
---------------- -------------------------------
Notary Public
NOVA S. WITTE
STATE OF PENNSYLVANIA NOTARY PUBLIC, STATE OF OHIO
COUNTY OF CHESTER: SS MY COMMISSION EXPIRES DEC. 5, 1999
Before me, a notary public in and for said state and county, personally
appeared ______________, the Decision One Director of Deal State the Tenant in
the foregoing Lease, who acknowledged the signing of the Lease to be his free
act and deed on behalf of Tenant.
Date: April 9, 1997 -----------------------------------
---------------- Notarial Seal
Phillis I. Marshall, Notary Public
East Whiteland Twp., Chester County
My Commission Expires June 12, 2000
-----------------------------------
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[EXHIBITS A-F INTENTIONALLY OMITTED]
<PAGE> 11
EXHIBIT G
RIDER TO LEASE BETWEEN DECISION ONE CORPORATION
AND 3423 SOUTHPARK PLACE DEVELOPMENT COMPANY
DATED APRIL ___, 1997
For the Demised Premises located at 3423 SouthPark Place, Grove City, Ohio.
The provisions of this Rider are incorporated into, and in the event of any
contradictions shall supersede, the terms of the Lease referenced in the title
of this Rider and any other amendments or modifications thereof.
1. LANDLORD'S OBLIGATIONS. Landlord at its sole expense shall be responsible
for all costs and expenses associated with the maintenance, repair and
replacement of the roof, foundations, exterior walls, all structural parts
of the Building, and all mechanical, electrical and structural systems of
the Building, including HVAC and telecommunications and sprinkler systems,
the source of which lie outside the Leased Premises or which do not serve
solely the Leased Premises.
2. INSURANCE: WAIVER OF SUBROGATION. Landlord shall maintain fire and full
extended coverage insurance, including vandalism and malicious mischief,
for full replacement cost of Landlord's property; with reputable insurance
companies. Each party hereby waive subrogation against the other, its
officers and employees for any damage covered by insurance required
pursuant to the Lease and this Rider regardless of which party caused such
damage in whole or in part. Both parties shall cause their respective
carriers to issue endorsements to their insurance policies to the effect
that the carrier agrees to be bound by such waiver of subrogation.
3. ACCESS. Access to the Leased Premises, including elevator service if
applicable, shall be provided to Tenant and its invitees on a seven
day-a-week, 24 hour-a-day basis.
4. LIEN ON PERSONAL PROPERTY. Regardless of whether Tenant is in default under
the Lease, Landlord waives all right of distraint, attachment, lien, levy,
execution against and security interest, statutory or otherwise, on and in
Tenant's personal property and trade fixtures and such property located in
the Leased Premises for which Tenant acts as bailor. Tenant reserves the
right to remove any such property from the Leased Premises at any time.
5. CERTIFICATE OF OCCUPANCY. Landlord shall obtain a certificate of occupancy,
or such other similar permit or license as is required by the locality in
which the Leased Premises are situated, for Tenant's occupancy of the
Leased Premises for the uses permitted by the Lease and for such build-out
and work undertaken by Landlord at the commencement of the Lease or at such
other times as stated in the Lease (not to include alterations made by
Tenant thereafter).
6. CONSENT AND APPROVALS. Whenever any action of any party contemplated by the
Lease requires the consent or approval of the other party, each party
agrees that such consent shall not be unreasonably withheld or delayed. If
the Lease contains any provision with respect to non-waiver of default,
self-help, or the right to counsel fees in the event of enforcement of a
party's rights under the Lease, then in each instance the provision shall
be interpreted as though both parties are favored thereby.
7. SUBORDINATION. If, in connection with a financial arrangement related to
the Building or any part thereof of which the Leased Premises are a part, a
bank, insurance company or other lender requests a modification to the
Leases, Tenant shall only be required to consent to or execute the same if
the modifications do not materially increase any responsibility, monetary
of otherwise, or decrease any rights of Tenant under the Lease.
8. NO SURCHARGE FOR PERMITTED USES. Landlord acknowledges and agrees that with
respect to any insurance policies maintained by Landlord now or during the
term of the Lease, Tenant's use of the Leased Premises in the regular
course of business as permitted by the Lease shall not be the basis for
imposing on Tenant any surcharge or other obligation by reason of increase
in premiums or surcharge on Landlord; nor shall such use be the basis for
any additional charges for utilities or otherwise, other than charges
expressly set forth in the Lease. Tenant's obligation of performance in
order to comply with the laws not currently enacted shall arise only from a
change of law relating specifically to Tenant's use of the Leased Premises
other than as general office use.
9. LIMITATIONS OF LIABILITY. In no event shall Tenant be liable, pursuant to
any indemnification provision in the Lease or otherwise, for an
consequential or indirect damage or loss.
<PAGE> 12
FIRST AMENDMENT TO LEASE AGREEMENT
----------------------------------
August __, 1997
This First Amendment to Lease Agreement ("Amendment") is entered into as of the
date set forth above by 3423 SouthPark Place Development Company ("Landlord")
and DecisionOne Corp. ("Tenant").
BACKGROUND
----------
Effective as of April 10, 1997, Landlord and Tenant entered into a Lease
Agreement ("Original Lease") pursuant to which Tenant agreed to lease 58,597
square feet of rentable space contained in the building located at 3423
SouthPark Place in Grove City, Ohio. The Original Lease further contemplated
that Tenant was obligated to lease an additional 57,976 square feet of space
("Expansion Space") no later than nine months after the commencement date of the
initial term of the Original Lease. Tenant has now expressed a desire (1) to
accelerate the commencement date of its leasing of the Expansion Space, and (2)
to lease an additional 57,976 square feet of space located adjacent to the
Expansion Space ("New Space"). The location of the Expansion and New Spaces are
shown on the floor plan attached hereto as Exhibit A.
The parties now desire to enter into this Amendment to reflect the terms and
conditions upon which Tenant's leasing of the Expansion and New Spaces will be
effected. All capitalized terms which are used, but not defined herein, will
have the meanings attributed to such terms in the Original Lease.
AGREEMENT
---------
Landlord and Tenant herby agree as follows:
Section 1. ACCELERATION OF LEASING OF EXPANSION SPACE. The commencement
date of Tenant's leasing of the Expansion Space (that is, bays 20-23,
consisting of 57,976 square feet of rentable space) will be September 15, 1997
("Expansion Space Commencement Date"). The term of Tenant's leasing of the
Expansion Space will otherwise be co-terminus with its leasing of the initial
Leased Premises under the Original Lease. Tenant will pay Base Rent to Landlord
for the Expansion Space of $12,320 per month (the equivalent of $2.55 per
rentable square foot per year). In addition to its obligation to pay such Base
Rent, Tenant will, at all times from and after the Expansion Space Commencement
Date, be required to comply with all of the provisions of the Original Lease
for the remainder of the Lease Term (including, without limitation, the
obligation to pay Estimated Operating Expense Payments in the same per rentable
square foot amount then being paid by Tenant with respect to the initial Leased
Premises).
Section 2. LEASING OF NEW SPACE. Effective as of March 1, 1998 ("New Space
Commencement Date"), Tenant will lease the New Space from Landlord (that is,
bays 16-19, consisting of 57,976 square feet of rentable space). The term of
Tenant's leasing of the New Space will otherwise be co-terminus with its
leasing of the initial Leased Premises under the Original Lease. Tenant will
pay Base Rent to Landlord for the New Space of $12,803 per
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month (the equivalent of $2.65 per rentable square foot per year). In addition
to its obligation to pay such Base Rent, Tenant will, at all times from and
after the New Space Commencement Date, be required to comply with all of the
provisions of the Original Lease for the remainder of the Lease Term
(including, without limitation, the obligation to pay Estimated Operating
Expense Payments in the same per rentable square foot amount then being paid by
Tenant with respect to the initial Lease Premises).
Section 3. TENANT IMPROVEMENTS. Landlord will provide a tenant improvement
allowance of $125,000 to cover all hard and soft costs associated with the
construction of improvements to the Expansion and New Spaces. The preliminary
and final plans for any such improvements will be prepared, submitted and
approved in accordance with the procedures set forth in Section 9 of the
Original Lease. If the cost of the construction of any such improvements
ultimately approved by Landlord and Tenant exceeds the amount of the
aforementioned tenant improvement allowance, then such excess costs will be
paid by Tenant in accordance with the provisions of Section 9 of the Original
Lease. If the cost of the construction of the improvements ultimately approved
by the Landlord and Tenant is less than the amount of the aforementioned tenant
improvement allowance, then, at the election of Tenant, such diminished costs
will either be (a) paid in cash to Tenant within 30 days after the completion of
construction of the improvements, (b) credited against the next rent payments
due from Tenant hereunder or (c) reserved for the construction of future
improvements to the New and Expansion Spaces. Landlord will no longer be
obligated under the terms of the Original Lease to construct a demising wall in
Bay 24.
Section 4. EARLY OCCUPANCY. Tenant will have access to the New and
Expansion Spaces as of the date hereof, so as to permit Tenant to begin
installing its fixtures and otherwise readying such space for its use and
occupancy. Tenant's obligation to pay Base Rent with respect to the New and
Expansion Spaces will not commence until the commencement dates set forth in
Sections 1 and 2, respectively. Tenant will, however, from and after the date on
which it assumes early occupancy of the New Expansion Spaces under this Section
4, be obligated to make Operating Expense Payments to Landlord with respect to
the New and Expansion Spaces. The amount of such Operating Expense Payments will
be calculated on the basis of a $.32 per rentable square foot per year formula
and will be paid by Tenant in advance on or before the first day of each
calendar month throughout the period of its early occupancy of the New and
Expansion Spaces.
Section 5. RENEWAL OPTIONS. The renewal options granted to Tenant pursuant
to paragraph 3 of Exhibit F to the Original Lease will be fully applicable to
each of the New and Expansion Spaces. In order to be effective, Tenant's
exercise of any such renewal option must apply to all of the space being leased
by it in the Building (that is, the initial Leased Premises, the Expansion Space
and the New Space). In determining the Base Rent payable by Tenant during any
exercised renewal term, the Base Rent payable by it with respect to each of the
Initial Leased Premises, the Expansion Space and the New Space will be
separately calculated using the formula set forth in paragraph 3 of Exhibit F to
the Original Lease.
Section 6. MISCELLANEOUS. Except as otherwise expressly provided herein,
the Original Lease will remain in full force and effect.
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Landlord and Tenant have executed this Amendment as of the date first set forth
at the beginning hereof.
WITNESSES: 3423 SOUTHPARK PLACE DEVELOPMENT COMPANY
By Pizzuti Management Inc.
- --------------------
/S/ CINDY L. SMITH By: /S/ RICHARD C. DALEY
- ------------------ --------------------------------
Richard C. Daley, Vice President
- ------------------ DECISIONONE CORP.
/S/ MICHAEL MORRONE
- ------------------- By: /S/ TOM FOGARTY TREASURER
--------------------------------
(Name) (Title)
STATE OF OHIO:
COUNTY OF FRANKLIN: SS
Before me, a notary public in and for said state and county, personally
appeared Richard C. Daley, the Vice President of Pizzuti Management Inc., who
acknowledged the signing of this Amendment to be his free act and deed on
behalf of Landlord.
Dated: 8/13/97 /S/ NOVA MENDELSON
-------------------------------
Notary Public Nova Mendelson
Commission Expires: 12/5/99
State of Pennsylvania
------------
County of Chester: SS
-------
Before me, a notary public in and for said state and county, personally
appeared Tom Fogarty, the Treasurer of DecisionOne Corp., who acknowledged the
signing of this Amendment to be his free act and deed on behalf of Tenant.
Date: 8/12/97 /S/ MARSHA E. KINTON
-------------------------------
Notary Public
-------------------------------------------
Notarial Seal
Marsha E. Kinton, Notary Public
East Whiteland Twp., Chester County
My Commission Expires July 2, 2001
-------------------------------------------
Member Pennsylvania Association of Notaries
3
<PAGE> 1
EXHIBIT 10.25
LEASE
SUMMARY OF BASIC TERMS
A. LEASE DATE: 2/14/95
B. LANDLORD: Metropolitan Life Insurance Company, a New York corporation
C. TENANT: Decision Servcom, Inc., a Delaware corporation
D. TRADE NAME (if any): None
E. GUARANTOR (if any): None
F. PREMISES (Section 1.1, Exhibit A): Approximately 60,000 rentable square
feet, of Building D (the "Building") of Washington Business Park, which
Building is known as 5330 East Washington Street, located in the City of
Phoenix, County of Maricopa, State of Arizona, more particularly
described on Exhibit A attached hereto.
Project: The Building, other buildings, landscaping, parking spaces,
roadways and walkways on the land commonly known as Washington Business
Park, Phoenix, Arizona, which Project is more particularly described in
Exhibit B attached hereto.
G. Parking Spaces (Section 1.3): 1 Parking Space per 600 Rentable Square
Feet, 16 of which shall be for Tenant's exclusive use, and the remainder
for Tenant's nonexclusive use.
H. TERM (Section 2.1):
Projected Commencement Date:
Expiration Date: The last day of the seventy second (72th)
month period which begins on the Commencement
Date.
I. BASE MONTHLY RENT WITH ADJUSTMENT DATES (Section 3.1):
<TABLE>
<CAPTION>
Month Base Monthly Rent/Month
----- -----------------------
<S> <C>
1 $25,200.00
2-4 Free
5-24 $25,200.00
25-48 $28,800.00
49-72 $31,800.00
</TABLE>
Advance Rent paid upon Tenant's execution: $25,200 plus rental
tax
J. PERMITTED USE (Section 4.1): Subject to the prohibition of Hazardous
Materials and other limitations and provisions of Article 4: general
office, warehousing, repair of computer systems.
K. ADDRESS FOR NOTICES (Article 23):
To Landlord: With Copies To:
Metropolitan Life Insurance Company Metropolitan Life Insurance Company
101 Lincoln Centre Drive, Suite 600 333 South Hope Street, Suite 2950
Foster City, CA 94404 Los Angeles, CA 90071
Attn: Vice President Attn: Assistant Vice President
Real Estate Investments Real Estate Investments
To Tenant: With Copies To:
Decision Servcom, Inc. Decision Servcom, Inc.
One Progress Avenue One Progress Avenue
Horsham, PA 19044 Horsham, PA 19044
Attn: Richard A. Newton Attn: Law Department
- i -
<PAGE> 2
L. TAXES AND OPERATING COSTS (Section 3.4):
Rentable Area of Premises: approximately 60,000 rentable square feet
Tenant's Building Share: 66.3%
Tenant's Project Share: 43.5%
M. SECURITY DEPOSIT (Article 24): $31,800
N. BROKER(S) (Article 25): CB Commercial Real Estate Group, Inc. and Grubb
& Ellis Company
The provisions of the Lease identified above in parentheses are those
provisions making reference to above-described Basic Terms. Each such reference
in the Lease shall incorporate the applicable Basic Terms. In the event of any
conflict between the Summary of Basic Terms and the Lease, the latter shall
control.
TENANT LANDLORD
Decision Servcom, Inc. Metropolitan Life Insurance Company,
a Delaware corporation a New York corporation
By: /s/ E.W. Buckley By: /s/ Illegible Signature
-------------------------------- ----------------------------------
Print Name: Print Name:
------------------------ --------------------------
Its: Its:
------------------------------- ---------------------------------
By:
--------------------------------
Print Name:
------------------------
Its:
-------------------------------
- ii -
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SUMMARY OF BASIC TERMS ........................................................................ i
TABLE OF CONTENTS ............................................................................. iii
ARTICLE 1 - PREMISES/COMMON AREAS/PARKING ..................................................... 1
Section 1.1 - Premises ................................................................ 1
Section 1.2 - Common Areas ............................................................ 1
Section 1.3 - Parking ................................................................. 2
ARTICLE 2 - TERM/"AS IS" CONDITION OF PREMISES ................................................ 2
Section 2.1 - Term .................................................................... 2
Section 2.2 - Acceptance by Tenant; "AS IS" Nature of Premises ........................ 3
ARTICLE 3 - RENT, BASE MONTHLY RENT; TAXES, BUILDING COSTS AND PROJECT COSTS .................. 3
Section 3.1 - Rent .................................................................... 3
Section 3.2 - Base Monthly Rent ....................................................... 3
Section 3.3 - Intentionally Deleted ................................................... 3
Section 3.4 - Taxes, Building Costs and Project Costs ................................. 3
Section 3.5 - Additional Taxes ........................................................ 6
Section 3.6 - Late Payments: Charges; Interest; Default Rate .......................... 7
Section 3.7 - Consideration ........................................................... 7
Section 3.8 - Time and Manner of Payment in General ................................... 7
ARTICLE 4 - USE AND OCCUPANCY ................................................................. 7
Section 4.1 - Permitted Use ........................................................... 7
Section 4.2 - Compliance with Law ..................................................... 8
Section 4.3 - Compliance with Insurance Requirements .................................. 8
Section 4.4 - Certificates of Occupancy ............................................... 8
Section 4.5 - Life-Safety Systems ..................................................... 8
Section 4.6 - Prohibited Uses ......................................................... 9
Section 4.7 - Definition of Hazardous Material ........................................ 9
Section 4.8 - Tenant's Obligations ..................................................... 9
Section 4.9 - Landlord's Exculpation .................................................. 11
Section 4.10 - Right of Contribution .................................................. 11
Section 4.11 - Monitoring ............................................................. 11
Section 4.12 - Abatement Activities ................................................... 11
Section 4.13 - Effect on Proposed Assignments and Sublets ............................. 12
ARTICLE 5 - ASSIGNMENT/SUBLETTING/MORTGAGE .................................................... 12
Section 5.1 - Prohibition; Definitions ................................................ 12
Section 5.2 - Assignments or Subleases Subject to Landlord's Prior Written Consent .... 12
Section 5.3 - Share of Proceeds of Assignment or Sublease ............................. 13
Section 5.4 - Landlord Options to Terminate Lease ..................................... 14
ARTICLE 6 - ALTERATIONS ....................................................................... 14
Section 6.1 - Alterations ............................................................. 14
Section 6.2 - Mechanics' Liens ........................................................ 15
Section 6.3 - Alterations as Landlord's Property ...................................... 15
Section 6.4 - Indemnification ......................................................... 15
Section 6.5 - Survival ................................................................ 15
ARTICLE 7 - REPAIRS ........................................................................... 16
Section 7.1 - Tenant's Obligations/Procedures ......................................... 16
Section 7.2 - Landlord's Obligations and Rights ....................................... 16
Section 7.3 - Statutory Waivers ....................................................... 17
Section 7.4 - No Liability of Landlord ................................................ 17
ARTICLE 8 - SUBORDINATION/PROTECTION OF LENDERS ............................................... 17
Section 8.1 - Subordination ........................................................... 17
Section 8.2 - Attornment to Successor ................................................. 17
Section 8.3 - Lender's Right to Cure .................................................. 18
Section 8.4 - Tenant's Financial Statements ........................................... 18
Section 8.5 - Lease Modifications ..................................................... 18
</TABLE>
- iii -
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE 9 - LIABILITY/INDEMNIFICATION ......................................................... 18
Section 9.1 - Landlord's Exculpation and Limited Liability ........................... 18
Section 9.2 - Tenant's Liability, Indemnification and Hold Harmless .................. 18
Section 9.3 - Survival and Conflicts with other Indemnity Provisions ................. 19
ARTICLE 10 - DAMAGE/DESTRUCTION ............................................................... 19
Section 10.1 - Destruction and Repair ................................................ 19
Section 10.2 - 180 Day and 60 Day Repair Criteria .................................... 19
Section 10.3 - Lack of Insurance Proceeds ............................................ 20
Section 10.4 - No Release of Liability ............................................... 20
Section 10.5 - Tenant's Negligence ................................................... 20
Section 10.6 - Express Agreement Re Damage and Destruction ........................... 20
ARTICLE 11 - EMINENT DOMAIN ................................................................... 20
Section 11.1 - Partial or Total Taking ............................................... 20
Section 11.2 - Award ................................................................. 20
Section 11.3 - Sale to Condemning Authority .......................................... 21
Section 11.4 - Proration/Abatement of Base Monthly Rent .............................. 21
Section 11.5 - Temporary Taking ...................................................... 21
ARTICLE 12 - UTILITIES ........................................................................ 21
Section 12.1 - Utilities ............................................................. 21
ARTICLE 13 - LANDLORD'S RIGHT OF ENTRY ........................................................ 21
ARTICLE 14 - TENANT'S INSURANCE ............................................................... 22
Section 14.1 - Tenant's Insurance .................................................... 22
Section 14.2 - General Requirements of Tenant's Insurance ............................ 22
Section 14.3 - Waiver of Subrogation ................................................. 23
Section 14.4 - Landlord's Insurance .................................................. 23
ARTICLE 15 - INSOLVENCY OR BANKRUPTCY ........................................................ 23
Section 15.1 - Insolvency or Bankruptcy .............................................. 23
Section 15.2 - Measure of Damages .................................................... 24
Section 15.3 - Provision of Services and Assumption of Lease ......................... 24
ARTICLE 16 - DEFAULT/REMEDIES ................................................................. 24
Section 16.1 - Events of Default ..................................................... 24
Section 16.2 - Remedies .............................................................. 25
ARTICLE 17 - LANDLORD'S RIGHT TO PERFORM ...................................................... 26
ARTICLE 18 - END OF TERM ...................................................................... 27
Section 18.1 - Condition of Premises ................................................. 27
Section 18.2 - Holding Over .......................................................... 27
Section 18.3 - Conditions of Termination ............................................. 27
ARTICLE 19 - QUIET POSSESSION ................................................................. 27
ARTICLE 20 - RULES AND REGULATIONS ............................................................ 28
ARTICLE 21 - NO WAIVER/ENTIRE AGREEMENT/MODIFICATION .......................................... 28
ARTICLE 22 - LANDLORD'S DEFAULT/LIABILITY ..................................................... 28
Section 22.1 - Force Majeure ......................................................... 28
Section 22.2 - Notice/Right to Cure .................................................. 28
Section 22.3 - Limitation of Landlord's Liability .................................... 28
Section 22.4 - Sale by Landlord ...................................................... 29
ARTICLE 23 - NOTICES .......................................................................... 29
Section 23.1 - Notices To Tenant ..................................................... 29
Section 23.2 - Notices to Landlord ................................................... 29
Section 23.3 - Time of Rendition of Notices .......................................... 29
ARTICLE 24 - SECURITY DEPOSIT ................................................................. 29
ARTICLE 25 - BROKERAGE ........................................................................ 30
</TABLE>
- iv -
<PAGE> 5
<TABLE>
<S> <C>
ARTICLE 26 - MISCELLANEOUS .................................................................... 30
Section 26.1 - Captions and Construction .............................................. 30
Section 26.2 - Definitions ............................................................ 30
Section 26.3 - Successors and Assigns ................................................. 30
Section 26.4 - Landlord's Approval .................................................... 30
Section 26.5 - Joint and Several Liability ............................................ 30
Section 26.6 - Governing Law .......................................................... 30
Section 26.7 - Severability ........................................................... 31
Section 26.8 - Security Systems ....................................................... 31
Section 26.9 - Time of the Essence .................................................... 31
Section 26.10 - Recordation ........................................................... 31
Section 26.11 - Change of Name ........................................................ 31
Section 26.12 - Estoppel Certificates ................................................. 31
Section 26.13 - Authority ............................................................. 31
Section 26.14 - Attorneys' Fees ....................................................... 31
Section 26.15 - Waiver of Trial By Jury ............................................... 32
Section 26.16 - Substitution of Premises .............................................. 32
Section 26.17 - Binding Effect ........................................................ 32
Section 26.18 - Exhibits and Addenda .................................................. 32
Section 26.19 - Signs ................................................................. 32
Section 26.20 - No Merger ............................................................. 32
Section 26.21 - Acknowledgement of Waivers and Limitations ............................ 32
Section 26.22 - Tenant's Equipment and Personal Property .............................. 32
ARTICLE 27 - OPTION TO EXTEND ................................................................. 32
Section 27 - Option to Extend ......................................................... 32
</TABLE>
LIST OF EXHIBITS/ADDENDA
EXHIBIT A - Premises
EXHIBIT B - Project Description
EXHIBIT C - Confirmation of Lease Term
EXHIBIT D - Work Letter and Construction Agreement
EXHIBIT E - Landlord's Work Letter
EXHIBIT F - Rules and Regulations
EXHIBIT G - Sign Program
EXHIBIT H - Form of Subordination, Non-disturbance and Attornment Agreement
EXHIBIT I - Landlord's Consent to Encumbrance of Equipment
- v -
<PAGE> 6
GENERAL LEASE PROVISIONS
ARTICLE I - PREMISES/COMMON AREAS/PARKING
Section 1.1 - Premises
Upon and subject to the terms, covenants and conditions hereinafter set
forth and all matters of record, Landlord hereby leases to Tenant and Tenant
hereby hires from Landlord the Premises comprising the area described in
Paragraph F of the Summary of Basic Terms, substantially as outlined on the
floor plan(s) that have been signed by Landlord and Tenant and that are attached
hereto as Exhibit A. The plan attached as Exhibit A is used solely for the
purpose of identifying or designating the Premises under the terms of this Lease
and any markings, measurements, dimensions, footages or notes of any kind
contained thereon have no bearing upon any of the terms, covenants, conditions,
provisions or agreement of this Lease and are not to be considered a part
thereof.
