<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
---------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number 0-28090
DECISIONONE HOLDINGS CORP.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3435409
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Commission File Number 333-28411
DECISIONONE CORPORATION
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2328680
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
50 East Swedesford Road, Frazer, Pennsylvania 19355
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (610) 296-6000
Indicate by check mark whether registrants (1) have filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes [ ] No [x]
As of September 30, 1999, 12,557,881 shares of DecisionOne Holdings Corp. common
stock were outstanding and one share of DecisionOne Corporation common stock was
outstanding.
DecisionOne Corporation meets the requirements set forth in General Instruction
H(1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
<PAGE> 2
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES AND
DECISIONONE CORPORATION AND SUBSIDIARIES
FORM 10-Q JANUARY 14, 2000
CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of
DecisionOne Holdings Corp. and Subsidiaries:
Condensed Consolidated Balance Sheets -
September 30, 1999 and June 30, 1999
(unaudited) 2
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss) - Three Months
Ended September 30, 1999 and 1998 (unaudited) 3
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
September 30, 1999 and 1998 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited)
Condensed Consolidated Financial Statements
of DecisionOne Corporation and Subsidiaries:
Condensed Consolidated Balance Sheets -
September 30, 1999 and June 30, 1999
(unaudited) 8
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss) - Three Months
Ended September 30, 1999 and 1998 (unaudited) 9
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
September 30, 1999 and 1998 (unaudited) 10
Notes to Condensed Consolidated
Financial Statements (unaudited) 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations - Three Months Ended
September 30, 1999 and 1998. 14
Item 3. Quantitative and Qualitative Disclosure
About Market Risk. 25
PART II OTHER INFORMATION 26
</TABLE>
<PAGE> 3
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
ASSETS 1999 1999
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 39,882 $ 31,249
Restricted cash 2,366 3,410
Accounts receivable, net of allowances of $18,553 and $18,066 89,987 93,134
Consumable parts, net of allowances of $40,380 and $8,906 15,632 15,859
Repairable parts, net of allowance of $46,062 52,843 --
Prepaid expenses and other assets 21,596 21,738
--------- ---------
Total current assets 222,306 165,390
Repairable parts, net of accumulated amortization of $141,842 -- 134,924
Property and equipment, net of accumulated depreciation of
$43,271 and $40,866 24,579 25,028
Intangibles, net of accumulated amortization of $91,010 and $84,380 121,903 128,509
Other assets 1,670 2,036
--------- ---------
Total Assets $ 370,458 $ 455,887
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Current portion of debt $ 781,776 $ 778,866
Notes payable - related party 7,300 7,300
Accounts payable and accrued expenses 96,933 92,635
Deferred revenues 31,261 28,876
Income taxes and other liabilities 8,444 8,540
--------- ---------
Total current liabilities 925,714 916,217
Debt 527 674
Other Liabilities 5,570 6,152
Shareholders' Deficit:
Preferred stock, $.01 par value; authorized 15,000,000 shares; none outstanding -- --
Common stock, $.01 par value, authorized 30,000,000 shares;
issued and outstanding 12,557,881 and 12,564,485 shares 126 126
Additional paid-in capital 242,181 242,181
Accumulated deficit (801,021) (706,795)
Accumulated other comprehensive loss (2,639) (2,668)
--------- ---------
Total shareholders' deficit (561,353) (467,156)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 370,458 $ 455,887
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE> 4
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues $ 155,101 $ 196,044
Cost of Revenues 123,246 148,479
--------- ---------
Gross Profit 31,855 47,565
Operating Expenses:
Selling, general and administrative expenses 24,959 33,241
Amortization of intangibles 6,727 6,792
--------- ---------
Total operating expenses 31,686 40,033
--------- ---------
Operating Income 169 7,532
Interest Expense, Net of Interest Income 19,997 18,524
--------- ---------
Loss Before Income Taxes and Cumulative
Effect of Change in Accounting Principle (19,828) (10,992)
Provision for Income Taxes -- --
--------- ---------
Net Loss Before Cumulative Effect of Change in
Accounting Principle (19,828) (10,992)
Cumulative Effect of Change in Accounting for
Repairable Parts, Net of tax of $0 (74,398) --
--------- ---------
Net Loss (94,226) (10,992)
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation Adjustments 29 (313)
--------- ---------
Comprehensive Loss $ (94,197) $ (11,305)
========= =========
Amounts per Common Share:
Net Loss Before Cumulative Effect of Change
in Accounting Principle $ (1.58) $ (0.87)
Cumulative Effect of Change in Accounting for
Repairable Parts, Net of tax (5.92) --
--------- ---------
Net Loss $ (7.50) $ (0.87)
========= =========
Weighted Average Number of Common
Shares Outstanding 12,563 12,584
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
<PAGE> 5
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating Activities:
Net loss $(94,226) $(10,992)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Cumulative effect of accounting change 74,398 --
Amortization of repairable parts 18,894
Depreciation 2,869 3,596
Amortization of intangibles 6,727 6,792
Changes in assets and liabilities, net of effects of acquisitions 21,582 9,291
-------- --------
Net cash provided by operating activities 11,350 27,581
Investing Activities:
Capital expenditures (2,062) (3,811)
Repairable spare parts purchases, net (22,910)
Payments related to acquisitions of companies and contracts (417) (417)
-------- --------
Net cash used in investing activities (2,479) (27,138)
Financing Activities:
Net proceeds from (payments on) borrowings (223) 4,013
Other, net (15) (465)
-------- --------
Net cash provided by (used in) financing activities (238) 3,548
-------- --------
Net change in cash and cash equivalents 8,633 3,991
Cash and cash equivalents, beginning of period 31,249 6,415
-------- --------
Cash and cash equivalents, end of period $ 39,882 $ 10,406
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 6
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Holdings Corp. and Subsidiaries (the "Company") have been prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission and, therefore, do not include all information and footnotes
necessary for presentation of financial position, results of operations and cash
flows required by generally accepted accounting principles. The June 30, 1999
balance sheet was derived from the Company's audited consolidated financial
statements. The information furnished reflects all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair summary of the financial position, results of operations and cash
flows. The results of operations for the three month periods ended September 30,
1999 and 1998 are not necessarily indicative of operating results to be expected
for the full fiscal year. The financial statements should be read in conjunction
with the audited consolidated financial statements of the Company and notes
thereto filed with the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999.
Certain reclassifications have been made in order to conform with the September
30, 1999 presentation.
NOTE 2: INDEBTEDNESS RESTRUCTURING
The Company has continued to experience declining trends in revenues and
earnings throughout the three month period ended September 30, 1999 compared to
the corresponding period ended September 30, 1998. The declining trends
principally result from lower sales of new service contracts, erosion of
contract base, and no growth from acquisitions.
On January 28, 1999, the Company initiated a corporate operating plan
("Operating Plan") intended to restore revenue growth and improve financial
performance. The Operating Plan included the following key components: (i)
focusing all aspects of the Company's operations--from sales through service
delivery--on providing information technology support services to three customer
groups: large corporate customers (also known as "enterprise accounts"), medium
sized accounts (also known as "middle market"), and alliance customers
(including OEMs, software publishers, systems integrators, distributors and
resellers, etc.); (ii) a cost-reduction program designed to reduce the Company's
cost structure by $40 million annually upon full implementation, including a
reduction in force of more than 500 employees; and (iii) financial structure
changes, including an additional $7.3 million investment in the form of 14%
Senior Unsecured Notes due 2006 (the "14% Notes") in DecisionOne Corporation by
an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJMB"), and the
Company's agreement with its lenders to waive certain financial covenants in the
Company's credit agreement through July 29, 1999 (the "Waiver").