Section 1.2 - Common Areas
1.2.1 Tenant shall have the right to the nonexclusive use of all areas
and facilities outside the Premises that are provided and designated by Landlord
from time to time for the general non-exclusive use of tenants at the Project,
and which are located (a) within the Building (herein called "Building Common
Areas"), and (b) outside the Building and outside other buildings designed for
occupancy by tenants (and constructed from time to time by Landlord), but within
the exterior boundary lines of the Project, including, without limitation,
parking areas, loading and unloading areas, roadways, walkways and landscaped
area (herein called "Project Common Areas"). The Building Common Areas (if any)
and the Project Common Areas collectively are sometimes herein called the
"Common Areas." Landlord shall at all times have the right to use such Common
Areas.
1.2.2 Landlord shall maintain the Common Areas in a manner reasonably
comparable to the manner other properties similar in size, character and
location are maintained and operated by institutional owners. The manner in
which the Common Areas are operated and the expenditures therefor shall be at
the sole discretion of Landlord. The use of Common Areas shall be subject to the
Rules and Regulations (as defined in Article 20) and the provisions of any
covenants, conditions and restrictions affecting the Project, as Landlord shall
make from time to time, as further provided in Section 1.2.4 and Article 20.
1.2.3 Exhibit A and Exhibit B show the approximate location of the
Premises, Common Areas and Project and are not meant to constitute an agreement
as to the specific location of the Premises, Common Areas or the elements
thereof or of the means of access to the Premises, Building or the Project.
Landlord hereby reserves the right, at any time and from time to time, as long
as reasonable access to the Premises and Building remains available, to (a) use
the Common Areas while engaged in making alterations in or additions or repairs
to the Project, and (b) close temporarily any of the Common Areas for
maintenance purposes. Tenant agrees that no diminution of light, air, or view by
any structure that may be erected in, about or outside the Project after the
date hereof shall entitle Tenant to any reduction of Base Monthly Rent or any
other Rent (as defined below) or result in any liability of Landlord to Tenant.
1.2.4 Landlord reserves the right, from time to time, to grant such
easements, rights and dedications as Landlord deems necessary or desirable, and
to cause the recordation of parcel maps and covenants, conditions and
restrictions in addition to the covenants, conditions and restrictions existing
as of the Lease Date affecting the Project. Unless required by governmental
authorities, Landlord shall not exercise its rights under this Section 1.2.4 if
such easements, rights, dedications, maps and covenants, conditions and
restrictions unreasonably interfere with Tenant's use of the Premises. At
Landlord's request, Tenant shall promptly join in the execution of any of the
aforementioned documents. The Building and the Project may be known by any name
that Landlord may choose, which name may be changed from time to time in
Landlord's sole discretion.
1.2.5 The rights of Tenant hereunder in and to the Common Areas shall
at all times be subject to the rights of Landlord specified under this Lease.
Tenant shall not use the Common Areas for its day-to-day business other than
using appropriately designated areas of the Common Areas for ingress and egress,
parking, or loading and unloading. Without limiting the generality of the
foregoing, storage, either permanent or temporary, of any materials, supplies,
equipment or refuse in the Common Areas is strictly prohibited. Should Tenant
violate this provision of the Lease, such violation shall be considered a
material violation of this lease and Landlord may, at its option after
reasonable written advance notice to Tenant, remove said materials, supplies or
equipment from the Common Areas and place such items in storage, the cost
thereof to be paid by Tenant to Landlord as additional Rent under this Lease
within ten (10) days after Tenant's receipt of a statement submitted by
Landlord. All subsequent costs in connection with the storage of said items
shall be paid to Landlord by Tenant as accrued. Tenant agrees that receiving and
shipping goods and merchandise and all removal of refuse shall be made only by
way of the designated loading areas immediately adjacent to and serving the
Premises. If, in the opinion of Landlord, unauthorized persons are using the
Common Areas by
- 1 -
<PAGE> 7
reason of the presence of Tenant in the Premises, Tenant, upon demand of
Landlord, shall correct such situation by appropriate action or proceedings
against all such unauthorized persons. Nothing herein shall affect the right of
Landlord at any time to remove any such unauthorized persons from said areas or
to prevent the use of any of said areas by unauthorized persons.
Section 1.3 - Parking
Tenant shall have the right for the benefit of Tenant and its
employees, customers and invitees to use of the number of "Parking Spaces" set
forth in Paragraph G of the Summary of Basic Terms on an unassigned, unreserved
basis for parking by vehicles no larger than full-sized passenger automobiles or
pick-up trucks on, and only on, those portions of the Project Common Areas
provided and designated by Landlord from time to time for parking. Tenant shall
not at any time park or permit the parking of motor vehicles, belonging to it or
to others, so as to interfere with the walkways, roadways, or loading areas, or
in any portion of the parking areas not designated by Landlord for such use by
Tenant.
ARTICLE 2 - TERM/"AS IS" CONDITION OF PREMISES
Section 2.1 - Term
2.1.1 The term of this Lease (the "Term") shall commence upon the
Commencement Date. The "Commencement Date," shall be the earliest of (i) sixty
(60) days after the date possession of the Premises are made available to Tenant
or (ii) the date that a temporary certificate of occupancy (or its equivalent)
for the Tenant Improvements (as defined below) is issued by the City of Phoenix
or Landlord is provided with all documents or occupancy approvals (written or
oral) which are customarily given prior to the actual delivery of a temporary
certificate of occupancy or (iii) the date that Tenant, or any person occupying
any of the Premises with Tenant's permission, commences business operations from
the Premises. When the actual Commencement Date has occurred, Landlord and
Tenant shall execute a written memorandum in the form of Exhibit C to the Lease
confirming said actual Commencement Date, but the failure of either or both to
do so shall not affect the establishment of the Commencement Date. If Landlord
shall be unable to give possession of the Premises on the Projected Commencement
Date for any reason, any such delay resulting therefrom shall be deemed excused
and Landlord shall not be subject to any liability for the failure to give
possession on said date.
2.1.2 Landlord hereby agrees that upon execution of the Lease by both
Tenant and Landlord, Landlord shall deliver possession of the Premises to Tenant
so that Tenant and its authorized agents, contractors, subcontractors and
employees may, during ordinary business hours, at Tenant's sole risk, enter upon
and use the Premises for the sole purposes of constructing and installing the
Tenant Improvements (as defined in the Work Letter) in the Premises pursuant to
the "Work Letter" (attached hereto as Exhibit D and incorporated herein by this
reference) and of installing Tenant's personal property in the Premises;
provided, however, that (i) all of the provisions of the Lease, other than with
respect to the payments of Base Monthly Rent, Tenant's Building Share of
Building Costs and Tenant's Project Share of Taxes and Project Costs, shall
apply during such early entry, (specifically including, but not limited to, the
provisions of Article 9 of the Lease relating to the indemnification of
Landlord, which indemnity obligations shall include any matter arising out of or
in connection with such entry and Tenant's performance and observance of, or
failure timely to perform and observe, its obligations under the Work Letter);
(ii) Tenant shall pay for and provide evidence of the insurance to be provided
by Tenant pursuant to the provisions of Article 14 of the Lease; (iii) such
entry shall not, in Landlord's opinion, jeopardize any insurance maintained in
connection with the Premises or Project; (iv) Tenant shall pay utility charges
and other charges in connection with such early entry reasonably allocated to
Tenant by Landlord; (v) all such construction and installations shall be
performed by a licensed contractor approved in advance by Landlord, at Tenant's
sole expense, in compliance with all applicable laws and covenants, conditions
and restrictions of record, in accordance with the Work Letter and, furthermore,
the work shall be done in a good and workmanlike manner conforming in quality
and design with the Premises; (vi) all Tenant Improvements constructed or
installed in the Premises shall immediately become and remain the property of
Landlord; (vii) all Tenant's personal property installed by Tenant shall be and
remain the property of Tenant upon installation and Tenant shall, subject to
Article 7 of the Lease, upon the termination of this Lease, at Tenant's expense,
remove any Tenant's personal property installed by Tenant and return the
Premises to its condition as of the execution of this Lease, normal wear and
tear and damage caused by casualty (subject to the other provisions of the
Lease) excepted; and (viii) Tenant, its agents, contractors or subcontractors in
the construction of the Tenant Improvements will not cause any labor
difficulties for Landlord, its agents, contractors or subcontractors. Tenant
shall not use the Premises to commence the conduct or operation of its business
during the period of such early entry.
2.1.3 Landlord shall perform the work and make the installations in the
Premises and the Project substantially as set forth in "Landlord's Work Letter"
hereto as Exhibit E and incorporated herein by this reference. Landlord's Work
(as defined in the Landlord's Work Letter) shall be performed by Landlord's
general contractor. Other than Landlord's Work, Landlord has no obligation to
improve, alter, repair or remodel the Premises. All such installations shall
immediately become and remain the property of Landlord.
- 2 -
<PAGE> 8
Section 2.2 - Acceptance by Tenant; "AS IS" Nature of Premises
Neither Landlord nor Landlord's agents have made any representations or
promises with respect to the Project, Building or the Premises except as herein
expressly set forth. Tenant acknowledges and agrees that Tenant has been
afforded ample opportunity to inspect the Premises, the Building and the
Project, and has investigated their condition to the extent Tenant desires to do
so, including their environmental condition, and that Landlord has no obligation
to remodel or to make any repairs, alterations or improvements to the Premises
or the Building or remediate any condition therein, except as expressly provided
in the Lease. The taking of possession of the Premises by Tenant shall be
conclusive evidence, as against Tenant, that Tenant accepts the same to its then
"AS IS" condition and that the Premises, the Building and the Project were in
good and satisfactory condition at the time such possession was so taken subject
to: (i) completion of items listed on a written punchlist mutually agreed upon
by Landlord and Tenant (which in no event shall relate to items constructed
pursuant to the Work Letter), and (ii) latent defects in any portion of
Landlord's Work reported to Landlord in writing within ninety (90) days after
the Commencement Date. As Tenant's sole right and remedy, and as Landlord's sole
obligation, with respect to such punchlist items and latent defects, Landlord
shall, with reasonable diligence, cause such items to be completed or corrected
at its own expense; Landlord shall have no responsibility, liability, duty to
indemnify, defend or hold Tenant harmless from any damages, losses, claims,
liabilities, awards or actions related, directly or indirectly, to such items.
For purposes of this Section 2.2 latent defects shall not include any defects
which were readily apparent at the time the punchlist was delivered to Landlord.
Notwithstanding the foregoing, Landlord's obligation with respect to latent
defects shall not apply to equipment, materials or items implemented in the
Project by Landlord or are part of Landlord's Work which were specified by
Tenant, but Landlord shall assign to Tenant Landlord's interest in any warranty
from a subcontractor regarding such equipment or material after Tenant's written
request for same. Landlord shall have no responsibility, liability, duty to
indemnify, defend or hold Tenant harmless from any damages, losses, claims,
liabilities, awards or actions related, directly or indirectly to such items.
ARTICLE 3 - RENT; BASE MONTHLY RENT; TAXES, BUILDING COSTS AND PROJECT COSTS
Section 3.1 - Rent
"Rent" as used herein shall refer to the Base Monthly Rent (as defined
in Section 3.2, below), as it may be adjusted as hereinafter provided in this
Lease, plus all other sums and monetary obligations of Tenant payable to
Landlord under this Lease including, but not limited to the following:
(a) Any late charges or interest due pursuant to Sections 3.6.1 and
3.6.2;
(b) Tenant's Building Share of Taxes and Building Costs due pursuant to
this Article 3;
(c) Tenant's Project Share of Taxes and Project Costs due pursuant to
this Article 3; and
(d) Any consideration received by Tenant which is due to Landlord
pursuant to Article 5.
Section 3.2 - Base Monthly Rent
Tenant shall pay to Landlord commencing on the Commencement Date and
thereafter during the Term the Base Monthly Rent set forth in the Summary of
Basic Terms, which sum shall be payable by Tenant in consecutive monthly
installments on or before the first day of each month ("Monthly
Installment(s)"), in advance, in the manner described more particularly in
Section 3.8.1, provided, however, that Tenant shall pay the amount of Advance
Rent set forth in Paragraph I of the Summary of Basic Terms concurrently with
Tenant's execution of this Lease, which shall be a credit against the first
Monthly Installments as they become due. If the Commencement Date should occur
on a day other than the first day of a calendar month, or the Expiration Date
should occur on a day other than the last day of a calendar month, then the
Monthly Installment for such fractional month shall be prorated on a daily basis
based upon a thirty (30) day calendar month. In addition to the Base Monthly
Rent, Tenant shall pay the amount of any Rent, Rent increase or adjustment, and
additional payments when and as hereinafter provided in this Lease.
Notwithstanding anything to the contrary contained herein, Landlord's rent
concession granted to Tenant for Months 2, 3 and 4 of the Term extends only to
Base Monthly Rent, and Tenant shall pay all other Rent and additional payments
when and as due as hereinafter provided for in the Lease, including Tenant's
Building Share of Building Costs and Tenant's Project Share of Taxes and Project
Costs relating to Months 2, 3 and 4.
Section 3.3 - Intentionally Deleted
Section 3.4 - Taxes, Building Costs and Project Costs
3.4.1 Definitions. The following terms shall be defined as set forth
below:
(a) "Computation Year" shall mean the calendar year, provided
that Landlord, upon notice to Tenant, may change the Computation Year from time
to time to any other twelve (12) consecutive month
- 3 -
<PAGE> 9
period and, in the event of any such change, Tenant's Building Share of Building
Costs and Tenant's Project Share of Taxes and Project Costs shall be equitably
adjusted for the Computation Years involved in any such change.
(b) "Tenant's Building Share" shall be Sixty-Six and
Three-Tenths percent (66.3%) and has been computed by dividing the Rentable Area
of the Premises by the total Rentable Area of the Building. Rentable Area of the
Premises shall be 60,000 square feet and Rentable Area of the Building shall be
90,506 square feet.
(c) "Tenant's Project Share" shall be Forty-Three and
Five-Tenths percent (43.5%) and has been computed by dividing the Rentable Area
of the Premises by the total Rentable Area of the Project. Rentable Area of the
Project shall be 137,824 square feet. Tenant acknowledges that it has been given
an opportunity to verify the accuracy of the square footage figures set forth in
the foregoing Section 3.4.1(b) and this Section 3.4.1(c). Whether or not Tenant
has taken the opportunity to verify the foregoing figures, Tenant agrees to
accept such square footage figures as being accurate. Landlord reserves the
right to increase or decrease the size of the Project or the buildings therein
designed for occupancy by tenants, and to recalculate the Rentable Area
contained therein, and in the event of any such increase, decrease or
recalculation, Landlord shall recompute Tenant's Project Share.
(d) "Taxes" shall mean all taxes and assessments, general or
special, ordinary or extraordinary, unforeseen as well as foreseen, levied upon
or with respect to all or any portion of the Project and the areas used in
connection with the operation of the Project, the Rent, and the personal
property contained in the Project and used in connection with the management and
maintenance of the Project imposed by federal, state or local governments or
governmental assessment districts. Taxes shall not include Landlord's income,
franchise, capital stock, estate or inheritance taxes. Taxes shall include,
without limitation, all general real property taxes, general and special
assessments, gross receipts taxes, annual or periodic license or use fees,
excise, transit charges, housing fund and child care assessments, charges
imposed for social services, police, fire, or environmental protection, other
business taxes and the cost of contesting by appropriate proceedings any of the
aforementioned Taxes (with respect either to validity or amount). If, because of
any change in the method of taxation of real estate, any tax or assessment is
imposed upon Landlord or upon the owner of the land and/or the Building and/or
the Project or any part thereof and/or the areas used in connection with the
operation of the Building and/or the Project or the rents or income therefrom,
in substitution for or in lieu of any tax or assessment which would otherwise be
a real estate tax or assessment, such other tax or assessment shall be deemed to
be included in Taxes. If any Taxes are specially assessed by reason of the
occupancy or activities of one or more tenants and not the occupancy or
activities of the tenants as a whole, such taxes shall be allocated by Landlord
to the tenant or tenants whose occupancy or activities, brought about such
assessment and Tenant shall pay any such taxes so allocated to Tenant. In case
there shall be a reduction of the assessed valuation for any tax year, the Rent
on account of Tenant's Building Share and Project Share of Taxes shall be
recalculated and Landlord, after receiving a refund or after the delinquency
date of its next tax bill in the event Landlord is given a credit, will credit
against the Rent on account of Tenant's Building Share and Project Share of
Taxes next becoming due from Tenant such sums as may be due to Tenant by reason
of the recalculation, less the expenses incurred in effecting such reduction.
(e) "Building Costs" shall mean the aggregate amount of all
Operating Costs (defined below) to the extent the same are incurred with respect
to the Building, as distinguished from the portion of Operating Costs incurred
solely with respect to the Project Common Areas or solely with respect to the
Project generally.
(f) "Project Costs" shall mean the aggregate amount of (i)
insurance Costs (defined below) plus (ii) Operating Costs, but for purposes of
this Section 3.4.1(f) excluding Building Costs from Operating Costs.
(g) "Insurance Costs" shall mean, with respect to all or any
portion of the Project, including, without limitation, the Building, other
buildings and Improvements in the Project, Project Common Areas and the areas
used in connection with the Project, the aggregate amount of all costs, expenses
and expenditures paid or incurred by Landlord or Landlord's authorized
representatives of fire, extended coverage, all-risk, property damage, boiler,
sprinkler, rent, public liability or commercial general liability, earthquake or
other insurance and the deductible portion of any insured loss otherwise covered
by such insurance.
(h) No Double Counting. In no event shall any portion of
Building Costs, Project Costs or Insurance Costs be assessed or counted against
Tenant more than once.
(i) "Operating Costs" shall mean, with respect to the Building
or to all or any portion of the Project and the areas used in connection
therewith, as the case may be, the aggregate amount of all costs, expenses and
expenditures paid or incurred, by Landlord or Landlord's authorized
representatives of: (i) wage and labor costs and expenses applicable to persons
engaged in the management, operation, maintenance, overhaul or repair, whether
they be employed by Landlord or as independent contractors (including, without
limitation, the cost effect of any increase or decrease in the hours of
employment or the number of paid holidays or vacation days, social security
taxes, unemployment insurance taxes and the cost (if any) of providing
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disability, hospitalization, medical, welfare, pension, retirement, or other
benefits applicable with respect to such employees); (ii) utilities, utilities
surcharges, water and sewer charges, fuel, building supplies and materials,
other supplies and materials, equipment, tools, service contracts, security, or
any costs levied, assessed or imposed by, or at the direction of, or resulting
from statutes or regulations or interpretations thereof, promulgated by any
federal, state, regional, municipal or local government authority in connection
with the use or occupancy of the Building or the Common Areas or the Project,
including, without limitation, the Parking facilities serving the Project; (iii)
a management foe and costs incurred in or associated with the management of the
Project; (iv) the repair, replacement and maintenance of the nonstructural
portions of the Project or any portion thereof, (including, without limitation,
the plumbing, heating, ventilating, air-conditioning, elevator, electrical,
security, fire and life-safety systems installed or furnished by Landlord and
the nonstructural portions of the roof of the Building); (v) costs incurred in
or associated with providing, operating, maintaining, repairing and replacing
the Common Areas and facilities therein; (vi) gardening and landscaping,
maintenance of signs and tenant directories, repairs, repainting, maintenance,
resurfacing, painting, lighting, cleaning, janitorial services, refuse removal
and similar items; (vii) assessments or maintenance charges if the Landlord is
obligated to pay such charges; (viii) capital expenditures together with all
costs, and interest thereon at an annual rate equal to the reference rate of
interest announced publicly from time to time by Bank of America N.T. & S.A. (or
any successor bank) at its San Francisco Headquarters, or any successor rate of
interest thereto (the "Reference Rate") plus two (2) percentage points, but in
no event in excess of the maximum rate of interest permitted to be contracted by
law, all amortized over their actual useful life, (ix) rental of personal
property used in connection with any of the foregoing; (x) the costs and
expenses paid or incurred by Landlord or Landlord's authorized representatives
of legal, accounting and consulting fees and of permits, certificates and
licenses required in connection with the Project or any portion thereof, (xi)
depreciation and amortization of personal property used exclusively for the
management or operation of the Project (or a reasonable and equitable pro rata
share of such depreciation and amortization if such personal property is not so
exclusively used); and (xii) such other items as are now or hereafter
customarily included in the cost and expense of managing, operating, maintaining
overhauling and repairing all or any portion of the Project and areas used in
connection with the operation thereof. All such costs, expenses and expenditures
shall be determined in accordance with generally accepted accounting principles
which shall be consistently applied (with accruals appropriate to Landlord's
business). Landlord agrees that in any event the replacement of the following
items at the Building shall be amortized over their actual useful life with
interest thereon at an annual rate equal to the Reference Rate plus two (2)
percentage points: (i) entire or the major portion of the roof membrane (but not
the patching of lesser portions of the roof membrane from time to time), (ii)
condenser, compressor, cooling coils and blower which are part of the heating,
ventilating and air conditioning system, and (iii) ceiling or wall mounted space
heaters. Operating Costs shelf not include "Operating Costs Exclusions" defined
below.
(j) "Operating Costs Exclusions" shall mean (i) the initial
construction cost of the Project, or the costs of providing Landlord's Work to
Tenant, or depreciation of such costs; (ii) debt service (including, without
limitation, interest, principal and any impound payments) required to be made on
any mortgage or deed of trust recorded with respect to all or any part of the
Project other than debt service and financing charges imposed pursuant to
Section 3.41(i)(viii); (iii) any rent payable under any ground lease now or
hereafter affecting the Project; (iv) leasing commissions and other costs and
expenses incurred in connection with negotiations or disputes with prospective
or present tenants in the Project; (v) expenditures relating to the repair of
the structural components of each of the following: foundations, exterior walls,
roof and any interior load bearing walls of the Building (but with respect to
the roof these provisions do not exclude and Tenant shall, subject to Section
3.4.1(i) and Section 7.2, bear all other roof costs) of the Premises; (vi)
capital expenditures relating to repairs, alterations or improvements to the
Building required by governmental authorities to comply with building code
provisions existing as of the Lease Date and, with respect to requirements of
the American with Disabilities Act (ADA), to comply with ADA provisions as
interpreted and as enforced as of the Lease Date; (vii) costs, expenses and
expenditures to the extent incurred with respect to other buildings designed for
occupancy by tenants in the Project, as distinguished from costs, expenses and
expenditures incurred solely with respect to Project Common Areas or solely with
respect to the Project generally; (viii) costs of complying with Environmental
Laws relating to Hazardous Materials affecting the Premises, Building or Project
unless made the responsibility of Tenant pursuant to Section 4.8; and (ix)
specific costs which, pursuant to other provisions of this Lease, Tenant is
obligated to pay in full, including without limitation costs of Tenant's
performance of obligations to be performed by Tenant under this Lease and
payments which Tenant is obligated to make directly to any party, including,
without limitation, providers of goods, services, utilities or labor.
3.4.2 Tenant shall pay in advance on the first day of each month to
landlord as additional Rent one twelfth (1/12) of each of (a) Tenant's Building
Share of Building Costs and Taxes for each Computation Year and (b) Tenant's
Project Share of Taxes and Project Costs for each Computation Year, in an amount
estimated by Landlord and be filed by Landlord to Tenant. Landlord shall have
the right to revise such estimate from time to time (but no more than twice in
any Computation Year). Any assessments which are included as Taxes shall be
payable over the maximum allowable term that the same can be paid without
penalty or additional cost. With reasonable promptness after Landlord has
received the tax bills and support for Operating Costs for a Computation Year,
but not more than one hundred eighty (180) days after the close of such year,
Landlord shall furnish Tenant with a statement (herein called "Landlord's
Statement") showing a comparison of estimated Building Costs, Taxes and Project
Costs to the actual costs of the same for such Computation Year, and Tenant's
Building Share and Tenant's Project Share of those estimated and actual amounts.
If Tenant's Building Share of actual Building Costs and actual Taxes and
Tenant's Project Share of actual Taxes
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and Project Costs for such Computation Year exceeds Tenant's payments of the
estimated amounts of such categories for such Computation Year, Tenant shall pay
to Landlord the difference within thirty (30) days after Landlord's Statement is
given to Tenant, and if the total amount of Building Costs, Taxes and Project
Costs respectively paid by Tenant for any such Computation Year shall exceed
Tenant's Building Share of actual Building Costs and Tenant's Project Share of
actual Taxes and Project Costs for such Computation Year, such excess shall be
credited against the next installments of Tenant's Building Share of Building
Costs and actual Taxes and Tenants Project Share of Taxes and Project Costs due
from Tenant to Landlord hereunder. If there is an increase in Taxes (by reason
of an increase in assessed valuation or otherwise) affecting prior Computation
Year(s) at any time after rendition of Landlord's Statement for such year(s),
Tenant shall pay to Landlord the Tenant's Project Share and/or Building Share of
such increase in Taxes attributable to such year(s) within thirty (30) days
after Landlord's Statement is given to Tenant. Notwithstanding any other
provision of the Lease to the contrary, Tenant shall have the right, within
ninety (90) days following Landlord's delivery to Tenant of Landlord's Statement
for any Computation Year, and following thirty (30) days prior written notice to
Landlord, to have an independent certified public accountant reasonably
acceptable to Landlord ("CPA") inspect Landlord's books and records with regard
to Landlord's calculation of the Building Costs, Taxes and Project Costs
incurred during such Computation Year. Such inspection shall be conducted during
normal business hours at the location where such books and records are normally
maintained and all information secured therefrom shall be kept confidential by
Tenant and the CPA. If Landlord disagrees with any part of the CPA's inspection,
then Landlord shall be entitled to meet with the CPA and Tenant to discuss
corrections or revisions in the CPA's inspection to attempt to resolve any
differences for a period of twenty (20) business days after Landlord's receipt
of the CPA's written report of its inspection. The CPA shall take into
consideration any comments of Landlord or Tenant and shall then issue its final
written report, with such corrections or changes as shall be consistent with the
Lease and otherwise which the CPA deems appropriate. If the CPA's inspection of
Landlord's books and records reveals that Building Costs, Taxes or Project Costs
are overstated by Landlord, Landlord shall at its election within thirty (30)
days after the CPA's final written report, either refund or provide Tenant a
credit against Rent next due in the amount of any resulting overpayment by
Tenant. If the CPA's inspection of Landlord's books and records reveals that
Operating Costs or Taxes are understated, Tenant shall pay to Landlord within
thirty (30) days after the CPA's final written report the amount of any
resulting underpayment by Tenant. Such inspection, including without limitation
the fees and costs of the CPA, shall be at Tenant's sole cost and expense,
provided that if the CPA's inspection reveals that Landlord overstated Building
Costs, Taxes and Project Costs to the extent that the charges payable by Tenant
in the aggregate were overstated by more than ten percent (10%), Landlord shall
pay the reasonable fees of the CPA. If Tenant does not timely exercise the right
to inspect Landlord's books and records provided herein, Landlord's Statement
for such Computation Year shall be deemed final and binding on Landlord and
Tenant.
3.4.3 If the Term shall commence or the Lease shall terminate on a date
other than the first or last day of a Computation Year, Tenant's Building Share
of Building Costs and Tenant's Project Share of Taxes and Project Costs for such
partial Computation Year shall be appropriately adjusted by Landlord. To the
extent such Building Costs, Taxes and Project Costs are not affected by Tenant's
occupancy of the Premises or by this Lease, Tenant's Building Share and Tenant's
Project Share of those items shall be in the proportion that the number of days
of the Term included in such partial Computation Year bears to 365. During such
partial Computation Year(s) Tenant shall pay Tenant's Building Share of Building
Costs and Taxes and Tenant's Project Share of Taxes and Project Costs in the
same time and manner provided in Section 3.4.2 with the following exceptions
that (i) if the Commencement Date is not the first day of a Computation Year, on
or before the first day of the Term, or as soon thereafter as practicable,
Landlord may bill Tenant, and Tenant shall pay, an amount payable per month for
the remainder of the Computation Year which in the aggregate shall equal
Tenant's Building Share of estimated Building Costs and Taxes and Tenant's
Project Share of estimated Taxes and Project Costs for the partial Computation
Year; and (ii) if the Lease terminates before the end of a Computation Year and
if Landlord's Statement shows that (a) Tenant has overpaid, Landlord shall remit
the amount of such overpayment to Tenant within fifteen (15) days after issuance
of Landlord's Statement or (b) Tenant has underpaid, Tenant shall pay Landlord
the amount of such underpayment to Landlord within fifteen (15) days after
issuance of Landlord's Statement.
3.4.4 For purposes of calculating estimated taxes and Taxes, Building
Costs and Project Costs for any period during which the Building or Project is
less than ninety percent (90%) occupied there shall be added those amounts of
Taxes, Building Costs and Project Costs which Landlord determines, in good
faith, it would have incurred had the Project been ninety percent (90%) occupied
during any such period.
Section 3.5 - Additional Taxes
In addition to the Base Monthly Rent and other Rent to be paid by
Tenant hereunder, as additional Rent hereunder, Tenant shall reimburse Landlord,
upon demand, for any and all taxes payable by Landlord (other than net income
taxes) whether or not now customary or within the contemplation of the parties
hereto: (a) by reason of the manner of occupancy or activities of Tenant; or (b)
upon or with respect to the possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy by Tenant of the Premises, the
Building, the Project, or any portion thereof; or (c) upon the value of
Tenant's personal property located in the Premises or in any storeroom, garage
or any other place in the Premises or the Building or the Project, or the areas
used in connection with the operation of the Building or Project, it being
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the intention of Landlord and Tenant that, to the extent possible, such personal
property taxes shall be billed to and paid directly by Tenant; or (d) resulting
from overstandard tenant improvements to the Premises whether title thereto is
in Landlord or Tenant; or (e) upon this transaction; or (f) upon, allocable to,
or measured by the Rent payable hereunder, including without limitation, any
gross receipts tax or excise tax levied by any governmental or taxing body with
respect to the receipt of such Rent. The foregoing taxes may be referred to as
"Additional Taxes". Additional Taxes paid by Tenant pursuant to this Section 3.5
shall not be included in any computation pursuant to Section 3.4.
Section 3.6 - Late Payments: Charges; Interest; Default Rate
3.6.1 Tenant acknowledges that the late payment of Rent or any other
sum due from Tenant will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of such costs being extremely difficult and impractical
to fix. Such costs include, without limitation, processing and accounting
charges, late charges that may be imposed on Landlord by the terms of any
encumbrance, or notes secured by any encumbrance, covering the Premises and the
cost of money used by Landlord in place of such Rent or other sum. Therefore, if
any Monthly Installment of Base Monthly Rent is not paid within five (5) days
that such is due, or any other sum due hereunder is not paid within ten (10)
days of written notice that such payment is due, Tenant shall pay to Landlord as
additional Rent, without necessity of prior notice or demand, an additional sum
of five percent (5%) of said installment of Rent or other amount as a late
charge. The parties agree that this late charge represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of late payment by
Tenant. Acceptance of any late charges shall not constitute a waiver of Tenant's
default with respect to the overdue amount, or prevent Landlord from exercising
any of the rights and remedies available to Landlord under this Lease or under
law or equity.
3.6.2 Notwithstanding any other provisions of this Lease, any Monthly
Installment of Base Monthly Rent is not paid within five (5) days that such is
due, or any other sum due hereunder is not paid within ten (10) days of written
notice that such payment is due shall bear interest from the date such payment
is due until the same have been fully paid, at a rate (the "Default Rate") that
is equal to the lesser of (i) five (5) percentage points above the announced
prime rate (as it may be announced from time to time) of the then largest bank
in Arizona as determined by Landlord, and (ii) the highest rate permitted to be
contracted for by law. The payment of such interest shall not constitute a
waiver by Landlord of any default by Tenant hereunder.
Section 3.7 - Consideration
The Base Monthly Rent has been established in contemplation that (i)
Tenant will occupy the Premises for the entire Term and (ii) in the event of any
Assignment or Sublet of this Lease or all or any portion of the leasehold estate
created hereby, Landlord and Tenant have agreed that Landlord shall have the
rights and options provided in Article 5, including, without limitation, the
right to terminate this Lease. Tenant expressly acknowledges and agrees that
this Section 3.7 was a material inducement to Landlord in establishing the Base
Monthly Rent in the amount herein provided and that Landlord has relied on this
covenant and agreement in executing this Lease.
Section 3.8 - Time and Manner of Payment in General
3.8.1 All Rent shall be payable in lawful money of the United States of
America at the address specified for Landlord in the Summary of Basic Terms, or
at such other place as Landlord shall designate, without any prior demand
therefor and without any abatement, deduction or setoff whatsoever.
3.8.2 Except where a longer or shorter period is specifically provided
for in this Lease with respect to a particular expenditure, Tenant shall pay to
Landlord, within ten (10) days after notice by Landlord to Tenant of bills or
statements therefor: (a) sums equal to all expenditures made and monetary
obligations incurred by Landlord in connection with the remedying by Landlord of
Tenant's default, including, without limitation, expenditures made and
obligations incurred for reasonable legal counsel fees, (b) sums equal to all
losses, costs, liabilities, damages and expenses referred to in Article 9, and
(c) sums equal to all expenditures made and monetary obligations incurred by
Landlord in collecting or attempting to collect the Base Monthly Rent, or any
other Rent or sum of money accruing under this Lease or in enforcing or
attempting to enforce any rights of Landlord under this Lease or pursuant to
law, including, without limitation, expenditures made and obligations incurred
for reasonable legal counsel fees. Tenant's obligations under this Article 3
shall survive the termination of this Lease.
ARTICLE 4 - USE AND OCCUPANCY
Section 4.1 - Permitted Use
Tenant shall use and occupy the Premises only for the specific purposes
set forth in Paragraph J of the Summary of Basic Terms, and for no other
purpose. The character of the occupancy of the Premises, as restricted by this
Article 4 and as further restricted by Article 5, and any of the Rules and
Regulations attached
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to this Lease or hereafter adopted, is an additional consideration and
inducement to Landlord for the granting of this Lease.
Section 4.2 - Compliance with Law
4.2.1 Tenant, at Tenant's expense, shall comply with all laws, rules,
orders, ordinances, directions, regulations and requirements of federal, state,
county and municipal authorities pertaining to Tenant's use or occupancy of the
Premises, the Building and the Project and with the recorded covenants,
conditions and restrictions, regardless of when they become effective,
including, without limitation, all applicable federal, state and local laws,
regulations or ordinances pertaining to air and water quality, Hazardous
Materials (as defined below), and waste disposal, air emissions and other
environmental matters, all zoning and other land use matters, and utility
availability and with any direction of any public officer or officers, pursuant
to law, which shall impose any duty upon Landlord or Tenant with respect to the
use of occupancy of the Premises. Tenant shall at Tenant's sole cost and expense
take all proper and necessary action to cause the Premises to be kept,
maintained, used and occupied in compliance with the Americans With Disabilities
Act of 1990, as amended from time to time.
4.2.2 Without limiting its obligations under Section 4.2.1, Tenant
covenants and agrees to comply with all laws, rules, regulations and guidelines
now or hereafter made applicable to the Premises by government or other public
authorities respecting the disposal of waste, trash, garbage and other matter
(liquid or solid), generated by Tenant, its employees, agents, contractors,
invitees, licensees, guests and visitors, the disposal of which is not otherwise
the express obligation of Landlord under this Lease, including, but not limited
to, laws, rules, regulations and guidelines respecting recycling and other forms
of reclamation (all of which are herein collectively referred to as "Waste
Management Requirements"). Tenant covenants and agrees to comply with all rules
and regulations established by Landlord to enable Landlord from time to time to
comply with Waste Management Requirements applicable to Landlord (i) as owner of
the Premises and (ii) in performing Landlord's obligations under this Lease, if
any.
Section 4.3 - Compliance with Insurance Requirements
Tenant shall not do or permit to be done any act or thing in or upon
the Premises which will invalidate or be in conflict with any insurance policy
covering the Building or Project or any of the areas used in connection with the
operation thereof or its fixtures, appurtenances or equipment or the property
located therein, and shall not do, or permit anything to be done, in or upon the
Premises, or bring or keep anything therein, which shall increase the rates of
any insurance on the Building or Project or any of the areas used in connection
with the operation thereof of its fixtures, appurtenances or equipment or on
property located therein. If by reason of the failure of Tenant to comply with
the provisions of this Article 4 any insurance premium shall at any time be
higher than it otherwise would be, then, without Landlord's waiving any rights
it may have against Tenant hereunder as a result of such failure, Tenant shall
reimburse Landlord for that part of all such premiums thereafter paid by
Landlord which shall have been charged because of such violations by Tenant, and
shall make such reimbursement upon the first day of the month following such
expenditure by Landlord.
Section 4.4 - Certificates of Occupancy
Tenant shall not at any time use or occupy the Premises in violation of
the certificates of occupancy issued for the Premises, Building or Project. In
the event that any department of the city or county of the state in which the
Project is located shall hereafter at any time contend or declare that the
Premises are used for a purpose which is in violation of such certificate or
certificates of occupancy, Tenant shall immediately discontinue such use of the
Premises. Failure by Tenant to discontinue such use after such notice shall be
considered a default under this Lease and Landlord shall have the right to
exercise any and all rights and privileges and remedies given to Landlord by and
pursuant to the provisions of Article 16 hereof. Any statement in this Lease of
the nature of the business to be conducted by Tenant in the Premises shall not
be deemed or construed to constitute a representation or guaranty by Landlord
that such business is lawful or permissible or will continue to be lawful or
permissible under any certificate of occupancy issued for the Premises, Building
or Project or otherwise permitted by law.
Section 4.5 - Life-Safety Systems
If there now is or shall be installed in the Building or Project a
sprinkler system, heat or smoke detection system or any other so-called
life-safety system and (i) any such system or any of its appliances shall be
damaged or injured or not in proper working order by reason of any act or
omission of Tenant or Tenant's agents, servants, employees, contractors,
visitors or licensees, Tenant shall forthwith restore the same to good working
condition; and (ii) if the Insurance Services Office or any similar body or any
bureau, department or official of the state, county or city government, or any
governmental authority having jurisdiction over the Premises, shall require or
recommend that any changes, modifications, alterations, or additional equipment
be made or supplied in or to any such system by reason of Tenant's specific
business, or the location of partitions, trade fixtures, or other contents of
the Premises, Tenant shall, at Tenant's expense, promptly make and supply such
changes, modifications, alterations, or additional equipment.
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Section.4.6 - Prohibited Uses
4.6.1 Tenant shall not occupy or permit any portion of the Premises to
be occupied for a use which would be prohibited by any other portion of this
Lease (including but not limited to any Rules and Regulations then in effect) or
in violation of law. Nothing in this Section 4.6.1 shall expand the permitted
use of the Premises as set forth in Section 4.1.
4.6.2 Tenant shall not do or permit to be done any act or thing upon
the Premises which shall or might subject Landlord to any liability or
responsibility for injury to any person or persons or to any property by reason
of any business or operation being carried on upon the Premises or for any other
reason, and Tenant hereby indemnities and agrees to protect, defend and hold
harmless Landlord against any such liability or responsibility except to the
extent of Landlord's gross negligence or willful misconduct. Business machines
and mechanical equipment shall be placed and maintained by Tenant at Tenant's
expense in settings sufficient to absorb and prevent vibration. Tenant shall not
install any machine or equipment which may adversely affect the structure of the
Building without obtaining Landlord's prior written consent, which consent may
be conditioned on such terms as Landlord may require. Tenant shall not place a
load upon any floor of the Premises exceeding the floor load per square foot
area which such floor was designed to carry and which is allowed by law.
Section 4.7 - Definition of Hazardous Material
As used herein, the terms "Hazardous Material" or "Hazardous Materials"
shall mean any hazardous or toxic substance, material or waste which is or
becomes regulated by any local governmental authority, the State of Arizona or
the United States Government and include (i) petroleum, natural gas, synthetic
gas, asbestos, (ii) any substance designated as a "hazardous substance" pursuant
to Section 1317 of the Federal Water Pollution Control Act (33 U.S.C. Section
1251 et. seq.), (iii) any substance defined as a "hazardous waste" pursuant to
Section 6903 of the Federal Resource Conservation and Recovery Act, (42 U.S.C.
Section 6901 et seq.) ("RCRA"), or (iv) any substance defined as "hazardous
substances" pursuant to Section 9601 of the Comprehensive Environmental
Response, Compensation and Liability Act, (42 U.S.C. Section 9601 et seq.)
("CERCLA").
Section 4.8 - Tenant's Obligations
4.8.1 Tenant shall not use, generate, handle, manufacture, produce,
store, release, discharge or dispose of, on, under or about the Project or
Premises, or transport to or from the Project or Premises, any Hazardous
Material or allow its employees, agents, contractors, invitees or any other
person or entity to do so. Without in any way limiting, affecting or derogating
from the foregoing prohibition, Tenant shall be bound by, observe and perform
the conditions, covenants and provisions set forth in this Article 4 with
respect to Hazardous Materials. The foregoing prohibition of Hazardous Materials
shall not apply to any ordinary use and incidental storage of small and
insignificant amounts of substances in the regular and ordinary use of common
office business machines provided the same do not constitute, give rise to, or
create any substantial risk of any occurrence, condition, or event as a
consequence of which pursuant to any Environmental Law: (i) Tenant, Landlord, or
any owner, occupant, or person having any interest in the Premises shall be
liable, or (ii) the Premises shall be subject to any legal restriction on use,
ownership or transferability, or (iii) any Remedial Work (defined below) shall
be required.
4.8.2 Tenant, at its sole cost, shall comply with all Environmental
Laws (defined below) relating to Hazardous Materials on, under or about the
Project, Premises or Building, including the responsibility to obtain and
maintain current all permits required for its operations in connection with
Hazardous Materials. The term "Environmental Laws" shall mean any and all
federal, state or local laws, ordinances, rules or regulations, or requirements
of governmental agencies or instrumentalities, pertaining to Hazardous Materials
or to health, industrial hygiene or environmental conditions on, under, in or
about the Premises, Building or Project, including, without limitation, the
following (as amended from time to time): CERCLA; RCRA, and the Clean Air Act,
42 U.S.C. Section 7401 et. seq.
4.8.3 Without limiting the generality of Arizona Revised Statutes
Section 36-3501 et. seq., Tenant shall be responsible for and shall protect,
defend, indemnify, and hold Landlord and its directors, officers, employees,
agents, representatives, contractors, successors and assigns, any lessor under
any ground or underlying lease and any mortgagee or beneficiary under any
mortgage or deed of trust encumbering the Project, Premises or Building (for
purposes of this Section 4.8 collectively "Landlord Indemnitees") harmless from
and against all claims, costs, damages (consequential or otherwise), fines
judgments, penalties, losses and liabilities, (including, without limitation,
(i) diminution in value of the Premises, Building or Project, (ii) damages for
the loss or restriction on use of rentable or usable space or of any amenity on
the Premises, Building or Project, (iii) loss of rental income, (iv) cost of any
investigation, monitoring, removal, restoration, abatement, repair, clean-up,
detoxification or other ameliorative work of any kind or nature required by any
governmental agency having jurisdiction thereof, Landlord Indemnitees, or by any
private party (collectively "Remedial Work"), (v) damages arising from any
adverse impact on marketing of space in the Building or Project, (vi) costs of
the preparation and implementation of any closure, remedial or other required
plans, (vii) damage to natural resources or to property other than the Premises,
Building or Project or harm to any person
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or animal, and (viii) sums paid in settlement of claims, attorneys' fees,
consultant fees and expert fees), arising (directly or indirectly) in any way
whatsoever out of or attributable to Tenant's or its employees', agents',
representatives', contractors', successors', assigns', sublessees', Transferees'
(as defined hereinbelow) and invitees' (collectively herein "Agents") use,
generation, handling, manufacture, production, storage, release, threatened
release, discharge, disposal or transportation of Hazardous Materials on, under,
in or about the Project, Premises or Building (collectively a "Release" or
"Released").
4.8.4 In the event of the occurrence of a Release, Tenant shall, at its
sole expense and within thirty (30) days after demand by Landlord (or such
shorter period of time as may be required under applicable laws or by any
governmental entity having jurisdiction thereof) commence to perform and
thereafter diligently prosecute to completion such remedial work as is necessary
to restore the Premises and the Project to the condition existing prior to such
Release, including, without limitation, any investigation, monitoring, removal,
restoration, abatement, repair, clean-up, remediation, detoxification or other
ameliorative work necessary to remediate the effects of any Release (the
"Remedial Work"). All such Remedial Work shall be performed in conformance with
the requirements of Landlord and all applicable laws including, but not limited
to all Environmental Laws and regulations relating to Hazardous Materials. All
Remedial Work shall be performed in accordance with the terms and conditions of
this Lease and by one or more contractors, approved in advance in writing by
Landlord, and under the supervision of a consulting engineer approved in advance
in writing by Landlord. All costs and expenses of such Remedial Work shall be
paid by Tenant including, without limitation, the charges of such contractor(s)
and/or the consulting engineer, and Landlord's reasonable attorneys' fees and
costs incurred in connection with monitoring or review of such Remedial Work. In
the event Tenant shall fail to timely commence, or cause to be commenced, or
fail to diligently prosecute to completion such Remedial Work, Landlord may, but
shall not be required to, cause such Remedial Work to be performed and all costs
and expenses thereof, or incurred in connection therewith, shall become
immediately due and payable.
4.8.5 In the event there is a release, discharge or disposal of or
contamination by a Hazardous Material which is of the type that has been stored,
handled, transported or otherwise used or permitted by Tenant on or about the
Premises or Project and such Hazardous Material is of the type not presently
known to exist on or about the Premises, Building or Project, Tenant shall have
the burden of proving that such release, discharge, disposal or contamination is
not a Release. If Tenant fails to prove that any such release, discharge,
disposal or contamination is not a Release then such release, discharge,
disposal or contamination shall be deemed a Release and the provisions of this
Section 4.8 would be applicable thereto.
4.8.6 Upon the expiration or earlier termination of this Lease, Tenant
shall remove from the Premises, Building and Project all Hazardous Materials
placed or Released, or permitted to be placed or Released, on the Premises,
Building and Project by Tenant, its employees, agents, contractors or invitees
and all trade fixtures, furnishings and/or equipment associated with the use,
storage or disposal of Hazardous Materials placed or permitted to be placed on
the Premises, Building or Project by Tenant, its employees, agents, contractors
or invitees and perform any closure work, investigation and environmental
remedial work required by applicable Environmental Laws or by any governmental
authority having jurisdiction with respect to the Premises or Tenant's
activities thereon. Removal and disposal of any and all such Hazardous
Materials, equipment or fixtures shall be performed in strict accordance with
all applicable Environmental Laws.
4.8.7 In any matter covered by this Section 4.8 the Landlord
Indemnitees shall have the right to employ its or their own counsel at the
expense of Tenant. The Landlord Indemnitees shall have the right, but not the
obligation, at the expense of Tenant, to settle, adjust or compromise any claim,
suit or judgment against the Landlord Indemnitees arising out of the matters
covered herein.