5
<PAGE> 7
On July 14, 1999, the Company's common stock was delisted from the NASDAQ
national market System. Since that date, the Company's common stock has been
quoted on the OTC Bulletin Board.
On August 2, 1999, the Company announced an agreement in principle with its bank
lending group and the holders of the 14% Notes on the restructuring of its
indebtedness. Subsequent to August 2, 1999, the Company, its bank lending group
and the holders of the 14% Notes engaged in negotiations with an ad hoc
committee of the holders of the Company's 9 3/4% Senior Subordinated Notes due
2007 (the "9 3/4% Notes") and 11 1/2% Senior Discount Debentures due 2008 (the
"11 1/2% Notes"). These negotiations resulted in modifications to the August 2
agreement in principle. Under the terms of the final agreement reached between
the Company and these creditor groups (the "Indebtedness Restructuring"), the
bank lending group would exchange approximately $523 million in existing
indebtedness for approximately 94.6 percent of the reorganized Company's equity
and $250 million in new senior secured bank debt (the "New Credit Agreement").
The agreement further provides that the holders of the 14% Notes would exchange
their notes for (a) warrants equal to approximately 4.2 percent of the
reorganized Company's fully diluted equity (taking into account upon the
exercise of certain other warrants and options the shares of common stock issued
in connection with such exercise), at an exercise price based on an enterprise
value of $350 million and (b) warrants equal to approximately 2.0 percent of the
reorganized Company's equity, at an exercise price based on an equity valuation
of $280 million. The holders of the 9 3/4% Notes would exchange their notes for
(a) approximately 5.0 percent of the reorganized Company's equity; (b) warrants
equal to approximately 2.8 percent of the reorganized Company's fully diluted
equity (taking into account upon the exercise of certain other warrants and
options the shares of common stock issued in connection with such exercise), at
an exercise price based on an enterprise value of $350 million; (c) warrants
equal to approximately 5.0 percent of the reorganized Company,s equity, at an
exercise price based on an equity valuation of $200 million; and (d) warrants
equal to approximately 3.0 percent of the reorganized Company's equity, at an
exercise price based on an equity valuation of $280 million. In addition, the
holders of the 11 1/2% Notes and the holders of unsecured claims of Holdings
would receive a total of approximately 0.4 percent of the reorganized Company's
equity. Under the Indebtedness Restructuring, the Company's issued and
outstanding shares of common stock, warrants and options will be canceled, and
holders thereof will receive no distribution and retain no property interest or
claim on account of such holdings.
The Company did not make the $7.3 million interest payment on its 9 3/4% Notes,
which was due on August 2, 1999 nor the interest payment due to the holders of
the 14% Notes. The Waiver, pursuant to which the bank lending group agreed to
waive certain financial covenants under its Existing Credit Facility, expired on
July 29, 1999. The holders of the 9 3/4% Notes, the holders of the 14% Notes and
the bank lending group have the right to declare the respective outstanding loan
amounts immediately due and payable and seek to exercise remedies, including, in
the case of the Existing Credit Facility, foreclosure on the collateral securing
such amounts. As such, the Company has reflected all such loan amounts as
current liabilities as of September 30, 1999 and June 30, 1999.
The Company did not make the $2.64 million principal payment on its Existing
Credit Facility which was due on September 30, 1999 and the $5.56 million
principal payment which was due on December 31, 1999. As a result the Company
is subject to a 2% interest premium on the overdue principal commencing
effective October 1, 1999
The Company's proposed Indebtedness Restructuring will be subject to the
approval of a United States Bankruptcy Court (the "Bankruptcy Court") pursuant
to Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").
The Indebtedness Restructuring will be accomplished through a plan of
reorganization (the "Plan") in a prepackaged case under Chapter 11 of the
Bankruptcy Code. The Plan along with a related disclosure statement will be
delivered to the bank lending group and the holders of the 14% Notes in
connection with the Company's pre-petition solicitation of acceptances of the
proposed Plan. If, by the end of the solicitation period, the requisite
acceptances have been received from the bank lending group and the holders of
the 14% Notes, the Company intends to file a petition under Chapter 11 and to
use the acceptances received pursuant to the solicitation to seek confirmation
of the Plan. With respect to all the other creditors and equity holders of the
Company that are impaired under the Plan, the Company intends to seek
confirmation of the Plan under the "cram down" provisions of the Bankruptcy
Code. The Plan will only be confirmed if the Bankruptcy
6
<PAGE> 8
Court determines that all the requirements of the Bankruptcy Code have been met,
including, without limitation, that the Plan is (i) accepted by all impaired
classes of claims and equity interests or, if rejected by an impaired class,
that the Plan does not "discriminate unfairly" and is "fair and equitable" as to
such class, (ii) feasible and (iii) in the "best interests" of creditors and
equity holders impaired under the Plan.
On January 11, 2000, in connection with its proposed Indebtedness Restructuring,
the Company entered onto a commitment letter with Ableco Finance LLC (an
affiliate of Cerberus Capital Management, L.P., a member of the bank lending
group)("Ableco") pursuant to which Ableco agreed to extend up to $35 million in
revolving loans and letters of credit to the Company during the pendency of its
proposed bankruptcy proceeding (the "DIP Facility") and up to $35 million
(stepping down to $25 million on July 1, 2000) in revolving loans and letters of
credit to the Company following the conclusion of its bankruptcy proceeding (the
"Exit Facility"). The availability of the DIP Facility and the Exit Facility is
subject to customary conditions, including the satisfactory completion of
Ableco's due diligence, the absence of any material adverse change with respect
to the Company and the negotiation, execution and delivery of definitive
documentation in form and substance satisfactory to Ableco.
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis of accounting and do not reflect any adjustments that
might result if the Company is unable to continue as a going concern. The
Company's recent losses from operations, significant shareholders' deficiency,
default under the terms of its credit agreement, and the related Indebtedness
Restructuring and planned Bankruptcy Court filings raise substantial doubt about
the Company's ability to operate as a going concern. The appropriateness of
using the going concern basis is dependent upon, among other things, (i) the
Company's ability to reverse its declining revenue trends; (ii) the Company's
ability to generate sufficient cash from operations and/or obtain additional
financing to meets its obligations prior to confirmation of a plan of
reorganization; (iii) confirmation of the Company's plan of reorganization under
the Bankruptcy Code, and (iv) the Company's ability to achieve profitable
operations and generate sufficient cash from operations and/or obtain additional
financing after such confirmation.
NOTE 3: CHANGE IN ACCOUNTING PRINCIPLE
Effective July 1, 1999, the Company changed its method of accounting for
repairable parts from the amortization method to the usage method. Under the
amortization method, the Company amortized the cost of repairable parts over an
estimated average useful life and recorded the costs of refurbishing repairable
parts as a component of cost of revenues as incurred. Under the usage method,
the Company will record in cost of revenues the cost of new and refurbished
parts when used to service customers. Additionally, under the usage method,
management will perform periodic assessments to determine the existence of
excess or obsolete parts and will record any necessary provisions to reduce such
parts to net realizable value, consistent with past practice. Management
believes that this change in method for repairable parts more accurately
reflects periodic results of operations based on parts used to service
customers. The effect of this change was to record a cumulative effect charge of
approximately $74.4 million, during the fiscal quarter ended September 30, 1999.
The Company has not recorded any tax benefit resulting from this charge. The pro
forma effect of this change in accounting principle on prior years' operations
is not presented because such effects are not reasonably determinable. If the
Company had continued to account for repairable parts under the amortization
method for the three month period ended September 30, 1999, the effect on net
loss before cumulative effect of change in accounting principle would not have
been material.
NOTE 4: INCOME TAXES
During the three month period ended September 30, 1999, the Company recorded
additional net deferred tax assets of approximately $37.8 million, principally
due to the accumulation of additional temporary differences. The Company
recorded a corresponding increase to the valuation allowance, due principally to
the length of the period during which the anticipated tax benefits are expected
to be realized.
7
<PAGE> 9
DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
ASSETS 1999 1999
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 38,680 $ 30,061
Restricted cash 2,366 3,410
Accounts receivable, net of allowances of $18,553 and $18,066 89,987 93,134
Consumable parts, net of allowances of $40,380 and $8,906 15,632 15,859
Repairable parts, net of allowance of $46,062 52,843 --
Prepaid expenses and other assets 18,669 18,750
--------- ---------
Total current assets 218,178 161,214
Repairable parts, net of accumulated amortization of $141,842 -- 134,924
Property and equipment, net of accumulated depreciation of
$43,271 and $40,309 24,579 25,028
Intangibles, net of accumulated amortization of $91,010 and $84,380 121,903 128,509
Parent company loan receivable, net of allowances of $72,651 and $72,546 -- --
Other assets 1,670 2,036
--------- ---------
Total Assets $ 366,329 $ 451,711
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Current portion of debt $ 675,251 $ 675,370
Notes payable - related party 7,300 7,300
Accounts payable and accrued expenses 96,433 92,135
Deferred revenues 31,261 28,876
Income taxes and other liabilities 8,444 8,540
--------- ---------
Total current liabilities 818,689 812,221
Debt 527 674
Other Liabilities 5,570 6,152
Shareholder's Deficit:
Common stock, no par value, one share authorized, issued
and outstanding -- --
Additional paid-in capital 12,323 12,323
Accumulated deficit (468,141) (376,991)
Accumulated other comprehensive loss (2,639) (2,668)
--------- ---------
Total shareholder's deficit (458,457) (367,336)
--------- ---------
Total Liabilities and Shareholder's Deficit $ 366,329 $ 451,711
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
8
<PAGE> 10
DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues $ 155,101 $ 196,044
Cost of Revenues 123,246 148,479
--------- ---------
Gross Profit 31,855 47,565
Operating Expenses:
Selling, general and administrative expenses 24,959 33,241
Amortization of intangibles 6,727 6,792
--------- ---------
Total operating expenses 31,686 40,033
--------- ---------
Operating Income 169 7,532
Interest Expense, Net of Interest Income 16,921 14,529
--------- ---------
Loss Before Income Taxes and Cumulative
Effect of Change in Accounting Principle (16,752) (6,997)
Provision for Income Taxes -- --
--------- ---------
Net Loss Before Cumulative Effect of Change in
Accounting Principle (16,752) (6,997)
Cumulative Effect of Change in Accounting for
Repairable Parts, Net of tax of $0 (74,398) --
--------- ---------
Net Loss $ (91,150) $ (6,997)
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation Adjustments 29 (313)
--------- ---------
Comprehensive Loss $ (91,121) $ (7,310)
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
9
<PAGE> 11
DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating Activities:
Net loss $(91,150) $ (6,997)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Cumulative effect of accounting change 74,398 --
Amortization of repairable parts -- 18,894
Depreciation 2,869 3,596
Amortization of intangibles 6,727 6,792
Changes in assets and liabilities, net of effects of acquisitions 18,492 5,288
-------- --------
Net cash provided by operating activities 11,336 27,573
Investing Activities:
Capital expenditures (2,062) (3,811)
Repairable spare parts purchases, net (22,910)
Payments related to acquisitions of companies and contracts (417) (417)
-------- --------
Net cash used in investing activities (2,479) (27,138)
Financing Activities:
Net proceeds from (payments on) borrowings (223) 4,013
Loan from (made to) parent 700
Other, net (15) (465)
-------- --------
Net cash provided by (used in) financing activities (238) 4,248
-------- --------
Net change in cash and cash equivalents 8,619 4,683
Cash and cash equivalents, beginning of period 30,061 5,205
-------- --------
Cash and cash equivalents, end of period $ 38,680 $ 9,888
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
10
<PAGE> 12
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings
Corp., herein called "Holdings") and Subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the United States Securities
and Exchange Commission and, therefore, do not include all information and
footnotes necessary for presentation of financial position, results of
operations and cash flows required by generally accepted accounting principles.
The June 30, 1999 balance sheet was derived from the Company's audited
consolidated financial statements. The information furnished reflects all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair summary of the financial position,
results of operations and cash flows. The results of operations for the three
month periods ended September 30, 1999 and 1998 are not necessarily indicative
of the operating results to be expected for the full fiscal year. The financial
statements should be read in conjunction with the audited consolidated financial
statements of the Company and notes thereto filed with the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1999.
Certain reclassifications have been made in order to conform with the September
30, 1999 presentation.
NOTE 2: INDEBTEDNESS RESTRUCTURING
The Company has continued to experience declining trends in revenues and
earnings throughout the three month period ended September 30, 1999 compared to
the corresponding period ended September 30, 1998. The declining trends
principally result from lower sales of new service contracts, erosion of
contract base, and no growth from acquisitions.
On January 28, 1999, the Company initiated a corporate operating plan
("Operating Plan") intended to restore revenue growth and improve financial
performance. The Operating Plan included the following key components: (i)
focusing all aspects of the Company's operations--from sales through service
delivery--on providing information technology support services to three customer
groups: large corporate customers (also known as "enterprise accounts"), medium
sized accounts (also known as "middle market"), and alliance customers
(including OEMs, software publishers, systems integrators, distributors and
resellers, etc.); (ii) a cost-reduction program designed to reduce the Company's
cost structure by $40 million annually upon full implementation, including a
reduction in force of more than 500 employees; and (iii) financial structure
changes, including an additional $7.3 million investment in the form of 14%
Senior Unsecured Notes due 2006 (the "14% Notes") in DecisionOne Corporation by
an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJMB"), and the
Company's agreement with its lenders to waive certain financial covenants in the
Company's credit agreement through July 29, 1999 (the "Waiver").
11
<PAGE> 13
On July 14, 1999, Holdings' common stock was delisted from the NASDAQ national
market System. Since that date, the Holdings' common stock has been quoted on
the OTC Bulletin Board.
On August 2, 1999, the Company announced an agreement in principle with its bank
lending group and the holders of the 14% Notes on the restructuring of its
indebtedness. Subsequent to August 2, 1999, the Company, its bank lending group
and the holders of the 14% Notes engaged in negotiations with an ad hoc
committee of the holders of the Company's 9 3/4% Senior Subordinated Notes due
2007 (the "9 3/4% Notes") and 11 1/2% Senior Discount Debentures due 2008 (the
"11 1/2% Notes"). These negotiations resulted in modifications to the August 2
agreement in principle. Under the terms of the final agreement reached between
the Company and these creditor groups (the "Indebtedness Restructuring"), the
bank lending group would exchange approximately $523 million in existing
indebtedness for approximately 94.6 percent of the reorganized Company's equity
and $250 million in new senior secured bank debt (the "New Credit Agreement").