4.8.8 Tenant shall give immediate written notice to Landlord of:
(a) Any action, proceeding or inquiry by any governmental authority
with respect to the presence of any Hazardous Material on the Project, Premises
or Building or the migration thereof from or to other property;
(b) All demands or claims made or threatened by any third party against
Tenant or the Project, Premises or Building relating to any loss or injury
resulting from any Hazardous Materials;
(c) Any spill, release, discharge or nonroutine disposal of Hazardous
Materials that occurs with respect to the Project, Premises or Building or
Tenant's operations,
(e) Tenant's discovery of any occurrence or condition on, under, in or
about the Project, Premises or Building or any real property adjoining or in the
vicinity of the Project, Premises or Building which may cause the Premises,
Building or Project or any part thereof to be subject to any restrictions on the
ownership, occupancy, transferability or use under any Environmental Law.
4.8.9 Tenant's obligations under this Article 4 shall survive the
termination of this Lease.
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Section 4.9 - Landlord's Exculpation
4.9.1 Landlord and Tenant acknowledge that Landlord may become legally
liable for the costs of complying with Environmental Laws relating to Hazardous
Materials which are not the responsibility of Landlord or Tenant, including the
following: (i) Hazardous Material present in the soil or ground water on the
Premises, Building or Project of which Landlord has no actual knowledge as of
the Commencement Date; (ii) a change in Environmental Laws which make Hazardous
Materials which are present on the Premises, Building or Project as of the
Commencement Date, whether known or unknown to Landlord, a violation of such new
Environmental Laws; (iii) Hazardous Materials that migrate, flow, percolate,
diffuse or in any way move to or under the Premises, Building or Project, or
(iv) Hazardous Materials present on or under the Premises, Building or Project
as a result of any discharge, dumping or spilling (whether accidental or
otherwise) by prior or other occupants or lessees of the Premises, Building or
Project or their agents, employees, contractors or invitees, or by others.
4.9.2 In the event any of the circumstances described in Section 4.9.1
materialize, Landlord and Tenant agree that under such circumstances (i)
Landlord shall have no liability to Tenant for and no obligation to indemnify,
defend, protect and hold Tenant harmless from any damages, claims, penalties,
judgments, fines, costs, liabilities or losses (including, without limitation,
diminution in value of the Premises, Building or Project, damages for the loss
or restriction on use of rentable or usable space or of any amenity on or in the
Premises, Building or Project, loss of business, damages for harm to natural
resources or to property other than the Premises, Building or Project or injury
to persons or animals, and sums paid in settlement of claims, attorneys' fees,
consultant and expert fees) which Tenant may incur during or after the Term as a
result of such contamination, (ii) the provisions of Article 10 shall apply in
the event there is any restriction on Tenant's use of the Premises, and (iii)
the cost of complying with the Environmental Laws relating to Hazardous
Materials affecting the Premises, Building or Project for which Landlord is
legally liable and which are paid or incurred by Landlord shall not be Project
Operating Costs unless the cost of such compliance, as between Landlord and
Tenant, is made the responsibility of Tenant pursuant to Section 4.8.
Section 4.10 - Right of Contribution
Except as expressly provided in this Article 4 to the contrary
(including but not limited to the treatment of Project Operating Costs), neither
Landlord nor Tenant shall be deemed to have waived any rights of contribution
which either party may have against the other party at law in connection with
costs, claims, damages or liabilities arising out of or resulting from the use,
presence, disposal or clean-up of Hazardous Materials in the Premises, Building
or Project.
Section 4.11 - Monitoring
4.11.1 Entry for Inspection and Testing. Tenant expressly agrees that
Landlord shall have the right to enter the Premises to inspect the Premises
and/or to perform an environmental investigation and assessment of the Premises
(an "Environmental Assessment") upon reasonable notice to Tenant, and that this
right of entry shall include, without limitation, the right to test for any
release, threatened release, discharge or disposal of any Hazardous Material.
Landlord's entry shall be carried out in a manner so as not unreasonably to
interrupt or interfere with Tenant's business operations. An Environmental
Assessment may include, without limitation, the review of any documents,
materials, inventory, financial data or notices or correspondence to or from
private parties or governmental authorities, the review of any storage, use and
disposal facilities and procedures associated with the storage, use and disposal
of Hazardous Materials, and the testing of the soils and groundwater at or under
the Premises. Tenant shall pay for the cost of such Environmental Assessments if
in the reasonable judgment of Landlord or its environmental consultant, a
release, threatened release, discharge or disposal of any Hazardous Material
caused by Tenant has occurred or in the event of a default by Tenant in any of
its obligations under Section 4.7 through Section 4.13. In all other cases, the
cost of such Environmental Assessments shall neither be Project Operating Costs
nor borne by Tenant directly, but shall be at Landlord's cost. If Landlord
reasonably so requires, Tenant shall comply, at its sole cost and expense, with
all recommendations contained in any Environmental Assessment, including any
recommendation with respect to the precautions which should be taken with
respect to activities on the Premises or any recommendations for additional
testing and studies to detect the presence of Hazardous Materials.
Section 4.12 - Abatement Activities
To the extent that any testing or monitoring demonstrates that
significant levels of contamination by Hazardous Materials at the Project exist
or are increasing, Landlord shall have the right but not the obligation to
identify the source of the contamination and seek to have it abated by the
responsible parties. Landlord may undertake, or cause to be undertaken,
voluntary clean-up activities to ameliorate or stabilize any Hazardous Materials
in the Project. The determination whether to undertake any clean-up activities
shall be made by Landlord in its sole and absolute discretion based upon its
consultant's or expert's recommendations and Landlord's determination of the
feasibility of the proposed activities, their cost, their projected efficiency,
and the levels of contamination of the Hazardous Materials in the Project in
comparison with the levels of contamination in other properties in the vicinity
of the Project. Tenant agrees to cooperate fully with
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Landlord and with any parties designated by Landlord at Landlord's expense to
perform testing, monitoring or clean-up activities in the Project.
Section 4.13 - Effect on Proposed Assignments and Sublets
Without in any way limiting or affecting Landlord's right to withhold
its consent for other reasons, it shall not be unreasonable for Landlord to
withhold its consent to any proposed transfer, assignment or sublease if (i) the
proposed transferee's anticipated use of the Premises or Project involves the
use, generation, handling, manufacture, production, storage, testing, treatment,
discharge or disposal of Hazardous Materials; (ii) the proposed transferee has
been required by any prior landlord, lender or governmental authority to take
remedial action in connection with Hazardous Material contaminating a property
if the contamination resulted from such transferee's actions or use of the
property in question; or (iii) the proposed transferee is subject to an
enforcement order issued by any governmental authority in connection with the
use, disposal or storage of Hazardous Materials.
ARTICLE 5 - ASSIGNMENT/SUBLETTING/MORTGAGE
Section 5.1 - Prohibition; Definitions
5.1.1 Subject only to the exceptions provided in Section 5.2 below,
neither Tenant nor Tenant's legal representatives, successors or assigns shall
assign this Lease ("Assign" or "Assignment"), or transfer, sublet, license or
permit the Premises or any part thereof to be used or occupied by others
(collectively, "Sublet" or "Sublease"); furthermore, in no event shall Tenant or
Tenant's legal representatives or assigns pledge, hypothecate, mortgage or
otherwise encumber this Lease (collectively, "Mortgage"). Any such Assignment,
Sublease or Mortgage (whether voluntary or by operation of law) shall be
voidable at the option of Landlord, and shall constitute a material breach of
this Lease. No interest of Tenant in this Lease or the Premises shall be
assignable or assigned by operation of law and Tenant shall not suffer or permit
either such an assignment or any involuntary assignment of any nature
whatsoever. By way of example and not limitation it shall be deemed an
Assignment under this Lease and shall be subject to all the provisions of this
Article 5, if either (a) Tenant consists of more than one party and there is a
purported assignment from one such party to any other or others of such parties
constituting Tenant, or (b) there is any transfer of control of Tenant, whether
by transfer of shares of stock, partnership interests or otherwise or (c) there
is a transfer of a major portion of Tenant's assets but not an assignment and
assumption of this Lease in accordance with Section 5.2. As used in the
immediately preceding sentence, the term "Tenant" shall also mean any entity
that has guaranteed Tenant's obligations under this Lease. As used in this
Article, the term "control" or "controls" or "controlled" shall mean either the
possession, directly or indirectly, through one or more intermediaries, of the
power to direct or cause the direction of the management and policies of the
controlled Person (as defined below) or the ownership, directly or indirectly,
of fifty percent (50%) of the voting power of, or the equity interests in the
controlled Person (as defined below). The term Person shall mean individuals,
groups, partnerships, firms, associations, corporations, trusts or any other
form of business or legal entity. The Person who is the actual assignee,
sublessee, licensee, occupant, transferee or any other recipient of an
Assignment or Sublease is herein referred to as "Transferee". Notwithstanding
the foregoing, a transfer of control of Tenant (by stock transfer, merger or
consolidation) to an affiliated entity (as defined below) shall not be deemed an
assignment under this Section. For purposes of this Section 5, an "affiliated
entity" shall mean (a) a corporation all or at least 75% of the stock of which
is owned, held and controlled by Tenant (so long as Tenant owns such
percentage); or (b) a corporation which owns, holds and controls all or at least
75% of all stock of Tenant (so long as Tenant owns such percentage) ("Parent");
or (c) a corporation of which at least 75% of its stock is owned, held and
controlled by Parent; or (d) notwithstanding any provision of the foregoing to
the contrary, the shares of stock of Decision Servcom, Inc. a Delaware
corporation may be sold or transferred, without obtaining the prior written
consent of Landlord, but subject to the other conditions and provisions of this
Section 5, in the following events: (i) such stock is publicly traded through
the New York, American or Pacific Stock Exchanges or the NASDAQ national market
and its price is listed at least daily in the Wall Street Journal and such sale
is a public sale effected through such exchange or market.
5.1.2 If there is an Assignment or Sublet, whether in violation of or
in compliance with this Article, then: (a) Landlord may collect rent from the
Transferee and apply the net amount collected to the rent herein reserved, but
no such collection shall be deemed either a waiver of the covenants and
conditions of this Article 5, or the acceptance of the Transferee as Tenant, or
a release of Tenant from the further performance by Tenant of the obligations on
the part of Tenant herein contained or an alteration of Tenant's primary
liability for such obligations; or (b) in the event of default by any
Transferee, or any other successor of Tenant, in the performance or observance
of any of the terms of this Lease of any Sublease or Assignment agreement,
Landlord may proceed directly against Tenant without the necessity of exhausting
remedies against such Transferee or successor.
Section 5.2 - Assignments or Subleases Subject to Landlord's Prior Written
consent
Notwithstanding any contrary provision of Article 5.1.1, Tenant may
Assign or Sublet only upon the following express conditions which are agreed to
be reasonable:
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5.2.1 The proposed Assignment or Sublease shall be subject to and
conditioned on the prior written consent of Landlord, which consent will not be
unreasonably withheld or conditioned or delayed and, without limiting the
generality of the foregoing, it shall be deemed reasonable for Landlord to
withhold, condition or revoke such consent it among other things the following
conditions are not satisfied:
5.2.1.1 the use to be made of the Premises by the proposed
Transferee is the expressly permitted use under Section 4.1 and would not be
prohibited by any other portion of this Lease (including but not limited to any
Rules and Regulations then in effect) and would not create greater demands upon
the facilities, systems or services of the Premises, the Building or Project or
any part thereof than the demands created by Tenant;
5.2.1.2 the character, business stability, reputation, history
of timely lease performance and financial responsibility of the proposed
Transferee are both (a) of high quality and (b) satisfactory to Landlord in the
good faith exercise of its business judgment, and in any event the proposed
Transferee demonstrates, by virtue of its net worth, ratio of assets to
liabilities, net income and cash flow, among other things, the ability to
perform (i) all obligations of Tenant in the case of an Assignment and (ii) the
obligations of Tenant allocable to the Sublease space in the case of a Sublease;
5.2.1.3 the proposed Transferee is then neither a prospective
tenant of the Project with whom Landlord is in negotiation for rental of space
in the Project nor a tenant of the Project;
5.2.1.4 any proposal for alterations to the Premises requested
by the proposed Transferee satisfies the covenants and conditions of Article 6;
and
5.2.1.5 all of the conditions set forth below are satisfied.
5.2.2 Tenant shall pay to Landlord Landlord's then standard processing
fee (currently Five Hundred Dollars ($500)) and any taxes or other charges
imposed upon Landlord or the Project as a result of such Assignment or Sublease,
and shall reimburse Landlord for all costs, including the reasonable fees of
attorneys, architects, engineers or other consultants incurred by Landlord in
connection with such Assignment or Sublease, whether or not such proposed
Assignment or Sublease is consented to by Landlord.
5.2.3 Tenant shall deliver to Landlord with its request for Landlord's
consent the proposed Assignment or Sublease and current financial statements of
the proposed Transferee, prepared by an independent certified public accountant,
and promptly upon Landlord's request for same, any additional documents or
information reasonably related to the proposed transaction or Transferee.
5.2.4 Tenant shall deliver to Landlord an executed original counterpart
of the Assignment or Sublease, which by its terms shall be binding on Tenant and
the Transferee subject only to Landlord's consent being obtained and the
execution by Tenant, the proposed Transferee and Landlord of Landlord's consent.
Every Assignment or Sublease shall provide, among other things, that: (a) it is
and shall be subject and subordinate to the provisions of this Lease, (b) the
termination of this Lease shall, at Landlord's sole election, constitute a
termination of every such Assignment or Sublease and (c) the covenants and
conditions of this Lease shall be covenants and conditions of the Assignment or
Sublease, and the proposed Transferee shall assume for the benefit of Landlord,
and shall perform faithfully and shall be bound by, all of the covenants and
conditions of this Lease from and after the effective date of the Assignment or
Sublease, limited, in the case of a Sublease, to the extent they apply to the
space in question.
5.2.5 The consent by Landlord to an Assignment or Sublease shall not in
any way be construed to relieve Tenant or the assignee or sublessee from
obtaining the express consent in writing of Landlord with respect to any
subsequent Assignment or Sublease. Landlord may, but shall not be obligated to,
consent to subsequent Assignments or Subletting of this Lease or amendments or
modifications to this Lease with Transferees or other successors of Tenant,
without notifying Tenant, and without obtaining its consent thereto and such
action shall not relieve Tenant of liability under this Lease.
5.2.6 Tenant shall not be released from Tenant's obligations under this
Lease nor shall Tenant's primary liability to pay Rent and to perform all other
obligations to be performed by Tenant under this Lease be altered by (a) any
Assignment or Sublease, regardless of Landlord's consent, or (b) any failure by
Landlord after any Assignment or Sublease, regardless of Landlord's consent, to
give Tenant notice of default under or in respect of any of the terms,
covenants, conditions, provisions or agreements of this Lease.
Section 5.3 - Share of Proceeds of Assignment or Sublease
Fifty percent (50%) of that portion of rent and all other consideration
payable to or for the benefit of Tenant in connection with any Assignment or
Sublease which is in excess of the Rent (which for purposes of this Section 5.3
shall mean the Base Monthly Rent plus those Building Costs, Project Costs and
Taxes payable by Tenant pursuant to Section 3.4) which Tenant is obligated to
pay Landlord under this Lease (in the event of a Sublease or Assignment of less
than the entire Premises, prorated to reflect obligations allocable to that
portion of the Premises subject to the Sublease or Assignment) less Tenant's
costs shall be payable
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to Landlord as additional Rent under this Lease without affecting or reducing
any other obligation of Tenant under this Lease. Such excess shall be payable to
Landlord at the same time as such rent or other consideration is payable to
Tenant, provided, however, that fifty percent (50%) of the cash equivalent of
any non-cash consideration payable to or for the benefit of Tenant at any time
in connection with an Assignment or Sublease shall be paid by Tenant to Landlord
at the time Landlord gives its consent. For purposes hereof, the term "Tenant's
Costs" shall mean: (a) the amount of any reasonable out-of-pocket broker's fee
or commissions paid to a broker unrelated to Tenant as a result of any
assignment or subletting by Tenant hereunder and reasonable out-of-pocket
counsel fees paid to outside (and not in-house) counsel and disbursements
incurred with respect to such assignment or subletting, and (b) reasonable
advertising expenses directly related to the assignment of this Lease or
subletting of the space.
Section 5.4 - Landlord Options to Terminate Lease
With respect to any Assignment or Sublet except any made in accordance
with Landlord's prior written consent, it is expressly agreed and understood
that in addition to Landlord's other rights set forth in this Article 5,
Landlord shall have the following options, exercisable in Landlord's sole
discretion: (a) in the event of a Sublease or Assignment of substantially all
the Premises, to terminate this Lease as of the date proposed by Tenant for the
commencement of the term of the proposed Sublease or Assignment; and (b) without
regard to the size of the portion of the Premises to be affected by the proposed
Sublease or Assignment, to declare this Lease to be so modified so as to exclude
therefrom, and to be terminated as to, the space subject to the proposed
Sublease or Assignment, such modification to become effective on the date
proposed by Tenant for the commencement of the term of the Sublease or
Assignment, with the Base Monthly Rent, and amounts payable by Tenant pursuant
to Section 3.4 for Building Costs, Taxes and Project Costs, to be adjusted in
proportion to the reduction in Rentable Area of the Premises. If Landlord
exercises either of its options to terminate under this Section 5.4, the
provisions of this Lease applicable to Tenant's obligations on expiration or
termination shall apply to the space as to which the termination applies.
ARTICLE 6 - ALTERATIONS
Section 6.1 - Alterations
Tenant shall not make any alterations, additions or improvements
including, but not limited to, the initial tenant improvement in or to the
Premises or parking space configuration in the Project Common Areas
(collectively, "Alterations") without first meeting the following requirements:
(a) Prior to the commencement of any Alterations, Tenant shall
submit plans and specifications prepared by an architect and/or structural
engineer licensed by the state where Project is located for Landlord's approval,
which approval shall not be unreasonably withheld or delayed, and obtain any
necessary governmental permits and deliver a copy thereof to Landlord;
(b) The Alterations shall be made at Tenant's sole cost and
expense and by a contractor or mechanic designated by Landlord or a contractor
or mechanic chosen by Tenant and approved by Landlord, which approval shall not
be unreasonably withheld or delayed;
(c) Tenant shall provide satisfactory evidence of contractor's
comprehensive general liability insurance covering Landlord, builder's risk
insurance, and workmen's compensation insurance all in form and substance
satisfactory to Landlord;
(d) Tenant shall provide a performance and payment bond
satisfactory in form and substance to Landlord for all Alterations which in
Landlord's reasonable judgment will cost more than Five Thousand Dollars
($5,000) to complete, and such other security as Landlord may reasonably require
to insure payment for the completion of all Alterations free and clear of liens;
(e) Tenant shall give Landlord at least ten (10) business
days' notice before commencing any proposed Alterations so that Landlord can
post and record a notice of nonresponsibility and any other notice as may be
permitted by law, to protect Landlord from having its interest in Premises made
subject to a mechanic's lien;
(f) All Alterations shall be made in full compliance with all
laws, rules, orders, ordinances, directions, regulations and requirements of all
governmental agencies, offices, departments, bureaus and boards having
jurisdiction;
(g) All of Tenant's contractors, subcontractors, employees,
servants and agents must work in harmony with and shall not interfere with any
labor employed by Landlord, or Landlord's contractors;
(h) Tenant shall be fully responsible if any shutdown of
plumbing, electrical or air conditioning equipment jeopardizes or invalidates
any warranties covering the Building;
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(i) Landlord expressly reserves the right to revoke its
consent upon notice to Tenant in the event of the breach which is not de minimis
in nature of any of the terms or conditions hereof, in which case all work on
the Alterations shall immediately cease to the extent directed by Landlord in
such notice until the breach in question is cured to Landlord's satisfaction;
(j) Tenant shall reimburse Landlord for any and all costs or
expenses reasonably incurred by Landlord in connection with the Alterations,
including without limitation architectural or engineers' fees and attorneys'
fees; and
(k) Tenant shall provide Landlord with a cost and expense
breakdown of the Alterations.
6.1.1 Notwithstanding any provision of Section 6.1(a) to the contrary,
Tenant may make Alterations in or to the Premises at any one time which cost
less than Five Thousand Dollars ($5,000) and which in the aggregate do not
exceed Thirty Thousand Dollars ($30,000) per year without obtaining Landlord's
prior written consent provided (i) such Alterations do not adversely affect the
foundations, structural components, exterior walls, roof or roof membrane, or
the heating, ventilating and air conditioning systems of the Building, or its
exterior appearance, (ii) such Alterations do not impair the use of the Building
or materially reduce the value or marketability of the Premises and/or Building,
(iii) Tenant complies with all other provisions of Section 6.1. Tenant shall
have no right to make any Alterations to the structure of the Building or the
roof under this Lease.
6.1.2 At the same time Tenant submits detailed specifications, floor
plans and necessary permits to Landlord for review for the purpose of obtaining
Landlord's consent to any proposed Alteration, Tenant may request Landlord to
indicate whether or not such proposed alteration or addition is to be removed
from the Premises upon the expiration of the Term of this Lease and whether
Tenant is to perform all restoration made necessary by the removal of any such
Alteration. In the event Tenant does not request Landlord to make such
indication, or when Tenant does not obtain Landlord's prior consent to any
alteration or addition pursuant to Section 6.1.1, Landlord shall have the right
to require Tenant to remove any alteration or addition upon expiration of the
Term of this Lease and to perform all restoration made necessary by such
removal.
Section 6.2 - Mechanics' Liens
Any mechanics' lien filed against the Premises, Building or Project for
work done or claimed to have been done by or materials claimed to have been
furnished to Tenant or its agents shall be discharged by Tenant at its expense
within ten (10) days thereafter by the filing of the bond required by law, by
payment, by satisfaction or otherwise. Failure to so discharge any such lien
shall constitute a default hereunder. If Tenant has not caused the lien to be so
released within such 10-day period, Landlord, in addition to all other remedies
provided in this Lease and by law, shall have the right, but shall not be
obligated, to cause the lien to be released by such means as Landlord deems
proper, including payment of the claim giving rise to the lien. All payments
made and expenses incurred by Landlord in connection with the lien shall be
considered additional Rent pursuant to Section 3.1 above.
Section 6.3 - Alterations as Landlord's Property
All Alterations, whether made and/or paid for by Tenant or Landlord,
shall immediately become a part of the realty and shall be and remain Landlord's
property, and shall not be removed without the written consent of Landlord.
Notwithstanding the foregoing, all goods, effects, personal property, cubicles,
partitions, local area network cabling, detachable walls, business and trade
fixtures, machinery and equipment owned by Tenant or installed at Tenant's
expense in the Premises shall remain the personal property of Tenant and may be
removed by Tenant at any time, and from time to time, during the Term of this
Lease provided Tenant shall, in removing any such property, repair or, at
Landlord's option, shall pay to Landlord the cost of repairing all damage to the
Premises and the Building caused by such removal and to restore the Premises to
their original condition as of the Commencement Date.
Section 6.4 - Indemnification
Tenant's indemnity obligations under Article 9 of this Lease shall
include any matter arising out of or connected with (i) the making, maintenance,
repair, installation, removal or existence of any Alterations (including, but
not limited to, claims or liability for breach of warranty, worker's
compensation, personal injury or property damages) and (ii) Tenant's performance
and observance of, or failure to timely perform and observe, its obligations
under this Article 6. Notwithstanding the previous sentence, Landlord shall have
no right to settle mechanics' or materialmen's liens within the ten (10) day
period described in Section 6.2 or any liens which are bonded over.
Section 6.5 - Survival
Tenant's obligations under this Article 6 shall survive the expiration
or earlier termination of this Lease.