The agreement further provides that the holders of the 14% Notes would exchange
their notes for (a) warrants equal to approximately 4.2 percent of the
reorganized Company's fully diluted equity (taking into account upon the
exercise of certain other warrants and options the shares of common stock issued
in connection with such exercise), at an exercise price based on an enterprise
value of $350 million and (b) warrants equal to approximately 2.0 percent of the
reorganized Company's equity, at an exercise price based on an equity valuation
of $280 million. The holders of the 9 3/4% Notes would exchange their notes for
(a) approximately 5.0 percent of the reorganized Company's equity; (b) warrants
equal to approximately 2.8 percent of the reorganized Company's fully diluted
equity (taking into account upon the exercise of certain other warrants and
options the shares of common stock issued in connection with such exercise), at
an exercise price based on an enterprise value of $350 million; (c) warrants
equal to approximately 5.0 percent of the reorganized Company's equity, at an
exercise price based on an equity valuation of $200 million; and (d) warrants
equal to approximately 3.0 percent of the reorganized Company's equity, at an
exercise price based on an equity valuation of $280 million. In addition, the
holders of the 11 1/2% Notes and the holders of unsecured claims of Holdings
would receive a total of approximately 0.4 percent of the reorganized Company's
equity. Under the Indebtedness Restructuring, the Company's issued and
outstanding shares of common stock, warrants and options will be canceled, and
holders thereof will receive no distribution and retain no property interest or
claim on account of such holdings.
The Company did not make the $7.3 million interest payment on its 9 3/4% Notes,
which was due on August 2, 1999 nor the interest payment due to the holders of
the 14% Notes. The Waiver, pursuant to which the bank lending group agreed to
waive certain financial covenants under its Existing Credit Facility, expired on
July 29, 1999. The holders of the 9 3/4% Notes, the holders of the 14% Notes and
the bank lending group have the right to declare the respective outstanding loan
amounts immediately due and payable and seek to exercise remedies, including, in
the case of the Existing Credit Facility, foreclosure on the collateral securing
such amounts. As such, the Company has reflected all such loan amounts as
current liabilities as of September 30, 1999 and June 30, 1999.
The Company did not make the $2.64 million principal payment on its Existing
Credit Facility which was due on September 30, 1999 and the $5.56 million
principal payment which was due on December 31, 1999. As a result the Company is
subject to a 2% interest premium on the overdue principal commencing effective
October 1, 1999.
The Company's and Holdings' proposed Indebtedness Restructuring will be subject
to the approval of a United States Bankruptcy Court (the "Bankruptcy Court")
pursuant to Chapter 11 of Title 11 of the United States Code (the "Bankruptcy
Code").
The Indebtedness Restructuring will be accomplished through a plan of
reorganization (the "Plan") in a prepackaged case under Chapter 11 of the
Bankruptcy Code. The Plan along with a related disclosure statement will be
delivered to the bank lending group and the holders of the 14% Notes in
connection with the Company's pre-petition solicitation of acceptances of the
proposed Plan. If, by the end of the solicitation period, the requisite
acceptances have been received from the bank lending group and the holders of
the 14% Notes, the Company intends to file a petition under Chapter 11 and to
use the acceptances received pursuant to the solicitation to seek confirmation
of the Plan. With respect to all the other creditors and equity holders of the
Company that are impaired under the Plan, the Company intends to seek
confirmation of the Plan under the "cram down" provisions of the Bankruptcy
Code. The Plan will only be confirmed if the Bankruptcy Court determines that
all the requirements of the Bankruptcy Code have been met, including,
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<PAGE> 14
without limitation, that the Plan is (i) accepted by all impaired classes of
claims and equity interests or, if rejected by an impaired class, that the Plan
does not "discriminate unfairly" and is "fair and equitable" as to such class,
(ii) feasible and (iii) in the "best interests" of creditors and equity holders
impaired under the Plan.
On January 11, 2000, in connection with its proposed Indebtedness Restructuring,
the Company entered onto a commitment letter with Ableco Finance LLC (an
affiliate of Cerberus Capital Management, L.P., a member of the bank lending
group)("Ableco") pursuant to which Ableco agreed to extend up to $35 million in
revolving loans and letters of credit to the Company during the pendency of its
proposed bankruptcy proceeding (the "DIP Facility") and up to $35 million
(stepping down to $25 million on July 1, 2000) in revolving loans and letters of
credit to the Company following the conclusion of its bankruptcy proceeding (the
"Exit Facility"). The availability of the DIP Facility and the Exit Facility is
subject to customary conditions, including the satisfactory completion of
Ableco's due diligence, the absence of any material adverse change with respect
to the Company and the negotiation, execution and delivery of definitive
documentation in form and substance satisfactory to Ableco.
The accompanying consolidated financial statements have been prepared on a going
concern basis of accounting and do not reflect any adjustments that might result
if the Company is unable to continue as a going concern. The Company's recent
losses from operations, significant shareholders' deficiency, default under the
terms of its credit agreement, and the related Indebtedness Restructuring and
planned Bankruptcy Court filings raise substantial doubt about the Company's
ability to operate as a going concern. The appropriateness of using the going
concern basis is dependent upon, among other things, (i) the Company's ability
to reverse its declining revenue trends; (ii) the Company's ability to generate
sufficient cash from operations and/or obtain additional financing to meets its
obligations prior to confirmation of a plan of reorganization; (iii)
confirmation of the Company's plan of reorganization under the Bankruptcy Code,
and (iv) the Company's ability to achieve profitable operations and generate
sufficient cash from operations and/or obtain additional financing after such
confirmation.
NOTE 3: CHANGE IN ACCOUNTING PRINCIPLE
Effective July 1, 1999, the Company changed its method of accounting for
repairable parts from the amortization method to the usage method. Under the
amortization method, the Company amortized the cost of repairable parts over an
estimated average useful life and recorded the costs of refurbishing repairable
parts as a component of cost of revenues as incurred. Under the usage method,
the Company will record in cost of revenues the cost of new and refurbished
parts when used to service customers. Additionally, under the usage method,
management will perform periodic assessments to determine the existence of
excess or obsolete parts and will record any necessary provisions to reduce such
parts to net realizable value, consistent with past practice. Management
believes that this change in method for repairable parts more accurately
reflects periodic results of operations based on parts used to service
customers. The effect of this change was to record a cumulative effect charge of
approximately $74.4 million, during the fiscal quarter ended September 30, 1999.
The Company has not recorded any tax benefit resulting from this charge. The pro
forma effect of this change in accounting principle on prior years' operations
is not presented because such effects are not reasonably determinable. If the
Company had continued to account for repairable parts under the amortization
method for the three month period ended September 30, 1999, the effect on net
loss before cumulative effect of change in accounting principle would not have
been material.
NOTE 4: INCOME TAXES
During the three month period ended September 30, 1999, the Company recorded
additional net deferred tax assets of approximately $37.8 million, principally
due to the accumulation of additional temporary differences. The Company
recorded a corresponding increase to the valuation allowance, due principally to
the length of the period during which the anticipated tax benefits are expected
to be realized.
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<PAGE> 15
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements of DecisionOne Holdings Corp. and
Subsidiaries, the audited Consolidated Financial Statements of DecisionOne
Corporation and Subsidiaries, and the respective Notes thereto, filed with these
registrants' Annual Report on Form 10-K for the fiscal year ended June 30, 1999.
Item 2, and 3 are presented with respect to both registrants noted above. (As
used within Item 2, and 3, the term "Company" refers to DecisionOne Holdings
Corp. and its wholly-owned subsidiaries, including DecisionOne Corporation, and
the term "Holdings" refers to DecisionOne Holdings Corp.)
The information herein contains forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve a number of
risks and uncertainties. A number of factors could cause actual results,
performance, achievements of the Company, or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. These factors include, but are not
limited to, the ability to complete the Restructuring, as described herein; the
Company's ability to reverse its declining revenue trends; the ability to
attract and retain qualified personnel; the significant indebtedness of the
Company; 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; 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.
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<PAGE> 16
BUSINESS OVERVIEW
Founded in 1969, the Company began operations as a provider of key punch
machines under the tradename "Decision Data". During the 1980s, its operations
expanded to include the sale of midrange computer hardware and related
maintenance services. During fiscal 1993, the Company decided to focus on
providing computer maintenance and support services and sold its computer
hardware products business.
Since the beginning of fiscal 1993, the Company has established a major presence
in the computer maintenance and technology support services industry through the
acquisition and integration of assets and contracts of over 40 complementary
businesses. Significant acquisitions included IDEA Servcom, Inc. ("Servcom"),
certain assets and liabilities of which were acquired in August 1994 for cash
consideration of approximately $29.5 million, and Bell Atlantic Business Systems
Services, Inc. ("BABSS"), which was acquired in October 1995 for cash
consideration of approximately $250.0 million. In addition, certain assets of
the U.S. computer service business of Memorex Telex 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.
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 91% of the Company's revenues during the three month
period ended September 30, 1999 were derived from maintenance contracts covering
a broad spectrum of computer services. 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. 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
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<PAGE> 17
costs related to facilities, personnel and consumable and repairable parts in
the same proportion as increases in acquired revenues. Any failure to consummate
acquisitions, enter into new contracts or add additional services and equipment
to existing contracts, or any increase in erosion could have a material adverse
effect on the Company's profitability. The Company has not completed any
acquisitions since the first quarter of fiscal 1999 and it expects to be unable
to finance acquisitions pending the restructuring of its indebtedness.
Cost of revenues is comprised principally of personnel-related costs (including
fringe benefits), consumable parts cost recognition, amortization and repair
costs for repairable parts in fiscal year 1999, the usage costs of new and
refurbished repairable parts in fiscal year 2000, and facilities costs and
related expenses.
RESULTS OF OPERATIONS
The following discussion of results of operations is presented with respect to
the Company and with respect to DecisionOne Corporation and Subsidiaries for the
three month periods ended September 30, 1999 and 1998.
The following tables set forth, for the three month periods ended September 30,
1999 and 1998, respectively, certain operating data of the Company and of
DecisionOne Corporation and Subsidiaries:
<TABLE>
<CAPTION>
DECISIONONE HOLDINGS CORP DECISIONONE CORPORATION
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 155,101 $ 196,044 $ 155,101 $ 196,044
Gross Profit 31,855 47,565 31,855 47,565
Operating Income 169 7,532 169 7,532
Net loss before cumulative effect of change
in accounting principle (19,828) (10,992) (16,752) (6,997)
Cumulative effect of change in accounting
Principle (74,398) -- (74,398) --
--------- --------- --------- ---------
Net Loss $ (94,226) $ (10,992) $ (91,150) $ (6,997)
========= ========= ========= =========
OTHER DATA:
EBITDA (1) $ 9,766 $ 39,513 $ 9,766 $ 39,513
Less: Amortization of repairable parts -- (18,894) -- (18,894)
--------- --------- --------- ---------
Adjusted EBITDA (1) $ 9,766 $ 20,619 $ 9,766 $ 20,619
Net cash provided by operating
Activities 11,350 27,581 11,336 27,573
Net cash used in investing activities (2,479) (27,138) (2,479) (27,138)
Net cash provided by (used in) financing (238) 3,548 (238) 4,248
activities
</TABLE>
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<PAGE> 18
(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 and incremental charges related
to the Company's ongoing service delivery re-engineering program (approximately
$0.0 million and $2.7 million for the three month periods ended September 30,
1999 and 1998, respectively.) "Adjusted EBITDA" represents EBITDA reduced by the
amortization of repairable parts in fiscal year 1999. Adjusted EBITDA is
presented because it is relevant to certain covenants contained in debt
agreements.
Accounting Change - Spare Parts
Effective July 1, 1999, the Company changed its method of accounting for
repairable parts from the amortization method to the usage method. Under the
amortization method, the Company amortized the cost of repairable parts over an
estimated average useful life and recorded the costs of refurbishing repairable
parts as a component of cost of revenues as incurred. Under the usage method,
the Company will record in cost of revenues the cost of new and refurbished
parts when used to service customers. Additionally, under the usage method,
management will perform periodic assessments to determine the existence of
excess or obsolete parts and will record any necessary provisions to reduce such
parts to net realizable value, consistent with past practice. Management
believes that this change in method for repairable parts more accurately
reflects periodic results of operations based on parts used to service
customers. The effect of this change was to record a cumulative effect charge of
approximately $74.4 million, during the three month period ended September 30,
1999. The Company has not recorded any tax benefit resulting from this charge.
The pro forma effect of this change in accounting principle on prior years'
operations is not presented because such effects are not reasonably
determinable. . If the Company had continued to account for repairable parts
under the amortization method for the three month period ended September 30,
1999, the effect on net loss before cumulative effect of change in accounting
principle would not have been material.
Overview
The Company has continued to experience declining trends in revenues, earnings
and EBITDA for the three month period ended September 30, 1999 compared to the
corresponding period ended September 30, 1998. The declining trends principally
result from lower sales of new service contracts, contracted base erosion, and
no acquisition growth.
On January 28, 1999, the Company initiated a corporate operating plan
(the"Operating Plan") intended to restore revenue growth and improve financial
performance. The Operating Plan included the following key components: (i)
focusing all aspects of the Company's operations - from sales through service
delivery - on providing information technology support services to three
customer groups: large corporate customers (also known as "enterprise
accounts"), medium sized accounts (also known as the "middle market"), and
alliance customers (including OEMs, software publishers, systems integrators,
distributors and resellers, etc.); (ii) a cost-reduction program designed to
reduce the Company's cost structure by $40 million annually upon full
implementation, including a reduction in force of more than 500 employees; and
(iii)
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<PAGE> 19
financial structure changes, including DLJMB's additional $7.3 million
investment in the form of senior unsecured notes in DecisionOne Corporation, and
the Company's agreement with its lenders to waive financial covenants in the
Company's credit agreement through July 29, 1999 (see "Liquidity and Capital
Resources" for additional details).
The Company is on schedule to achieve its $40 million annual cost reduction
target. Notwithstanding the Operating Plan, the Company currently believes it is
likely that its revenues will decline further in the next fiscal quarter
compared to the first quarter ended September 30, 1999 and to the comparable
prior year quarter ended December 31, 1998.
Operating income was $0.2 million and $7.5 million for the three months ended
September 30, 1999 and 1998, respectively. Adjusted EBITDA was $9.8 million
for the three months ended September 30, 1999 compared to $20.6 million for
the three months ended September 30, 1998.
Three Month Period Ended September 30, 1999 Compared to Three Month Period Ended
September 30, 1998
Revenues: Revenues decreased by $40.9 million, or 20.9%, from $196.0 million for
the three months ended September 30, 1998 to $155.1 million for the three months
ended September 30, 1999. This decrease is principally due to lower monthly
maintenance contract-based revenues as a result of equipment cancellations
exceeding sales of new contracts and lower volume of per incident revenues.
The Operating Plan is intended, in part, to restore revenue growth by increasing
the Company's focus on selected customers within its enterprise, middle market,
and alliance groups. While the Company expects these actions to result in
revenue growth from current levels, the timing of such revenue growth, if any,
is uncertain. The Company currently believes that its revenues will further
decline in the next fiscal quarter compared to the first quarter ended
September 30, 1999 and to the comparable prior year quarter ended December 31,
1998.