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ARTICLE 7 - REPAIRS
Section 7.1 - Tenant's Obligations/Procedures
7.1.1 Subject to the provisions of Section 7.1.2, Section 7.2, Article
10 and Article 11, Tenant shall operate, maintain, keep clean, provide
janitorial services for, and take good care of the Premises and the fixtures
therein (including, without limitation, the floor and window coverings), and
provide for the disposal of trash, garbage, and waste arising in connection with
Tenant's use or occupancy, all at Tenant's sole cost and expense and, subject to
the provisions of Article 6 hereof, shall make all repairs and replacements, at
its sole cost and expense as and when Landlord deems reasonably necessary to
preserve in good working order and condition the Premises and every part
thereof, including, without limitation, all plumbing, electrical and lighting
facilities and equipment, fixtures, interior walls, interior surfaces of
exterior walls, ceilings, doors, windows, roof membrane, plate glass, skylights
and, subject to Section 7.1.2, the heating, ventilating and air conditioning
systems located within the Premises or serving the Premises and located within
or on the Building, serving the Premises except if and to the extent any of such
Building systems are located within the premises of any other tenant of the
Building and to such extent, after reasonable written notice to Landlord,
Landlord shall cause such work to be performed at Tenant's sole cost and
expense. Tenant shall maintain, repair and operate the Premises, the fixtures
therein and such Building systems serving the Premises in a good condition
comparable to the manner other buildings in projects similar in size, character
and location are maintained and operated by institutional owners. All repairs
and replacements shall be in quality and class equal to the original work. Upon
the expiration or other termination of the Term of this Lease, Tenant shall
surrender the Premises to Landlord in as good order, condition and repair as
they were received by Tenant, ordinary wear and tear and damage caused by
casualty (subject to the other provisions of the Lease) excepted. All repairs
and replacements made by Tenant pursuant to this Section 7.1 shall be subject to
the conditions set forth in Article 6.
7.1.2 At Landlord's option exercisable from time to time, either
Landlord or Tenant shall procure and maintain, at Tenant's expense (payable by
Tenant directly to the provider of such service), a heating, ventilating and air
conditioning system maintenance contract to provide for inspection, maintenance
and repair of such systems. If Landlord elects to have Tenant obtain such
contract, the form and substance of the contract and the qualifications of the
service provider shall be satisfactory to Landlord. Without limiting the
generality of the foregoing, such contract shall name Landlord as an express
third party beneficiary of the contract, shall be assignable to Landlord, shall
be terminable upon thirty (30) days advance written notice, shall provide for
inspections, repairs and maintenance to be performed at a minimum frequency of
once every three (3) months, shall provide for a written report to Landlord of
each such occasion of inspection, maintenance or repair, and an original of such
contract shall be delivered to Landlord. If Landlord elects to procure and
maintain such maintenance contract, Tenant shall pay to Landlord from time to
time, within ten (10) days after delivery of a statement therefor, the cost of
such contract.
7.1.3 Supplementing the provisions of Sections 7.1.1 and 7.1.2 and not
in limitation or derogation thereof, Tenant shall be obligated to pay directly
to the parties entitled thereto all direct and indirect fees, costs and
expenses, in connection with performance of Tenant's obligations set forth in
Sections 7.1.1 and 7.1.2, including, without limitation, the following: (i) all
wage and labor costs and expenses paid or incurred by Tenant or Tenant's
authorized representatives and applicable to the persons engaged in the
operation, maintenance, overhaul or repair of all or any portion of the Premises
or fixtures therein, whether they be employed by Tenant or as independent
contractors (including, without limitation, the cost effect of any increase or
decrease in the hours of employment or the number of paid holidays or vacation
days, social security taxes, unemployment insurance taxes and the cost (if any)
of providing disability, hospitalization, medical, welfare, pension, retirement,
or other benefits applicable with respect to such persons); (ii) the cost and
expense of utilities, utility surcharges, water and sewer charges, fuel,
building supplies and materials, services contracts, janitorial services, or any
costs levied, assessed or imposed by, or at the direction of, or resulting from
statutes or regulations or interpretations thereof, promulgated by any federal,
state, regional, municipal or local government authority in connection with the
use or occupancy of the Premises.
Section 7.2 - Landlord's Obligations and Rights
Landlord, subject to reimbursement pursuant to Article 3 and further
subject to the provisions of Article 10 and Article 11, shall keep in good
condition and repair the following: (a) the foundations, exterior walls,
structural condition of interior bearing walls and roof of the Premises; and (b)
the Common Areas, including, without limitation, the parking lots, utilities
installations, roadways, walkways, sidewalks, landscaping, fences and Project
signs. Notwithstanding the foregoing sentence, (i) Landlord shall not be
responsible for any such maintenance, upkeep, repair or replacement to the
extent that the same may be made necessary by or arise from placement or
servicing of, or other activities in relation to the location of, equipment on
the roof of the Premises or the Building in which Tenant is located, or
penetration of the roof by such equipment, regardless of Tenant's having
obtained, prior to the placement of any such equipment, the written approval of
Landlord, unless and until Tenant pays Landlord therefor, including at
Landlord's option advance payment on an estimated basis, the full cost of any
such maintenance, upkeep, repair or replacement; (ii) Landlord shall not, unless
and except as otherwise expressly provided in the Work Letter, be obligated to
paint the exterior or interior surface of exterior walls, nor shall Landlord be
required to maintain, repair or replace doors,
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windows or plate glass of the Premises; and (iii) Landlord shall have no
obligation to repair, but without obligation to do so may elect to repair, at
the expense of Tenant, all damage or injury to the Premises, or to the Building
or Project and its fixtures, appurtenances or equipment or to any of the areas
used in connection with the operation of the Building or Project, caused or done
by Tenant or Tenant's agents, servants, employees, contractors, visitors or
licensees or caused by moving property of Tenant in or out of the Building or
the Project, or by the installation or removal of furniture or other property,
or resulting from fire, heating, ventilating or air conditioning unit or system,
short circuits, overflow or leakage of water, steam, gas, sewage or odors, or by
frost or by bursting or leaking of pipes or plumbing works, or gas, or from any
other source, due to the negligence, or willful misconduct of Tenant or Tenant's
agents, servants, employees, contractors, visitors or licensees.
Section 7.3 - Statutory Waivers
Tenant hereby waives all rights under the provisions of any law in
existence during the Term, authorizing a tenant to make repairs at the expense
of a landlord.
Section 7.4 - No Liability of Landlord
Unless and except to the extent caused by Landlord's gross negligence
or willful misconduct and except as provided in Article 10 hereof, there shall
be no allowance to Tenant for diminution of rental value, and no liability on
the part of Landlord by reason of inconvenience, annoyance or injury to business
arising from the making of, or the failure to make, any repairs, alterations,
decorations, additions or improvements in or to any portion of the Premises,
Building or the Project (or any of the areas used in connection with the
operation thereof or in or to any fixtures, appurtenances or equipment), or by
reason of the active or passive negligence of Tenant or any other tenant or
occupant of the Building or Project. In no event shall Landlord be responsible
for any consequential damages arising or alleged to have arisen from any of the
foregoing matters. Notwithstanding the foregoing, if Landlord receives, as the
result of any interruption in services or as a result of the making of or
failure to make any of the above-mentioned repairs, alterations, decorations,
additions or improvements, when any of the foregoing prevented Tenant's use of
the Premises, rental insurance proceeds, then to the extent of such proceeds
received, Tenant's Rent shall be abated.
ARTICLE 8 - SUBORDINATION/PROTECTION OF LENDERS
Section 8.1 - Subordination
8.1.1 This Lease shall be subject and subordinate to all ground or
underlying leases, mortgages and deeds of trust which now or hereafter encumber
or otherwise affect the real property of which the Premises forms a part or
encumber or affect the ground or underlying leases, and all renewals,
modifications, consolidations, replacements and extensions thereof, without the
necessity of executing any instrument to effectuate such subordination;
provided, however, upon the request of Landlord, Tenant, or Tenant's
successors-in-interest, shall execute and deliver any and all instruments
desired by Landlord evidencing such subordination in the manner requested by
Landlord. Notwithstanding the foregoing, within ten (10) days after the written
request of Landlord, Tenant agrees to execute any appropriate instrument making
this Lease and the leasehold estate created hereby superior to the lien of any
ground or underlying lease, mortgage or deed of trust. Notwithstanding the
foregoing, upon Tenant's request, Landlord agrees to make good faith efforts to
obtain nondisturbance on behalf of Tenant substantially in the form of the
agreement attached hereto as Exhibit H and incorporated herein by this
reference.
Section 8.2 - Attornment to Successor
8.2.1 Tenant agrees that, at the option of the landlord under any
ground or underlying lease now or hereafter affecting the real property of which
the Premises forms a part, Tenant shall attorn to said landlord in the event of
the termination or cancellation of such ground or underlying lease and, if
requested by said landlord, shall enter into a new lease with said landlord (or
a successor ground lessee designated by said landlord) for the balance of the
Term then remaining hereunder upon the same terms and conditions as those herein
provided.
8.2.2 In the event of foreclosure or exercise of power of sale under
any mortgage or deed of trust now or hereafter affecting the real property of
which the Premises forms a part, the holder of any such mortgage or deed of
trust ("Holder") (or purchaser at any sale pursuant thereto) shall have the
option (a) to require Tenant to attorn to such Holder or purchaser, and to enter
into a new lease with such Holder or purchaser (as Landlord) for the balance of
the term then remaining hereunder upon the same terms and conditions as those
herein provided, or (b) notwithstanding this Article 8, to elect that this Lease
become or remain, as the case may be, superior to said mortgage or deed of trust
and to require Tenant to attorn. Tenant agrees to execute and deliver any
further instruments requested by such Holder or purchaser to evidence such
attornment or superiority.
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Section 8.3 - Lender's Right to Cure
If Landlord is in default, Tenant will accept cure of any default by
any Holder whose name and address shall have been furnished to Tenant in
writing. Tenant may not terminate this Lease for Landlord's default unless
Tenant gives notice of such intent to terminate to each such Holder and the
default is not cured within thirty (30) days after the time period given to
Landlord to cure any such default in this Lease or within such greater time as
may be reasonably necessary to cure such default. A default which cannot
reasonably be cured within said thirty (30) day period shall be deemed cured
within said period if work necessary to cure the default is commenced within
such time and the Holder proceeds diligently thereafter with such work until the
default is cured.
Section 8.4 - Tenant's Financial Statements
8.4.1 Tenant agrees that Landlord is hereby authorized to request a
credit report on Tenant at any time and from time to time subsequent to the
Lease Date from any third party.
8.4.2 Upon default under this Lease by Tenant, or upon any request by
Tenant for Landlord's approval of an Assignment or Sublease pursuant to Article
5 above, or upon request of Landlord made not more than once during any
Computation Year for any reason whatsoever, Tenant agrees to promptly provide
Landlord with a full, true and correct current audited annual financial
statement (certified by Tenant's regular certified public accountant) or, if a
current annual audited financial statement should not be available, a full, true
and correct current unaudited annual financial statement (certified by the chief
financial officer of Tenant), covering the financial condition of Tenant, the
same to be accompanied by all financial statements of any kind issued by Tenant
to any bank or other financial institution or credit reporting service at any
time during the twelve (12) months next immediately preceding the date of said
current financial statement.
8.4.3 Within ten (10) days after Landlord's written request, Tenant
shall deliver to Landlord, or to any actual or prospective Holder that Landlord
designates, such the most recent quarterly financial statements as are available
to verify the financial condition of Tenant, or any Transferee or guarantor of
Tenant, to facilitate the financing or refinancing of the Building or Project,
or the creation, extension or renewal of any underlying or ground lease
affecting the Project.
8.4.4 Tenant represents and warrants to Landlord and such Holder that
each financial statement delivered by Tenant is or shall be, as the case may be,
accurate in all material respects to the best of Tenant's actual knowledge as of
the date of such statement.
Section 8.5 - Lease Modifications
If any prospective Holder should require, as a condition of any ground
or underlying lease, mortgage, or deed of trust, or modification of any
provision of this Lease, Tenant shall approve and execute any such modifications
within ten (10) days after written request, provided such modifications do not
increase any monetary obligation of Tenant hereunder or otherwise materially and
adversely alter the rights or obligations of Landlord or Tenant hereunder.
ARTICLE 9 - LIABILITY/INDEMNIFICATION
Section 9.1 - Landlord's Exculpation and Limited Liability
Landlord, its employees and agents shall not be liable to Tenant and
Tenant waives all claims against Landlord for any injury to or death of any
person or for loss of use of or damage to or destruction of property in or about
the Premises, Building or the Project by or from any cause whatsoever, including
without limitation earthquake or earth movement, gas leak, fire, oil spills or
contamination, electricity or leakage from the roof, walls, basement or other
portion of the Premises, Building or the Project, except to the extent caused by
the gross negligence or willful misconduct of Landlord, its employees or agents,
but in no event shall Landlord be liable for consequential damages, including,
without limitation, loss of profits or damages from business interruptions.
Landlord is not liable for latent defects in the Premises, Building or Project,
except that such lack of liability shall not excuse Landlord from its
obligations to repair and maintain the Premises, Building and Project to the
extent it is specifically obligated to do so under this Lease.
Section 9.2 - Tenant's Liability, Indemnification and Hold Harmless
To the extent permitted by law, Tenant hereby indemnifies and agrees to
protect, defend and hold Landlord (its employees, agents, property manager)
harmless against all claims, liability, damages or loss of every nature
whatsoever and against all costs and expenses, including, but not limited to,
reasonable fees of attorneys of Landlord's choice and expert witnesses and
expenses in connection therewith, arising out of either (i) any failure of
Tenant to timely perform or observe its obligations hereunder or (ii) arising
out of or connected with any matter expressly referenced elsewhere in the Lease
as being included within Tenant's indemnity obligation under this Article 9 or
any injury to or death of any person or for loss of use of or damage to or
destruction of property or for violation of law (A) occurring in, on or about
the Premises, from
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any cause whatsoever, except to the extent caused by the gross negligence or
willful misconduct of Landlord or its employees, agents or contractors or (B)
occurring in, on or about any portion of the Building or Project or areas used
in connection with the Project, the use of which Tenant has in common with other
tenants (including, without limitation, elevators, stairways, passageways or
hallways and other portions of the Common Areas), when such claim, injury or
damage is caused in whole or in part by the act, neglect, default, or omission
of Tenant, its employees, agents, contractors, invitees, licensees, visitors,
assignees or subtenants including, without limitation, the default by Tenant in
the observance or performance of any of its obligations hereunder. Landlord
reserves the right to settle, compromise or dispose of any and all suits, claims
and actions related to the foregoing indemnities in its sole discretion and the
exercise of said right shall not reduce Tenant's obligations hereunder. Any
defense made by Tenant under this Article 9 shall be made only with counsel (i)
previously approved in writing by Landlord which approval shall not be
unreasonably withheld in its sole discretion, and (ii) willing to cooperate with
counsel of Landlord's choice in connection with such defense.
Section 9.3 - Survival and Conflicts with other Indemnity Provisions
The provisions of this Article 9 shall not diminish Landlord's rights
and Tenant's obligations set forth in Article 4 and Section 6.4. The provisions
of this Article 9 shall survive the expiration or earlier termination of this
Lease. Any waiver of claims against Landlord and/or indemnification of Landlord
pursuant to the terms of this Lease, including without limitation the terms of
this Article 9, shall in no event be deemed to apply to Landlord's fraud,
willful injury to the person or property of another, or violation of any law,
whether willful or negligent, to the extent such waiver or indemnity would
violate Arizona law.
ARTICLE 10 - DAMAGE/DESTRUCTION
Section 10.1 - Destruction and Repair
If the Premises shall be damaged by fire or other cause, and if Tenant
shall give prompt notice to Landlord of such damage, Landlord, at Landlord's
expense, shall repair such damage and restore the Premises to substantially the
condition it was in prior to such fire or casualty; provided, however, that
Landlord shall have no obligation to repair any damage or to replace Tenant's
personal property, trade fixtures or equipment, Alterations or any other
property or effects of Tenant. Notwithstanding the foregoing, Landlord shall
have no obligation to repair such damage and restore the Premises to
substantially the condition it was in prior to such fire or casualty: (i) to the
extent there are governmental restrictions which preclude Landlord from
repairing and restoring the Premises or the Building to substantially the
condition it was in prior to such fire or other casualty; or (ii) if Tenant is
in default which is not de minimis under this Lease. Except as otherwise
provided in this Article 10, if the entire Premises shall be rendered
untenantable by reason of any such damage, the Base Monthly Rent shall abate for
the period from the date of such damage to the date when such damage to the
Premises shall have been repaired, and if only a part of the Premises shall be
rendered untenantable, the Base Monthly Rent shall abate for such period in the
proportion that the area of the part of the Premises so rendered untenantable
bears to the total area of the Premises; provided, however, if, prior to the
date when all of such damage shall have been repaired, any part of the Premises
so damaged shall be rendered tenantable or shall be used or occupied by Tenant
or any person or persons claiming through or under Tenant, then the amount by
which Base Monthly Rent shall abate shall be equitably apportioned for the
period from the date of any such use or occupancy to the date when all such
damage shall have been repaired.
Section 10.2 - 180 Day and 60 Day Repair Criteria
10.2.1 Notwithstanding the provisions of Section 10.1, if prior to or
during the Term, the Premises shall be so damaged by fire or other casualty
that, in Landlord's architect's or contractor's opinion determined in its
reasonable discretion, it will take longer than one hundred eighty (180) days
from the date of the casualty to substantially complete the repair and
restoration of the Premises or Building, then Landlord shall give to Tenant as
soon as possible but in no event later than sixty (60) days after the casualty,
notice of such opinion ("the 180 Day Notice"). If such repairs and restoration
cannot in Landlord's architect's or contractor's opinion be substantially
completed within one hundred eighty (180) days after the date of the casualty,
Landlord and Tenant shall each have the right to terminate this Lease by giving
written notice to the other within fifteen (15) days after Tenant's receipt of
the 180 Day Notice.
10.2.2 Notwithstanding any provision herein to the contrary, Landlord
and Tenant shall each have the right to terminate this Lease in the event the
Premises is damaged by a fire or other casualty during the last year of the Term
of this Lease if in Landlord's architect's or contractor's opinion determined in
its reasonable discretion it will take longer than sixty (60) days to
substantially complete the repair and restoration of the Premises. Landlord
shall give notice of such opinion (the "60 Day Notice") as soon as possible, but
in no event later than thirty (30) days after such casualty. In the event either
party elects to terminate this Lease pursuant to this Section 10.2.2 such party
shall give written notice to the other, which must be received by the other
party no later than five (5) days after Tenant's receipt of the 60 Day Notice.
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10.2.3 In the event Landlord or Tenant delivers such a written
termination notice pursuant to Section 10.2.1 or Section 10.2.2, this Lease and
the Term shall terminate thirty (30) days thereafter with the same effect as if
the expiration of such thirty (30) day period was the Expiration Date, and Rent
shall be apportioned as of such date. In the event that this Lease is not so
terminated and the actual time to substantially complete the repair and
restoration of the Premises takes longer than one hundred eighty (180) days (or
sixty (60) days in the event Landlord gives a 60 Day Notice), Tenant shall have
no claim or remedy of any kind whatsoever against Landlord for any costs,
damages, losses, liabilities or penalties it incurs, provided Landlord
diligently prosecutes the repair and restoration of the Premises to substantial
completion.
Section 10.3 - Lack of Insurance Proceeds
Notwithstanding anything contained in this Article 10 to the contrary,
in no event shall Landlord be required to spend for any repair, replacement or
reconstruction of the Premises an amount greater than the insurance proceeds
actually received by Landlord (plus the amount of reimbursement of deductibles
actually received from Tenant as Building Costs or Project Costs) as a result of
the fire or other casualty causing such loss, damage or destruction.
Section 10.4 - No Release of Liability
Except to the extent expressly provided otherwise in this Lease,
including, without limitation the provisions of Section 14.3, nothing contained
in this Lease shall relieve Tenant of any liability to Landlord or to its
insurance carriers that Tenant may have under law or under the provisions of
this Lease in connection with any damage to the Premises or the Project by fire
or other casualty.
Section 10.5 - Tenant's Negligence
Notwithstanding the provisions of Section 10.1, if any such damage or
destruction is due to the negligent act or omission of Tenant, any person
claiming through or under Tenant, or any of their employees, suppliers,
shippers, customers or invitees, then there shall be no abatement (to the extent
such is provided herein) of Base Monthly Rent by reason of such damage, unless
Landlord is reimbursed for such abatement of Base Monthly Rent pursuant to any
rental insurance policies that Landlord may, in its sole discretion, elect to
carry.
Section 10.6 - Express Agreement Re Damage and Destruction
The provisions of this Lease, including this Article 10, constitute an
express agreement between Landlord and Tenant with respect to any and all damage
to, or destruction of, all or any part of the Premises, the Building or any
other portion of the Project, and it is agreed that any statute or regulation of
the State of Arizona with respect to any rights or obligations concerning damage
or destruction in the absence of an express agreement between the parties, and
any similar statute or regulation, now or hereafter in effect, shall have no
application to this Lease or to any damage to or destruction of all or any part
of the Premises, the Building or any other portion of the Project.
ARTICLE 11 - EMINENT DOMAIN
Section 11.1 - Partial or Total Taking
If all or substantially all of the Premises or Building is condemned or
taken in any manner for public or quasi-public use, including, but not limited
to, a conveyance or assignment in lieu of a condemnation or taking, this Lease
shall automatically terminate as of the earlier of the date of the vesting of
title or the date of dispossession of Tenant as a result of such condemnation or
other taking. If less than all or substantially all of the Premises or Building
is so condemned or taken, this Lease shall automatically terminate only as to
the portion of the Premises so taken as of the earlier of the date of the
vesting of title or the date of dispossession of Tenant as a result of such
condemnation or taking. If such portion of the Premises or Building is condemned
or otherwise taken so as to require, in the opinion of Landlord, a substantial
alteration or reconstruction of the remaining portions thereof, this Lease may
be terminated by Landlord, as of the earlier of the date of the vesting of title
or the date of dispossession of Tenant as a result of such condemnation or
taking, by written notice to Tenant given within sixty (60) days following
notice to Landlord of the date on which said vesting or dispossession will
occur. Tenant hereby specifically waives any and all rights it may have under
any law, statute, ordinance or regulation to terminate this Lease upon partial
condemnation of the Premises, Building, or Project and the parties hereto
specifically agree that this Lease shall not automatically terminate upon
condemnation.
Section 11.2 - Award
Landlord shall be entitled to the entire award in any condemnation
proceeding or other proceeding for taking for public or quasi-public use,
including, without limitation, any award made for the value of the leasehold
estate created by this Lease and Alterations which are the property of Landlord.
No award for any partial or entire taking shall be apportioned, and Tenant
hereby assigns to Landlord any award that may be
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made in such condemnation or other taking, together with any and all rights of
Tenant now or hereafter arising in or to same or any part thereof; provided,
however, that nothing contained herein shall be deemed to give Landlord any
interest in, or to require Tenant to assign to Landlord, any award made to
Tenant specifically for its relocation expenses, the taking of personal property
and trade fixtures belonging to Tenant, or the interruption of or damage to
Tenant's business if such award is made separately to Tenant and not as part of
the damages recoverable by Landlord.
Section 11.3 - Sale to Condemning Authority
Landlord may, without any obligation to Tenant and without obtaining
Tenant's consent, agree to sell and/or convey to the condemnor the Premises,
Building or Project or any portion thereof sought by the condemnor, free from
this Lease and the rights of Tenant hereunder, without first requiring that any
action or proceeding be instituted air, if instituted, pursued to a judgment. In
the event Landlord sells and/or conveys all or any portion of the Premises,
Building or Project to a condemnor this Lease shall terminate on the date the
deed or other document evidencing such conveyance is recorded. Tenant shall
still be entitled to any awards it would have received under this Article 11
had a condemnation in lieu of sale occurred.
Section 11.4 - Proration/Abatement of Base Monthly Rent
In the event of an automatic or elective termination of this Lease
pursuant to Section 11.1 or of sale pursuant to Section 11.3, the Rent shall be
equitably prorated as of the date of termination of this Lease. In the event of
a partial condemnation or taking that is permanent, but does not result in a
termination of this Lease as to the entire Premises pursuant to Section 11.1,
the Rent shall abate in proportion to the portion of the Premises taken by such
condemnation of other taking.
Section 11.5 - Temporary Taking
If all or any portion of the Premises is condemned or otherwise taken
for public or quasi-public use for a limited or temporary period of time, this
Lease shall remain in full force and effect and Tenant shall continue to perform
all terms, conditions and covenants of this Lease, except that the Base Monthly
Rent shall be abated in accordance with Section 11.3 but only during the period
of any such limited or temporary condemnation or taking. The apportionment of
any award shall be governed by the provisions of Section 11.2.
ARTICLE 12 - UTILITIES
Section 12.1 - Utilities
12.1.1 Tenant shall pay directly to the providers of all services for
separately metered or directly billed water, gas, heat, light, power, telephone
and other utilities and services supplied to the Premises, all fees, costs and
expenses of such services, together with any Taxes thereon. Landlord makes
no representation with respect to the adequacy or fitness of the heating,
ventilating or air conditioning equipment in the Project to maintain
temperatures that may be required for, or because of, any equipment of Tenant
other than normal fractional horsepower office equipment, and Landlord shall
have no liability for loss or damage in connection therewith.
12.1.2 In the event any governmental entity promulgates or revises any
statute, ordinance or building, fire or other code or imposes mandatory or
voluntary controls or guidelines on Landlord, the Project or any part thereof,
relating to the use or conservation of energy, water, gas, light or electricity
or the reduction of automobile or other emissions or the provision of any other
utility or service provided with respect to this Lease, or in the event Landlord
is required or elects to make alterations to the Project or any other part
thereof in order to comply with such mandatory or voluntary controls or
guidelines, Landlord may, in its sole discretion, require Tenant to comply with
such mandatory or voluntary controls or guidelines or Landlord may, in its sole
discretion, make such alterations to the Project or any other part thereof. All
costs incurred by Landlord in connection with such laws, ordinances, guidelines
or controls, including alterations to the Project shall be included in Operating
Costs and assessed to Tenant pursuant to Section 3.4, except to the extent that
such costs are to be entirely the responsibility of Tenant pursuant to this
Lease, in which latter case such costs shall be entirely assessed to Tenant.
Neither such compliance nor the making of such alterations shall in any event
entitle Tenant to any damages, relieve Tenant of the obligation to pay the full
Rent reserved hereunder or constitute or be construed as a constructive or other
eviction of Tenant.
ARTICLE 13 - LANDLORD'S RIGHT OF ENTRY
Landlord and Landlord's agents shall have the right to enter the
Premises at all times, to examine the same and to make such repairs or
alterations, decorations, additions or improvements as Landlord may reasonably
deem necessary or desirable, including without limitation the use and
maintenance of pipes and conduits in and through the Premises, and Landlord and
Landlord's agents shall be allowed to take all material into and upon the
Premises that may be required therefor without the same constituting an eviction
of Tenant in whole or in part, and subject to the provisions of Article 10, the
Base Monthly Rent reserved shall in no way abate while said repairs,
alterations, decorations, additions or improvements are being made, by reason
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of inconvenience, annoyance or injury to the business of Tenant because of the
prosecution of any such work, or otherwise. Landlord and Landlord's agents are
expressly granted permission to inspect the Premises at any reasonable time and
to show the Premises at any reasonable time to prospective tenants, mortgagees,
purchasers, lessees of the Building or Project and other persons with a business
interest therein. If, during the last month of the Term, Tenant shall have
removed all or substantially all of Tenant's property therefrom, Landlord may
immediately enter and alter, renovate and redecorate the Premises, without
elimination or abatement of Rent or other compensation, and such acts shall have
no effect upon this Lease. If Tenant shall not be personally present to open and
permit an entry into the Premises, at any time, when for any reason entry
therein shall be necessary or permissible hereunder, Landlord or Landlord's
agents may enter the same by a master key, or may forcibly enter the same,
without rendering Landlord or such agents liable therefor (if during such entry
Landlord or Landlord's agents shall accord reasonable care to Tenant's
property), and without in any manner affecting the obligations, terms,
covenants, conditions, provisions or agreements of this Lease. Nothing herein
contained, however, shall be deemed or construed to impose upon Landlord any
obligation, responsibility or liability whatsoever, for the care, supervision or
repair of the Project or the Building or any part thereof, other than as
otherwise provided in this Lease. Notwithstanding any provision in this Article
13 to the contrary, Landlord agrees to provide Tenant with at least 24 hours
prior notice (except when Landlord reasonably determines that an emergency
situation exists) and Tenant shall have the right to accompany Landlord or
Landlord's employees, agents, contractors and representatives when Landlord
enters the Premises. Landlord shall use reasonable efforts to accommodate
Tenant's desire to have all entry into the Premises during normal business
hours.
ARTICLE 14 - TENANT'S INSURANCE
Section 14.1 - Tenant's Insurance
Tenant shall carry at its expense and maintain in force during the Term
the following insurance:
(a) Commercial General Liability Insurance with a Broad Form
Liability Endorsement (including protective liability coverage on operations of
independent contractors engaged in construction and also blanket contractual
liability insurance) on an "occurrence" basis against claims for "personal
injury" liability, including without limitation bodily injury, death or property
damage liability with a limit of not less than Five Million Dollars ($5,000,000)
in the event of "personal injury" to any number of persons or of damages to
property arising out of any one "occurrence"; such insurance shall cover
Tenant's indemnity obligations hereunder (excluding the indemnity obligations
relating to Hazardous Materials, so long as such indemnity obligations are not
generally insured for by tenants in the vicinity of the Project) and may be
furnished under a "primary" policy and an "umbrella" policy, provided that it
is primary insurance and not excess over or contributory with any insurance in
force for Landlord;
(b) insurance against loss or damage by fire and such other
risks and hazards as are insurable under present and future standard forms of
fire and extended coverage insurance policies, to the personal property,
furniture, furnishings and fixtures belonging to Tenant located in the Premises
for not less than 100% of the actual replacement value thereof;
(c) Worker's Compensation and Employee's Liability Insurance
(as required by state law); and
(d) such other insurance as is generally required by owners of
lenders on buildings similar in size, character, age and location as the
Building.
Section 14.2 - General Requirements of Tenant's Insurance
14.2.1 All such insurance shall name Landlord, any mortgagee and/or
ground or underlying lessor as additional insureds and shall provide that
Landlord and any additional insureds shall receive thirty (30) days' written
notice from the insurer prior to any cancellation or change of coverage, and
shall contain a cross liability or severability clause.
14.2.2 All insurance required to be carried by Tenant hereunder shall
be written only as primary insurance and non-contributing and shall be effected
with only such companies as Landlord shall approve, but in any event not with
any company of less repute than those having a general policy rating of A and a
financial rating of XV as rated in the most current available "Best's Insurance
Reports". In the event "Best's Insurance Reports" is not currently published,
such minimum standard shall be that published by any other nationally recognized
publisher of such information. Landlord's approval shall be deemed to have been
given unless Landlord in writing disapproves such company (i) not later than one
month after submission of a policy or certificate to Landlord or (ii) at any
time due to claims experience. Any insurance carried by Landlord shall not be
contributory.
14.2.3 Tenant shall deliver true and correct copies of the policies of
insurance required hereunder and original certificates thereof to Landlord at
least ten (10) days before the Commencement Date, and thereafter at least thirty
(30) days before the expiration dates of expiring policies.
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14.2.4 In the event Tenant shall fail to procure such insurance, or to
deliver such policies or certificates, Landlord may, at its option, without
waiving any rights or remedies which Landlord may have for Tenant's default
hereunder, procure such insurance for the account of Tenant, and the cost
thereof shall be paid to Landlord within ten (10) days after delivery to Tenant
of bills therefor. Nothing contained in this Article 14 shall be construed as a
limitation of Tenant's liability hereunder.
Section 14.3 - Waiver of Subrogation
(a) Subject to the rights of Landlord under Article 3 to collect,
utilize and replenish Building Costs and Project Costs for the purposes therein
set forth, Landlord waives any and all rights of recovery against Tenant for or
arising out of damage to or destruction of the Premises, the Building or the
Project, or any part thereof, from causes then included under standard "all
risk" coverage owner's property insurance policies or endorsements whether or
not such policies are in effect covering Landlord or Tenant and whether or not
such damage or destruction shall have been caused by the negligence of Tenant,
its agents, employees, contractors, visitors or licensees, but only to the
extent that Landlord's insurance policies then in force permit such waiver.
Tenant waives any and all rights of recovery against Landlord for or arising out
of damage to or destruction of any property of Tenant, from causes then included
under standard "all risk" coverage property insurance policies or endorsements
whether or not such policies are then in effect covering Landlord or Tenant and
whether or not caused by the negligence of Landlord, its agents, employees,
contractors, visitors or licensees, but only to the extent that Tenant's
insurance policies then in force permit such waiver. Landlord and Tenant
represent that their present insurance policies now in force permit such waiver.
(b) If at any time during the term of this Lease either party shall
give no less than five (5) days prior notice to the other certifying that any
insurance carrier which has issued any such policy covering any of the property
above mentioned has refused to consent to the aforesaid waiver of subrogation,
or such carrier revokes a consent previously given or cancels or threatens to
cancel any policy previously issued and then in force and effect because of such
waiver of subrogation, then, in any of such events, the waiver in this Article
14 shall thereupon be of so further force and effect as to the loss, damage or
destruction covered by such policy; provided, however, that if at any time
thereafter such consent shall be obtained therefor from any existing or
substitute insurance company, the waiver hereinabove provided for shall again
become effective. The cost of obtaining any such waiver shall be deemed a cost
of such policy.
Section 14.4 - Landlord's Insurance
Landlord shall procure, at Tenant's cost and expense as an Operating
Cost under Article 3, the following insurance:
(a) Commercial General Liability Insurance (including
protective liability coverage on operations of independent contractors engaged
in construction and also blanket contractual liability insurance) on an
"occurrence" basis for the benefit of Landlord as named insured against claims
for "personal injury" liability, including, without limitation, bodily injury,
death or property damage liability;
(b) Insurance against loss or damage by fire and such other
risks and hazards as are insurable under present and future standard forms of
fire and extended coverage insurance policies, covering the full replacement
cost (to the extent such coverage is available at a commercially reasonable
cost) of all structures of the Premises; and
(c) Landlord may, but is not obligated to carry such other
insurance (including, without limitation, insurance against loss of rents and/or
earthquake insurance) with respect to the Landlord or the Premises, Building
and/or Project: (i) as is generally carried by Metropolitan Life Insurance
Company for similar properties, for as long as Metropolitan Life Insurance
Company has an ownership interest in the Landlord or any portion of the Project;
and (ii) after Metropolitan no longer has an ownership interest in the Landlord
or any portion of the Project, as is generally carried by owners of, or required
by lenders on, buildings or projects similar in size, character and location as
the Building or Project.
Tenant shall be entitled to obtain at its own cost and expense any
additional insurance Tenant reasonably desires to protect itself as a result of
Tenant agreeing to the exculpatory language in Articles 6 and 9.
ARTICLE 15 - INSOLVENCY OR BANKRUPTCY
Section 15.1 - Insolvency or Bankruptcy
15.1.1 In addition to the occurrences set forth in Section 16.1
hereinafter, the following events shall constitute a default under this Lease:
(i) Tenant admits in writing its inability to pay its debts as they mature; (ii)
Tenant makes an assignment for the benefit of creditors or takes any other
similar action for the protection or benefit of creditors; (iii) Tenant gives
notice to any governmental body of insolvency or pending insolvency, or
suspension or pending suspension of operations; (iv) Tenant files a voluntary
petition in bankruptcy or has an involuntary petition filed against him, her or
it and such petition has not been dismissed
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within sixty (60) days; (v) Tenant files any petition or answer seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or other similar relief under any present or future bankruptcy statute,
regulation or law; (vi) a court of competent jurisdiction enters an order,
judgment or decree approving a petition filed against Tenant seeking any relief
described in the preceding subparagraph (v) and such order, judgment or decree
shall remain unvacated and unstayed for an aggregate of sixty (60) days from the
date of entry thereof; (vii) a trustee, receiver, conservator or liquidator of
Tenant or of all or any substantial part of its property or its interest in the
Premises is employed or appointed and such receivership remains undissolved for
sixty (60) days; or (viii) this Lease or any estate of Tenant hereunder is
levied upon under any writ of attachment or execution, and such writ shall
remain unvacated and unstayed for ten (10) days.
15.1.2 Upon the filing of a petition by or against Tenant under the
United States Bankruptcy Code, Tenant, as debtor in possession, and any trustee
who may be appointed agree to:
(a) perform each and every obligation of Tenant under this
Lease until such time as this Lease is either rejected or assumed by order of
the United States Bankruptcy Court;
(b) pay in the manner and at the time provided hereunder as
reasonable compensation for use and occupancy of the Premises;
(c) reject or assume this Lease within sixty (60) days of the
filing of such petition under Chapter 7 of the Bankruptcy Code or within one
hundred twenty (120) days (or such shorter term as Landlord, in its sole
discretion, may deem reasonable so long as notice of such period is given) of
the filing of a petition under any other Chapter;
(d) give Landlord at least forty-five (45) days prior written
notice of any abandonment of the Premises; any such abandonment to be deemed a
rejection of this Lease; and
(e) do all other things of benefit to Landlord otherwise
required under the Bankruptcy Code.
Tenant, as debtor in possession, and any such trustee shall be deemed
to have rejected this Lease in the event of the failure to comply with any of
the above requirements and to have consented to the entry of an order by an
appropriate Bankruptcy Court requiring compliance with any of the above
requirements, waiving all rights to notice of the entry of such order.
Section 15.2 - Measure of Damages
In the event of the termination of this Lease pursuant to Section 15.1,
Landlord shall be entitled to the same rights and remedies as those set forth in
Sections 16.1 and 16.2 and in Article 18 of this Lease.
Section 15.3 - Provision of Services and Assumption of Lease
In the event of the occurrence of any of those events specified in
Section 15.1, if Landlord shall not choose to exercise, or by law shall not be
able to exercise, its rights hereunder to terminate this Lease upon the
occurrence of such events, then, in addition to any other rights of Landlord
hereunder or by law, (i) Landlord shall not be obligated to provide Tenant with
any of the services specified in Article 12, unless Landlord has received
compensation in advance for such services, and the parties agree that Landlord's
estimate of the compensation required with respect to such services shall
control, and (ii) neither Tenant, as debtor-in-possession, nor any trustee or
other person (hereinafter collectively called the "Assuming Tenant") shall be
entitled to assume this Lease unless, on or before the date of such assumption,
the Assuming Tenant (x) cures, or provides adequate assurance that the latter
will promptly cure, any existing default under this Lease, (y) compensates, or
provides adequate assurance that the Assuming Tenant will promptly compensate,
Landlord for any pecuniary loss (including, without limitation, attorneys' fees
and disbursements) resulting from such default, and provides adequate assurance
of future performance under this Lease, it being covenanted and agreed by the
parties that, for such purposes, any cure or compensation shall be effected by
the immediate payment of any monetary default or any required compensation, or
the immediate correction or bonding of any nonmonetary default; any "adequate
assurance" of such cure or compensation shall be effected by the establishment
of an escrow fund for the amount at issue or by bonding and "adequate assurance"
of future performance shall be effected by the establishment of an escrow fund
for the amount at issue or by bonding, it being covenanted and agreed by
Landlord and Tenant that the foregoing provision was a material part of the
consideration for this Lease.
ARTICLE 16 - DEFAULT/REMEDIES
Section 16.1 - Events of Default
It shall be deemed conclusively a material breach of this Lease, and
the occurrence of any of the following shall constitute a default by Tenant:
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(a) Tenant fails to make (i) payment of any Monthly
Installment of Base Monthly Rent within five (5) days of when due, or (ii) any
other payment of Rent pursuant to this Lease within ten (10) days of written
notice of when due; or
(b) Tenant fails to perform or honor any obligation, covenant,
condition or representation required to be performed or made by Tenant under
this Lease (other than those described above in Section 16.1(a) and except as
otherwise provided below in Sections 16.1(c) through 16.1(h)) and shall fail,
for a period of ten (10) days after delivery of written notice from Landlord
specifying such failure ("Landlord's Nonmonetary Default Notice"), to cure said
failure (which cure shall include payment to Landlord for compensation for any
damages suffered by Landlord due to such failure and prior to such cure), unless
such failure cannot be cured within said thirty (30) days, in which case it
shall be deemed an event of default under this Lease if Tenant either (1) fails
to commence to cure the applicable default within such thirty (30) day period,
(ii) fails, after commencing to cure within such thirty (30) day period, to use
due diligence to cure the applicable default within such period of time as may
be reasonably necessary, or (iii) fails to cure the applicable default within
sixty (60) days after Landlord's Nonmonetary Default Notice; or
(c) Tenant abandons the Premises for a period of thirty (30)
days, and Tenant fails to (i) give Landlord fifteen (15) days prior written
notice of such intent to abandon and (ii) keep in place all signage it has
erected or constructed in the Common Areas, Premises, Building or Project; or
(d) Tenant fails to timely perform or observe any obligation
required to be performed or observed by Tenant under this Lease within any time
period specifically set forth in this Lease for such performance or observance;
or
(e) Tenant fails to timely perform or observe any obligation
required to be performed or observed by Tenant under this Lease (other than an
obligation described in 16.1(a), above) and in its sole judgment, Landlord
determines that such failure subjects the Premises, Building or Project to the
risk of physical damage which is not de minimis in nature, or disturbs or
threatens to disturb other tenants in the Project which disturbance is not de
minimis, or subjects the Landlord to the risk of civil damages, equitable
forfeiture or restraint or criminal penalties, or consists of, results in or
threatens the cancellation of any insurance policy required to be kept under
this Lease or constitutes a violation of any contractual obligation of Landlord;
or
(f) Any of the events described in Section 15.1.1 shall occur;
or
(g) Tenant assigns, or transfers, by operation of law or
otherwise, or enters into an agreement to assign or transfer any or all of its
interests under this Lease without obtaining Landlord's prior written consent
(other than as expressly permitted under Article 5 hereof) or permits, commits,
suffers or maintains any unlawful act, nuisance or waste on or about the
Premises, the Building or the Project or areas used in connection therewith; or
(h) Tenant fails to pay, or deposit with Landlord, timely any
amount of money due to Landlord pursuant to Exhibit D or Tenant Delay under
Exhibit D exceeds thirty (30) days.
Section 16.2 - Remedies
In the event of any such default or breach by Tenant, Landlord may at
any time thereafter, with or without notice and demand and without limiting
Landlord in the exercise of any rights or remedies otherwise available at law or
in equity which Landlord may have by reason of such default or breach do any one
or more of the following:
(a) Re-enter upon the Premises with or without process of law
and with or without terminating the Lease and take possession of the same and of
all trade fixtures, furnishings, equipment and other personal property of
Tenant, including the right to change door locks (or other means of prohibiting
Tenant from having occupancy of the Premises) and suspend utilities and services
and expel or remove Tenant and all other parties occupying the Premises, using
such force as may reasonably be necessary to do so without being liable to
Tenant for any loss or damage occasioned thereby. Personal property may be
removed by Landlord from the Premises and stored in such place as Landlord shall
designate for the account of and at the expense and risk of Tenant and Landlord
shall in no event be liable for any damage or loss thereto. Landlord may, at its
option, and after giving Tenant prior notice thereof, sell said personal
property at public or private sale for such price and upon such terms as
Landlord may determine, applying the proceeds of such sale against the balance
owing by Tenant to Landlord under this Lease, including the expense of such
removal and sale.
(b) With or without terminating the Lease lock the doors to
the Premises and exclude Tenant and all other persons therefrom (except those
authorized by Landlord in its sole discretion).
(c) Institute suit against Tenant to collect each installment
of rent or other sum as it becomes due or to enforce any other obligation under
this Lease.
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(d) With or without terminating the Lease, terminate Tenant's
right to possession of the Premises by any lawful means, in which case Tenant
shall immediately surrender possession of the Premises to Landlord and Landlord
shall have the right to reenter the Premises and remove all persons and property
therefrom using all force reasonably necessary for this purpose without being
guilty in any manner of trespass or conversion, any claim by reason of such
reentry being expressly waived. In such event Landlord shall be entitled to
recover from Tenant all damages actually incurred by Landlord by reason of
Tenant's default including, but not limited to, the cost of recovering
possession of the Premises; reasonable expenses (including commissions) of
reletting, including necessary renovation and alteration of the Premises, the
removal of special improvements made for Tenant, reasonable attorney's fees,
reasonable advertising expenses, the actual costs of protecting and caring for
the Premises while vacant, and the actual cost of removing and storing Tenant's
property; the worth at the time of the award of all unpaid rent, additional rent
and other sums payable under the Lease that are or become due and payable prior
to the time of such award (plus all interest and late charges payable with
respect thereto); the worth at the time of award of the amount by which the
unpaid rent, additional rent and other sums payable under the Lease for the
balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Tenant proves could be or could have been
reasonably avoided; and that portion of any leasing commission paid by Landlord
based upon or pursuant to this Lease applicable to the unexpired term of this
Lease. All of the foregoing amounts shall be and become immediately due and
payable from Tenant to Landlord upon a default, at Landlord's election which may
be exercised with or without the giving of notice.
(e) Maintain Tenant's right to possession in which case this
Lease shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event Landlord shall be entitled to enforce all of Landlord's
rights and remedies under this Lease, including, without limitation, the right
to recover the rent as it becomes due hereunder and any other damages incurred
by Landlord from time to time. Notwithstanding that Landlord shall have
maintained Tenant's right to possession or shall not have terminated the Lease
for a default, Landlord may at any time thereafter, upon notice to Tenant,
terminate the Lease and/or Tenant's right to possession for such prior default.
(f) Pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of Arizona. Unpaid installments of
rent and other unpaid monetary obligations of Tenant under the terms of this
Lease shall bear interest from the date due at the Default Rate.
(g) No re-entry or taking of possession by Landlord and/or
acceptance of keys to the Premises by Landlord shall be construed as an election
on Landlord's part to terminate or accept a surrender of this Lease unless a
written notice of such intention is then or thereafter served on Tenant.
(h) No failure by Landlord to insist upon the strict
performance of any covenant, agreement, term or condition of this Lease or to
exercise any right or remedy consequent upon a breach thereof, and no acceptance
of full or partial rent during the continuance of any such breach, shall
constitute a waiver of any such breach or of such covenant, agreement, term or
condition. No covenant, agreement, term or condition of this Lease to be
performed or compiled with by either party to this Lease, and no breach thereof,
shall be waived, altered, modified or terminated except by written instrument
executed by both the other party hereto. No waiver of any breach shall affect or
alter this Lease, but each and every covenant, agreement, term and condition of
this Lease shall continue in full force and effect with respect to any other
then existing or subsequent breach thereof.
(i) If Tenant causes a breach of any of the covenants,
agreements, terms or conditions contained in this Lease, Landlord shall be
entitled to invoke any right and remedy under this Lease or allowed at law or in
equity or by statute or otherwise as though re-entry, summary proceedings and
other remedies which were not provided for in this Lease.
(j) Tenant agrees that in the event of a default, Landlord
will incur damages which are beyond normally encountered leasehold damages and
Landlord shall be entitled to collect and recover all special damages incurred
by reason of Tenant's default including, without limitation, all costs of any
build-out or improvements done for Tenant, the full amount of any concessions or
inducements previously granted Tenant, plus any other special damages incurred
by Landlord.
(k) All rights and remedies of Landlord herein enumerated
shall be cumulative and none shall exclude any other right or remedy allowed by
law. All rights and remedies of Landlord, whether enumerated herein or allowed
by law, may be pursued singly, cumulatively, or consecutively and pursuit of one
such right or remedy shall not, except to the extent required by law, be deemed
an election of remedies or a waiver of any other remedies.
ARTICLE 17 - LANDLORD'S RIGHT TO PERFORM
If Tenant shall default in the timely performance of any obligation on
Tenant's part to be performed under this Lease, Landlord may immediately, or at
any time thereafter, without notice, perform the same for the account of Tenant.
If Landlord at any time is compelled to pay or elects to pay any sum of money or
do any act which will require the payment of any sum of money (including but not
limited to employment of
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attorneys or incurring of costs) by reason of the failure of Tenant to comply
with any term, covenant, condition, provision or agreement hereof, the sum or
sums so paid or incurred by Landlord with interest at the Default Rate shall be
due from Tenant to Landlord promptly upon demand by Landlord, as additional
rent.
ARTICLE 18 - END OF TERM
Section 18.1 - Condition of Premises
Upon the expiration or other termination of the Term, Tenant shall quit
and surrender the Premises to Landlord, broom clean, in as good order, condition
and repair as it now is or may hereafter be placed, ordinary wear and tear and
damage caused by casualty (subject to the other provisions of the Lease)
excepted. Tenant shall remove all property of Tenant, as directed by Landlord.