Gross Profit: As a percentage of revenue, gross profit declined from 24.2% for
the three months ended September 30, 1998 to 20.5% for the three months ended
September 30, 1999. The Company's re-engineering initiatives and variable cost
reductions related to revenue declines have resulted in lower costs of $25.2
million for the three month period ended September 30, 1999, compared to the
corresponding fiscal 1998 period. The lower costs are not proportionate to the
revenue reductions due to the fixed nature of much of the Company's cost
structure.
Management expects to further reduce costs in the next fiscal quarter as a
result of the Operating Plan initiatives. The Company has reduced its workforce
and streamlined operations by consolidating from seven to four service regions.
However, future gross profit performance is difficult to predict and
improvements therein will largely depend upon the Company's ability to generate
revenue growth.
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<PAGE> 20
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses decreased by $8.3 million, or 24.9%, from $33.2
million for the three months ended September 30, 1998 to $25.0 million for the
three months ended September 30, 1999. Included in SG&A expenses for the quarter
ended September 30, 1999 were $0.1 million of the Operating Plan and
re-engineering related consulting fees. Included in SG&A expenses for the
quarter ended September 30, 1998 were incremental consulting fees incurred in
connection with the Company's re-engineering efforts of $2.7 million (see
"Liquidity and Capital Resources" for additional information with respect to
these expenditures). Excluding these costs, SG&A declined by $5.7 million
principally due to reductions in employment costs as a result of implementing
the Operating Plan initiatives and lower sales commissions due to lower
revenues.
Management expects to further lower SG&A costs in the next fiscal quarter as a
result of the continuation of the Operating Plan initiatives.
Interest Expense: The Company's interest expense, net of interest income,
increased by $1.5 million, or 8.0%, from $18.5 million for the three months
ended September 30, 1998 to $20.0 million for the three months ended September
30, 1999. This increase is due principally to the Company's increased average
borrowings from the Company's revolver, the additional $7.3 million of debt
financing obtained on January 27, 1999 and the amortization of the $4.3 million
waiver fee incurred under the Waiver Agreement (see "Liquidity and Capital
Resources"). (See Note 2 to the Company's unaudited Condensed Consolidated
Financial Statements for the three month period ended September 30, 1999).
With respect to DecisionOne Corporation, consolidated interest expense, net of
interest income, increased by $2.4 million, or 16.5%, from $14.5 million for the
three months ended September 30, 1998 to $16.9 million for the three months
ended September 30, 1999. This increase is due principally to the Company's
increased average borrowings from the Company's revolver, the additional $7.3
million of debt financing obtained on January 27, 1999 and the amortization
of the $4.3 million waiver fee incurred under the Waiver Agreement (see
"Liquidity and Capital Resources"). (See Note 2 to the Company's unaudited
Condensed Consolidated Financial Statements for the three month period ended
September 30, 1999).
Consolidated net interest expense for DecisionOne Corporation during the three
month period ended September 30, 1999 was lower than the aforementioned net
interest expense for the Company, primarily due to interest expense with
respect to approximately $85.0 million of 11-1/2% Senior Discount Debentures
issued by Holdings. (see "Liquidity and Capital Resources").
Income Taxes: During the three month period ended September 30, 1999, the
Company recorded additional net deferred tax assets of approximately $37.8
million, principally due to the accumulation of additional temporary
differences. The Company recorded a corresponding increase to the valuation
allowance, due principally to the length of the period during which the
anticipated tax benefits are expected to be realized.
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<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Financing and Leverage
As of September 30, 1999, the Company had outstanding debt of approximately
$789.6 million, as compared to approximately $786.8 million as of June 30, 1999.
As of December 31, 1998, the Company obtained a waiver of certain financial
covenants in the amended Existing Credit Facility until January 28, 1999 and on
January 27, 1999, the Company entered into a Waiver of Financial Covenants (the
"Waiver") pursuant to which the Company's lenders under the Existing Credit
Facility (the "bank lending group") agreed to waive financial covenants in the
amended Existing Credit Facility through July 29, 1999. The Waiver covered the
quarters ending December 31, 1998, March 31, 1999 and June 30, 1999. Without the
Waiver, the Company would not have been in compliance with certain financial
covenants under the amended Existing Credit Facility. The Waiver required the
Company, among other things, to meet certain additional financial covenants as
of March 31, 1999, limited the additional borrowings available to the Company
under its revolver to $10 million, and generally, required that interest
payments on loans must be made monthly. In connection with the Waiver, the
Company incurred waiver fees of approximately $4.3 million, which were amortized
as interest expense through July 1999. The Company met the required March 31,
1999 financial covenants contained in the Waiver.
On July 29, 1999, the Waiver expired. As a result, since July 29, 1999, the
Company has been in default of certain financial covenants under the Existing
Credit Facility. In addition, on August 2, 1999, the Company failed to make the
interest payments due on both the 9 3/4% Notes and the 14% Notes. Given the
existing events of default under the Existing Credit Facility, the bank lending
group had previously delivered to the Company a notice prohibiting such
payments. As a result of the Company's failure to comply with such financial
covenants and to make such interest payments, events of default have occurred
under the Existing Credit Facility and under the indentures for the 9 3/4% Notes
and the 14% Notes. Accordingly, the bank lending group and the holders of the
9 3/4% Notes and the 14% Notes could declare the amounts outstanding under these
debt instruments immediately due and payable and seek to exercise remedies,
including, in the case of the Existing Credit Facility, foreclosure on the
collateral securing such amounts.
On August 2, 1999, the Company announced an agreement in principle with its bank
lending group and the holders of the 14% Notes on the restructuring of its
indebtedness. Subsequent to August 2, 1999, the Company, its bank lending group
and the holders of the 14% Notes engaged in negotiations with an ad hoc
committee of the holders of the Company's 9 3/4% Senior Subordinated Notes due
2007 (the "9 3/4% Notes") and 11 1/2% Senior Discount Debentures due 2008 (the
"11 1/2% Notes"). These negotiations resulted in modifications to the August 2
agreement in principle. Under the terms of the final agreement reached between
the Company and these creditor groups (the "Indebtedness Restructuring"), the
bank lending group would exchange approximately $523 million in existing
indebtedness for approximately 94.6 percent of the reorganized Company's equity
and $250 million in new senior secured bank debt (the "New Credit Agreement").
The agreement further provides that the holders of the 14% Notes would exchange
their notes for (a) warrants equal to approximately 4.2 percent of the
reorganized Company's fully diluted equity (taking into account upon the
exercise of certain other warrants and options the shares of common stock issued
in connection with such exercise), at an exercise price based on an enterprise
value of $350 million and (b) warrants equal to approximately 2.0 percent of the
reorganized Company's equity, at an exercise price based on an equity valuation
of $280 million. The holders of the 9 3/4% Notes would exchange their notes for
(a) approximately 5.0 percent of the reorganized Company's equity; (b) warrants
equal to approximately 2.8 percent of the reorganized Company's fully diluted
equity (taking into account upon the exercise of certain other warrants and
options the shares of common stock issued in connection with such exercise), at
an exercise price based on an enterprise value of $350 million; (c) warrants
equal to approximately 5.0 percent of the reorganized Company's equity, at an
exercise price based on an equity valuation of $200 million; and (d) warrants
equal to approximately 3.0 percent of the reorganized Company's equity, at an
exercise price based on an equity valuation of $280 million. In addition, the
holders of the 11 1/2% Notes and the holders of unsecured claims of Holdings
would receive a total of approximately 0.4 percent of the reorganized Company's
equity. Under the Indebtedness Restructuring, the Company's issued and
outstanding shares of common stock, warrants and options will be canceled, and
holders thereof will receive no distribution and retain no property interest or
claim on account of such holdings.
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The Company did not make the $2.64 million principal payment on its Existing
Credit Facility which was due on September 30, 1999 and the $5.56 million
principal payment which was due on December 31, 1999. As a result the Company is
subject to a 2% interest premium on the overdue principal commencing effective
October 1, 1999.
The proposed Indebtedness Restructuring will be implemented pursuant to a
prepackaged bankruptcy subject to the approval of a United States Bankruptcy
Court (the "Bankruptcy Court") pursuant to Chapter 11 of Title 11 of the United
States Code, as amended (the "Bankruptcy Code") and the approval of the bank
lending group and the holders of the 14% Notes. Management does not anticipate
any adverse impact on customers, vendors or employees as a result of the
Indebtedness Restructuring, since the Indebtedness Restructuring will address
only the de-leveraging of the Company's balance sheet through the reduction of
its indebtedness. However, there can be no assurance that the Indebtedness
Restructuring will be approved by the Bankruptcy Court, nor that any adverse
impact to the Company, its customers, creditors or employees will be avoided.
See Note 2 to the Company's Consolidated Financial Statements as of and for the
fiscal year ended June 30, 1999 for additional information.
On January 11, 2000, in connection with its proposed Indebtedness
Restructuring, the Company entered onto a commitment letter with Ableco Finance
LLC (an affiliate of Cerberus Capital Management, L.P., a member of the bank
lending group) ("Ableco") pursuant to which Ableco agreed to extend up to $35
million in revolving loans and letters of credit to the Company during the
pendency of its proposed bankruptcy proceeding (the "DIP Facility") and up to
$35 million (stepping down to $25 million on July 1, 2000) in revolving loans
and letters of credit to the Company following the conclusion of its bankruptcy
proceeding (the "Exit Facility"). The availability of the DIP Facility and the
Exit Facility is subject to customary conditions, including the satisfactory
completion of Abelco's due diligence, the absence of any material adverse
change with respect to the Company and the negotiation, execution and delivery
of definitive documentation in form and substance satisfactory to Abelco.
The interest rate applicable to outstanding borrowings under the amended
Existing Credit Facility as of September 30, 1999 is the Prime Rate (plus
applicable margin not to exceed 1.75%). As of September 30, 1999, the weighted
average interest rate applicable to loans under the Existing Credit Facility was
9.9%.
Financial Condition:
Cash flow from operating activities for the three months ended September 30,
1999 was approximately $11.4 million. These funds provided the required capital
to fund capital expenditures of approximately $2.1 million during the three
months ended September 30, 1999, as well as the scheduled payments of previous
obligations for acquisition of contracts and assets of complementary businesses
for approximately $0.4 million during this period.
The Company incurred approximately $1.1 million in incremental expenditures for
information systems and related re-engineering initiatives during the three
months ended September 30, 1999. The initiatives being funded include the
following: (i) enhancements to the Company's service entitlement process which
will 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.
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
21
<PAGE> 23
responsible party in respect of a fifth site, but has not received any other
communication in respect of that site. The Company originally estimated that its
share of the costs of the cleanup of one of the sites was approximately
$500,000, of which $372,000 remained unpaid and accrued in the accompanying
condensed consolidated balance sheets as of September 30, 1999 and June 30,
1999. 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 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.
22
<PAGE> 24
YEAR 2000 COMPLIANCE
This Year 2000 disclosure is being designated as a Year 2000 Readiness
Disclosure under the Year 2000 Information and Readiness Disclosure Act of 1998,
Public Law 105-271.
As is the case with most other businesses, the Company has evaluated and
continues to address the Year 2000 readiness of both its information technology
systems and its non-information technology systems (collectively referred to as
"Systems"). Such Year 2000 readiness efforts are designed to identify, address
and resolve issues that may be created by computer programs written to use two
digits rather than four to define the applicable year. Any of the Company's
computer programs having time-sensitive software may otherwise 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 mainframe information technology systems all of which have been
remediated and placed into service, the most recent mission-critical mainframe
system having been placed in service in September, 1999. Additionally, the
Company has implemented vendor Y2K upgrade releases from its software vendor for
the Company's packaged financial, human resources, and payroll systems. The
Company has installed, tested and placed these packaged software upgrades into
service. The Company has also identified approximately seventy (70) non-mission
critical information technology systems which the Company is in the process of
remediating by using in-house personnel or by seeking certifications and/or
upgrades from its vendors. Subsequently, the Company expects most of these
non-mission critical systems to be compliance tested by in-house personnel on an
on-going basis. The Company has completed remediation of its non-information
technology systems.
The Company has ongoing communications with all of its significant business
partners via Vendor Readiness Surveys to determine their plans to comply with
Year 2000. All responses are evaluated as received to determine if additional
action is required to determine the compliance of the business partner. Even
though a vendor has certified their equipment to be Y2K compliant, we continue
to receive upgrades/patches based upon the vendors identifying additional Y2K
issues. The Company engaged a consulting firm to assess the Company's processes
in place to achieve Year 2000 readiness, and also has in place a Year 2000
Steering Committee which meets regularly and periodically reports the progress
of Year 2000 readiness to the Company's executive management and the Board of
Directors.
The Company's approach to addressing Year 2000 readiness is to minimize the
possibility of any Year 2000-related interruptions or miscalculations.
Worst-case Year 2000 scenarios include the interruption of certain aspects of
the Company's business as a result of information technology systems failure or
the failure of the Company's business partners. Any such failure could have an
impact on future results; consequently, the Company formulated contingency
plans.
The Company's approach to contingency planning is to employ a combination of
existing disaster recovery plans and to develop additional plans as needed.
Because the Company elected to remediate its mission critical legacy systems
as opposed to replacing them, during a worst-case scenario, the Company would
invoke the disaster recovery plan the Company has
23
<PAGE> 25
developed under its standard operating procedures. The Company performed an
initial test of the disaster recovery plan at an off-site facility in March,
1999. While certain issues arose during the test relating to disaster recovery,
the Company was able to set the operating system date to February 29, 2000. In
addition, the Company's highest priority legacy system, the Service Delivery
System, has always had a back-up system residing on a different platform. This
back-up system has always stored four-digit year dates and is used when the
primary system is taken off line for maintenance. This back-up system was
tested for Year 2000 readiness. To gain a greater degree of confidence that
all other mainframe applications would function properly, the Company conducted
an integrated system test, once remediation work was completed. This additional
testing was conducted at an off-site facility specially developed for Year
2000 testing.
Additionally, one of the most critical facets of the Company's contingency
planning involves ensuring adequate staffing to meet potentially-significant
service call volume increases. To prepare for this possibility, the Company
placed substantial restrictions on authorized leave time for essential
call-center, operational, and information technology personnel during the
critical initial three weeks of January, 2000.
The Company believed that additional contingency plans might have been needed to
be developed relating to its suppliers. In June, 1998, the Company began the
process of surveying its vendors, suppliers, and key business associates to
determine their level of Year 2000 readiness. The Company identified which of
its vendors, suppliers, and business associates were mission-critical and
developed alternate means as necessary. The Company identified mission-critical
vendors and established related contingency planning through the balance of the
year. In the meantime, the Company monitored the need for additional contingency
planning.
As of September 30, 1999 the Company incurred costs of approximately $6.1
million and expects to incur approximately $1.9 million thereafter to remediate
or upgrade all of the Company's Systems. The $1.9 million represents
approximately 10% 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 and upgrade 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 are 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 may not be Year 2000 compliant.