Subject to Section 6.1.2, at Landlord's option, Landlord may require Tenant to
remove any Alterations or other improvements installed on Tenant's behalf in the
Premises, unless Landlord agreed in writing to non-removal at the time Landlord
consented to such Alterations or other improvements. If Tenant shall remove any
such property, Alterations or improvements permitted or required to be removed
from the Premises, Tenant shall repair or, at Landlord's option, shall pay to
Landlord the cost of repairing, any damage arising from such removal. Any
property left on the Premises at the expiration or other termination of this
Lease, or after the happening of any of the events of default set forth in
Article 16, may, at the option of Landlord, either be deemed abandoned or be
placed in storage at a public warehouse in the name of and for the account of
and at expense and risk of Tenant or otherwise disposed of by Landlord in the
manner provided by law. Tenant expressly releases Landlord of and from any
claims and liability for damage to or destruction or loss of property left by
Tenant upon the Premises at the expiration or other termination of the Lease and
Tenant hereby indemnifies Landlord against any and all claims and liability with
respect thereto.
Section 18.2 - Holding Over
If Tenant holds over after the Term with the express written consent of
Landlord such tenancy shall be from month to month only and shall not be a
renewal hereof, and Tenant shall pay as Rent to Landlord for the use and
occupancy of the Premises for each month Tenant holds over an amount agreed to
be one and one-quarter (1.25) times the Rent which is due on the last month of
the Term, and Tenant shall also comply with all of the terms, covenants,
conditions, provisions and agreements of this Lease for the time during which
Tenant holds over. If without the express written consent of Landlord, Tenant
shall fail to vacate the Premises after the expiration of the Term or sooner
termination of this Lease for any cause or after Tenant's right to occupy the
Premises ceases, thereafter, and notwithstanding anything to the contrary
contained elsewhere in this Lease, Tenant shall pay as Rent to Landlord for the
use and occupancy of the Premises for each month Tenant holds over an amount
agreed to be one and one-half (1.5) times the Rent which is due on the last
month of the Term, and Tenant shall also comply with all of the terms,
covenants, conditions, provisions and agreements of this Lease for the time
during which Tenant holds over. If the Premises are not surrendered at the end
of the Term or of a permitted hold over period, Tenant shall be additionally
responsible to Landlord for all damage (including but not limited to the loss of
Rent) which Landlord shall suffer by reason thereof, and Tenant hereby
indemnifies Landlord against all claims made by any succeeding lessee against
Landlord, resulting from delay by Landlord in delivering possession of the
Premises to such succeeding Tenant. Tenant's obligation to observe or perform
all of the terms, covenants, conditions, provisions and agreements of this
Article shall survive termination of this Lease.
Section 18.3 - Conditions of Termination
In the event that this Lease terminates for any reason prior to the
Expiration Date (including but not limited to termination by Landlord), such
termination will terminate any and all agreements for the extension of this
Lease (whether expressed in an option, exercised or not, or in a collateral
document or otherwise). Any right herein contained on the part of Landlord to
terminate this Lease shall continue during any extension hereof. Any option on
the part of Tenant herein contained for an extension hereof shall not be deemed
to give Tenant any option for a further extension beyond the first extended
term. No act of thing done by Landlord or Landlord's agents during the Term
shall be deemed an acceptance of a surrender of the Premises, and no agreement
to accept such surrender shall be valid unless in writing signed by Landlord. No
employee of Landlord or Landlord's agents shall have any power to accept the
keys of the Premises prior to the termination of this Lease.
ARTICLE 19 - QUIET POSSESSION
Landlord hereby expressly covenants and agrees with Tenant (in lieu of
any implied covenant of quiet possession) that upon Tenant's paying Rent and all
other charges and observing and performing all the terms, covenants, conditions,
provisions and agreements of this Lease on Tenant's part to be observed or
performed, Tenant shall have quiet possession of the Premises for the Term as to
anyone claiming by, through or under Landlord, subject, however, to the terms of
this Lease and of any ground leases, underlying leases, covenants, conditions
and restrictions, mortgages and deeds of trust affecting all or any portion of
the Project or any of the areas used in connection with the operation of the
Project.
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ARTICLE 20 - RULES AND REGULATIONS
Tenant and Tenant's agents, employees, contractors, visitors and
licensees shall observe faithfully and comply strictly with the Rules and
Regulations attached hereto as Exhibit F and made a part hereof, and such other
and further reasonable Rules and Regulations as Landlord or Landlord's
representatives may from time to time adopt. Any addition or change in the Rules
and Regulations shall become effective within five (5) days after written notice
thereof given by Landlord or its representatives. Landlord shall not be
responsible for the performance of, and shall not be liable to Tenant or any
other Person for violation of, any of said Rules and Regulations, or the breach
of any term, covenant, condition, provision or agreement in any lease or in any
covenants, conditions and restrictions affecting the Project, by any other
tenant in the Project or other Person.
ARTICLE 21 - NO WAIVER/ENTIRE AGREEMENT/MODIFICATION
The failure of Landlord to seek redress for violation of, or to insist
upon the strict performance of any term, covenant, condition, provision or
agreement of this Lease, or any of the Rules and Regulations attached to this
Lease or hereafter adopted by Landlord, shall not prevent a subsequent act,
which would have originally constituted a violation, from having all the force
and effect of any original violation. No provision of this Lease shall be deemed
to have been waived by Landlord, unless such waiver be in writing signed by
Landlord. The acceptance by Landlord of Rent with knowledge of the breach of any
term, covenant, condition, provision or agreement of this Lease shall not be
deemed a waiver of such breach. No payment by Tenant or receipt by Landlord of a
lesser amount than the Monthly Installment shall be deemed to be other than on
account of the earliest stipulated Rent, nor shall any endorsement or statement
on any check or any letter accompanying any check or payment as Rent be deemed
an accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such Rent or
pursue any other remedy in this Lease provided. This Lease contains the entire
agreement between the parties, and recites the entire consideration given and
accepted by the parties. There are no oral agreements between Landlord and
Tenant affecting this Lease, and this Lease supersedes and cancels any and all
prior negotiations, arrangements, correspondence, communications, brochures,
agreements and understandings, if any, whether oral or written, between Landlord
and Tenant or displayed by Landlord to Tenant with respect to the subject matter
of this Lease. There are no representations between Landlord and Tenant other
than those contained in this Lease and all reliance with respect to any
representations is based solely upon the terms of this Lease. Any agreement
hereafter made shall be ineffective to change, modify, waive or discharge any
provision of this Lease in whole or in part unless such agreement is in writing
and signed by the party against whom enforcement of the change, modification,
waiver or discharge is sought. This Lease may be executed in one or more
duplicates or counterparts, each of which shall be deemed an original, but all
of which together shall constitute but one and the same instrument.
ARTICLE 22 - LANDLORD'S DEFAULT/LIABILITY
Section 22.1 - Force Majeure
This Lease and the obligation of Tenant to pay Rent and all other sums
due hereunder to keep, observe and perform all of the other terms, covenants,
conditions, provisions and agreements of this Lease on the part of Tenant to be
kept, observed or performed shall in no way be affected, impaired or excused
because Landlord is unable to fulfill any of its obligations under this Lease,
or is delayed or curtailed in any way from doing so, by reason of any cause
beyond Landlord's reasonable control, including, but not limited to, acts of
God, strike or labor troubles, fuel or energy shortages, governmental
preemption or curtailment in connection with a national emergency or in
connection with any rule, order, guideline or regulation of any department or
governmental agency or by reason of the conditions of supply and demand which
have been or are affected by a war or other emergency. Any such prevention,
delay or curtailment shall be deemed excused and Landlord shall not be subject
to any liability resulting therefrom.
Section 22.2 - Notice/Right to Cure
Landlord shall not be deemed to be in default in the performance of any
obligation required to be performed by it hereunder unless and until it has
failed to perform such obligation within thirty (30) days after written notice
by Tenant to Landlord specifying the nature of Landlord's failure to perform
such obligation; provided, however, that if the nature of Landlord's obligation
is such that more than thirty (30) days are required for its performance, then
Landlord shall not be deemed to be in default if it shall commence such
performance within such thirty (30) day period and thereafter shall diligently
prosecute the same to completion. All rights to cure provided to Landlord under
this Section 22.2 shall also be accorded to any mortgagee, ground lessor or
beneficiary under a deed of trust encumbering the Building or the Project.
Section 22.3 - Limitation of Landlord's Liability
22.3.1 The liability of Landlord hereunder or in connection with the
Premises, Building or Project shall be limited to its interest in the Building,
and in no event shall any other assets of Landlord be subject to any claim
arising out of or in connection with the Lease, Premises, Building or Project.
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22.3.2 If, at any time during the term of this Lease, the holder of
Landlord's interest hereunder is a partnership or joint venture, Tenant agrees
to look only to the assets of such partnership or joint venture in the Building
and neither Landlord nor its partners or joint venturers shall have personal
liability with respect to any obligations or payments due or which may become
due from Landlord hereunder. A deficit in the capital account of any partner or
joint venturer shall not be considered an asset of such partnership or joint
venture.
Section 22.4 - Sale by Landlord
Landlord shall have the right at any time and from time to time to
sell, transfer, convey and assign by any means its rights, obligations and/or
interest in this Lease and/or in the Building, Project or any part thereof. Upon
such sale, transfer, conveyance or assignment, Landlord shall be freed and
relieved of such covenants and obligations. Landlord (or the transferee or
assignee) shall give Tenant prompt notice of such a transfer or assignment.
ARTICLE 23 - NOTICES
Section 23.1 - Notices To Tenant
Except as otherwise in this Lease provided, a bill, demand, statement,
consent, notice or communication which Landlord may desire or be required to
give to Tenant shall be deemed sufficiently given or rendered if in writing,
delivered personally to Tenant or sent by certified, registered or express
United States mail (return receipt requested and postage prepaid) or sent
(prepaid) by overnight or same day carrier or courier service which maintains
records of delivery, attempts at delivery and receipts in a manner similar to
those records kept by the U.S. Postal Service for its certified mail, return
receipt requested service, addressed to Tenant at the address set forth in
Paragraph K of the Summary of Basic Terms, with a copy to Tenant's legal
department at the same address, or at such other address as Tenant shall
designate by notice given as herein provided.
Section 23.2 - Notices to Landlord
Any notice, request, demand or communication by Tenant to Landlord must
be in writing and delivered personally to an officer of Landlord or sent by
certified (return receipt requested) or overnight or same day carrier or courier
(postage fully prepaid), addressed to Landlord, at the address set forth in the
Basic Lease Information, or at such other address as Landlord shall designate by
notice given as herein provided. If Tenant is notified of the identity and
address of Landlord's mortgagee or beneficiary under a deed of trust, or ground
or underlying lessor, Tenant shall give such party notice of any default by
Landlord hereunder in the same manner Tenant is to give Landlord notice
hereunder, and if an opportunity to cure such default is provided herein, such
party shall have a reasonable opportunity to cure such default before Tenant's
exercising any remedy available to it.
Section 23.3 - Time of Rendition of Notices
The time of the rendition of such bills or statements and of the giving
of such consents, notices, demands, requests or communications (collectively
"notice") by Tenant or Landlord shall be deemed to be the earlier of (i) the
date received, (ii) if the notice is sent by certified or registered mail
(return receipt requested, postage prepaid), upon delivery as indicated in the
return receipt, or (iii) if the notice is sent by express mail or by overnight
or same day carrier or courier, (prepaid) upon delivery as indicated in the
return receipt or records of delivery or attempted delivery. Rejection or
refusal to accept a notice, request, demand, or the inability to deliver same
because of a changed address of which no notice was given shall be deemed to be
a receipt of the notice, request or demand sent. Notwithstanding any provision
to the contrary contained in this Lease, no provision in this Lease shall
preclude service of notices in accordance with any state or local law.
ARTICLE 24 - SECURITY DEPOSIT
Tenant shall deposit in cash with Landlord the sums specified in this
Article as security for the faithful performance by Tenant of all the terms,
covenants and conditions of this Lease (the "Security Deposit"). Paragraph M of
the Summary of Basic Terms sets forth the initial amount of Tenant's Security
Deposit, which Tenant shall deposit with Landlord upon Tenant's execution of
this Lease. Tenant shall, before the Option Term commences, deposit in cash with
Landlord an additional amount so that the amount of the Security Deposit equals
the amount required during the Option Term as determined by Section 27(a)(2).
Landlord shall have the right, without waiving any of Landlord's other rights
and remedies under this Lease, upon the occurrence of any of the events of
default described in Article 16, to apply the Security Deposit to remedy any
failure by Tenant to repair or maintain the Premises or to perform any other
terms, covenants or conditions contained herein. If Tenant has kept and
performed all terms, covenants and conditions of the Lease during the Term,
Landlord will within thirty (30) days following the termination hereof return
the Security Deposit to Tenant or the last permitted assignee of Tenant's
interest hereunder at the expiration of the Term. Should Landlord use any
portion of the Security Deposit to cure any default by Tenant hereunder, Tenant
shall replenish the Security Deposit to the full amount within ten (10) days
after notice. Landlord shall not be
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required to keep the Security Deposit separate from its general funds, and
Tenant shall not be entitled to interest on any portion of the Security Deposit.
Upon any sale or transfer of its interest in the Building, Landlord may transfer
the Security Deposit to its successor in interest and thereupon, Landlord shall
be released from any liability or obligation with respect thereto.
ARTICLE 25 - BROKERAGE
Tenant represents and warrants that the broker or brokers specified in
Article N of the Summary of Basic Terms was/were the sole broker or brokers who
negotiated and brought about the consummation of this Lease, and that no
discussions or negotiations were had with any other broker, agent or finder
concerning the leasing of the Premises. Based on the foregoing representation
and warranty, Landlord has agreed with Tenant that Landlord shall pay such
commission or compensation due to said broker or brokers in connection with the
consummation of this Lease pursuant to any agreement between Landlord and such
broker. Each party hereby agrees to indemnify, protect, defend and hold the
other harmless from and against any claims for brokerage commissions made by any
broker, agent or finder not specified in Article N of the Summary of Basic Terms
arising out of any dealings, actions, discussions, negotiations or contracts
allegedly had with or on behalf of such party, and from and against any and all
losses, costs, expenses, liabilities and damages suffered or incurred by such
party as a consequence thereof, including, without limitation, attorneys' fees
and costs.
ARTICLE 26 - MISCELLANEOUS
Section 26.1 - Captions and Construction
The marginal notes and headings are inserted only as a matter of
convenience and for reference and in no way define, limit or describe the scope
or intent of this Lease nor do they in any way affect this Lease. The language
in all parts of this Lease shall be construed according to its normal and usual
meaning and not strictly for or against either Landlord or Tenant.
Section 26.2 - Definitions
The term "Landlord" as used in this Lease means only the owner or
mortgagee in possession or grantee in possession under a deed of trust, or the
owner of a lease of the Project (or part thereof in which the Premises is
situated) for the time being. The words "re-enter" and "re-entry" as used in
this Lease are not restricted to their technical legal meaning.
Section 26.3 - Successors and Assigns
The covenants contained in this Lease shall bind and inure to the
benefit of Landlord and Tenant and their respective legal representatives and
successors, and, except as otherwise provided in this Lease, their assigns.
Section 26.4 - Landlord's Approval
The review, approval, inspection or examination by Landlord of any item
to be reviewed, approved, inspected or examined by Landlord under the terms of
this Lease or the Exhibits attached hereto shall not constitute the assumption
of any responsibility by Landlord for either the accuracy or sufficiency of any
such item or the quality or suitability of such items for its intended use, and
shall not constitute an assumption of risk with respect to same, nor a
representation or certification by Landlord nor an estoppel against Landlord
that such matter is safe or reasonable or in compliance with applicable laws.
Any such review, approval, inspection or examination by Landlord is for the sole
purpose of protecting Landlord's interests in the Project and under this Lease,
and no third parties, including, without limitation Tenant or any person or
entity claiming through or under Tenant, or the contractors, agents, employees,
visitors or licensees of Tenant or any such person or entity, shall have any
rights hereunder.
Section 26.5 - Joint and Several Liability
If a partnership or more than one legal person at any time constitutes
Tenant, (1) each partner and each legal person is jointly and severally liable
for the keeping, observing and performing of all of the terms, covenants,
conditions, provisions and agreements of this Lease to be kept, observed or
performed by Tenant, and (2) the term "Tenant" as used in this Lease shall mean
and include each such partner or legal person jointly and severally and the act
of or notice from or notice or refund to, or the signature of, any one or more
of them, with respect to this Lease, including but not limited to any renewal,
extension, expiration, termination or modification of this Lease, shall be
binding upon each and all of the persons executing this Lease as Tenant with the
same force and effect as if each and all of them had so acted or so given or
received such notice or refund or so signed.
Section 26.6 - Governing Law
This Lease shall be governed by and construed in accordance with the
laws of the State of Arizona.
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<PAGE> 36
<PAGE> 37
enforcing or establishing its rights hereunder, including without limitation,
court costs and all fees, costs and expenses for legal representation,
including, without limitation, expert witness fees.
Section 26.15 - Waiver of Trial By Jury; Venue Jurisdiction
The respective parties hereto hereby waive trial by jury and any
objection to venue in Maricopa County, and agree and consent to personal
jurisdiction of the courts of the State of Arizona, in any action, proceeding or
counterclaim brought by either of the parties hereto against the other on any
matter whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises,
or any claim of injury or damage, or the enforcement of any remedy under any
statute, emergency or otherwise.
Section 26.16 - Substitution of Premises
Intentionally Deleted
Section 26.17 - Binding Effect
Submission of this instrument for examination or signature by Tenant
does not constitute an offer to lease, or a reservation of or option for a
lease, and it is not effective as a lease or otherwise until execution by and
delivery to both Landlord and Tenant.
Section 26.18 - Exhibits and Addenda
Any rider, addenda or exhibit attached hereto is made a part hereof.
Section 26.19 - Signs
Tenant shall have the right to display and maintain, at Tenant's
expense, on the exterior of the Premises, or in the interior of the Premises if
visible from the exterior of the Premises, only such signs, names, insignia,
trademarks and other descriptive, symbolic or decorative material of any kind
("Sign" or "Signs"): (a) as shall have first received the written approval of
Landlord as to type, size, color, location and other design features; (b) as
shall comply with the provisions and criteria of the Sign Program set forth on
Exhibit G attached hereto to the extent applicable; and (c) for which Tenant has
first obtained, at Tenant's expense, all required governmental approvals.
Landlord's review of Signs shall be made in accordance with the provisions and
criteria set forth on Exhibit G to the extent applicable. Notwithstanding any
other provision of this Lease, in no event shall Tenant make any alteration or
addition to or improvement on or visible from the exterior of the Premises
without Landlord's prior written consent, which may be withheld in Landlord's
sole and absolute discretion.
Section 26.20 - No Merger
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord terminate all or any existing subleases or subtenancies, or may, at the
option of Landlord, operate as an assignment to it of any or all such subleases
or subtenancies.
Section 26.21 - Acknowledgement of Waivers and Limitations
TENANT SPECIFICALLY ACKNOWLEDGES THAT THIS LEASE CONTAINS CERTAIN
WAIVERS OF CERTAIN STATUTORY AND COMMON LAW RIGHTS AND CERTAIN LIMITATIONS ON
DAMAGES AND THAT TENANT HAS AGREED THERETO.
Section 26.22 - Tenant's Equipment and Personal Property
With respect to equipment and personal property (including, without
limitation, spare parts) that Tenant has financed or uses in connection with
Tenant's business, which equipment is either not affixed to the Premises and is
not necessary to the use of the Premises by any tenant, Landlord agrees to
execute, from time to time upon request by Tenant and upon payment of a
reasonable fee to defray Landlord's administrative costs (and out-of-pocket
costs, if incurred) "Landlord's Consent to Encumbrance of Equipment" attached
hereto as Exhibit I and incorporated herein, to confirm Landlord's status of its
lien rights with respect to such property.
ARTICLE 27 - OPTION TO EXTEND
Section 27 - Option to Extend
Landlord hereby grants to Tenant the option (the "Option") to extend
the Term (the "Initial Term") for an additional five (5) years (the "Option
Term"), but only in strict accordance with the terms and conditions set forth
below:
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(a) The Option must be exercised, if at all, by written notice
to Landlord at twelve (12) months prior to the Expiration Date of the initial
Term. All of the terns and conditions of the Lease applicable as of such
Expiration Date shall continue to apply during the Option Term, except that:
(1) The Base Monthly Rent during the Option Term
shall be the Prevailing Market Rental as of the date of the
Landlord's Notice (both as defined below).
(2) The Security Deposit shall be increased, if
necessary, within fifteen (15) days after Prevailing Market
Rental has been determined to equal one hundred ten percent
(110%) of the Base Monthly Rent for the last month of the
Option Term.
(b) The "Prevailing Market Rental" shall mean and include all
rental and other monetary payments, together with all escalations, including,
without limitation, consumer price indexing and adjustments in Base Monthly
Rent, which the Landlord could obtain from a third party desiring to lease the
Premises for the Option Term, taking into account the age of the Project, the
size, the quality of construction of the Project and the Premises, the services
provided under the terms of the Lease, the rental then being obtained for new
leases of space comparable to the Premises in the Phoenix/Valley of the Sun area
and all other factors that would be relevant to such third party; provided,
however, that Prevailing Market Rental shall be stated net of any free rent
concessions included in such market rental and no allowance or credit for the
construction of tenant improvements (or reduction in rental as a result of the
absence of such allowance or credit) shall be taken into account in determining
Prevailing Market Rental.
(c) In the event Tenant exercises the Option, Landlord shall
use commercially reasonable efforts to notify Tenant of its opinion of the
Prevailing Market Rental at least one hundred fifty (150) days prior to the
Expiration Date of the Initial Term (the "Landlord's Notice"). Within thirty
(30) days following its receipt of the Landlord's Notice, Tenant shall deliver
written notice to Landlord either accepting the Prevailing Market Rental set
forth in the Landlord's Notice or disputing the same and setting forth Tenant's
opinion of the Prevailing Market Rental (the "Tenant's Notice"). Failure to
timely give a proper Tenant's Notice shall be conclusively deemed to be Tenant's
waiver and revocation of the Option.
(d) At any time within thirty (30) days following its receipt
of the Tenant's Notice, Landlord shall have the option to either (1) accept the
Prevailing Market Rental set forth in the Tenant's Notice, or (2) submit the
dispute to arbitration in accordance with Section 2(e) below. Landlord's failure
to notify Tenant of its election under clause (1) above shall be conclusively
deemed to be Landlord's election to submit the determination of Prevailing
Market Rental to arbitration under clause (2) above.
(e) Any arbitration under this Section 27 shall be conducted
in the County of Maricopa in accordance with the then prevailing rules of the
American Arbitration Association or its successor for arbitration of commercial
disputes, modified as follows, and any judgment or award rendered therein shall
be final and binding upon the parties and may be entered in any court of
competent jurisdiction:
(1) At any time concurrently with or after Landlord's
election under Section 27(d)(2) above, Landlord shall appoint
a qualified real estate appraiser familiar with the prevailing
market rentals of warehouse and "R&D" buildings in Maricopa
County who is a member of the National Institute of Real
Estate Appraisers (a "Qualified Appraiser") to act as an
arbitrator hereunder. Within ten (10) business days after such
appointment by Landlord, Tenant may by written notice to
Landlord appoint another Qualified Appraiser to also act as an
arbitrator hereunder. Tenant's failure to so appoint a second
arbitrator shall be conclusively deemed to be Tenant's
appointment of the arbitrator appointed by Landlord. (The date
of such notice by Tenant or, if none is given, the last date
such notice could have been given shall be hereinafter
referred to as the "Selection Date").
(2) Within ten (10) business days after the Selection
Date, the appointed arbitrators shall meet to determine (or
the sole arbitrator shall alone determine) the Prevailing
Market Rental. In the event two (2) arbitrators are appointed
under clause (e)(1) above who are unable to agree upon a
determination of the Prevailing Market Rental within thirty
(30) days after the Selection Date, they shall appoint a
Qualified Appraiser to act as an additional arbitrator
hereunder. In the event no such appointment is made within
thirty-five (35) days after the Selection Date, Landlord and
Tenant shall jointly appoint a Qualified Appraiser as such
third arbitrator or, if they cannot agree thereon, either
party may petition the then Chief Judge of the United States
District Court having jurisdiction over the City of Phoenix to
appoint a Qualified Appraiser as such third arbitrator.