Although the Company believes it is taking adequate measures to address Year
2000 issues, the Company is uncertain how it may be affected by litigation given
the evolving nature of such litigation. The Company believes, however, that it
does not have material exposure to liability for such claims.
While the Company does not believe that the Year 2000 matters presented in this
discussion 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, given the forward-looking nature of the Year 2000
issues.
24
<PAGE> 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses its revolving credit facility, term loans, senior discount
debentures, senior unsecured notes, 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, senior unsecured notes, and senior subordinated notes in
effect at September 30, 1999 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) management's estimates of indicative market prices for
the term loans, the revolver, senior discount debentures, senior unsecured notes
and senior subordinated notes and (2) estimates obtained from dealers to settle
interest rate swap and collar agreements.
<TABLE>
<CAPTION>
Fair Value
Fiscal Year of Maturity Total Due at Sep. 30,
Interest Rate Sensitivity 2000 2001 2002 2003 2004 Thereafter At Maturity 1999
- ------------------------- ---- ---- ---- ---- ---- ---------- ----------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed Rate -- -- -- -- -- $305,700 $305,700 $6,385
Average Interest Rate -- -- -- -- -- 10.7% -- --
Variable Rate $19,325 $36,875 $49,062 $73,438 $126,874 $217,514 $523,088 $196,158
Average Interest Rate 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% -- --
Interest Rate Instruments:
Variable to Fixed Swaps $25,000 -- -- -- -- -- $25,000 $3
Average Pay Rate 5.7% -- -- -- -- -- -- --
Average Receive Rate 5.3% -- -- -- -- -- -- --
Collars: $25,000 $75,000 -- -- -- -- $100,000 $(94)
Average Cap Rate 5.8% 6.7 % -- -- -- -- -- --
Average Floor Rate 5.7% 5.7% -- -- -- -- -- --
</TABLE>
25
<PAGE> 27
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
DECISIONONE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable
Item 2. Changes in Securities and Use of Proceeds.
Not applicable
Item 3. Defaults Upon Senior Securities.
The Company did not make the $7,312,500 interest
payment on its $150,000,000 of 9 3/4% Senior
Subordinated Notes due 2007, which was due on August
2, 1999. Total interest due as of January 14, 2000 is
$14,658,333.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description of Document
18.1 Letter regarding change in accounting
principle - DecisionOne Holdings
Corp.
18.2 Letter regarding change in accounting
principle - DecisionOne Corporation
27.1 Financial data schedule - DecisionOne
Holdings Corp.
27.2 Financial data schedule - DecisionOne
Corporation
(b) Reports on Form 8-K
Not applicable
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
DecisionOne Holdings Corp.
DATE: January 14, 2000 /s/ Thomas J. Fogarty
---------------- ---------------------
Thomas J. Fogarty
Senior Vice President and
Chief Financial Officer
DecisionOne Corporation
DATE: January 14, 2000 /s/ Thomas J. Fogarty
---------------- ---------------------
Thomas J. Fogarty
Senior Vice President and
Chief Financial Officer
27
<PAGE> 1
EXHIBIT 18.1
January 14, 2000
DecisionOne Holdings Corp.
50 East Swedesford Road
Frazer, Pennsylvania
Dear Sirs/Madams:
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
September 30, 1999, of the facts relating to the change in accounting policy for
repairable parts from the amortization method to the usage method effective July
1, 1999. Under the amortization method, the Company amortized the cost of
repairable parts over an estimated average useful life and recorded the costs of
refurbishing repairable parts as a component of cost of revenues as incurred.
Under the usage method, the Company records as a component of cost of revenues,
the cost of new and refurbished parts when used to service customers. We
believe, on the basis of the facts so set forth and other information furnished
to us by appropriate officials of the Company, that the accounting change
described in your Form 10-Q is an alternative accounting principle that is
preferable under the circumstances.
We have not audited any consolidated financial statements of DecisionOne
Holdings Corp. and its consolidated subsidiaries as of any date or for any
period subsequent to June 30, 1999. Therefore, we are unable to express, and we
do not express, an opinion on the facts set forth in the above-mentioned Form
10-Q, on the related information furnished to us by officials of the Company, or
on the financial position, results of operations, or cash flows of DecisionOne
Holdings Corp. and its consolidated subsidiaries as of any date or for any
period subsequent to June 30, 1999.
Yours truly,
Deloitte & Touche LLP
Philadelphia, Pennsylvania
<PAGE> 1
EXHIBIT 18.2
January 14, 2000
DecisionOne Corporation
50 East Swedesford Road
Frazer, Pennsylvania
Dear Sirs/Madams:
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
September 30, 1999, of the facts relating to the change in accounting policy for
repairable parts from the amortization method to the usage method effective July
1, 1999. Under the amortization method, the Company amortized the cost of
repairable parts over an estimated average useful life and recorded the costs of
refurbishing repairable parts as a component of cost of revenues as incurred.
Under the usage method, the Company records as a component of cost of revenues,
the cost of new and refurbished parts when used to service customers. We
believe, on the basis of the facts so set forth and other information furnished
to us by appropriate officials of the Company, that the accounting change
described in your Form 10-Q is an alternative accounting principle that is
preferable under the circumstances.
We have not audited any consolidated financial statements of DecisionOne
Corporation and its consolidated subsidiaries as of any date or for any period
subsequent to June 30, 1999. Therefore, we are unable to express, and we do not
express, an opinion on the facts set forth in the above-mentioned Form 10-Q, on
the related information furnished to us by officials of the Company, or on the
financial position, results of operations, or cash flows of DecisionOne
Corporation and its consolidated subsidiaries as of any date or for any period
subsequent to June 30, 1999.
Yours truly,
Deloitte & Touche LLP
Philadelphia, Pennsylvania
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001007588
<NAME> DECISION ONE HOLDINGS, CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 42,248
<SECURITIES> 0
<RECEIVABLES> 108,540
<ALLOWANCES> 18,553
<INVENTORY> 68,475
<CURRENT-ASSETS> 222,306
<PP&E> 67,850
<DEPRECIATION> 43,271
<TOTAL-ASSETS> 370,458
<CURRENT-LIABILITIES> 925,714
<BONDS> 527
0
0
<COMMON> 126
<OTHER-SE> (561,479)
<TOTAL-LIABILITY-AND-EQUITY> 370,458
<SALES> 155,101
<TOTAL-REVENUES> 155,101
<CGS> 123,246
<TOTAL-COSTS> 123,246
<OTHER-EXPENSES> 30,711
<LOSS-PROVISION> 975
<INTEREST-EXPENSE> 19,997
<INCOME-PRETAX> (19,828)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (74,398)
<NET-INCOME> (94,226)
<EPS-BASIC> (7.50)
<EPS-DILUTED> (7.50)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001040354
<NAME> DECISION ONE CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 41,046
<SECURITIES> 0
<RECEIVABLES> 108,540
<ALLOWANCES> 18,553
<INVENTORY> 68,475
<CURRENT-ASSETS> 218,178
<PP&E> 67,850
<DEPRECIATION> 43,271
<TOTAL-ASSETS> 366,329
<CURRENT-LIABILITIES> 818,689
<BONDS> 527
0
0
<COMMON> 0
<OTHER-SE> (458,457)
<TOTAL-LIABILITY-AND-EQUITY> 366,329
<SALES> 155,101
<TOTAL-REVENUES> 155,101
<CGS> 123,246
<TOTAL-COSTS> 123,246
<OTHER-EXPENSES> 30,711
<LOSS-PROVISION> 975
<INTEREST-EXPENSE> 16,921
<INCOME-PRETAX> (16,752)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,752)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (74,398)
<NET-INCOME> (91,150)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