(3) Within fifteen (15) business days after the
appointment of the third arbitrator, the appointed arbitrators
shall meet to determine the Prevailing Market Rental. In the
event all three (3) appraisers do not agree on the Prevailing
Market Rental, the average of the determinations of the two
(2) appraisers which are closest in value shall be the
Prevailing Market Rental.
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<PAGE> 39
(4) The arbitrators shall render their determination
in writing with counterpart copies to each party. Such
determination shall be certified by each arbitrator as his
opinion of the Prevailing Market Rental or, where such
determination was arrived at through averaging under clause
(e)(3) above, each arbitrator's individual determination shall
be set forth and certified by him. In no event shall any
arbitrator modify any provision of the Lease in arriving at
his determination.
(5) In the event of any failure, refusal or inability
of an arbitrator to act, a successor shall be appointed in the
same manner provided above for such arbitrator's appointment.
Each party shall beat all costs and expenses of the arbitrator
appointed (or deemed appointed) by it and both shall equally
share all costs and expenses of the third arbitrator, if any.
All attorneys' fees and expenses of witnesses shall be paid by
the party engaging such attorney or calling such witness.
(6) Each arbitrator shall have the right to consult
experts and competent authorities regarding factual
information or evidence pertaining to a determination of the
Prevailing Market Rental; provided, however that any such
consultation shall be made in the presence of Landlord, Tenant
and all other appointed arbitrators with full right on each of
their part to cross-examine.
(f) In the event the determination of the Prevailing Market
Rental has been submitted to arbitration but such arbitration has not been
concluded prior to the commencement of the Option Term, Tenant shall pay to
Landlord the amount determined under Section 27(c) above based on the Prevailing
Market Rental set forth in the Landlord's Notice as Rent and Additional Rent for
the Option Term. In the event the Prevailing Market Rental determined by
arbitration results in any Rent, Additional Rent or any other payment which may
become due under the Lease different from such amount, Tenant shall immediately
pay to Landlord any increase therein and Landlord shall credit any reduction
therein against the next Monthly Installments due from Tenant to Landlord under
the Lease.
(g) The Option shall be personal to Decision Servcom, Inc., a
Delaware corporation, and not assignable or transferrable to any other entity.
(h) Upon the occurrence of any of the following events,
Landlord shall have the option, exercisable at any time prior to the
commencement of the Option Term, to terminate all of the provisions of this
Article 27 whereupon no prior or subsequent exercise of the Option shall be of
any force or effect:
(1) Tenant's failure to timely exercise the Option in
strict accordance with Section 27(a) above or to timely
deliver a proper Tenant's Notice in strict accordance with
Section 27(c) above.
(2) The existence at the commencement of the Option
Term of any default on the part of Tenant under the Lease or
of any state of facts which with the passage of time or the
giving of notice, or both, would constitute such a default.
(3) Tenant's third default under the Lease prior to
the commencement of the Option Term, notwithstanding that all
such defaults may subsequently be cured.
(i) Time shall be of the essence with respect to all of the
provisions of this Article 27.
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year set forth in Paragraph A of the Summary of Basic
Terms.
LANDLORD:
METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
By: Illegible Signature
-------------------------
-------------------------
Print name
Its:
-------------------
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<PAGE> 40
TENANT:
DECISION SERVCOM INC.,
a Delaware corporation
By:
---------------------------
---------------------------
Print name
Its:
----------------------
By: /s/ E.W. BUCKLEY
---------------------------
E.W. BUCKLEY
---------------------------
Print name
Its: DIRECTOR-CORP SERVICES
----------------------
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<PAGE> 1
Exhibit 10.26
STEPHEN J. FELICE
President
April 18, 1998
[DECISION ONE LOGO]
Mr. James S. Burkhardt
326 Dutton Road
Sudbury, MA 01776
Dear Jim:
As we discussed, I have revised our offer of employment with
DecisionOne Corporation (the "Company"). You will begin your career with
DecisionOne on or before May 18, 1998 in the position of Senior Vice President
of Sales and Marketing. Your annual base salary will be $240,000 ($9,230.77
biweekly) and you will be eligible for an annual bonus targeted at $160,000.
The annual bonus will be composed of two elements:
* Approximately 70% of your bonus target will be based on
corporate sales results, with an accelerated rate of bonus
achievement for above reasonable and realistically achievable
target results. This bonus opportunity is uncapped. The sales
results target will be established via mutual agreement
between you and me, incorporating a ramp-up period giving you
time to improve the results.
* Approximately 30% of your bonus target will be based on
corporate earnings. This element of the bonus will range
between 0% to 200% achievement, depending on our financial
results.
I will give you more specifics about the bonus plan as we get closer to your
start date.
Stock Options. You will be provided the opportunity to participate in
the company stock option program. Subject to approval by the Compensation
Committee of the Board of Directors, you will receive an option to purchase
100,000 shares of DecisionOne stock at an exercise price of $20.6084, the same
exercise price as every participant has received.
The grant will be equally split between a time vesting option and a
performance vesting option. The time vesting option, to the extent possible
under Internal Revenue Code, is intended to be treated as an Incentive Stock
Option. The performance vesting option is not intended to be treated as an
Incentive Stock Option. On each of the first four anniversaries of the Date of
Grant, 25% of the time vesting option shall vest and become exercisable. The
performance vesting option shall vest and become exercisable on the seventh
anniversary of the Date of Grant. Notwithstanding the preceding sentence, 25% of
the performance vesting option will vest on the thirtieth day following the
availability of audited financial statements with respect to each of fiscal
years 1999, 2000, 2001, and 2002, if the "Implied Equity Value" set forth below
for the immediately preceding June 30 (each a "Valuation Date") is achieved:
VALUATION DATE IMPLIED EQUITY VALUE
June 30, 1999 $32.17
June 30, 2000 $47.93
June 30, 2001 $66.13
June 30, 2002 $91.26
DecisionOne Corporation * 50 East Swedesford Road * Frazer, PA 19355
610/296-6094 * 610/296-5250
<PAGE> 2
-2- April 18, 1998
Any portion of the performance vesting option which is not accelerated on a
Valuation Date shall vest on the next subsequent Valuation Date if the Implied
Equity Value set forth above is achieved for such subsequent Valuation Date.
Implied Equity Value shall be calculated as follows:
A fraction (i) the numerator calculated as (a) 7.5 times (b) the Pro
Forma Consolidated Cash Flow for the applicable fiscal year less (x)
all short term and long term Indebtedness of the Company and (y) all
preferred stock plus the sum of (w) any annual engagement fee payable
to Donaldson, Lufkin & Jenrette Securities Corporation for such fiscal
year, (x) cash and cash equivalents, (y) the proceeds which would be
received from the exercise of all outstanding options and (z) the
proceeds which would be received from the exercise of all outstanding
warrants and (ii) the denominator calculated as the fully diluted
outstanding number of shares. For purposes of this calculation
convertible securities will be treated as converted if they are "in the
money".
These options are personal to the Optionee and may be exercised only by
the Optionee or his or her representative in the event of the Optionee's
Disability and death. Any Incentive Stock Option shall not be transferable other
than by will or the laws of descent and distribution and pursuant to Article 3
of the Investors' Agreement. The vested portion of any Nonqualified Stock Option
may be transferred pursuant to Article 3 of the Investors' Agreement and to (i)
the spouse, children or grandchildren of the Optionee ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members or (iii) a partnership in which such Immediate Family Members are
the only partners, provided that (x) there may be no consideration for any such
transfer and (y) subsequent transfer of transferred Options shall be prohibited
except by will or the laws of descent and distribution.
Upon change of control, the time vesting option shall vest in its
entirety and become immediately exercisable and, if the Implied Equity Value as
of the June 30 immediately preceding the change of control was achieved, the
performance vesting option shall vest in its entirety and become immediately
exercisable.
The Optionee shall, as a condition precedent to the exercise of these
Options and his receipt of Shares, execute an instrument agreeing to be bound by
the Investors' Agreement or, at the election of the Company, a counterpart of
the Investors' Agreement.
Severance Agreement. If your employment is involuntarily terminated by
the Company without cause, or by you for good reason, other than by reason of
death or disability, and you are not offered comparable employment in an
executive capacity by another DecisionOne Holdings Corp. company, in exchange
for a release of all claims against the Company, the Company will pay to you,
during the twelve (12) month period commencing with the effective date on which
your employment is so terminated (the "Severance Period"), in lieu of all other
severance payments from the Company, an aggregate amount equal to your then
current annual base salary, payable in equal biweekly installments in accordance
with the Company's normal payroll practices, provided, however, that if you
shall become employed by another organization at any time during the Severance
Period, then during the remainder of the Severance Period, each such installment
payment shall be reduced to one-half the amount otherwise so payable, and the
total shall be reduced accordingly. In addition, during the Severance Period,
you will be entitled to continue to receive the standard medical, dental, and
life insurance coverage paid by the Company as in effect on the date of
termination, provided, however, that if you shall become employed by another
organization during the Severance Period as aforesaid, such benefits shall
forthwith cease and terminate at the time you become eligible for coverage under
the medical insurance plan of such organization, but in no case shall the
Company's obligation to provide standard medical, dental and life insurance
coverage go beyond the Severance Period.
<PAGE> 3
-3- April 18, 1998
For the purposes of this letter, "cause", "good reason" and "change in
control" shall each be defined as provided in Section 2 of the 1997 Management
Incentive Plan of the Company.
Work Location. Your office location will be in the Company's
headquarters in Frazer PA; however, you will not be expected to relocate to the
Frazer area for at least 24 months. You will have an office in Frazer and in our
Wayland, MA branch. We will provide an apartment at Company expense for you in
the Frazer area. We will also pay for all ordinary and reasonable expenses
incurred by you in your travel between Frazer and Waltham. If we decide for you
to relocate to the Frazer area after 24 months, you will be reimbursed under the
Company's relocation assistance plan. The Company waives the 12-month limitation
for benefits under the plan.
Other Benefits. You and your dependents will be eligible for the
Company's standard health and welfare benefits after 60 days of employment. The
benefits package offered at DecisionOne qualifies under the IRS Code Section 125
as a Cafeteria Plan allowing the premiums paid, through payroll deduction, to be
withheld on a before-tax basis. You will receive detailed information regarding
the plans and your selections after your employment begins. You will receive
four weeks of paid vacation for each 12 month period of employment with the
Company.
Non-Competition/Confidential Information. As a condition of this offer
of employment, you acknowledge and recognize the highly competitive nature of
the businesses of the Company and its affiliates and accordingly agree that
during the employment term and through the first anniversary of the date of
termination of employment, you will not directly or indirectly accept an
engagement with any person or entity engaged in the multivendor computer
maintenance business or any other line of business of the Company or any of its
affiliates accounting for 5% or more of the Company's gross revenues (including
without limitation by performing or soliciting the performance of services for
any customer or client of the Company or any of its affiliates), whether such
engagement is as an officer, director, proprietor, employee, partner, investor
(other than as a holder of less than 1% of the outstanding capital stock of a
publicly traded corporation), consultant, advisor, agent, sales representative
or other participant, in any geographic area in which the Company or any of its
affiliates conducted any such competing line of business.
During the employment term and through the second anniversary of the
date of termination of employment, you will not induce, or cause any person or
entity to induce, any employee of the Company or any of its affiliates to engage
in any activity in which you are prohibited to engage by the foregoing paragraph
or to terminate his or her employment with the Company or any of its affiliates,
and will not employ or offer employment, or cause any person or entity to employ
or offer employment, to any person who was employed by the Company or any of its
affiliates unless such person shall have ceased to be employed by the Company or
any of its affiliates for a period of at least 12 months.
You will not at any time (whether during or after your employment with
the Company) disclose or use for his own benefit or purposes or the benefit or
purposes of any other person, firm, partnership, joint venture, association,
corporation or other business organization, entity or enterprise other than the
Company and any of its affiliates, any trade secrets, information, data, or
other confidential information relating to customers, development programs,
costs, marketing, trading, investment, sales activities, promotion, credit and
financial data, manufacturing processes, financing methods, plans, or the
business and affairs of the Company generally, or of any of its affiliates,
provided that the foregoing shall not apply to information which is not unique
to the Company or which is generally known to the industry or the public other
than as a result of your breach of this covenant. You agree that upon
termination of your employment with the Company for any reason, you will return
immediately all memoranda, books, papers, plans, information, letters and other
data, and all copies thereof or therefrom, in any way relating to the business
of the Company and its affiliates, except that you may retain or personal notes,
notebooks and diaries. You
<PAGE> 4
-4- April 18, 1998
further agree that you will not retain or use for your account at any time any
trade names, trademark or other proprietary business designation used or owned
in connection with the business of the Company or its affiliates.
You will be promptly reimbursed for all ordinary and reasonable
expenses incurred by you in furtherance of the Company's business.
Upon the start of employment with DecisionOne, you will need to agree
to our Business Conduct Guidelines, disclose any conflicts of interest, and
agree to comply with the securities reporting requirements and trading
restrictions of Section 16(b) of the Securities Exchange Act of 1934 as an
executive officer of DecisionOne Holdings Corp. Please be advised that neither
this offer of employment nor any statements made by any officer or employee of
the Company constitutes an employment contract, and that you will be an
"at-will" employee of the Company. The substantive laws of the Commonwealth of
Pennsylvania shall govern this letter of agreement.
Please sign and fax this letter by the close of business on Monday,
April 20 to the fax number below and mail the originals to me also. Jim, as we
discussed, you are being presented with an opportunity to play a significant
role in DecisionOne's future. I have every confidence that you will lead a very
successful sales and marketing team at DecisionOne and that you will help us
fulfill our vision to be the world's best provider of information technology
support services.
Sincerely,
/s/ DWIGHT T. WILSON
-----------------------
for STEVE FELICE
I accept the offer of employment discussed in this letter.
/s/ JAMES S. BURKHARDT 4/20/98
- --------------------------------- ----------
James S. Burkhardt Date
<PAGE> 1
Exhibit 10.27
STEPHEN J. FELICE
April 20, 1998 President
[DECISION ONE LOGO]
Mr. Dennis M. Callagy
7503 Bromwich Court
Dallas, TX 75252
Dear Dennis:
I would like to extend to you an offer of employment with DecisionOne
Corporation. After an extensive search, we've selected you as the right
individual to lead our major account operations efforts into the future. You
will begin your career with DecisionOne on or before May 11, 1998 in the
position of Senior Vice President of Major Account Operations. Your annual base
salary will be $190,000 ($7,307.69 biweekly) and you will be eligible for an
annual bonus targeted at $76,000.
The annual bonus will be composed of two elements:
* Approximately 60% of your bonus target will be based on
business results from the major accounts: revenue, profit, and
customer satisfaction. The performance targets will be
established via mutual agreement between you and me.
* Approximately 40% of your bonus target will be based on
corporate earnings.
Each element of the bonus will range between 0% to 200% achievement, depending
on results. I will give you more specifics about the bonus plan as we get closer
to your start date.
You will receive a signing bonus of $10,000, payable (less applicable
withholdings) on your first day of employment; provided, however, that you shall
repay said bonus if you leave the company's employ before one year. You will
also receive your annual target bonus for the fiscal year ending June 30, 1998,
prorated for the period from your first day of employment through June 30, 1998,
payable on or before August 15, 1998 provided that you are an employee of the
company on the date of employment.
You will be provided the opportunity to participate in the company
stock option program. Subject to approval by the Compensation Committee of the
Board of Directors, you will receive an option to purchase 50,000 shares of
DecisionOne stock at an exercise price of $20.6084, the same exercise price as
every participant has received. The vesting schedule, as well as all other terms
and conditions, will be specified in the stock option agreement. There is a
provision that accelerates vesting of the options in the event of a change in
ownership control.
If your employment by the Company is involuntarily terminated without
cause, other than by reason of death or disability, and you are not offered
employment in an executive capacity by another DecisionOne Holdings Corp.
company, in exchange for a release of all claims against the Company, the
Company will pay to you, during the twelve (12) month period commencing with the
effective date on which your employment is so terminated (the "Severance
Period"), in lieu of all other severance payments from the Company, an aggregate
amount equal to your then current annual base salary, payable in equal biweekly
installments in accordance with the Company's normal payroll practices,
provided, however, that if you shall become employed by another organization at
any time during the Severance Period, then during the remainder of the Severance
Period, each such
Decision One Corporation * 50 East Swedesfor Road * Frazer, PA 19355
610/296-6094 * Fax 610/296-5250
<PAGE> 2
-2- April 20, 1998
installment payment shall be reduced to one-half the amount otherwise so
payable, and the total shall be reduced accordingly. In addition, during the
Severance Period, you will be entitled to continue to receive the standard
medical, dental, and life insurance coverage paid by the Company as in effect on
the date of termination, provided, however, that if you shall become employed by
another organization during the Severance Period as aforesaid, such benefits
shall forthwith cease and terminate at the time you become eligible for coverage
under the medical insurance plan of such organization, but in no case shall the
Company's obligation to provide standard medical, dental and life insurance
coverage go beyond the Severance Period. Any benefit payable under this
paragraph shall be referred to as "Severance Benefits".
For the purposes of this letter, "cause" shall mean a determination by
the Board of Directors or the Chief Executive Officer of DecisionOne that you
(i) failed to obey the reasonable and lawful orders of the Board of Directors,
(ii) acted with gross negligence in the performance of your duties, (iii)
willfully breached or habitually neglected your duties, or (iv) committed a
felony or any act involving dishonesty, fraud, or moral turpitude.
Your office location will be in the Company's headquarters in Frazer
PA. You will be reimbursed for your costs to move from the Dallas area under the
Company's relocation assistance plan. Reimbursement for incurred costs which
results in W-2 income will be grossed-up to cover your tax liability. Our intent
is to "keep you whole" for all reasonable expenses that you incur during your
relocation.
You will have an annual entitlement to four weeks of vacation time off
which accrues on a monthly basis, in addition to 11 annual holidays plus any
necessary time for illnesses and other reasonable causes. Also, you and your
dependents will be eligible for the Company's standard health and welfare
benefits after 60 days of employment. The benefits package offered at
DecisionOne qualifies under the IRS Code Section 125 as a Cafeteria Plan
allowing the premiums paid, through payroll deduction, to be withheld on a
before-tax basis. You will receive detailed information regarding the plans and
your selections after your employment begins.
As a condition of this offer of employment, you acknowledge and
recognize the highly competitive nature of the businesses of the Company and its
affiliates. Accordingly, you agree that during the employment term and through
the first anniversary of the date of termination of employment, if you are
eligible for Severance Benefits hereunder, or the Company at its option elects
to pay you Severance Benefits, then you will not directly or indirectly accept
an engagement with any person or entity engaged in the multivendor computer
maintenance business or any other line of business of the Company or any of its
affiliates accounting for 5% or more of the Company's gross revenues (including
without limitation by performing or soliciting the performance of services for
any customer or client of the Company or any of its affiliates), whether such
engagement is as an officer, director, proprietor, employee, partner, investor
(other than as a holder of less than 1% of the outstanding capital stock of a
publicly traded corporation), consultant, advisor, agent, sales representative
or other participant, in any geographic area in which the Company or any of its
affiliates conducted any such competing line of business.
During the employment term and through the second anniversary of the
date of termination of employment, you will not induce, or cause any person or
entity to induce, any employee of the Company or any of its affiliates to engage
in any activity in which you are prohibited to engage by the foregoing paragraph
or to terminate his or her employment with the Company or any of its affiliates,
and will not employ or offer employment, or cause any person or entity to employ
or offer employment, to any person who was employed by the Company or any of its
affiliates unless such person shall have ceased to be employed by the Company or
any of its affiliates for a period of at least 12 months.
<PAGE> 3
-3- April 20, 1998
You will not at any time (whether during or after your employment with
the Company) disclose or use for his own benefit or purposes or the benefit or
purposes of any other person, firm, partnership, joint venture, association,
corporation or other business organization, entity or enterprise other than the
Company and any of its affiliates, any trade secrets, information, data, or
other confidential information relating to customers, development programs,
costs, marketing, trading, investment, sales activities, promotion, credit and
financial data, manufacturing processes, financing methods, plans, or the
business and affairs of the Company generally, or of any of its affiliates,
provided that the foregoing shall not apply to information which is not unique
to the Company or which is generally known to the industry or the public other
than as a result of your breach of this covenant. You agree that upon
termination of your employment with the Company for any reason, you will return
immediately all memoranda, books, papers, plans, information, letters and other
data, and all copies thereof or therefrom, in any way relating to the business
of the Company and its affiliates, except that you may retain or personal notes,
notebooks and diaries. You further agree that you will not retain or use for
your account at any time any trade names, trademark or other proprietary
business designation used or owned in connection with the business of the
Company or its affiliates.
Upon the start of employment with DecisionOne, you will need to agree
to our Business Conduct Guidelines, disclose any conflicts of interest, and
agree to comply with the securities reporting requirements and trading
restrictions of Section 16(b) of the Securities Exchange Act of 1934 as an
executive officer of DecisionOne Holdings Corp. Please be advised that neither
this offer of employment nor any statements made by any officer or employee of
the Company constitutes an employment contract, and that you will be an
"at-will" employee of the Company. The substantive laws of the Commonwealth of
Pennsylvania shall govern this letter of agreement.
Please sign and fax this offer letter by the close of business on
Friday, April 17 to me at the fax number below and mail the originals to me
also. If you have any questions or concerns, either leave me a voice mail or
call Dwight Wilson at 610/296-6224. Dennis, as we discussed, you are being
presented with an opportunity to play a significant role in DecisionOne's
future. I have every confidence that you will lead a very successful major
accounts team at DecisionOne and that you will help us fulfill our vision to be
the world's best provider of information technology support services.
Sincerely,
/s/ STEPHEN J. FELICE
-------------------------
Stephen J. Felice
I accept the offer of employment discussed in this letter.
/s/ DENNIS M. CALLAGY 4/15/98
- --------------------------------- ----------
Dennis M. Callagy Date
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-03267, 333-19095, 333-33043, 333-33045 on Form S-8 and 333-33057, 333-33061
on Form S-3 of DecisionOne Holdings Corp., of our reports dated September 4,
1998 appearing in this Annual Report on Form 10-K of DecisionOne Holdings Corp.
and DecisionOne Corporation for the year ended June 30, 1998.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
September 24, 1998
<PAGE> 1
Exhibit 24
The undersigned hereby makes, constitutes and appoints Stephen J.
Felice, Thomas J. Fitzpatrick and Thomas M. Molchan, each of them acting alone,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to execute and cause to be filed with the Securities and
Exchange Commission the Annual Report on Form 10-K for the fiscal year ended
June 30, 1998 of DecisionOne Holdings Corp. and any amendents thereto pursuant
to the Securities Exchange Act of 1934, with all exhibits thereto and other
documents in connection therewith, and hereby ratifies and confirms all that
said attorney-in-fact or his substitute or substitutes may do or cause to be
done by virtue hereof.
Dated: September 17, 1998 /s/ Peter T. Grauer*
----------------------------
/s/ Peter T. Grauer
* Identical powers-of-attorney (other than the signature blocks) were executed
by Lawrence M.v.D. Schloss and Kirk B. Wortman.
<PAGE> 1
Exhibit 24.1
The undersigned hereby makes, constitutes and appoints Stephen J.
Felice, Thomas J. Fitzpatrick and Thomas M. Molchan, each of them acting alone,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to execute and cause to be filed with the Securities and
Exchange Commission the Annual Report on Form 10-K for the fiscal year ended
June 30, 1998 of DecisionOne Corporation and any amendents thereto pursuant to
the Securities Exchange Act of 1934, with all exhibits thereto and other
documents in connection therewith, and hereby ratifies and confirms all that
said attorney-in-fact or his substitute or substitutes may do or cause to be
done by virtue hereof.
Dated: September 17, 1998 /s/ Peter T. Grauer*
----------------------------
/s/ Peter T. Grauer
* Identical powers-of-attorney (other than the signature blocks) were executed
by Giles D. Harlow, Kirk B. Wortman and Richard C. Yancey.
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